Full Judgment Text
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PETITIONER:
UCO BANK, CALCUTTA
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, WEST BENGAL
DATE OF JUDGMENT: 13/05/1999
BENCH:
Sujata V.Manohar, D.P.Mohapatra, R.C.Lahoti
JUDGMENT:
Mrs. Sujata V. Manohar, J.
Civil Appeal No.235 of 1996
Civil Appeal No.235 of 1996 pertains to the assessment
of the income of the appellant, United Commercial Bank Ltd.,
for the assessment year 1981-82. The assessee had credited
a total sum of Rs.49,15,435/- by way of interest to a
suspense account since recovery of the said amount was
doubtful and no recovery of the said amount or any part of
it which was by way of interest on loans advanced by it, had
been effected in the three previous years. The assessee
excluded the said sum of Rs.49,15,435/- while computing its
total income.
The Income-tax department completed the assessment for
assessment year 1981-82 on 28th of February, 1985, by
following the Central Board of Direct Taxes Circular
No.F.201/21/84 TTA-II dated 9th of October, 1984 excluding
from the total income of the assessee, the said sum of
Rs.49,15,435/- while computing the total income of the
assessee. The Commissioner of Income-tax on examination of
the assessment records considered the exclusion of the said
sum of Rs.49,15,435/- to be erroneous and prejudicial to the
interest of the revenue. By his order dated 5th of March,
1987 he included the said amount in the total income of the
assessee. On appeal, the Income-tax Appellate Tribunal, by
its order dated 14.10.1988, allowed the appeal of the
assessee. A reference was made to the High Court at the
instance of the revenue under Section 256(1) of the
Income-tax Act. The following question was referred to the
High Court:
"Whether, on the facts and in the circumstances of the
case, the Tribunal is justified in law in cancelling the
CIT’s order under section 263 of the Income-tax Act holding
that when the assessment was completed, the only paper
available was the Board’s circular dated 9th October, 1984
and, therefore, it cannot be said that the IAC’s order of
assessment not taxing the interest in suspense of
Rs.49,15,435/- in view of that circular was erroneous and
prejudicial to the interest of revenue."
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The High Court has answered the reference in favour of
the revenue in view of the decision of this Court in State
Bank of Travancore v. Commissioner of Income-tax, Kerala
[(1986) 158 ITR 102].
We have to consider whether interest on a loan whose
recovery is doubtful and which has not been recovered by the
assessee-bank for the last three years but has been kept in
a suspense account and has not been brought to the profit
and loss account of the assessee, can be included in the
income of the assessee for the assessment year 1981-82. It
is the case of the assessee that in respect of loans which
are advanced by it to various customers, recovery of some
loans is very doubtful. It is doubtful whether even the
interest on the loans advanced will be recovered from the
customer. In such cases, the interest calculated on the
loan amount is credited in a suspense account. This amount
is not brought to the profit and loss account of the
assessee-bank because these are amounts which are not likely
to be realised by the bank. Hence they do not form a part
of the real income of the bank. If and when any such amount
or a part of it is recovered, it is included in that
assessment year in the total income of the assessee for the
purpose of payment of income-tax.
The method of accounting which is followed by the
assessee-bank is mercantile system of accounting. However,
the assessee considers income by way of interest pertaining
to doubtful loans as not real income in the year in which it
accrues, but only when it is realised. A mixed method of
accounting is thus followed by the assessee-bank. This
method of accounting adopted by the assessee is in
accordance with accounting practice. In Spicer and Pegler’s
Practical Auditing the relevant passage occurring at page
186-187 has been reproduced in the minority judgment of this
Court in State Bank of Travancore v. Commissioner of
Income-tax, Kerala [(1986) 158 ITR 102 at p.120]. It is as
follows:
"Where interest has not been paid, it is sometimes
left out of account altogether. This prevents the
possibility of irrecoverable interest being credited to
revenue, and distributed as profit. On the other hand, this
treatment does not record the actual state of the loan
account, and in the case of banks and other concerns whose
business it is to advance money, it is usual to find the
interest is regularly charged up, but when its recovery is
doubtful, the amount thereof is either fully provided
against or taken to the credit of an Interest Suspense
Account and carried forward and not treated as profit until
actually received."
