Holding

Interest on doubtful loans kept in a suspense account for three years is not taxable until actually received, and the CBDT circular of 9 Oct 1984 is binding under Section 119.

Summary

UCO Bank had credited interest on loans whose repayment was doubtful to a suspense account and, following CBDT Circular No. F 201/21/84 TTA‑11 dated 9 Oct 1984, excluded that interest from its total income for AY 1981‑82. The Commissioner of Income Tax re‑included the amount, but the ITAT and the Calcutta High Court allowed the bank’s claim. The Supreme Court examined whether such interest, not recovered for three consecutive years, could be taxed under Section 145 of the Income‑Tax Act and whether the CBDT circulars issued under Section 119 were binding. It held that the circulars are valid, beneficial to the assessee and binding on tax authorities, and that interest kept in a suspense account for three years is not taxable until actually received. Consequently, the bank’s exclusion of the interest was upheld.

Issues considered

The applicability of CBDT Circular No. F 201/21/84 TTA‑11 (9 Oct 1984) to interest on doubtful loans kept in a suspense account.
Whether interest on loans not recovered for three years can be included in taxable income under Section 145.
The binding nature of CBDT circulars issued under Section 119 of the Income‑Tax Act.

Legislation cited

Income Tax Act, 1961s. 119, s. 145, s. 256(1), s. 263

Subjects

income taxinterest on doubtful loanssuspense accountCBDT circularsSection 119Section 145bankingtaxable incomeassessment yearmercantile accounting

Judgment

UCO BANK, CALCUTT A A
v.
COMMISSIONER OF INCOME TAX, WEST BENGAL

MAY 13, 1999

[SUJATA V. MANOHAR, D.P. MOHAPATRA AND B
R.C. LAHOTI, JJ.]

Income Tax Act, 1961-Sections 145and119-Interest-Accrual of-
On loans advanced by the bank whose recovery is doubtful-Interest not
recovered by the bank for the last three years-Bank keeping the interest in C
a suspense account and not bringing to its profit and loss accounts-Held,
by virtue ofcircular dated 9.10.1984, the amount kept in the suspense account
cannot be included in the taxable income of the bank-Such method of
accounting is in accordance with the accounting practice followed by the
bank-Central Board of Direct taxes, Circular No.F 20Il21184 TTA-11 dated D
09. l 0. 1984.

Issuance of circulars-By Central Board of Direct Taxes-Power of-
Held, the Board has power to ensure a fair enforcement of circular-Such
circulars cannot be adverse to the assessee-Further these circulars are
binding on the income-tax authorities. E
Permitting exclusion of interest accruing to the money lender which is
kept in a suspense account because of extreme unlikelihood of recovery-
Held, applicable to public financial institutions-CBDT Circular dated
6.10.1952.
F
To aid proper determination of income, the Central Board of Direct
Taxes issued a Circular No.4l(V-6) D of 1952 dated 6.10.1952. This
circular enabled the Income Tax Officer to exclude "interest accruing to
a money lender on loans from him taxable income if the Income-Tax Officer
is satisfied that there is little probability of the loans being repaid." The G
CBDT issued circular dated 20.6.1978 withdrawing the earlier circular
stating that interest is taxable. However, they issued another Circular No.
F 201/21/84 TTA-11 dated 9.10.1984 under which the interest accrued to
banking companies remained unrecovered for three consecutive years was
not subjected to tax until recovered. This circular was to apply to assessment
year 1979-80 onwards. H
635
636 SUPREME COURT REPORTS [1999] 3 S.C.R.

A For the assessment year 1981-82 the assessee-bank credited a certain
sum by way of interest to a suspense account since recovery of the said
amount was doubtful and no part of it had been recovered in the three
previous years. The Income-tax department following the CBDT circular
dated 9.10.1984 excluded the sum credited by way of interest to a
suspense account from the total income of the assessee while computing
B the total income of the asse_ssee-bank. The Commissioner of Income-tax
held the exclusion of the said sum to be erroneous and prejudicial to the
interest of Revenue and included the said amount in the total income of
the assessee-bank. Income-tax Appellate Tribunal allowed the appeal of
the assessee-bank. High Court upheld the tribunal's order. Hence this
C appeal

