Circular No. 491-Income Tax dated 30-6-1987

892. Method of accounting in the case of interest on sticky advances – Change from mercantile to cash – Change by some State financial corporations – Whether to be allowed
893. The Supreme Court has in its judgment in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 held that the inter­est accruing on sticky loans is taxable to income-tax on accrual basis where the assessee follows the mercantile system of ac­counting.
894. Some State Financial Corporations have changed the method of accounting interest from mercantile to cash basis.
895. State Financial Corporations are governed by the directives of the Reserve Bank of India and IDBI. If these authorities are satisfied that the change in the system of accounting of interest from mercantile to cash basis by the concerned State Financial Corporation is legal, valid and bona fide, the Income-tax Depart­ment may accept the cash system of accounting of interest.

Circular : No. 491 [F.No. 201/60/867-IT(A-II)], dated 30-6-1987.