Similarly, referring to interest on doubtful debts,
Shukla and Grewal on Advanced Accounts, Ninth Edition at
page 1089 state as follows:
"Interest on doubtful debts should be debited to the
loan account concerned but should not be credited to
interest account. Instead, it should be credited to
Interest Suspense Account. To the extent the interest is
received in cash, the Interest Suspense Account should be
transferred to Interest account; the remaining amount
should be closed by transfer to the Loan account. This
treatment accords with the principle that no item should be
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treated as income unless it has been received or there is a
reasonable certainty that it will be realised."
(Vide State Bank of Tranvacore v. CIT [supra])
The assessee’s method of accounting, therefore,
transferring the doubtful debt to an interest suspense
account and not treating it as profit until actually
received, is in accordance with accounting practice.
Under Section 145 of the Income-tax Act, 1961, income
chargeable under the head "profits and gains of business or
profession or income from other sources" shall be computed
in accordance with the method of accounting regularly
employed by the assessee; provided that in a case where the
accounts are correct and complete but the method employed is
such that in the opinion of the Income- tax Officer, the
income cannot properly be deduced therefrom, the computation
shall be made in such manner and on such basis as the
Income-tax Officer may determine. In the present case the
method employed is entirely for a proper determination of
income.
For this same reason, and to aid proper determination
of income, the Central Board of Direct Taxes had issued
Circular No.41(V-6)D of 1952 dated 6th October, 1952. The
circular, inter alia, stated that "interest accruing to a
money lender on loans entered in the suspense account
because of the extreme unlikelihood of their being recovered
need not be included in the assessee’s taxable income if the
Income-tax Officer is satisfied that there is really little
probability of the loans being repaid. It is considered
desirable to extend this principle to banks which, instead
of transferring the doubtful debts to a suspense account,
credit the interest on such debts to that account provided
the Income-tax Officer is satisfied that recovery is
practically improbable." This circular was in force till
20th of June, 1978 when the Central Board of Direct Taxes
issued a circular dated 20th of June, 1978 withdrawing with
immediate effect the earlier circular of 6th of October,
1952. The reason for the withdrawal of the circular of 1952
is set out in the circular of 20th of June, 1978. The
reason is stated thus: "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 also expressed the same view in the
case of State Bank of Travancore v. Commissioner of
Income-tax, Kerala [110 ITR 336]. The amount of such
interest is, therefore, includible in the taxable income."
The withdrawal of the circular of 6th of October, 1952 which
had been in force for thirty six years was on account of the
decision of the Kerala High Court in State Bank of
Travancore v. Commissioner of Income-tax, Kerala (Supra).
The Central Board of Direct Taxes, however, issued another
circular of 9th of October, 1984 under which the Central
Board of Direct Taxes decided that "interest in respect of
doubtful debts credited to suspense account by the banking
companies will be subjected to tax but interest charged in
an account where there has been no recovery for three
consecutive accounting years will not be subjected to tax in
the fourth year and onwards. However, if there is any
recovery in the fourth year or later the actual amount
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recovered only will be subjected to tax in the respective
years. This procedure will apply to assessment year 1979-
80 and onwards. The Board’s Instruction No.1186 dated
20.6.78 is modified to this extent." The same circular has
also further clarified that upto assessment year 1978- 79
the taxability of interest on doubtful debts credited to
suspense account will be decided in the light of the Board’s
earlier circular dated 6.10.1952 as the said circular was
withdrawn only in June, 1978. The new procedure under the
circular of 9th of October, 1984 will be applicable for and
from the assessment year 1979-80. All pending disputes on
the issue should be settled in the light of these
instructions. Therefore, upto the assessment year 1978-79,
the Central Board of Direct Taxes’ circular of 6th October,
1952 would be applicable; while from the assessment year
1979-80, the Central Board of Direct Taxes’ circular of 9th
of October, 1984 is made applicable. In the present case,
the assessment was made on the basis of the Central Board of
Direct Taxes circular of 9th of October, 1984, since the
assessment pertains to assessment year 1981-82 to which the
circular of 6th October, 1984 is applicable.