Allowing the appeal, this Court

HELD : 1.1. The interest on loans advanced by the bank to various
customers whose recovery is doubtful and has not been recovered for ~he
D last three years cannot be included in the income of the assessee for the
assessment year" 1981-82 by virtue of Circular No. F 201/21/84 TTA-11
dated 9.10.1984. In such cases, the interest calculated on the loan amount
is credited in a suspense account and this amount is not brought to the.
profit and loss account of the assessee-bank because these are not likely
E to be realised by the bank. If and when any such amount or a part of
. it is recovered, it is included in that assessment year in the total income
of the assessee for the purpose of payment of income-tax. (639-E-F)

1.2. The method of accounting followed by the assessee-bank is
mercantile system of accounting. The assessee considers income by way
F of interest pertaining to doubtful .loans as not real income in the year in
which it accrues, but only when it is realised. A mixed method of
accounting is thus followed by the assessee-bank which is in accordance
with the accounting practice. [639-G)

G State Bank o/Travancore v. CIT, Kera/a, 110 ITR 336, Distinguished.

State Bank ofTravancore v. CIT, Kera/a, (1986) 158 ITR 102, referred
to.

Spicer and Pegler's Practical Auditing; Shukla and Grewal on Advanced
H Accounts, Ninth Edition, page 1089, referred to.
UCO BANK v. C.l.T. 637

2.1. The Central Board of Direct Taxes has power to tone down the A
rigour of the law and ensure a fair enforcement of its provisions by issuing
circulars in exercise of its statutory power under Section 119 of the Income
Tax Act which are binding on the authorities in the administration of the Act
Under Section 119(2) (a) of the Act the circulars as contemplated therein
cannot be adverse to the assessee. Circulars beneficial to the assessee which B
tone down the rigour of the law and are issued in exercise of the statutory
powers under Section 119 are binding on the authorities in the administration
of the Act. The benefit of such circulars is admissible to the assessee even
though the circulars might have departed from the strict tenor of the statutory
provision and mitigated the rigour of the law. The Board cannot pre-empt a
judicial interpretation of the scope and ambit of a provision of the Act Also C
a circular cannot impose on the tax-payer a burden higher than what the Act
itself, on a true interpretation, envisages. The fask of interpretation of the
laws is the exclusive domain of the Court. However, the Board has the
statutory power under Section 119 to tone down the rigour of the law for the
benefit of the assessee by issuing· circulars to ensure a proper administration D
of the fiscal statute and such circulars would be binding on the authorities
administering the Act. [644-F-H; 642-F]

Navnitlal C. Javeri v. K.K. Sen, [1965) 1 SCR 909 and C.B. Gautam
....., v. Union of India & Ors., (1993) 199 ITR 530, followed .

K.P. Varghese v. Income Tax Officer, Ernakulam and Ors., {1981) 4 E
SCC 173 and Keshavji Ravji & Co. v. C.l. T., (1990) 183 ITR 1, relied on.
State Bank ofTravancore v. CIT, Kera/a, (1986) 158 ITR 102, referred
to.
2.2. The circular of9.10.1984, provides a test for recognising whether p
a claim for interest can be treated as a doubtful claim unlikely to be recovered
or not. It clarifies the way in which these amounts are to be treated under
the accounting practice followed by the lender. Therefore, the circular cannot
be treated as contrary to Section 145 of the Income Tax Act or illegal in any
form. It is meant for a uniform administration of law by all the income tax
authorities in a specific situation and therefore, validly issued under Section G
119 of the Act. As such, the circular would be binding on the department.
[645-G)

Kera/a Financial Corporation v. CIT [1994) 4 SCC 375, overruled.

3.1. The circular dated .6.10.1952 unlike the circular of 9.10.1984 H
+-
638 SUPREME COURT REPORTS (1999] 3 S.C.R.

A which applies to banking companies, applies to interest accruing to a money
lender on loans entered in a suspense account because of extreme unlikelihood
of their being recovered. The circular is widely worded to include within its
ambit a public financial institution such as the assessee- Mis Tamil Nadu
Industrial Investment Corporation Ltd. (648-F-G)

B CIVIL APPELLATE JURISDICTION : Civil Appeal No. 235 of I 996
Etc.

