Income Tax Appellate Tribunal - Indore
State Bank Of Indore vs Commissioner Of Income-Tax on 23 May, 1997
Equivalent citations: [1998]64ITD209(INDORE)
ORDER
--Allowability of interest on sticky loans Ratio & Held:
Where the facts and circumstances of the case are sufficient to establish that the assessing officer has not applied his mind while passing the order for allowability of interest on sticky loans, his order is erroneous and prejudicial to the interests of the revenue for which revision under section 19 may be made by the Commissioner.
Case Law Analysis:
Venkatakrishna Rice Co. v. CIT (1987) 163 ITR 129 (Mad) distinguished.
Application:
Also to current assessment year.
A. Y.:
1985-86 & 1986-87 Dt. Ord.:
23-5-1997 Interest Tax Act 1974 s.4 ORDER Shri S. K. Yadav, J.M.
1. I.T.A. Nos. 1 & 2/Ind./91 are directed against the order of the Commissioner of Income-tax, Bhopal for the assessment years 1985-86 and 1986-87. The other Income-tax Act Nos. 1 & 2/Ind./93 are directed against the order of the CIT(Appeals) for the same assessment years. Some inter-connected issues are involved in these appeals and as such they were heard together and are being disposed of by this consolidated order.
2. ITA Nos. 1 & 2/Ind./91 - These appeals are preferred against the revisional orders of the Commissioner passed under section 19 of the Interest-tax Act, 1974 (hereinafter referred to as 'the Act'). In these appeals the assessee has challenged the order of the CIT on the ground that he has erred in setting aside the order of the Assessing Officer by holding that his order is erroneous and prejudicial to the interest of the revenue.
3. Briefly stated, the assessee is a banking company and is a subsidiary of the State Bank of India. The assessee filed returns declaring chargeable interest at Rs. 6.46,03,760 for the assessment year 1986-87 and at Rs. 25,17,25,333 for the assessment year 1985-86. In the returns the assessee did not offer interest, on dead and doubtful sticky loans and export subsidy received from the Reserve Bank of India, to tax. The assessment under section 8 of the Interest-tax Act was framed in which the claim of the assessee with regard to the interest on sticky loans and export subsidy was allowed by the Assessing Officer. The CIT exercised his revisional jurisdiction under section 19 of the Interest-tax Act, and set aside the order of the Assessing Officer after holding that the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Aggrieved by the order of the CIT the assessee is before us.
4. The learned counsel for the assessee, Shri Dinesh Vyas, senior advocate, has submitted that the return for the assessment year 1986-87 was accompanied by a covering letter dated 27th May, 1986 in which the assessee has specifically mentioned in para 16 that the interest on dead and doubtful sticky accounts of the borrowers, credited to the interest suspense account, is not exigible to tax and they crave leave to refer to the order of the Appellate Assistant Commissioner and the Income-talc Appellate Tribunal in appeal relating to the assessment year 1961-62 which has been accepted by the department. A similar note to this effect is also given in the return itself. He has drawn our attention to the assessment orders for both the assessment years passed on 6-1-1989 and submitted that the Assessing Officer had discussed certain claims of the assessee in his order and finally written a specific line in his order which is as under :-
"All considered, net chargeable interest is worked out as under."
It means that all the claims of the assessee are considered by the Assessing Officer while passing the assessment order. It is a well settled law that the Assessing Officer is not supposed to discuss each and every claim of the assessee in his order. In the assessment order the Assessing Officer has also discussed certain claims of the assessee. The learned counsel further submits that for invoking revisional jurisdiction, the order of the Assessing Officer must be erroneous and prejudicial to the interest of the revenue. Mr. Vyas has relied on the judgment in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129/30 Taxman 528 (Mad.) in which their Lordships have held that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the Treasury, nor is the section meant to get at sheer escarpment of revenue which is taken care of by other provisions in the Act. The prejudice i.e., contemplated under section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective as a review of the subordinate's order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudice to the revenue which is a unique conception, which has to be understood in the context and in the interest of revenue administration. Reliance on the judgment in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 of the Hon'ble High Court of Bombay; was also placed in which their Lordships have held that the decision of the ITO could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard.
