Shylendra Kumar, J.—In this reference at the instance of the revenue for the assessment year 1987-88 the Tribunal has referred the following 3 questions for the opinion of this court :

"1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is correct in following cash system of accounting for interest receivable on sticky loans and mercantile system of accounting for other receipts ?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the interest on sticky loans should be assessed on cash basis and not on accrual basis ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that penal interest paid to Reserve Bank of India is not disallowable ?"

2. On a perusal of the statement of case as provided by the Tribunal it appeared that the revenue had initially sought for referring as many as 6 questions for the opinion of this court. However, the Tribunal finding that two of the questions being academic in nature, inasmuch as similar questions had been answered by this court earlier did not deem it fit to refer the same. In respect of the other 4 questions the Tribunal has thought it fit to refer as is now referred for our opinion.

3. The facts as emerge from the statement of facts by the Tribunal is that the respondent-assesses a nationalised bank carrying on the business of banking had been following the mercantile system of accounting for the purpose of computing its profits. The assessee had adhered to the mercantile system of accounting in respect of its transactions uniformly. However, it appears that in respect of certain categories of loans considered to be sticky loans which comprised of 3 types of transactions, viz.,

(1) suit filed accounts,

(2) claims lodged accounts, and

(3) accounts provided for bad and doubtful debts, the interest income on these loans was sought to be offered to tax on cash basis, in the sense that the interest income from these loans were actually reflected in the books of account on receipt basis and not on accrual basis.

In respect of the interest arising out of such sticky loans the assessee had put a claim that it was shifting over to the cash system of accounting wherein such accounts had been categorised as sticky loans and such transactions fell in one or other of the 3 classified types of transactions referred to above. Also it transpires from the statement that the assessee bank did not give up its claim for interest in respect of such transactions in the nature of sticky loans, and on the other hand it appears that suits had been filed claiming repayment of the capital and the interest amount. Interest was being claimed pendante lite also. Nevertheless the assessee was not offering interest attributable to such transactions of sticky loans as part of the total income as and when they were categorized as such, and when they indicated that they are following the cash system of accounting in respect of the interest out of such sticky loans. It transpires that a sum of Rs.24,21,43,522 was interest attributable for the accounting period relevant for the assessment year 1987-88 which the assessee has earned in respect of such sticky loan transactions. The assessee nevertheless did not offer this amount for tax on the premise that the assessee having chosen to follow the cash system of accounting in respect of these transactions, amount can be offered to tax as forming part of the total income only in the corresponding assessment year referable to the accounting year during which year the assessee actually receives the amount. The question as to whether such interest amount forms part of the total income of the assessee, liable to be taxed in the assessment year under consideration is the subject-matter of the first two questions referred to for our opinion. It appears that the assessing officer had disallowed the claim of the assessee t