Case: Uco Bank Vs. Comm.Of Income Tax, West Bengal

1. Civil Appeal No. 235 of 1996 pertain 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.  2. 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 of 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 inthe circumstances of the case, the Tribunal is justified in law in cancelling the CITs order under section 263 of the Income-tax Act holding that when the assessment was completed, the only paper available was the Boards circular dated 9th October, 1984 and, therefore, it cannot be said that the IACs 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.  . 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.

Court's reasoning:
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 the 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 recognizing whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. 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.15. 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 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 includable 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. Nagativing 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, the 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 assesses 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 law16. 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 assesses 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 tot he 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, national income as also the treatment of such national income under accounting practice17. 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. Sent (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 national 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 assesses 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.18. 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 department19. 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 Corporation v. Commissioner of 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 administrative and application of the Income-Tax Act.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.