JUDGMENT

TULZAPURKAR, J. (Minority view) :— These appeals by certificate from the High Court raise the following two interesting questions of law for our determination :

(1) Whether on the facts and in the circumstances of the case the addition of the sums of Rs. 67,170/-, Rs. 47,777/- and Rs. 57,889/-, representing interest on sticky advances, as income for the assessment years 1965-66, 1966-67 and 1967-68 respectively was justified in law?

(2) Whether on the facts and in the circumstances of, the case the exchange difference of Rs. 1,66,128/- arising on, devaluation of the Indian rupee on 6-6-1966 was rightly treated as income for the assessment year 1967-68?

2. The facts giving rise to the first question lie in a narrow compass and are these. The assessee is a subsidiary of the State Bank of India; it maintains accounts on mercantile system making entries on accrual basis; it adopts the calendar year as its previous year and the calendar years 1964, 1965 and 1966 are respectively the relevant previous years for the assessment years 1965-66, 1966-67 and 1967-68 to which the question relates. In the course of its banking business the assessee charged interest on advances considered doubtful of recovery otherwise called sticky advances by debiting the concerned parties but instead of carrying it to its Profit and Loss Account credited the same to a separate account styled Interest Suspense Account as the principal amounts of these sticky advances themselves had become, not bad or irrecoverable but extremely doubtful of recovery. However, in its returns the assessee disclosed such interest separately and claimed that the same was not taxable in its hands as income for the concerned years. The amounts so charged to the concerned parties but credited to the Interest Suspense Account were Rs. 67, 170/-, Rs. 47,777/- and Rs. 57,889/- for the assessment years 1965-66, 1966-67 and 1967-68 respectively.

3. Before the taxing authorities as also before the Tribunal and the High Court the assessee raised the contention that having regard to the deteriorating financial position of the concerned parties and history of their accounts, the recovery of even the principal amounts had become highly improbable and extremely doubtful rendering the advances sticky and as such the interest thereon, though. debited to them, was, following a well recognised principle of commercial accountancy, taken to Interest Suspense Account so as to avoid showing inflated profits by including hypothetical income and since such interest was not its real income, the same was not taxable in its hands. The contention was rejected at all the levels principally on two grounds (a) since admittedly the assessee was following the mercantile system of accounting such interest had accrued to it at the end of each accounting year and (b) the assessee had itself shown the accrual of such interest by charging the same to the concerned parties by making debit entries in their accounts. It was observed that if any part of the debts later became irrecoverable in any year the assessee could in that year treat it as such and claim deduction under S. 36(1)(vii) of the Income-tax Act, 1961. In holding that these three sums were taxable as income in the hands of the assessee for the concerned years the High Court followed its earlier decision in the case of Catholic Bank of India (In Liquidation) v. Commr. of Income-tax, Kerala, 1964 Ker LT 653 : (1965) 1 ITJ 855 where despite the directive issued by the Reserve Bank of India to the assessee-bank not to carry interest on such sticky advances to Profit and Loss Account and despite the fact that the assessee-bank had in pursuance thereof omitted such interest from its Profit and Loss Account the Court had taken the view that such interest was taxable as income in the hands of the assessee-bank because of the mercantile system of accounting that had been regularly employed by it, which had not been changed even after receiving the directive