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TMI Blog2014 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of which mercantile actual of interest was shown in the suspense account and not the profit and loss account, would not, be payable on mercantile accrual basis - Interest on such loans would have to be accounted for and paid as and when it is realised - Decided in favour of assessee. - I.T.A. No. 43 of 2002 - - - Dated:- 2-12-2013 - Indira Banerjee And Anindita Roy Saraswati,JJ. For the Appellant : Mr. R. N. Bajoria, Mr. S. Bhowmik, Mr. C. S. Das For the Respondent : Mr. Nizamuddin ORDER Indira Banerjee, J. This appeal under Section 21 of the Interest Act 1974 read with Section 260 A of the Income Tax Act 1961 has been filed by the Assessee bank in relation to the Assessment Years 1975-1976 to 1986-1987 except for the Assessment Year 1980-1981. The issue involved in this appeal is, whether interest on sticky loans, not credited by the Assessee Bank in its Profit and Loss Account, by reason of recovery being extremely doubtful, is liable to tax under the Interest Act 1974. The Assessee Bank follows a mixed system of accounting, which is mainly mercantile, but in respect of certain sticky loans, that is, loans of which recovery is doubtful, on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the case may be, in which it is actually received by the credit institution, whichever is earlier. 6. Computation of chargeable interest (1) Subject to the provisions of sub-section (2), in computing the chargeable interest of a previous year, there shall be allowed from the total amount of interest (other than interest on loans and advances made to credit institutions) accruing or arising to the assessee in the previous year, a deduction in respect of the amount of interest which is established to have become a bad debt during the previous year: Provided that such interest has been taken into account in computing the chargeable interest of the assessee of an earlier previous year and the amount has been written off as irrecoverable in the accounts of the assessee for the previous year during which it is established to have become a bad debt. Explanation For the removal of doubts, it is hereby declared that in computing the chargeable interest of a previous year, no deduction other than the deduction specified in this sub-section shall be allowed from the total amount of interest accruing or arising to the assessee. (2) In computing the chargeable interest of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en though the assessee bank was found to follow the mercantile system of accounting. The Supreme Court found that the assessee bank had been following a mixed system of accounting and in effect and substance, approved such mixed system of accounting. The Supreme Court held:- The question whether interest earned on what have come to be known as sticky loans can be considered as income or not until actual realisation, is a question which may arise before several Income Tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed all Income Tax Officers should treat such amounts as not forming part of the income of the assessee untained realised, the direction by way of the circular cannot be considered as travelling beyond the powers of the board under section 119 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved. The judgement of the Supreme Court in UCO Bank (supra) was affirmed and followed by the Supreme Court in Mercantile Bank Ltd versus Commissioner of Income Tax reported in (2006) 283 ITR 84 (SC). In view of the judgements of the Supreme Court in UCO Bank (Supra) and in Mercantile Bank Ltd (Supra), it is well settled that interest on Sticky Loans , recovery whereof is doubtful, if not shown in Profit and Loss Account should be treated as not forming part of the income of the assessee, irrespective of whether the assessee otherwise follows the mercantile system of accounting. The question in this appeal is whether the principle applicable in the case of computation of income under the Income Tax Act would apply in relation to computation of chargeable interest under the Interest Act. By an order dated 20th August 2002, this Court admitted the appeal on the following questions of law: 1. Whether in the facts and circumstances of this case, there being in the assessee s accounts certain sticky loans which are non-operational and in respect of which the mercantile accrual of interest was shown only in the suspense account upto 31. 12. 1980, and thereafter only the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est within the meaning of Sections 5 and 6 of the Interest Act Moreover, the proviso to Section 5 of the Interest Act specifically provides that interest in relation to categories of bad or doubtful debts, referred to in Section 43D of the Income Tax Act, shall be deemed to accrue or arise in the previous year in which it is credited to the profit and loss account for that year. If the interest, recovery of which is doubtful, is not credited in the profit and loss account of the previous year, the interest would not fall within the scope and ambit of chargeable interest under the Interest Act. For the reasons discussed above, Question I and 2 are answered in the negative, in favour of the assessee and against the Revenue. We have already held that non-operational sticky loans in respect of which mercantile actual of interest was shown in the suspense account and not the profit and loss account, would not, in law, be payable on mercantile accrual basis. Interest on such loans would have to be accounted for and paid as and when it is realised. Question number 3 is answered accordingly and in favour of the assessee. The appeal filed by the assessee is, thus, allowed. Let pho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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