CBDT circulars can defer tax on sticky advances until realisation, while forfeited dividend adjustments may be rejected

A binding CBDT circular under section 119 was treated as controlling the tax treatment of interest on sticky advances and doubtful loans, so such interest was not brought to tax on accrual where the circular's conditions were met and the bank credited it to a suspense account. The commentary also notes that a forfeited dividend provision, treated as an appropriation of post-tax profits rather than a charge against profits, did not justify an addition, and the appellate relief deleting that adjustment was maintained.

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Issues: (i) Whether interest on sticky advances / non-performing assets in the hands of cooperative banks was taxable on accrual basis or was liable to be excluded in view of the relevant CBDT circulars and the banking accounting practice. (ii) Whether the deletion of the addition relating to forfeited dividend in the connected appeals was sustainable.

Issue (i): Whether interest on sticky advances / non-performing assets in the hands of cooperative banks was taxable on accrual basis or was liable to be excluded in view of the relevant CBDT circulars and the banking accounting practice.

Analysis: The dispute turned on the effect of section 145 of the Income-tax Act, 1961, the binding force of circulars issued under section 119 of the Income-tax Act, 1961, and the treatment of interest on doubtful loans under the banking accounting practice. The Court applied the principle that the CBDT circular governing sticky advances is binding on the Department and operates to ensure that interest on doubtful loans is not brought to tax until actually realised, where the prescribed conditions are satisfied. The decision relied on the settled position that such circulars mitigate the rigour of the law and that the assessee bank's treatment of doubtful interest in a suspense account is consistent with the accepted method of accounting for such items.

Conclusion: The interest on sticky advances was not required to be brought to tax in the manner urged by the Revenue, and the addition was rightly deleted. The finding is in favour of the assessee.

Issue (ii): Whether the deletion of the addition relating to forfeited dividend in the connected appeals was sustainable.

Analysis: The dividend amount was treated as an excess provision made earlier and reversed in the year under consideration, with the amount transferred to a reserve account. The Court accepted the view that the earlier provision was not a charge against profits but an appropriation of post-tax profits. On that basis, no infirmity was found in the appellate finding deleting the addition.

Conclusion: The deletion of the addition relating to forfeited dividend was upheld. The finding is in favour of the assessee.

Final Conclusion: The Revenue's challenges failed on both the principal issue concerning sticky advances and the connected issue concerning forfeited dividend, and the appellate relief granted to the assessees was maintained.

Ratio Decidendi: A binding CBDT circular issued under section 119 of the Income-tax Act, 1961 can direct that interest on sticky advances or doubtful loans is not assessed as income until actually realised, and such treatment prevails where the prescribed conditions of the circular are satisfied.

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