1 ITA 202 of 2001 ITA 203 of 2001 ITA 204 of 2001 ITA 205 of 2001 In The High Court At Calcutta Special Jurisdiction (Income Tax) Original Side Present: The Hon'ble Justice [ENTITY] And The Hon'ble Justice [ENTITY] Commissioner of Income Tax- II, Calcutta Judgment on: 28.1.2011. [ENTITY], J.:- The instant appeal has been preferred against the judgment and order of Income Tax Appellate Tribunal "E" Bench, Calcutta in [CASE NUMBER] relating to assessment year 1989-1990 dated 23rd March, 2000. It appears from the record that the learned Tribunal by the judgment and order impugned, disposed of five several appeals preferred by the appellant before us and three several appeals preferred by the Revenue. The appellant before us preferred appeal before the learned Tribunal in relation to assessment years 1989-90, 1990-91, 1991-92 [two appeals in relation to 1991-92, [CASE NUMBER] and [CASE NUMBER]] and 1992-93. The Revenue preferred appeal in relation to assessment years 1990-91, 1991-92 and 1992-93. 2 The present appeal was admitted by an order dated 18th September 2001 on the following substantial question of law:- (i) Whether on a proper reading of the approval made by the Board of Directors in respect of the balance-sheet and the profit and loss account and the notes which clearly indicate the non-charging of interest on the loan/advance to Swan Mills Limited, it can be said to be in law that the Board of Directors had not approved the surrender and/or non-charging of interest on the loan advanced to Swan Mills Limited? (ii) Whether the approval of the Board of Directors of the accounts including the balance-sheet, profit and loss account and the notes thereto the approval will relate back to the accounting year in question for which the Board of Directors have approved of the accounts? (iii) Whether in view of the provision of the [ACT] and the fact that scheme has been framed by the Board of Directors in respect of the Swan Mills Limited, the interest on the advances/loans made to Swan Mills limited can be said to accrued to the assessee and is liable to be included in the income of the assessee? (iv) Whether the inclusion of the interest on loan and advances to Swan Mills Limited is sustainable in law and/or not is otherwise unreasonable and perverse? 3 The facts and circumstances which are related to the controversy in the present appeal are set out hereunder: The assessee/appellant before the accounting year ended 31st March 1988 granted loan to one M/s. Swan Mills Industries. The said loan amount was repayable, however, the same was not paid. Therefore, there has been accrual of interest on the said loan amounting to Rs. 16,27,059 even though the assessee company did not reflect it in the profit and loss account. Naturally in the returns for the assessment year 1989-90 it was not shown as income. The Assessing Officer did not accept the said returns as filed included the amount of interest as being income of the said year. On appeal being preferred the said order of assessment was set aside by the CIT (Appeal) and remanded the matter for fresh hearing by the Assessing Officer on the question of assessibility of interest amount after taking into consideration of the order passed by BIFR. The Assessing Officer in the fresh assessment order found that the said loan amount has to be included in the returns hence it was chargeable to tax as the order of the BIFR has no impact as regard recovery of the said amount of loan or interest. It was also observed by the Assessing Officer no material was produced before him to establish that the said debt had become bad or the same is written off during the relevant accounting year by the assessee company. Similarly in the assessment year 1990-91 the said interest amount on the aforesaid loan was also included in the returns as being income. The assessee company again preferred appeal to the Commissioner of Income Tax (Appeal) and claimed exclusion of the 4 said amount of interest from relevant assessment years on the ground that the same could not be recovered and in view of the order passed by the BIFR and further the company had written off the said amount of loan as being bad debt and sticky. The Commissioner of Income Tax (Appeal) granted part relief to the extent that after 22nd August 1990 the amount of interest shown to have accrued on the said loan on mercantile system of accounting could not be included in the income of the year. Therefore, in the assessment year of 1990-91 partly and 1991-92 in its entirety and subsequent year also the said interest amount on the said loan was deleted. The Income Tax Appellate Tribunal by the impugned judgment and order set aside the aforesaid part relief granted by the CIT (Appeal) as far as assessibility of the interest amount of loan is concerned and restored the order of the Assessing Officer. It thus appears in this appeal the core controversy is as to whether the amount of interest accrued on the loan should be included in the assessment as being an income despite the fact that the BIFR had sanctioned a scheme under the [ACT] (in short [ACT]) and further after approval of the Board of Directors of the assessee company, for not showing the said income of interest amount in the profit and loss account. Dr. [ENTITY] learned Senior Counsel contends with the support of Supreme Court decision in the case of [PRECEDENT] that the stickiness of the advances or loans objectively established by furnishing proper materials, is sufficient to prevent the accrual of interest thereupon as real 5 income and would have the effect of rendering such income hypothetical. Therefore, interest cannot be brought to tax irrespective of the method of accounting followed provided it has to establish that loans had infact become sticky during the concerned year or years by producing proper materials and that the assessee had invariably followed the conduct of carrying the interest of such loan to Interest suspense account instead of crediting it to PL A/C. Hence he submits that when the principal amount of loan could not be realized since 1979 consequently interest also could not be realized, such interest either on accrual basis or on receipt basis does not form part of the real income. Since the assessment year 1988-89 the company has never brought such interest in its PL Account and has not charged the same in the PL Account intending not to treat the same being income in any sense, the said income could not be treated for assessment even on the basis of Mercantile System