What is the status of these circulars? Section 119(1)
of the Income-tax Act, 1961 provides that, "The Central
Board of Direct Taxes may, from time to time, issue such
orders, instructions and directions to other income-tax
authorities as it may deem fit for the proper administration
of this Act and such authorities and all other persons
employed in the execution of this Act shall observe and
follow such orders, instructions and directions of the
Board. Provided that no such orders, instructions or
directions shall be issued (a) so as to require any
income-tax authority to make a particular assessment or to
dispose of a particular case in a particular manner; or (b)
so as to interfere with the discretion of the Appellate
Assistant Commissioner in the exercise of his appellate
functions". Under sub-section (2) of Section 119, without
prejudice to the generality of the Board’s power set out in
sub-section (1), a specific power is given to the Board for
the purpose of proper and efficient management of the work
of assessment and collection of revenue to issue from time
to time general or special orders in respect of any class of
incomes or class of cases setting forth directions or
instructions, not being prejudicial to assessees, as the
guidelines, principles or procedures to be followed in the
work relating to assessment. Such instructions may be by
way of relaxation of any of the provisions of the sections
specified there or otherwise. The Board thus has power,
inter alia, to tone down the rigour of the law and ensure a
fair enforcement of its provisions, by issuing circulars in
exercise of its statutory powers under Section 119 of the
Income-tax Act which are binding on the authorities in the
administration of the Act. Under Section 119(2)(a),
however, the circulars as contemplated therein cannot be
adverse to the assessee. Thus, the authority which wields
the power for its own advantage under the Act is given the
right to forego the advantage when required to wield it in a
manner it considers just by relaxing the rigour of the law
or in other permissible manners as laid down in Section 119.
The power is given for the purpose of just, proper and
efficient management of the work of assessment and in public
interest. It is a beneficial power given to the Board for
proper administration of fiscal law so that undue hardship
may not be caused to the assessee and the fiscal laws may be
correctly applied. Hard cases which can be properly
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categorised as belonging to a class, can thus be given the
benefit of relaxation of law by issuing circulars binding on
the taxing authorities.
The question whether interest earned, on what have
come to be known as "sticky" loans, can be considered as
income or not until actual realization, is a question which
may arise before several income tax officers exercising
jurisdiction in different parts of the country. Under the
accounting practice, interest which is transferred to the
suspense account and not brought to the profit and loss
account of the company is not treated as income. The
question whether in a given case such "accrual" of interest
is doubtful or not, may also be problematic. If, therefore,
the Board has considered it necessary to lay down a general
test for deciding what is a doubtful debt, and directed that
all income tax officers should treat such amounts as not
forming part of the income of the assessee until realized,
this direction by way of a circular cannot be considered as
travelling beyond the powers of the Board under Section 119
of the Income Tax Act. Such a circular is binding under
Section 119. The circular of 9th of October, 1984,
therefore, provides a test for recognising whether a claim
for interest can be treated as a doubtful claim unlikely to
be recovered or not. The test provided by the said circular
is to see whether, at the end of three years, the amount of
interest has, in fact, been recovered by the bank or not.
If it is not recovered for a period of three years, then in
the fourth year and onwards the claim for interest has to be
treated as a doubtful claim which need not be included in
the income of the assessee until it is actually recovered.
