The facts of the case were as follows. For assessment year 1981-82, the assessee had credited a total sum of Rs 49,16,435 by way interest to a suspense account since recovery of the said amount was doubtful and no recovery of the said amount at any part of it which was by way of interest on loans advanced by it had been effected in the three previous years. Hence the said sum was excluded while computing total income. The I.Tax officer completed the assessment for the year 81-82 on 28 February 85 excluding from the total incomethe said sum of Rs 4915435 by following Central Board of Direct taxes circular No.F201/21/84/TTA II dt. 9th October 1984. The commissioner of Income Tax by his order dated 5th March 1987, included the said amount in the total income of Assessee. The tribunal allowed the appeal of the Assessee. On reference to High Court, in view of Supreme court's decision in State Bank of Travancore vs. Comm. of I.Tax Kerala (1986) 158 ITR 102, High Court answered the reference in favour of revenue. Hence the present appeal by the assessee.

The assessee's case was in respect of loans which are considered sticky & where interest is not recovered for three years, interest calculated on such account is credited to suspense account and is excluded from total income as recovery of such interest is doubtful. However whenever such interest or part thereof is recovered, it is included in total income.

Supreme Court noted that assessee follows mixed method of accounting which is in accordance with accepted accounting practice.The supreme court noted that Central Board of Direct Taxes had issued Circular No.41 (V-6) D of 1952 which interalia extended the principle of interest on sticky loans being transferred to Interest Suspense account to Banks provided the Income tax Officer is satisfied that recovery is practically improbable". This circular was in force till 20th June 1978 when it was withdrawn. The reason for withdrawal of circular given was "The Board has been advised that where accounts are kept on Mercantile basis, interest thereon is taxable irrespective of whether the interest is credited to suspense account or to interest account.The Kerala High Court has expressed the same view in the case of State Bank of Travancore vs. Comm. of I.Tax Kerala, 110 ITR 336. The amount of such interest is therefore includible in the taxable income."

Central Board of Direct taxes issued another circular under which it was decided "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjectto tax but interest charged in an account where there has been no recovery for three consecutive years will not be subject to tax in the fourth year onwards. However if there is any recovery in the fourth year or later the actual amount received will be subject to tax in respective years." In the present case the assessment was made on the basis of Circular dt. 90 CT 1984.

Supreme Court considered status of these circulars in the light of provisions of sec 119(1) of Income tax Act 1961 and noted that the power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest.

Supreme Court considered its earlier decisions (1) in Navnitlal C Javeri vs. K.K. Sen Appelate Asst.Comm. of Income tax "D" Range Bombay 1965(1) SCR 909 (2) K.P. Verghese vs. I.Tax officer Ernakulum & Ors. 1981 4 SCC 173 (3) Keshavji Ramji Co. vs. Comm. of I.Tax 1990 183 ITR 1. In above cases it was clearly held that circulars of Central Board of Direct Taxes are legally binding on therevenue and this binding character attaches to the circulars even if they be found of not in accordance with the correct interpretation of the section & they depart or deviate from such construction.

Supreme Court considered majority judgement in State Bank of Travancore vs. Comm. of I.Tax Kerala 1986 (158) ITR 102. The court noted majority appears to have proceeded on the basis that by 2nd Circular of 20 June 1978 the C.Board had directed that interest in the suspense account on sticky advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of 9th October 1989 by which benefit was given to banking companies does not appear to have been pointed out to to the court. Apparently decisions of Supreme Court, in Navnitlal C. Javeri & K.P. Verghese S mentioned above were also not pointed out to the Court. In the premises Supreme Court held that the majority decision in State Bank of Travancore vs.Comm. of I.Tax mentioned above cannot be looked upon as laying down that a circular which is properly issued under sec 119 of I.Tax Act for proper administration of Act and for reliving the rigour of too literal construction of the law for the benefit of assessee in certain situation would not be binding on the departmental authorities.

The circular clarifies the way in which these amounts i.e. interest on sticky loan, are to be treated under the accounting practice followed by the lender. The circular cannot be treated as contrary to sec 145 of the Income Tax Act or illegal in any form. It is meant for uniform administration of law by all Income-tax authorities in a specific situation and therefore validly issued under sec 119 of the Income Tax Act. As such Circular will be binding on department. The appeal of the U.Co Bank was allowed & question answered in favour of the assessee & against department.

(The author is a Mumbai based chartered accountant)