of Accounting. He further submits that theory of bad and doubtful debts as contemplated in [SECTION] can be allowed only when an assessee maintains its accounts on mercantile basis and not on receipt of realization basis. Dr. [ENTITY] has argued with the support of the Supreme Court decision reported in [CASE NUMBER] that where the cash system is adopted, there is no question of bad debts or outstanding at all in the case of mercantile system against the book profits some of the bad debts when they are found to be irrecoverable. His further contention is that the learned Tribunal in its order did not at all consider this point that the interest in question did not form part of the real income in view of the fact the said income did not reach the assessee at all 6 even either on mercantile basis or on receipt or realization basis. He submits that the learned Tribunal failed to accept the contention of the assessee that the resolution which passed for finalization of the account by the Board was after the close of the financial year and therefore, such a resolution cannot be considered to have taken effect from very beginning of the year. In support of this contention he has referred to decisions of the Supreme Court reported in [CASE NUMBER] and that of the Bombay High Court reported in [PRECEDENT]. He submits that once by resolution the company adopts the correctness of any accounts this will have the retrospective effect from the beginning of the accounting year. In this connection has relied on another decision of Supreme Court in case of [PRECEDENT] and also in the case of [PRECEDENT] at page 569. Mr. [ENTITY] learned Senior Counsel appearing for the respondents submits
that interest income of Rs. 16,27,059/- due from Swan Mills Ltd. was taxable on accrual basis under mercantile system of accounting. Scheme of the rehabilitation was approved by BIFR which says that interest liability was kept out of the purview of the scheme. Pursuant to the direction given by the CIT (Appeal) the Assessing Officer considered the matter afresh and held that no material was produced before him that the debt become bad doubtful or the same have been written off during the relevant accounting year. He submits further that the Assessee therefore could enforce to recover loan or interest de hors the scheme. The CIT (Appeal) held that the debt had neither become bad nor doubtful. Hence interest from the loan cannot be said to be irrecoverable. He submits that the learned Tribunal on fact found that there is no evidence of the Board of Directors of the Assessee having taken decision to waive interest. In the absence of any Board resolution or the Directors' report mere approval of the accounts by three Directors cannot amount to overt or conscious act of forming opinion of the assessee company.
He submits that in the mercantile system of accounting, accrual income is inherent and not receipt thereof. Accrual means right to receive. The assessee could not establish that the debt had become bad or the interest was given up. If this being the factual position, citing following decisions he submits that the contention of the appellant is not legally sound or acceptable:
[PRECEDENT] (Bijaya Bank's case), 155 ITR 605 (Bomb), 209 ITR 221 (Cal).
Therefore, he submits that this appeal must be dismissed. Upon hearing the learned Counsel for the parties and going through the judgment of all the authorities below it appears to us the following are the admitted position:
(a) The appellant/assessee granted loan to Swan Mills Ltd. (hereinafter in short SML) in 1979 in ordinary course of business of lending money and deposit.
(b) The amount of interest on such loan was being charged to profit and loss account on accrual basis and is being offered for taxation upto 1986-87.
(c) The SML became a sick company and was referred to BIFR in the year 1987 and ultimately a scheme was framed.
(d) Thence, interest income was not reflected in the profit and loss account from the date when the said SML was referred to BIFR.
(e) In the Board meeting on 28th of August 1989 for the assessment year 1989 -90 and 22nd August 1990 for the relevant assessment years 1990-91 and 1991-92 the said profit and loss account was approved.
(f) It appears that the said interest income was shown even when the same was not reflected in the profit and loss account and subsequently it was shown never received.
(g) The BIFR framed a scheme in the year 1992 and the scheme did not materialize and no amount either of the principal or of the interest was paid to the assessee uptill now.
(h) It further appears that the learned Tribunal and all the authorities below have examined the scope and purport of the said scheme framed by the BIFR.
(i) The learned Tribunal as well as the Assessing Officer came to the conclusion that the said scheme does not debar the appellant/assessee to recover the said amount of loan with interest. It was also noticed by the learned Tribunal that the scheme provides for rehabilitation scheme by which payment of the unsecured creditors can be made.
We are of the view the learned Tribunal and all the authorities below have proceeded in completely different direction and did not address real issues involved, namely whether any amount of income which is not shown in the profit and loss account can be said to be an income whether on accrual or receipt basis, for the purpose of levying Income Tax or not.
In our view when any particular amount of income is not shown in the accounts or there is no remark of the Auditor that this account has not been prepared faithfully having regard to the transaction took place between the parties such account has to be accepted to be a conclusive document for the purpose of computation of taxation unless of course Auditor's report is questioned by the department. It is the fundamental provision of law unless there is any accrual of income in real sense there cannot be levy on tax. This legal concept has been settled in an old decision of the Supreme Court reported in [CASE NUMBER] in the case of [PRECEDENT] Justice [ENTITY] speaking for the Bench explained this legal concept as to taxability of income. At page 148 of the report His Lordship propounded as a statement of law as follows:
"Income-tax is levy on income. No doubt, the [ACT] takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
Thus it is clear even in the Books of Account such income reflected hypothetical and if it does not yield to any income ultimately the same cannot even be brought to tax.
