Deduction from the income of banks and institutions. - Income Tax - 1226/CBDT

INSTRUCTION NO. 1226/CBDT Dated : December 22, 1978 The Board have recently examined the question whether voluntary remission of interest due on loans advanced by nationalised banks and public financial institutions such as IDBI and State/Central Financial corporations which the sick units are unable to pay due to unsound financial condition will be eligible for deduction from the income of such banks and institutions. 2. In the case which came up for consideration before the Board the borrower was an undertaking set up almost entirely with public fund. The undertaking ran into financial difficulties and was unable to pay interest accrued on the loans advanced by the nationalised banks and the State/Central financial institutions. Under a Scheme of financial rehabilitation, such banks and financial institutions agreed to remit/write off a part of the interest due. The question arose whether such banks and financial institutions could claim deduction of the amount of interest so remitted. 3. The Board have examined the matter in consultation with the Ministry of Law. Such Banks and financial institutions which have advanced loans in the course of their ordinary business remit or write off the interest due or part thereof in their larger interests so as to make the recoveries of the principal loan and advances or balance possible. Such a remission is normally in consideration of commercial expediency and is with a view to ultimately save larger losses to the Banks/Financial institutions. Thus, if on a bonafide consideration of the matter, it is considered commercially expedient to remit accrued interest or part thereof, the loss on account of such remission by the nationalised banks and State/Central financial institutions could be regarded as a trading loss incidental to their business and may be allowed as deduction while computing their total income. Each case has however to be decided on its own merits.