In the case of Navnitlal C. Javeri v. K.K. Sen,
Appellate Assistant Commissioner of Income-Tax, ’D’ Range,
Bombay (1965 (1) SCR 909), the legal effect of such
circulars is, inter alia, considered by a Bench of five
judges of this Court. Section 2(6A)(e) and Section 12(1B)
were introduced in the Income-tax Act by the Finance Act 15
of 1955 which came into force on 1st of April, 1955. The
Government, however, realised that the operation of Section
12(1B) would lead to extreme hardship because it would have
covered the aggregate of all outstanding loans of past years
and would impose an unreasonably high liability on the
shareholders to whom the loans might have been advanced.
The Minister, therefore, gave an assurance in Parliament
that outstanding loans and advances which are otherwise
liable to be taxed as dividends in the assessment years
1955-56 will not be subjected to tax if it is shown that
they had been genuinely refunded to the respective companies
before 30th of June, 1955. Accordingly, a circular was
issued by the Central Board of Revenue on 10th of May, 1955
pointing out to all income tax officers that it was likely
that some of the companies might have advanced loans to
their shareholders as a result of genuine transactions of
loans, and the idea was not to affect such transactions and
not bring them within the mischief of the new provision.
The officers, therefore, were asked to intimate to all the
companies that if the loans were repaid before 30th of June,
1955 in a genuine manner, they would not be taken into
account in determining the tax liability of the shareholders
to whom they may have been advanced despite the new section.
This circular was held by this court as binding on the
Revenue, though limiting the operation of Section 12(1B) or
excluding certain transactions from the ambit of Section
12(1B). It was so held because the circular was considered
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as issued for the purpose of proper administration of the
provisions of Section 12(1B) and the court did not look upon
this circular as being in conflict with Section 12(1B).
A similar view of CBDT circulars has been taken in the
case of K.P. Varghese v. Income Tax Officer, Ernakulam and
Ors. (1981 (4) SCC 173 [at page 188]), by a Bench of two
judges consisting of P.N. Bhagwati and E.S. Venkataramiah,
JJ. The Bench has held that circulars of Central Board of
Direct Taxes are legally binding on the Revenue and this
binding character attaches to the circulars even if they be
found not in accordance with the correct interpretation of
the section and they depart or deviate from such
construction. Citing the decision of Navnitlal C. Javeri
v. K.K. Sen (Supra), this Court observed that circulars
issued by the Central Board of Direct Taxes under Section
119 of the Act are binding on all officers and persons
employed in the execution of the Act even if they deviate
from the provisions of the Act. In Keshavji Ravji and Co.
v. Commissioner of Income-Tax (1990 [183] ITR 1) a Bench of
three judges of this Court has also taken the view that
circulars beneficial to the assessee which tone town the
rigour of the law and are issued in exercise of the
statutory powers under Section 119 are binding on the
authorities in the administration of the Act. The benefit
of such circulars is admissible to the assessee even though
the circulars might have departed from the strict tenor of
the statutory provision and mitigated the rigour of the law.
This Court, however, clarified that the Board cannot
pre-empt a judicial interpretation of the scope and ambit of
a provision of the Act. Also a circular cannot impose on
the tax-payer a burden higher than what the Act itself, on a
true interpretation, envisages. The task of interpretation
of the laws is the exclusive domain of the courts. However,
the Board has the statutory power under Section 119 to tone
down the rigour of the law for the benefit of the assessee
by issuing circulars to ensure a proper administration of
the fiscal statute and such circulars would be binding on
the authorities administering the Act.
In the case of C.B. Gautam v. Union of India and
Ors. (1993 (199) ITR 530 at page 546) a Bench of five
judges of this Court considered as enforceable, Instruction
No.1A88 issued by the Central Board of Direct Taxes relating
to the enforcement of the provisions of Chapter XX-C of the
Income-tax Act. The Central Board pointed out in the said
instruction that in administering the provisions of the said
Chapter, it has to be ensured that no harassment is caused
to bona fide and honest purchasers or sellers of immovable
property and that the power of pre-emptive purchase has to
be exercised by the appropriate authority only when it has
good reason to believe that the property has been sold at an
undervalue and there is payment of black money in the
transaction. The instruction that when the property is put
up for sale by the appropriate authority, the reserve price
should be fixed at a minimum of 15% above the purchase price
shown as the apparent consideration under the agreement
between the parties, was held to be binding on the
authority. The Constitution Bench in the above case also
approved of the decision of this Court in K.P. Varghese v.
