2012 (3) TMI 716 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of interest on sticky loans (NPA) transferred to suspense account.
2. Applicability of the Supreme Court's decision in State Bank of Travancore Vs. CIT versus Keshav Ji Ravji & Co. Vs. CIT.

Summary:

Issue 1: Allowance of Interest on Sticky Loans (NPA) Transferred to Suspense Account

The Revenue appealed against the CIT(A)'s decision allowing interest on sticky loans (NPA) transferred to suspense account and not accounted for in the P&L account. The AO had taxed the interest on sticky loans credited to the suspense account, relying on the Supreme Court's decision in State Bank of Travancore Vs. CIT, which mandated that interest on sticky loans should be taxed under the mercantile system of accounting. However, the CIT(A) deleted the addition, citing the Supreme Court's later decision in UCO Bank Vs. CIT, which held that interest on sticky loans transferred to a suspense account should not be included in the income if not received for three years, as per the CBDT circular dated 9th October 1984.

Issue 2: Applicability of Supreme Court Decisions

The CIT(A) distinguished the case from State Bank of Travancore Vs. CIT, noting that subsequent changes in the Act and RBI guidelines, as well as the Supreme Court's decision in UCO Bank Vs. CIT, were more applicable. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's reliance on the overruled decision in State Bank of Travancore was misplaced. The Tribunal noted that the issue of accrual of interest on sticky loans is debatable and cannot be adjudicated in proceedings u/s 154 of the Act, which is meant for rectifying apparent mistakes.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the CIT(A) correctly applied the Supreme Court's decision in UCO Bank Vs. CIT and the relevant CBDT circular, which support the exclusion of interest on sticky loans from taxable income if not realized for three years. The Tribunal also highlighted that debatable issues cannot be rectified under section 154 of the Act.