- (1.) This appeal under Section 21 of the Interest Act 1974 read with Section 260 A of the Income Tax Act 1961 has been filed by the Assessee bank in relation to the Assessment Years 1975-1976 to 1986-1987 except for the Assessment Year 1980-1981.
(2.) The issue involved in this appeal is, whether interest on sticky loans, not credited by the Assessee Bank in its Profit and Loss Account, by reason of recovery being extremely doubtful, is liable to tax under the Interest Act 1974. The Assessee Bank follows a mixed system of accounting, which is mainly mercantile, but in respect of certain sticky loans, that is, loans of which recovery is doubtful, on realization basis. The interest on sticky loans is not credited to the Profit and loss Account. Such interest on sticky loans were transferred to the Suspense Account upto 31st December 1980. After 1981 interest on the sticky loans was not at all entered in tne Books of Accounts. A memorandum was maintained of possible interest. As and when interest on such sticky loans was actually realized, tax thereon was paid under the Interest Act as well as the IT Act.
(3.) Sections 4, 5 and 6 of the Interest Act provide as follows:- "4. Charge of tax (1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the first day of April, 1975, a tax (in this act referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest: Provided that the rate at which interest tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983, shall be three and a half per cent. of such chargeable interest. (2) Notwithstanding anything contained in subsection (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the first day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent. of such chargeable interest. Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1997, shall be two per cent. of such chargeable interest. 5. Scope of chargeable interest Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions [or to any co-operative Society engaged in carrying on the business of banking]) accruing or arising to the credit institution in that previous year: Provided that any interest in relation to categories of bad or doubtful debts referred to in section 43D of the Income Tax Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier. 6. Computation of chargeable interest (1) Subject to the provisions of sub-section (2), in computing the chargeable interest of a previous year, there shall be allowed from the total amount of interest (other than interest on loans and advances made to credit institutions) accruing or arising to the assessee in the previous year, a deduction in respect of the amount of interest which is established to have become a bad debt during the previous year: Provided that such interest has been taken into account in computing the chargeable interest of the assessee of an earlier previous year and the amount has been written off as irrecoverable in the accounts of the assessee for the previous year during which it is established to have become a bad debt. Explanation For the removal of doubts, it is hereby declared that in computing the chargeable interest of a previous year, no deduction other than the deduction specified in this sub-section shall be allowed from the total amount of interest accruing or arising to the assessee. (2) In computing the chargeable interest of the previous year, the amount of interest which accrues or arises to the assessee before the first day of August, 1974, or during the period commencing on the first day of March, 1978, and ending with the 30th day of June, 1980 or during the period commencing on the first day of April, 1985 and ending with the 30 day of September, 1991, shall not be taken into account." ;