Income Tax Officer (Supra).
There are, however, two decisions of this Court which
have been strongly relied upon by the respondents in the
present case. The first decision is the majority judgment
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in The State Bank of Travancore v. Commissioner of Income-
Tax, Kerala (1986 (158) ITR 102) decided by a Bench of three
Judges of this court by a majority of two to one. This
judgment directly deals with interest on "sticky advances"
which have been debited to the customer but taken to the
interest suspense account by a banking company. The
majority judgment has referred to the circular of 6th of
October, 1952 and its withdrawal by the second circular of
20th of June, 1978. The majority appears to have proceeded
on the basis that by the second circular of 20th of June,
1978 the Central 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 of October, 1984 by which,
from the assessment year 1979-80 the banking companies were
given the benefit of the circular of 9th of October, 1984,
does not appear to have been pointed out to the Court. What
was submitted before the Court was, that since such interest
had been allowed to be exempted for more than half a
century, the practice had transformed itself into law and
this position should not have been deviated from.
Negativing this contention, the Court said that the question
of how far the concept of real income enters into the
question of taxability in the facts and circumstances of the
case, and how far and to what extent the concept of real
income should intermingle with the accrual of income, will
have to be judged "in the light of the provisions of the
Act, the principles of accountancy recognised and followed,
and feasibility". The Court said that the earlier circulars
being executive in character cannot alter the provisions of
the Act. These were in the nature of concessions which
could always be prospectively withdrawn. The Court also
observed that the circulars cannot detract from the Act.
The decision of the Constitution Bench of this Court in
Navnitlal C. Javeri v. K.K. Sen (Supra), or the
subsequent decision in K.P. Varghese v. Income Tax Officer
(supra) also do not appear to have been pointed out to the
Court. Since the later circular of 9.10.1984 was not
pointed out to the Court, the Court naturally proceeded on
the assumption that the benefit granted under the earlier
circular was no longer available to the assessee and those
circulars could not be resorted to for the purpose of
overcoming the provisions of the Act. Interestingly, the
concurring judgment of the second judge has not dealt with
this question at all but has decided the matter on the basis
of other provisions of law.
The said circulars under Section 119 of the Income-
tax Act were not placed before the Court in the correct
perspective because the later circular continuing certain
benefits to the assessees was overlooked and the withdrawn
circular was looked upon as in conflict with law. Such
circulars, however, are not meant for contradicting or
nullifying any provision of the statute. They are meant for
ensuring proper administration of the statute, they are
designed to mitigate the rigours of the application of a
particular provision of the statute in certain situations by
applying a beneficial interpretation to the provision in
question so as to benefit the assessee and make the
application of the fiscal provision, in the present case, in
consonance with the concept of income and in particular,
notional income as also the treatment of such notional
income under accounting practice.