From the Judgmt'.nt and Order dated 19.6.91 of the Calcutta High Court
in l.T.R. No. 68of1989.

c Harish N. Salve, Ramesh Singh, Ms. Bina Gupta, Siddharth Goswami
and Ms. Vanita Bhargava for the Appellant in C.A. No. 235/96 and 11888/95.

R.N. Keshwani for the Respondent in C.A. No. 9885-87/96 and 10408/
96.
D
KN. Shukla, S.D_ Sharma and S.K. Dwivedi for the Respondent.

The Judgment of the Court was delivered by

MRS. SUJATA V. MANOHAR, J. Civil Appeal No.235of1996.
,..
E
Civil Appeal No.235 of 1996 pertains to the assessment of the income
of the appellant, United Commercial Bank Ltd., for the assessment year 1981-
82. The assessee had credited a total sum of Rs.49,15,435 by way of interest
to a suspense account since recovery of the said amount was doubtful and
F no recovery of the said amount or any part of it which was by way of interest
on loans advanced by it, had been effected in the three previous years. The
assessee excluded the said sum of Rs.49,15,435 while computing its total
income.

The Income-tax department completed the assessment for assessment
G year 1981-82 on 28th of February, 1985, by following the Central Board of
Direct Taxes Circular No.F.201/21/84 TTA-11 dated 9th of October, 1984
excluding from the total income of the assessee, the said sum of Rs.49, 15,435
while computing the total income of the assessee. The Commissioner of
Income-tax on examination of the assessment records considered the exclusion
of the said sum of Rs.49,15,435 to be erroneous and prejudicial to the interest
H of the revenue. By his order dated 5th of March, 1987 he included the said
UCO BANK v. C.l.T. [SUJATA V. MANOHAR, J.) 639

amount in the total income of the assessee. On appeal, the Income-tax A
Appellate Tribunal, by its order dated 14.10.1988, allowed the appeal of the
assessee. A reference was made to the High Court at the instance of the
revenue under Section 256(1) of the Income-tax Act. The following question
was referred to the High Court:

"Whether, on the facts and in th~ circumstances of the case, the B
Tribunal is justified in law in cancelling the CIT's order under
section 263 of the Income-tax Act holding that when the assessment
was completed, the only paper available was the Board's circular
dated 9th October, 1984 and, therefore, it cannot be said that the
IAC's order of assessment not taxing the interest in suspense of
Rs.49,15,435/- in view of that circular was erroneous and prejudicial C
to the interest of revenue."
The High Court has answered the reference in favour of the revenue
in view of the decision of this Court in State Bank of Travancore v.
Commissioner .of Income-tax, Kera/a, (1986) 158 ITR 102.
D
We have to consider whether interest on a loan whose recovery is
doubtful and which has not been recovered by the assessee-bank for the last
three years. but has been kept in a suspense account and has not been

- brought to the profit and loss account of the assessee, can be included in the
income of the assessee for the assessment year 1981-82. It is the case of the
assessee that in respect ofloans which are advanced by it to various customers,
recovery of some loans is very doubtful. It is doubtful whether even the
E

interest on the loans advanced will be recovered from the customer. In such
cases, the interest calculated on the loan amount is credited in a suspense
account. This amount is not brought to the profit and loss account of the
assessee-bank because these are amounts which are not likely to be realised p _
by the bank. Hence they do not form a part of the real income of the bank.
If ~nd when any such amount or a part of it is recovered, it is included in
that assessment year in the total income of the assessee for the purpose of
payment of income-tax.
The method of accounting which is followed by the assessee-bank is G
mercantile system of accounting. However, the assessee considers income by
,- way of interest pertaining to doubtful loans as not real income in the year
in which it accrues, but only when it is realised. A mixed method of
accounting is thus followed by the assessee-bank. This method of accounting
adopted by the assessee is in accordance with accounting practice. In Spicer
and Pegler's Practical Auditing the relevant passage occurring at page 186- H
t
640 SUPREME COURT REPORTS (1999] 3 S.C.R.

