Interest in respect of doubtful debts. - Income Tax - 1686/CBDT

INSTRUCTION NO. 1686/CBDT Dated: May 2, 1986 Attention is invited to the Board's Instruction F. No. 201/21/84-ITA.II issued on 9.10.1984 wherein it was directed that with effect from the assessment year 1979-80, the interest in respect of doubtful debts credited to suspense account where there had been no recovery for three consecutive years could not be subjected to tax in the fourth year and onwards except for the actual amount of recovery, if any. 2.The Supreme Court, in their judgment dated 8.1.1986 in Civil Appeal No. 1860-1862 (NT) of 1978 in the case of State Bank of Travancore Vs. CIT Kerala, have held that interest charged on sticky advances and credited to 'Interest Suspense Account' was taxable under the income-tax Act 1961. It was, inter-alia, laid down in the judgment that the concept of real income could not be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decided to treat it as bad debt nor claimed deduction under section 36(2) of the Act but still entered the same with the diminished hope of recovery in the suspense account. The aforesaid instruction apparently travels beyond the law as expounded by the Supreme Court. 3.It may further be pointed out that by the Finance Act, 1985, a new clause (viia) has been inserted in sub-section (1) of Section 36 providing for the deduction of an amount specified therin inrespect of any provision for bad and doubtful debts made by the scheduled banks (except the excluded category) and non-scneduled banks. 4.In view of the aforesaid, the Board have decided to withdraw with immediate effect the instruction (F. No. 201/21/84-ITA.II) issued on 9-10-1984. 5.This fact may be brought to the notice of all the officers working in your charge.