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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 ..... sferred to the Suspense Account upto 31st December 1980. After 1981 interest on the sticky loans was not at all entered in tne Books of Accounts. A memorandum was maintained of possible interest. As and when interest on such sticky loans was actually realized, tax thereon was paid under the Interest Act as well as the IT Act. Sections 4, 5 and 6 of the Interest Act provide as follows:- "4. Charge of tax - (1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the first day of April, 1975, a tax (in this act referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest: Provided that the rate at which interest tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983, shall be three and a half per cent. of such chargeable interest. (2) Notwithstanding anything contained in subsection (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the first day of April, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on the first day of March, 1978, and ending with the 30th day of June, 1980 or during the period commencing on the first day of April, 1985 and ending with the 30 day of September, 1991, shall not be taken into account. In case of assessment of tax under the Income Tax Act, no tax was levied on sticky loans on accrual basis. This was clarified by a circular of the Board dated 6th October 1952, which was rescinded in view of the judgment of the Kerala High Court in the case of State Bank of Travancore vs CIT reported in [1977] 110 ITR 366(Ker), inter alia holding that tax on interest was payable on accrual basis. The judgment of the Kerala High Court was affirmed by the Supreme Court in State Bank of Travancore vs CIT reported in [1986] 158 ITR 102(SC). In the meanwhile, by another circular dated 9th October 1984 the old position was restored. The said circular made it clear that the circular dated 6th October 1952 would apply till the Assessment Year 1978-1979 and the Circular dated 9th October 1984 would apply from the Assessment Year 1979-1980. The minority view of Tulzapurkar J in State Bank of Travancore (Supra) that, interest payable on sticky loans constituted hypothetic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether at the end of 3 years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of 3 years, then in the 40 year and on the words the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered." The Supreme Court further held: "in the premises the majority decision in the State Bank of Travancore versus CIT (1986) 158 ITR 102 (SC) cannot be looked upon as laying down that the circular which is properly issued under section 119 Of the Income Tax Act for proper administration of the Act and for relieving the rigour of too literal construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the bench of 5 judges of the Supreme Court in Navnit Lal (C) Javeri.........it is held only as laying down that a circular cannot alter the provisions of the Act........The circular, therefore, cannot be treated as contrary to section 145 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and circumstances of the case, it being already a matter decided for the assessee, that no income tax is payable on the above mercantile accrual of interest, shown in the suspense account or by way of memorandum, for the relevant assessment years in question, on non-operational i.e. "sticky" loans, interest under the said Interest Tax Act can nonetheless be payable in law? 3. Whether for the relevant assessment years in question, tax under the Interest Tax Act, 1974 for the above non-operational loans, is to be held as payable in law on the mercantile accrual of interest basis, or on the basis of actual receipt of interest income on the sticky loans, if such interest at all was received in the relevant assessment years?" Chargeable interest has been defined in Section 2 (5) of the Interest Act 1974, to mean the total amount of interest referred to in Section 5, computed in the manner laid down in Section 6. Thus, chargeable interest of any previous year of a credit institution is the total amount of interest (other than interest on loans and advances made to other credit institutions, co-operative societies etc., accruing or arising to the credit institution in that previous ..... X X X X Extracts X X X X X X X X Extracts X X X X
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