A 187 has been reproduced in the minority judgment of this Court in State Bank
o/Travancore v. Commissioner of Income-tax, Kera/a, (1986) 158 ITR 102 at
· p.120 . It is as follows:

"Where interest has not been paid, it is sometimes left out of account
altogether. Th.is prevents the possibility of irrecoverable interest being
B credited to revenue, and distributed as profit. On the other hand, this
treatment does not record the actual state of the loan account, and
in the case of banks and other concerns whose business it is to
advance money, it is usual to find the interest is regularly charged
up, but when its recovery is doubtful, the amount thereof is either
fully provided against or taken to the credit of an Interest S~spense
c Account and carried forward and not treated as profit until actually
received."

Similarly, referring to interest on doubtful debts, Shukla and Grewal
on Advanced Accounts, Ninth Edition at page 1089 state as follows:

D "Interest on doubtful debts should be debited to the loan account
concerned but should not be credited to interest account. Instead, it
should be credited to Interest Suspense Account. To the ex.tent the
interest is received in cash, the Interest Suspense A~cnnnt c:hnnlri hP.
transferred to Interest account; the remaining amount should be closed
E by transfer to the Loan account. ·This treatment accords with the
principle that no item should be treated as income unless it has been
received or there is a reasonable certainty that it will be realised."

(Vide State Bank ofTravancore v. CIT [supra])

The assessee's method of accounting, therefore, transferring the doubtful
F debt to an· interest suspense account and not treating it as profit until actually
received, is in accordance with accounting practice.

Under Section 145 of the Income-tax Act, 1961, income chargeable under
the head "profits and gains of business or profession or income from other
G sources" shall be computed in accordance with the method of accounting
regularly employed by the assessee; provided that in a case where the accounts
are correct and complete but the method employed is such that in the opinion
of the Income- tax Officer, the income cannot properly be deduced therefrom,
the computation shall be made in such. manner and on such basis as the
Income-tax Officer may determine. In the present case the method employed
H is entirely for a proper determination of income ..
UCO BANK v. C.l.T. (SUJATA V. MANO.HAR, J.] 641

For this same reason, and to aid proper determination of income, the A
Central Board of Direct Taxes had issued Circular No.4l(V-6)D of 1952 dated
6th October, 1952. The circular, inter alia, stated that "interest accruing to a
money lender on loans entered in the suspense account because of the
e_'.{treme unlikelihood of their being recovered need not be included in the
assessee's taxable income if the Income-tax Officer is satisfied that there is
really little probability of the loans being repaid. It is considered desirable
B
to extend this principle to banks which, instead of transferring the doubtful
debts to a suspense account, credit the interest on such debts to that account
provided the Income-tax Officer is satisfied that recovery is practically
improbable." This .circular was in force till 20th of June, 1978 when the
. Central. Board of Direct Taxes issued a circular dated 20th of June, 1978 C
withdrawing with immediate effect the earlier circular of 6th of October,
1952. The reason for the withdrawal of the circular of 1952 is set out in the
circular of 20th of June, 1978. The reason is stated thus: "the Board has
been advised that where accounts are kept on mercantile pasis, interest
thereon is taxable irrespective of whether the interest is crediteq to suspense
account or to interest account. The Kerala High Court has also expressed the D
same view in the case of State Bank of Travancore v. Commissioner of
Income-tax, Kera/a, 110 ITR 336. The amount of such interest is, therefore,
includible in the taxable income." The withdrawal of the circular of 6th of
October, 1952 which had been in force for thirty six years was on account
of the decision of the Kerala High Court in State Bank of Travancore v. E
Commissioner of Income-tax, Kera/a (Supra). The Central Board of Direct
Taxes, however, issued another circular of 9th of October, 1984 under which
the Central Board of Direct Taxes decided that "interest in respect of doubtful
debts credited to suspense account by the banki~g companies will be subjected
to tax but interest charged in an account where there has been no recovery
for three consecutive accounting, years will not be subjected to tax in the F
fourth year and onwards. However, if there is any recovery in the fourth year
or later the actual amount recovered only will be subjected to tax in the
respective years. This procedure will apply to assessment year 1979-80 and
onwards. The Board's Instruction No.1186 dated 20.6. 78 is modified to this
extent." The same circular has also further clarified that upto assessment G
year I 978- 79 the taxability of interest on doubtful debts credited to suspense
account will be decided in the light of the Board's earlier circular dated
6.10.1952 as the said circular was withdrawn only in June, 1978. The new
procedure under the circular of 9th of October, 1984 will be applicable for
and from the assessment year 1979-80. All pending disputes on the issue
should be settled in the light of these instructions. Therefore, upto the H
642 SUPREME COURT REPORTS [1999) 3 S.C.R.

