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2013 Supreme(Cal) 769
High Court of Judicature at Calcutta
INDIRA BANERJEE & ANINDITA ROY SARASWATI, JJ.
UCO Bank
Versus
Commissioner of Income Tax
I.T.A. No. 43 of 2002 (Original Side)
Decided On : 02-12-2013
For the Appellant:R.N. Bajoria, S. Bhowmik, C.S. Das, Advocates.
For the Respondent:Nizamuddin, Advocate.
Interest on sticky loans, not credited in the profit and loss account due to doubtful recovery, is not taxable under the Interest Act, 1974.
Headnote:
INTEREST TAX ACT - INTEREST ON STICKY LOANS - SECTIONS 4, 5, 6 - INTEREST ON STICKY LOANS, NOT CREDITED IN PROFIT AND LOSS ACCOUNT DUE TO DOUBTFUL RECOVERY, NOT TAXABLE UNDER INTEREST ACT, 1974.
Fact of the Case:
The assessee bank followed a mixed system of accounting, with interest on sticky loans (loans of which recovery is doubtful) being transferred to a suspense account up to 31st December 1980 and not entered in the books of accounts thereafter. A memorandum was maintained for possible interest, and tax was paid on such interest when realized under the Interest Act and the Income Tax Act.
Finding of the Court:
The court held that interest on loans and advances, of which recovery has become extremely doubtful and is written off for all practical purposes, but recorded separately in the faint hope of recovery at some future point of time, does not come within the purview of chargeable interest within the meaning of Sections 5 and 6 of the Interest Act.
Issues: 1. Whether interest on sticky loans, not credited in the profit and loss account due to doubtful recovery, is liable to tax under the Interest Act 1974? 2. 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?
Ratio Decidendi: 1. Chargeable interest under the Interest Act is the total amount of interest accruing or arising in the previous year, irrespective of whether it is actually received. 2. Interest on loans and advances of which recovery has become extremely doubtful and is written off for all practical purposes, but recorded separately, does not come within the purview of chargeable interest under the Interest Act. 3. 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.
Final Decision: The appeal filed by the assessee is allowed.
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 realization basis. The interest on sticky loans is not credited to the Profit and loss Account. Such interest on sticky loans were transferred to the Suspense Account upto 31st December 1980. After 1981 interest on the sticky loans was not at all entered in the 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 ITAct.
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, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three 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, 1997, shall be two per cent. of such chargeable interest.
5. Scope of chargeable interest – Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions [or to any co-operative Society engaged in carrying on the business of banking]) accruing or arising to the credit institution in that previous year:
Provided that any 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 to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, 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 c