In the case of [PRECEDENT] the Three-Judges- Bench of the Supreme Court while taking note of the decision in the case of [PRECEDENT] and further distinguishing the same held as a proposition of law at page 896 as follows:
"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".
The aforesaid decision of Three-Judges" bench has really accepted minority decision rendered earlier by the Supreme Court reported in [CASE NUMBER].
Yet in the case of [PRECEDENT] the supreme Court at page 86 of the report came to the same conclusion following the aforesaid UCO Bank's case. In that case the assessee maintaining mercantile system of accounting interest amount was not brought to the profit and loss account, but kept it only in the suspense account.
In the case under reference the Supreme Court impliedly accepted the position that stickiness of the advances or loans once objectively established to the satisfaction of Revenue Authorities by furnishing proper materials, is sufficient to prevent accrual of interest thereupon as real income and would have effect of rendering such income hypothetical. Therefore the interest cannot be brought to tax irrespective of the method of accounting provided the assessee was able to establish that loans had in fact become sticky during concerned year or years by producing proper materials and that the assessee company invariably followed the practice of carrying the interest of such loans to interest of suspense account in stead of crediting it to interest account or profit and loss account with the additional safeguard of offering the same for taxation if and when it was subsequently realized.
In this case in our view the assessee/appellant has been established the fact upon placing materials, that advances has become sticky because of impossibility of recovery in real sense in view of the reference having been made to BIFR and subsequently the scheme having been framed and yet to be implemented.
Under the provision [SECTION] of [ACT] neither the said principal amount nor the interest could be recovered from the date of making reference by initiating legal proceedings except with the consent of the Board. The said Section reads as follows:
"[SECTION]. Suspension of legal proceedings, contracts, etc.- (1)Where in respect of an industrial company, an inquiry under [SECTION] is pending or any scheme referred to under [SECTION] is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under [SECTION] relating to an industrial company is pending, then, notwithstanding anything contained in the [ACT], or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof [and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.
(2) Where the management of the sick industrial company is taken over or changed [in pursuance of any scheme sanctioned under [SECTION]], notwithstanding anything contained in the [ACT], or any other law or in Memorandum and Articles of Association of such company or any instrument having effect under the said Act or other law-
(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board."
Thus the said loan had become sticky is clearly established. It is also established that the said account on August 1989 not showing the said interest amount as being income has been approved by the company. Therefore, it shows that the said amount of loan as well as the interest has become irrecoverable.
According to us it is not a case of showing bad debt but it is a question of receivability of the said income. We also notice that the method of accounting is done by the appellant assessee in accordance with the accounting standard-IX read with [SECTION] of the Act of 1961.
We find that the learned Tribunal has not dealt with the implication of the provision of [SECTION] of the [ACT] nor has discussed the aforesaid decisions of the Supreme Court. The learned Tribunal has relied on the decision of the Assessing Officer who in his turn has relied on the decision of the case of State Bank of Travancore. Dr. [ENTITY] has correctly pointed out that the learned Tribunal failed to notice that the aforesaid decision has not been followed by the subsequent Three Judges' Bench of the Supreme Court in UCO Bank's case (supra). Hence the learned Tribunal failed to note that decision of the Assessing Officer is contrary to latest pronouncement of the Supreme Court on the question of assessibility of interest income in this case.
The decision cited by Mr [ENTITY] of the Supreme Court reported in [CASE NUMBER] rather helping the case of the assessee/appellant as it has been established that the said loan as well as the amount of interest income therefore have now become irrecoverable. The Supreme Court in that case held as a proposition of law that after April 1, 1989, it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In this case it is not a question of bad debt but is a case of taxability of the income. Thus this decision is not at all helpful for the department.
[ENTITY]'s case [PRECEDENT] cited by Mr. [ENTITY] does not lend any assistence in this case. The Apex Court in case cited on fact, was dealing with doubtful debt. The amount of doubtful debt was debited in the profit and loss account. Similarly decisions of this Court in case of [PRECEDENT] and Bombay High Court [(155) ITR 605] are distinguishable as the amounts of bad debts were shown in the accounts Books.
In view of the forgoing discussion while accepting contention of Dr. [ENTITY], we think that all the authorities have not proceeded in right direction. We, therefore, hold that since date of referring the said SML to BIFR and further scheme having been framed and particularly when the said interest income has not been shown in the accounts at all, it cannot be said that income has accrued for the purpose of taxation. We accordingly allow the appeal and direct the Assessing Officer to exclude the interest income on the said loan as it has become sticky from the previous accounting year that is 1989-90 and also subsequent years.
Therefore, this appeal is allowed.
No order as to costs.
([ENTITY], J.) I agree.
([ENTITY],J.)