A assessment year 1978-79, the Central Board of Direct Taxes' circular of 6th
October, 1952 would be applicable; while from the assessment year 1979-80,
the Central Board of Direct Taxes' circular of 9th of October, 1984 is made
applicable. In the present case, the assessment was made on the basis of the
Central Board of Direct Taxes circular of 9th of October, 1984, since the
B assessment pertains to assessment year 1981-82 to which the circular of 6th
October, 1984 is applicable.

What is the status of these circulars? Section 119(1) of the Income-tax
Act, 1961 provides that, "The Central Board of Direct Taxes may, from time
to time; issue such orders, instructions and directions to other income-tax
C authorities as it may deem fit for the proper administration of this Act and
such authorities and all other persons employed in the execution of this Act
shall observe and follow such orders, instructions and directions of the
Board. Provided that no such orders, instructions. or directions shall be
issued (a) so as to require any income-tax authority to make a particular
assessment or to dispose of a particular case in a particular manner; or (b)
D so as to interfere with the discretion of the Appellate Assistant Commissioner
in the exercise of his appellate functions". Under sub-section (2) of Section
119, without prejudice to the generality of the Board's power set out in sub-
section (I), a specific power is given to the Board for the purpose of proper
and efficient management of the work of assessment, and collection of revenue
E to issue from time to time general or special orders in respect of any class
of incomes or class of cases setting forth directions or instructions, not being
prejudicial to assessees, as the guidelines, principles or procedures to be
followed in the work relating to assessment. Such instructions may be by
way of relaxation of any of the provisions of the sections specified there or
otherwise. The Board thus has power, inter alia, to tone down the rigour of
F the law and ensure a fair enforcement of its provisions, by issuing circulars
in exercise of its statutory powers under Section 119 of the Income-tax Act
which are binding on the authorities in the administration of the Act. Under
Section 119(2)(a), however, the circulars as contemplated therein cannot be
adverse to the assessee. Thus, the authority which wields the power for its
G own advantage under the Act is given the right to forego the advantage
when required to wield it in a manner it considers just by relaxing the rigour
of the law or in other permissible manners as laid down in Section 119. The
power is given for the purpose of just, proper and efficient management of
the work of assessment and in public interest. It is a beneficial power given
to the Board for proper administration of fiscal law so that undue hardship
H may not be caused to the assessee and the fiscal laws may be correctly
UCO BANK v. C.I.T. [SUJATA V. MANOHAR, J.) 643

applied. Hard cases which can be properly categorised as belonging to a A
class, can thus be given the benefit of relaxation of law by issuing circulars
binding on the taxing authorities.

The question whether interest earned, on what have come to be known
as "sticky" loans, can be considered as income or not until actual realization,
is a question which may arise before several income tax officers exercising B
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
also be problematic. If, therefore, the Board has considered it necessary to C
lay down a general test for deciding what is a doubtful debt, and directed
that all income tax officers should treat such amounts as not forming part
of the income of the assessee until realized, this direction by way of a
circular cannot be considered as travelling beyond the powers of the Board
under Section 119 of the Income Tax Act. Such a circular is binding under
Section 119. The circular of 9th of October, l984, therefore, provides a test D
for recognising whether a claim for interest can be treated as a doubtful
claim unlikely to be recovered or not. The test provided by the said circular
is to see whether, at the end of three years, the amount of interest has, in ·
fact, been recovered by the bank or not. If it is not recovered for a period
of three years, then in the fourth year and onwards the claim for interest has
to be treated as a doubtful claim which need not be included in the· income E
of the assessee until it is actually recovered.

