Interest on doubtful debts in suspense account of banking company not taxable under Income-tax Act, 1961.

The High Court CALCUTTA held that interest on debts doubtful of recovery credited to the suspense account of a banking company is not taxable. The Court relied on a Supreme Court decision and a circular from 1952, stating that such interest cannot be taxed under the Income-tax Act, 1961. The Court emphasized that if any part of the interest is recovered later, it can be taxed in the year of receipt. The Tribunal's decision was deemed erroneous, and both issues were decided in favor of the assessee against the Revenue.

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Issues Involved:
The judgment involves the taxation of interest on debts doubtful of recovery credited to the suspense account of a banking company for the assessment year 1976-77.

Issue 1 - Taxability of Interest on Sticky Advances:
The Tribunal referred whether the interest on sticky advances credited to the interest suspense account is taxable in view of circulars issued by the Central Board of Revenue. The Income-tax Officer added the interest to the income of the assessee based on the decision in State Bank of Travancore v. CIT [1986] 158 ITR 102. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this decision.

Issue 2 - Benefit of Circulars to the Assessee:
The second question raised was whether the Tribunal was justified in not giving the benefit of the circulars to the assessee and treating the net increase in the interest suspense account as the income of the assessee. The assessee argued that the interest credited in the suspense account is not taxable based on Circular No. 41 (V-6)D of 1952. The assessee relied on the latest decision of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889, where it was observed that interest accruing to money lenders on loans entered in the suspense account due to unlikelihood of recovery cannot be taxed.

The High Court, considering the latest decision of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889, held that the interest on debts doubtful of recovery credited to the suspense account is not taxable. The Court noted that the circular of October 6, 1952, applied to banking companies and such interest cannot be taxed under the Income-tax Act, 1961. The Court emphasized that if any part of the interest is recovered later, it can be taxed in the year of receipt under section 41(1) of the Act. Consequently, the Tribunal's decision was deemed erroneous, and both questions were answered in favor of the assessee and against the Revenue.

The judgment was delivered by Y. R. MEENA and ARUNABHA BARUA of the High Court CALCUTTA.

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