STATE BANK OF TRAVANCORE versus COMMISSIONER OF INCOME TAX, KERALA

Citation: [1986] 1 S.C.R. 25 · Decided: 08-01-1986 · Supreme Court of India · Bench: V.D. TULZAPURKAR · Disposal: Dismissed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

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' 
_, 
STATE BANK OF TRAVANCORE 
v. 
COMMISSIONER OF INCOME TAX, KERALA 
JANUARY 8, 1986 
[V, D, TULZAPURKAR, SABYASACIU MUKHARJI AND 
RANGAl'IATH MISRA, JJ, ] 
Income Tax Act, 1961: 
25 
Sections 28, 29 & 145 - Banking Company - Advances con-
sidered doubtful of recovery-interest on such 'sticky' advan-
ces not carried in 'Profit and Loss Account' -
Credited to 
separate account -
'Interest suspense ac;count' -
Accrual of 
income - Whether arises - Interest amount - Whether exemption 
frorn tax. - Concept and notion of real income - Explained. 
Hethod of account;i.ng - How far relevant for computa-
tion of income, prof.its and gains -
Mercantile and cash 
systems of accounting - Oif fererice between. 
Devaluation of Indian Rupee -
Exchange difference aris-
ing therefrom - Whether income assessable to tax. 
The assessee, a subsidiary bank of the State Bank of 
India, used to maintain in the accounting years 1964, 1965 and 
1966, its accounts in mercantile system making entries and 
calculating income and loss on accrual basis and adopted the 
calendar year as its previous year. The assessee, in the 
course of its banking business, used to charge interest on 
~.. advances considered doubtful of recovery termed as 'sticky 
advances' by debiting the concerned parties but instead of 
carrying the same to its 'Profit & Loss Account', credited the 
same to a separate accqunt called 'Interest Suspense Account' 
as the principal amounts of these 'stic~y advances' themselves 
had become not bad or irrecoverable, but extremely doubtful of 
recovery. In its returns th~ assessee disclosed such interests 
separately and claimed that the same were not taxable in its 
hands as income for the concerned years. 
'\ 
The business of the assessee bank also included buying 
and selling of foreign exchange and before devaluation of the 
Indian Rupee on August 6, 1966, the assessee bank held foreign 
A 
B 
c 
D 
E 
F 
G 
H 
A 
B 
c 
D 
E 
F 
G 
P. 
26 
SUPREME COURT REPORTS 
(1986] 1 s.c.R. 
exchm\ge by way of cash balances available with their foreign ·i 
correspondents, forward contracts, items in transits, etc. in 
U.S. Dollars and in Sterling, which on devaluation of the 
Indian Rupee when converted back to rupees at the post de-
valuation rates gave rise to a profit of 57.5% in the transac-
tion; the assessee bank-credited this surplus to an account 
designated "Provision for Contingencies". In the Assessment 
Year 1967-i>B the assessee bank claimed that profit by way of 
exchange difference on devaluation should not be taxed as it 
was of a casual and non-recurring nature. 
The claim of the assessee bank on both these aspects was 
rejected by the Income-tax Authorities, Income-tax Appellate 
Tribunal and the High Court. The High Court held: (a) the 
assessee was following the mercantile system of accounting; 
such interest, therefore, had accrued to the assessee at the 
end of the accounting year; and (b) the assessee itself had 
treated such income as accrual of interest by charging the 
same to the parties concerned by making debit entries in their 
respective accounts. However, if any part of these debits had r 
later on become irrecoverable in any year, the assessee could 
have, in that year, treated the same as such and claimed 
deduction under section 36(l)(vii) of the Income Tax Act, 
1961. 
In the appeals to this Court on behalf of the assessee-
bank it was contended: (l) that the three sums representing 
interest on 'sticky' advances, i.e. advances in respect where-
of there was high improbability of recovery of even the 
principal amounts, ought not to have been subjected to tax as 
income under the Act; that what are chargeable to income-tax 
in respect of a business are prof its and gains actually 
resulting from the transaction of the previous year, that is 
, 
to say, the real profits and gains and not hypothetical 
-
profits or gains on a doctrinaire theory of accrual; that even 
under the mercantile system of accounting regularly adopted by 
an assessee it is only the acrual of "real income" in the 
commercial sense which is chargeable to tax, that accrual is a 
matter of substance to be decided on commercial principles 
having regard to business character of the transaction and the 
realities of the situation and cannot be determined on any 
, 
abstract theory of accrual or by adopting a legalistic 
~ 
approach and that if regard is had to the commercial princi-
ples and realities of the situation it will be clear 

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