CIT v. Standard Chartered Bank (2024)

🏦 CIT v. Standard Chartered Bank & Bank of Rajasthan Ltd – Supreme Court on Non-Taxability of Interest on Bad and Doubtful Debts (2024)

📌 Background

The taxation of interest on bad and doubtful debts has long been a contentious issue in banking taxation. The question fundamentally revolves around whether such interest, which is not realized and whose recovery is uncertain, can still be treated as “income” under Section 4 of the Income-tax Act, 1961.

In CIT v. Standard Chartered Bank (2024) 469 ITR 408 (SC) and Bank of Rajasthan Ltd v. CIT (2024) 469 ITR 280 / 301 Taxman 463 (SC), the Supreme Court reaffirmed the long-standing principle that interest on bad and doubtful debts is not taxable, following the rationale laid down in UCO Bank v. CIT (1999) 237 ITR 889 (SC). The Court further recognized the binding effect of the CBDT Circular dated October 9, 1984, which directed that interest on doubtful debts credited to a “suspense” or “memorandum account” shall not be treated as income.

📂 Facts of the Case

Assessees:

1. Standard Chartered Bank (AYs 1985–86 & 1986–87)
2. Bank of Rajasthan Ltd (AYs 1985–86 & 1986–87)

Both were banking institutions governed by the Banking Regulation Act, 1949 and followed mercantile accounting.

Core Issue:

Whether interest on bad and doubtful debts, which was not credited to the profit and loss account but placed in a suspense account, can be taxed on accrual basis under Sections 4 and 5 of the Income-tax Act.

❓ Point of Dispute

Whether interest on non-performing or doubtful advances accrues as real income chargeable to tax under Section 4, despite the uncertainty of its collection and the bank’s adherence to CBDT Circular No. 41 (F.No. 201/21/84-IT(A-II)) dated October 9, 1984.

📑 Submissions by the Assessees

• The interest in question was on bad and doubtful debts, and therefore, realization was highly uncertain.
• In compliance with the CBDT Circular (1984) and prudential banking norms, the interest was credited to a suspense or memorandum account rather than to the profit and loss account.
• Under the doctrine of real income, only income that has actually accrued or is reasonably certain of realization can be taxed.
• The issue was covered by the Supreme Court’s decision in UCO Bank v. CIT (1999) 237 ITR 889 (SC), which held that such interest is not taxable until realized.
• The assessee banks followed a consistent and bona fide accounting practice, accepted by the Department in earlier years.

📑 Submissions by the Revenue

• The Revenue contended that under the mercantile system of accounting, income accrues when the right to receive arises, irrespective of actual receipt.
• The Revenue argued that the CBDT circular could not override statutory provisions of the Income-tax Act.
• Since the banks maintained accounts on accrual basis, interest should be deemed to have accrued at the close of the accounting year.

⚖️ Legal Principles & Supreme Court’s Findings

1. Binding Nature of CBDT Circulars (Section 119)

The Court reiterated that CBDT Circulars are binding on the Department.
The Circular dated October 9, 1984, clearly instructed that:

“Interest on doubtful debts, if credited to a suspense account and not brought to the profit and loss account, shall not be included in taxable income until actually realized.”

Hence, the Department was bound to follow the circular.

2. Doctrine of Real Income (Sections 4 & 5)

The Court reaffirmed the principle that tax is levied on real income, not hypothetical accruals.
Citing UCO Bank v. CIT (1999) 237 ITR 889 (SC), the Court observed:

“Interest on sticky advances, which is not brought to the profit and loss account due to uncertainty of realization, does not accrue as real income.”

Since the banks had no real expectation of receipt, there was no accrual of income in substance.

3. Recognition of Income under Mercantile System

While the mercantile system recognizes income on accrual, the Court clarified that accrual cannot be a fictional event — it must represent a real right to receive.
In the case of sticky loans, the right to receive is contingent upon recovery, hence no real accrual occurs.

4. Consistency and Bona Fides

The Court appreciated that both banks had consistently followed a recognized accounting method, aligning with prudential banking norms and CBDT guidance.
No mala fides were alleged by the Revenue.

🏁 Held

✅ Interest on bad and doubtful debts is not taxable until realized.

✅ The CBDT Circular dated October 9, 1984, is binding on tax authorities and protects banks following its directions.

✅ The doctrine of real income must prevail over notional accruals under the mercantile system.

✅ The decisions of the High Courts of Kerala (CIT v. Standard Chartered Bank, ITR No. 87 of 1996) and Rajasthan (CIT v. Bank of Rajasthan Ltd, 316 ITR 391) were reversed.

✅ The Karnataka High Court’s decision in CIT (LTU) v. State Bank of India (2020) 428 ITR 316 (Karn.) was affirmed.

✅ Practical Impact on Taxpayers

• Banks and NBFCs: Interest on bad or doubtful debts, credited to a suspense or memorandum account, need not be included in taxable income until realization.
• CBDT Circulars are binding: Department cannot disregard circulars beneficial to taxpayers.
• Consistency in accounting: Banks must maintain consistent accounting policies and comply with RBI prudential norms.
• Certainty in tax treatment: This ruling provides judicial finality, minimizing litigation on this recurring issue.

🔑 Key Takeaways

1. Real income doctrine reaffirmed: Only income that has actually accrued or is reasonably realizable is taxable.
2. CBDT circulars have binding effect: Circulars issued under Section 119 are enforceable on tax authorities.
3. Suspense account ≠ income: Crediting interest to a suspense or memorandum account signifies non-accrual.
4. Uniform application: The ruling applies equally to domestic and foreign banks.
5. Judicial continuity: Aligns with earlier Supreme Court precedents such as UCO Bank and State Bank of India cases.

📢 Why This Case Matters

The 2024 Supreme Court rulings in CIT v. Standard Chartered Bank and Bank of Rajasthan Ltd provide long-awaited clarity on the tax treatment of interest on non-performing assets (NPAs).
They reinforce that the principle of real income remains paramount, even in the context of mercantile accounting.

By affirming the CBDT Circular’s authority and rejecting arbitrary taxation of unrealizable interest, the Court safeguarded the interests of the banking industry and ensured consistency between tax law and prudential financial regulation.

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