In the case of Navnitla/ C. Javeri v. K.K. Sen, Appellate Assistant
Commissioner of Income-Tax, 'D' Range, Bombay, [1965] 1 SCR 909, the
legal effect of such circulars is, inter alia, considered ·by a Bench of five
judges of this Court. Section 2(6A)(e) and Section 12(IB) were introduced F
in the Income-tax Act by the Finance Act 15 of 1955 which came into force
on 1st of April, 1955. The Government, however, realised that the operation
of Section 12(1B) would lead to extreme hardship because it would have
covered the aggregate of all outstanding loans of past years and would
impose an unreasonably high liability on the shareholders to whom the loans G
might have been advanced. The Minister, therefore, gave an assurance in
Parliament that outstanding loans and advances which are otherwise liable
to be taxed as dividends in the assessment years 1955-56 will not be subjected
to tax if it is shown that they had been genuinely refunded to the respective
companies before 30th of June, 1955. Accordingly, a circular· was issued by
the Central Board of Revenue on 10th of May, 1955 pointing outto all income H
644 SUPREME COURT REPORTS [l 999) 3 S.C.R.

A tax officers that it was likely that some of the companies might have advanced
loans to their shareholders as a result of genuine transactions of loans, and ·
the idea was not to affect such transactions and not bring them within the
mischief of the new provision. The officers, therefore, were asked to intimate
to all the companies that if the loans were repaid before 30th of June, 1955
B in a genuine manner, they would not be taken into account in determining the
tax liability of the shareholders to whom they may have been advanced
despite the new section. This circular was held by this court as binding on
the Revenue, though limiting the operation of Section l2(IB) or excluding
certain transactions from the ambit of Section l2(lB). It was so held because
the circular was considered as issued for the purpose of proper administration
C of the provisions of Section l2(1B) and the court did not look upon this
circular as being in conflict with Section l2(1B).

A similar view of CBDT circulars has been taken in the case of K.P.
Varghese v. Income Tax Officer, Ernaku/am and Ors., [1981] 4 SCC 173 (at
page 188), by a Bench of two judges consisting of P.N. Bhagwati an.d E.S.
D Venkataramiah, JJ. The Bench has held that circulars of Central Board of
Direct Taxes are legally binding on the Revenue and this binding character
attaches to the circulars even if they be found not in accordance with the
correct interpretation of the section and they depart or deviate frorri .such
construction. Citing the decision of Navnitlal C. Javeri v. K.K. Sen (Supra),
E this Court observed that circulars issued by the Central Board of Direct
Taxes under Section 119 of the Act are binding on all officers and persons
employed in the execution of the Act even if they deviate from the provisions
of the Act. In Keshavji Ravji and Co. v. Commissioner of Income-Tax,
(1990) 183 ITR I a Bench of three judges of this Court has also taken the
view that circulars beneficial to the assessee which tone down the rigour of
F the law and are issued in exercise of the statutory powers under Section 119
are binding on the authorities in the administration of the Act. The benefit
of such circulars is admissible to the assessee even though the circulars
might have departed from the strict tenor of the statutory provision and
mitigated the rigour of the law. This Court, however, clarified that the Board
G cannot pre-empt a judicial interpretation of the scope and ambit of a provision
of the Act. Also a circular cannot impose on the tax-payer a burden higher
than what the Act itself, on a true interpretation, envisages. The task of
interpretation of the laws is the exclusive domain of the courts. However, the
Board has the statutory power under Section 119 to tone down the rigour of
the law for the benefit of the assessee by issuing circulars to ensure a proper
H administration of the fiscal statute and such circulars would be binding on
UCO BANK v. C.I.T. [SUJATA V. MANOHAR, J.] 645
the authorities administering the Act. A
In the case of C.B. Gautam v. Union of India and Ors., ( 1993) 199 ITR
530 (at page 546) a Bench offive judges of this Court considered as enforceable,
.l Instruction No.IA88 issued by the Central Board of Direct Taxes relating to
the enforcement of the provisions of Chapter XX-C of the Income-tax Act.
The Central Board pointed out in the said instruction that in administering the B
provisions of the said Chapter, it has to be ensured that no harassment is
caused to bona fide and honest purchasers or sellers of immovable property
and that the power of pre-emptive purchase has to be exercised by the
appropriate authority only when it has good reason to believe that the
property has been sold at an undervalue and there is payment of black money
in the transaction. The instruction that when the property is put up for sale C
by the appropriate authority, the reserve price should be fixed at a minimum
of 15% above the purchase price shown as the apparent consideration under
the agreement between the parties, was held to be binding on the authority.
The Constitutio.n Bench in the above case also approved of the decision of
this Court in K.P. Varghese v. Income Tax Offi~er (Supra). D
There are, however, two decisions of this Court which have been strongly
relied upon by the respondents in the present case. The first decision is the
majority judgment in The State Bank of Travancore v. Commissioner of
Income-Tax, Kera/a, (l 986) 158 ITR 102, decided· by a Bench of three Judges
of this court by a majority of two to one. This judgment directly deals with E
interest on "sticky advances" which have been debited to the customer but
taken to the intere~t suspense account by a banking company. The majority
judgment has referred to the circular of 6th of October, 1952 and its
withdrawal by the second circular of 20th of June, 1978. The majority .
appears to have proceeded on the basis that by the second circular of 20th
of June, 1978 the Central Board had directed that interest in the suspense F
account on "sticky" advances should be includible in the taxable income of
the assessee and all pending cases should be disposed of keeping these
instructions in view. The subsequent circular of 9th of October, 1984 by
which, from the assessment year 1979-80 the banking companies were given
the benefit of the circular of 9th of October, 1984, does not appear to have G
been pointed out to the Court. What was submitted before the Court was,
that since such interest had been allowed to be exempted for more than half
a century, the practice had transformed itself into law and this position
should not have been deviated from. Negativing this contention, the Court
said that the question of how far the concept of real income enters into the
question of taxability in the facts and circumstances of the case, and how far H
646 SUPREME COURT REPORTS [1999] 3 S.C.R.