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In the premises the majority decision in the State
Bank of Travancore v. Commissioner of Income-Tax (Supra)
cannot be looked upon as laying down that a circular which
is properly issued under Section 119 of the Income-tax Act
for proper administration of the Act and for relieving the
rigour of too literal a construction of the law for the
benefit of the assessee in certain situations would not be
binding on the departmental authorities. This would be
contrary to the ratio laid down by the Bench of five judges
in Navnitlal C. Javeri v. K.K. Sen (Supra). In fact,
State Bank of Travancore v. Commissioner of Income- Tax
(Supra) has already been distinguished in the case of
Keshavji Ravji and Co. v. Commissioner of Income-Tax
(Supra) by a Bench of three judges in a similar fashion. It
is held only as laying down that a circular cannot alter the
provisions of the Act. It being in the nature of a
concession, could always be prospectively withdrawn. In the
present case, the circulars which have been in force are
meant to ensure that while assessing the income accrued by
way of interest on a "sticky" loan, the notional interest
which is transferred to a suspense account pertaining to
doubtful loans would not be included in the income of the
assessee, if for three years such interest is not actually
received. The very fact that the assessee, although
generally using a mercantile system of accounting, keeps
such interest amounts in a suspense account and does not
bring these amounts to the profit and loss account, goes to
show that the assessee is following a mixed system of
accounting by which such interest is included in its income
only when it is actually received. Looking to the method of
accounting so adopted by the assessee in such cases, the
circulars which have been issued are consistent with the
provisions of Section 145 and are meant to ensure that
assessees of the kind specified who have to account for all
such amounts of interest on doubtful loans are uniformly
given the benefit under the circular and such interest
amounts are not included in the income of the assessee until
actually received if the conditions of the circular are
satisfied. The circular of 9.10.1984 also serves another
practical purpose of laying down a uniform test for the
assessing authority to decide whether the interest income
which is transferred to the suspense account is, in fact,
arising in respect of a doubtful or "sticky" loan. This is
done by providing that non-receipt of interest for the first
three years will not be treated as interest on a doubtful
loan. But if after three years the payment of interest is
not received, from the fourth year onwards it will be
treated as interest on a doubtful loan and will be added to
the income only when it is actually received.
We do not see any inconsistency or contradiction
between the circular so issued and Section 145 of the
Income-tax Act. In fact, the circular clarifies the way in
which these amounts are to be treated under the accounting
practice followed by the lender. The circular, therefore,
cannot be treated as contrary to Section 145 of the
Income-tax Act or illegal in any form. It is meant for a
uniform administration of law by all the income tax
authorities in a specific situation and, therefore, validly
issued under Section 119 of the Income-tax Act. As such,
the circular would be binding on the Department.
The other judgment on which reliance was placed by the
Department was a judgment of a Bench of two judges of this
Court in Kerala Financial Corportion V. Commissioner of
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Income-Tax (1994 (4) SCC 375) where this Court, following
the majority view in State Bank of Travancore v.
Commissioner of Income-Tax (Supra) held that interest which
had accrued on a "sticky" advance has to be treated as
income of the assessee and taxable as such. It is said that
ultimately, if the advance takes the shape of a bad debt,
refund of the tax paid on the interest would become due and
the same can be claimed by the assessee in accordance with
law. For reasons set out above, we are not in agreement
with the said judgment. The relevant circulars of C.B.D.T.
cannot be ignored. The question is not whether a circular
can override or detract from the provisions of the Act; the
question is whether the circular seeks to mitigate the
rigour of a particular section for the benefit of the
assessee in certain specified circumstances. So long as
such a circular is in force it would be binding on the
departmental authorities in view of the provisions of
Section 119 to ensure a uniform and proper administration
and application of the Income-tax Act.
The appeal is, therefore, allowed and the question is
answered in favour of the assessee and against the
department.
Civil Appeal No. 9885-87 of 1996 and 10408 of 1996 :
These two appeals are filed by M/s Tamil Nadu
Industrial Investment Corporation Ltd. The question raised
is similar to the question which we have considered in Civil
Appeal No. 235 of 1996 pertaining to the United Commercial
Bank Ltd. In these two appeals the relevant assessment
years are 1972-73, 1973-74, 1974-75 and 1976- 77. During
these assessment years the circular which was in force was
the circular of 6th of October, 1952. This circular, unlike
the later circular of 9.10.1984 which applies to banking
companies, applies to interest accruing to a money lender on
loans entered in a suspense account because of the extreme
unlikelihood of their being recovered. The circular is
widely worded to include within its ambit a public financial
institution such as the assessee. In view of this circular
which was then in force and which was binding on the
assessing authorities, these two appeals also have to be
allowed for reasons which we have set out in Civil Appeal
No. 235 of 1996. These appeals are also, therefore,
allowed and the question referred is answered in favour of
the assessee and against the department.