1999 (9) TMI 124 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of interest on sticky advances.
2. Method of accounting for interest on sticky advances.
3. Applicability of Supreme Court decisions and CBDT circulars.

Detailed Analysis:

1. Taxability of Interest on Sticky Advances:

The primary issue in this appeal was the addition of Rs. 22,60,70,917 on account of alleged accrual of interest on sticky advances made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a nationalized bank, excluded interest on sticky advances from its income, arguing that it followed a hybrid system of accounting where interest on such advances was accounted for on a receipt basis. The AO, however, added the interest on sticky advances to the income, citing the agreements with customers which mandated interest on an accrual basis, and the Supreme Court decision in State Bank of Travancore vs. CIT.

2. Method of Accounting for Interest on Sticky Advances:

The assessee argued that it had consistently followed a hybrid system of accounting since 1957, treating interest on sticky advances on a cash basis while using the mercantile system for other transactions. The AO and CIT(A) rejected this, asserting that two different accounting methods could not be maintained for the same business in one assessment year. The CIT(A) also noted that the assessee could not unilaterally alter the system of accounting for particular transactions and that unrealized interest could be claimed as a bad debt if irrecoverable.

3. Applicability of Supreme Court Decisions and CBDT Circulars:

The assessee distinguished its case from the Supreme Court's decision in State Bank of Travancore vs. CIT, arguing that unlike in that case, it did not debit interest to the customer's account or credit it to a suspense account. The assessee relied on various High Court and Tribunal decisions supporting the use of different accounting methods for different sources of income. The latest Supreme Court decision in UCO Bank vs. CIT was pivotal, where the Court upheld the CBDT circular allowing interest on sticky loans to be excluded from taxable income if not received for three years, and to be taxed only upon actual receipt. The Tribunal decided to restore the matter to the AO to re-examine the issue in light of this circular and the Supreme Court's decision in UCO Bank vs. CIT.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the taxability of interest on sticky advances in accordance with the CBDT Circular dated 9th October 1984, as upheld by the Supreme Court in UCO Bank vs. CIT. The AO was instructed to assess the interest amount only when actually received, provided it had not been received for three continuous years, and to afford the assessee an opportunity of being heard.