A and to what extent the concept of real income should intermingle with the
accrual of income, will have to be judged "in the light of the provisions of
the Act, the principles of accountancy recognised and followed, and
feasibility". The Court said that the earlier circulars being executive in
-
I.:
character cannot alter the provisions of the Act. These were in the nature
B of concessions which could always be prospectively withdrawn. The Court
also observed that the circulars cannot detract from the Act. The decision of
the Constitution Bench of this Court in Navnitlal C. Javeri v. K.K. Sen
(Supra), or the subsequent decision in K.P. Varghese v. Income Tax Officer
(supra) also do not appear to have been pointed out to the Court. Since the
later circular of 9.10.1984 was not pointed out to the Court, the Court
C naturally proceeded on the assumption that the benefit granted under the
earlier circular was no longer available to the assess~e and those circulars
could not be resorted to for the purpose of overcoming the provisions of the
Act. Interestingly, the concurring judgment of the second judge has not dealt
with this question at all but has decided the matter on the basis of other
provisions of law.
D
The said circulars under Section 119 of the Income-tax Act were not
placed before the Court in. the correct perspective because the later circular
continuing certain benefits to the assessees was overlooked and the withdrawn
circular was looked upon as in conflict with law. Such circulars, however, are
E not meant for contradicting or nullifying any provision of the statute. They
are meant for ensuring proper administration of the statute, they are designed
to mitigate the rigours of the application of a particular provision of the
statute in certain situations by applying a beneficial interpretation to the
provision in question so as to benefit the assessee and make the application
of the fiscal provision, in the present case, in consonance with the concept
F of income and in particular, notional income as also the treatment of such
notional income under accounting practice.

In the premises the majority decision in the State Bank of Travancore
v. Commissioner of Income-Tax (Supra) cannot be looked upon as laying
G down that a 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 a 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 five judges
in Navnitlal.C. Javeri v. K.K. Sen (Supra). In fact, State Bank of Travancore
H v. Commissioner ofIncome- Tax (Supra) has already been distinguished in the
UCO BANK v. C.l.T. (SUJATA V. MANOHAR, J.] - 647

case of Keshavji Ravji and Co. v. Commissioner of Income-Tax (Supra) by A
a Bench of three judges in a similar fashion. It is held only as Jaying down
that a circular cannot alter the provisions of the Act. It being in the nature
of a concession, could always be prospectively .withdrawn: In the present
case, the circulars which have been in force are meant to e~sure that while
assessing the income accrued by way of interest on a "sticky" loan, the B

