Ajit K. Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1978-79, the following questions of law have been referred to this court : "1. Whether, on the facts and in the circumstances of the case and in view of the circular of the Central Board of Revenue dated October 6, 1952, read with the subsequent Circular dated October 9, 1984, issued by the Central Board of Direct Taxes, the Tribunal was justified in treating as the income of the assessee the sum of Rs. 2,40,77,729 being the interest on sticky advances and/or debts doubtful of recovery credited during the year in question to the interest suspense account ? 2. Whether, in view of the majority judgment of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102, the Tribunal was justified in holding that the question whether interest on sticky loans credited to the interest suspense account is taxable has been finally concluded by the said majority judgment ? E. A. No. 894 (Cal) of 1966 : 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in terms of Section 36(1)(iv) of the Income-tax Act, 1961, and Rules 87 and 88 of the Income-tax Rules, 1962, and the Board's Notification No. 100 (F. 44A)/8/64/ITJ, dated October 21, 1965, in setting aside the order of the Income-tax Officer in allowing 100 per cent, of the claim for initial contribution to the assessee's Staff Pension Scheme in respect of past services of its members?"
(2.) It is not disputed that the third question is covered by the judgment of this court in I. T. Ref. No. 113 of 1985 (CIT v. Union Carbide (India) Ltd.), where the judgment was delivered on February 5, 1990. In that view of the matter, we do not intend setting out the facts relating to the third question. Following the said decision, we answer the third question in the negative and in favour of the assessee.
(3.) We now turn to the facts relating to the first and second questions : The assessee claimed that the sum of Rs. 2,40,77,729 being interest on sticky advances and/or debts doubtful of recovery credited during the relevant accounting year to the interest suspense account and not to the profit and loss account is not taxable. The assessee credited the aforesaid interest on sticky advances to the interest suspense account as per circular No. 41(V-6) D of 1952, dated October 6, 1952, issued by the Central Board of Revenue. The assessee, by relying upon the aforesaid circular, claimed that the interest credited by the assessee to the interest suspense account is to be excluded from the taxable income. It was the case of the assessee that the Central Board of Revenue, since August 25, 1924, has recognised that interest credited to the interest suspense account and not to the profit and loss account on sticky and/or doubtful debts is not to be included in the income of the assessee. The assessee all throughout has been following the said practice of suspensing the interest on debts which are doubtful of recovery as per the instructions issued by the Board from time to time. However, in the draft assessment order, the Income-tax Officer proposed a disallowance of Rs. 4,02,56,628 being the gross interest credited to the interest suspense account during the previous year. The Inspecting Assistant Commissioner was of the opinion that the circular dated October 6, 1952, has been withdrawn by the CBDT's Circular dated June 20, 1978, and in view of the Board's instructions contained in circular dated June 20, 1978, the whole amount credited in the previous year to the interest suspense account is to be included in the total income. However, he made adjustments for an amount of Rs. 44,75,464 being the amount of bad debts written off during the year and not debited to the profit and loss account and an amount of Rs. 1,17,03,435 being the amount transferred to the interest account. So, he directed that the balance amount of Rs. 2,40,77,729 should be added to the total income of the assessee-bank. The Income-tax Officer followed this direction. On appeal, the Commissioner of Income-tax (Appeals ) upheld this addition, relying on the decision of the Kerala High Court in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336.;