1988 (10) TMI 70 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest on protested advances.
2. Applicability of the Supreme Court decision in State Bank of Travancore v. CIT.
3. Interpretation of circulars issued by the Central Board of Direct Taxes (CBDT) and the Indian Banks Association.

Detailed Analysis:

1. Taxability of Interest on Protested Advances:
The primary issue in this case revolves around whether the interest of Rs. 6,19,68,285 on protested advances should be taxed. The bank argued that since the recovery of these advances was doubtful, the interest should not be considered as accrued income and thus not taxable. The bank maintained a separate "Protested Advance Register" for such cases and followed a cash basis method for this interest, unlike other advances where an accrual basis was used. The Income-tax Officer (ITO) disagreed, citing that the bank charged interest on both good and sticky advances on an accrual basis, and thus, the interest on protested advances should be considered as accrued income and taxed accordingly.

2. Applicability of the Supreme Court Decision in State Bank of Travancore v. CIT:
The Departmental Representative argued that the matter was conclusively settled by the Supreme Court in State Bank of Travancore v. CIT, which affirmed that interest on sticky advances accrues according to the mercantile system of accounting and should be taxed. The Supreme Court emphasized that the concept of real income cannot be used to defeat statutory provisions, and interest, even if credited to a suspense account, is taxable. The assessee's counsel contended that this decision was not applicable as the interest on protested advances was never brought to the main books but kept in a separate register, arguing that the theory of real income applied in this case.

3. Interpretation of Circulars Issued by CBDT and the Indian Banks Association:
The Commissioner (A) had deleted the addition based on CBDT circulars, which stated that interest on doubtful debts credited to a suspense account would be taxed, but interest charged in accounts with no recovery for three consecutive years would not be taxed in the fourth year or onwards. The assessee argued that these circulars were binding on tax officials and supported their case. However, the Tribunal noted that the Supreme Court had clarified that circulars cannot override the Income-tax Act and that interest accrued according to the Act is taxable, irrespective of the Board's circulars.

Conclusion:
The Tribunal concluded that the Supreme Court's decision in State Bank of Travancore v. CIT was authoritative and applicable to this case. The Supreme Court had laid down several propositions, emphasizing that income which has accrued according to the accounts of the assessee must be taxed, and the concept of real income cannot negate this accrual. The Tribunal found no substantial difference between the case before them and the one decided by the Supreme Court. Consequently, the Tribunal upheld the view that the interest on protested advances had accrued and was taxable, reversing the Commissioner (A)'s order and restoring the ITO's decision.

Judgment:
The appeal by the Inspecting Assistant Commissioner was allowed, and the order of the Commissioner (A) was reversed. The interest on protested advances amounting to Rs. 6,19,68,285 was held to be taxable.