- notional interest which is transferred to a suspense account pertaining to
doubtful loans would not be included in the income of the assessee, if for
three years such interest is not actually received. The very fact that the
assessee, although generally using a mercantile system of accounting, keeps
such interest amounts in a suspense account and does not bring these amounts
to the profit and loss account, goes to show that the assessee is following a C
mixed system of accounting by which such interest is included in its income
only when it is actually received. Looking to the method of accounting so
adopted by the assessee in such cases, the circulars which have been issued
are consistent with the provisions of Section 145 and are meant to ensure
that assesse.es of the kind specified who have to account for all such amounts. D
of interest on doubtful loans are uniformly given the benefit under the
circular and such interest amounts are not included in the income of the
assessee until actually received if the conditions of the circ.ular are satisfied.
The circular of 9.10.1984 also serves another practical purpose of laying
down a uniform test for the assessing authority to decide whether the interest
income which is transferred to the suspense account is, in fact, arising in E
respect of a doubtful or "sticky" loan. This is done by providing that non-
receipt of interest for the first three years will not be treated as interest on
a doubtful loan. But if after three ¥ears the payment of interest is not
received, from the fourth year onwards it will be treated as interest on a
doubtful loan and will be added to the income only when it is actually
received. F

We do not see any inconsistency or contradiction between the circular
so issued and Section 145 of the Income-tax Act. In fact, the circular clarifies
the way in which these amounts are to be treated under the accounting
practice followed by the lender. The circular, therefore, cannot be treated as G
contrary to Section 145 of the Income-tax Act or illegal in any form. It is meant
for a uniform administration of law by all the income tax authorities in a
specific situation and, therefore, validly issued under Section 119 of the
Income-tax Act. As such, the circular would be binding on the Department.

The other judgment on which reliance was placed by the Department H
648 SUPREME COURT REPORTS [1999] 3 S.C.R.

A was a judgment of a Bench of two judges of this Court in Kera/a Financial
Coraportion v. Commissioner of Income-Tax, [J 994] 4 SCC 375, where this
Court, following the majority view in State Bank of Travancore v.
Commissioner of Income-.Tax (Supra) held that interest which had accrued
on a "sticky" advance has to be treated as income of the assessee and taxable
B as such. It is said that ultimately, if the advance takes the shape of a bad
debt, refund of the tax paid on the interest would become due and the same
can be claimed by the assessee in accordance with law. For rea~ons set out
above, we are not in agreement with the said judgment. The relevant circulars
of C.B.D.T. cannot be ignored. The question is not whether a circular can
override or detract from the provisions of the Act; the question is whether
C the circular seeks to mitigate the rigour of a particular section for the benefit
of the assessee in certain specified circumstances. So long as such a circular
is in force it would be binding on the departmental authorities in view of the
provisions of Section 119 to_ensure a uniform and proper administration and
application of the Income-tax Act.

D The appeal is, therefore, allowed and the question is answered in favour
of the assessee and against the department.

Civil Appeal No. 9885-87 of 1996 and 10408 of 1996 :

E These two appeals are filed by Mis Tamil Nadu Industrial Investment
Corporation Ltd. The question raised is similar to the question which we
have considered in Civil Appeal No. 235 of 1996 pertaining to the United
Commercial Bank Ltd. In these two appeals the relevant assessment years
are 1972-73, 1973-74, 1974-75 and 1976- 77. During these assessment years
the circular which was in force was the circular of 6th of October, 1952.
1
F This circular, unlike the later circular of 9.10.1984 which applies to banking
companies, applies to interest accruing to a money lender on loans entered
in a suspense account because of the extreme unlikelihood of their being
recovered. The circular is widely worded to include within its ambit of a public
financial institution such as the assessee. In view of this circular which was
G then in force and which was binding on the assessing authorities, these two
appeals also have to be allowed for reasons which we have set out in Civil
Appeal No. 235 of 1996. These appeals are alSo, therefore, allowed and the
question referred is answered in favour of the assessee and against the
department.
-
. H N.J. Appeals allowed .