UCO BANK, CALCUTTA versus COMMISSIONER OF INCOME TAX, WEST BENGAL

Citation: [1999] 3 S.C.R. 635 · Decided: 13-05-1999 · Supreme Court of India · Bench: SUJATA V. MANOHAR · Disposal: Appeal(s) allowed

Cited by 2 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

UCO BANK, CALCUTT A 
v. 
COMMISSIONER OF INCOME TAX, WEST BENGAL 
MAY 13, 1999 
[SUJATA V. MANOHAR, D.P. MOHAPATRA AND 
R.C. LAHOTI, JJ.] 
Income Tax Act, 1961-Sections 145and119-Interest-Accrual of-
A 
B 
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 of circular 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. 
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 
F 
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 

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