5. The learned counsel has also relied on the judgment of the M.P. High Court in the case of CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141/[1987] 34 Taxman 443 in which their Lordships have held that if the ITO has considered the requisite information furnished by the assessee and completed the assessment, the order of revision by the CIT on the ground that the Assessing Officer has not made proper inquiries would not hold good. Mr. Vyas further relied on the judgment of the Calcutta High Court in the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 in which their Lordships have held that the order passed by the ITO following the decision of the Appellate Tribunal cannot be held to be erroneous and as such order cannot be revised. The learned counsel has drawn our attention to the notice issued by the CIT under section 19 of the Act which is placed at page No. 67 of the assessee's compilation and submitted that the said notice was issued on the ground that the order of the Assessing Officer appears to be erroneous and prejudicial to the interests of the revenue for the reasons of non-consideration of the claim of the assessee with regard to the capital subsidy and interest credited to the interest suspense account. Mr. Vyas has further drawn our attention to the Board resolution which is placed at page 13 of the compilation of the assessee in ITA Nos. 470/89 and 471/89 whereby it was resolved that the interest on sticky loans should be placed to the interest suspense account and thereafter since the assessment year 1961-62 the assessee has changed its method of accounting from mercantile to hybrid system and started crediting the interest on sticky loans to suspense account. He has also drawn our attention to the memorandum of appeal filed before the first and second appellate authorities for the assessment year 1961-62 and their respective orders in which the hybrid method of accounting was accepted and approved by the Tribunal in its order dated 9th September, 1977 in ITA No. 75/Ind./70 for the assessment year 1961-62. Since then the assessee had been adopting the same method of accounting which was accepted by the revenue. He also drew our attention to the Circular No. 491, dated 30th June, 1987 issued by the CBDT reported at Prahlad Maliram v. CIT [1987] 166 ITR 149/31 Taxman 275 (Raj.) in which it was stated that if the Reserve Bank of India and IDBI are satisfied that the change in the system of accounting of interest from mercantile to cash basis by concerned, State Financial Corporation is legal, valid and bona fide, income-tax department may accept the cash system of accounting of interest. Since the assessee is a banking company and is governed by the rules and the regulations issued by the Reserve Bank of India and the accounting method was approved and accepted by the Reserve Bank of India the revenue authorities are required to accept the same as per the above circular of the CBDT.
6. Mr. Vyas has further argued that all these informations and the materials are available before the Assessing Officer while making the assessment. After following the directions as well as the order of the Tribunal for the assessment year 1961-62 the Assessing Officer has allowed the claim of the assessee though he did not make specific discussion in his order. Therefore, the order of the Assessing Officer cannot be called erroneous and prejudicial to the interests of the revenue. He also relied on the following decisions :-
(i) CIT v. Govindram Seksariya Charity Trust [1987] 166 ITR 580/32 Taxman 62 (MP),
(ii) CIT v. Co-operative Processing & Marketing Society [1995] 216 ITR 632 (MP)
(iii) CIT v. K. L. Rajput [1987] 164 ITR 197 (MP) and
(iv) Mannesmann Demag A. G. v. Dy. CIT [1995] 53 ITD 533 (Delhi).
7. In oppugnation, the learned Departmental Representative, Mrs. Swati Patil, has submitted that the claim of the assessee with regard to export subsidy and interest on sticky loans is not an ordinary claim. It requires proper adjudication by the Assessing Officer. She did not dispute the order of the Tribunal for the assessment year 1961-62 in which the accounting system of the assessee was approved but she has submitted that in the year 1986 the Hon'ble Supreme Court has delivered a land mark judgment in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 in which their Lordships have held that the interest on sticky advances accrued to the assessee are exigible to tax. Their Lordships have further held that carrying a certain amount which has accrued as interest without treating it as a bad debt or irrecoverable interest, but keeping it in a suspense account was repugnant to section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961. She has also drawn our attention to the return filed by the assessee for the assessment year 1985-86 in which he has not disclosed the method of accounting against the respective clause. The learned DR has drawn our attention to the assessment order in the income-tax matter for the assessment years 1985-86 and 1986-1987 which were passed on 25-2-1988 and 20-2-1989 in which the claims of the assessee with regard to the interest on sticky loans were disallowed by the Assessing Officer. The original assessment order under the Interest-tax Act was passed on 6-1-1989 after the assessment order passed in the Income-tax Act, for the assessment year 1985-86 in which similar claim of the assessee was rejected. While this order was before the Assessing Officer, there is no reason as to why the claim of the assessee in respect of interest on sticky loans was not properly discussed and considered in view of the judgment of the Supreme Court in the case of State Bank of Travancover's case (supra). She has further drawn our attention to the assessment order in the income-tax case for the assessment year 1986-87 which was passed on 22-2-1989 in which the claim of the assessee regarding the interest on sticky loans was rejected, but in the Interest-tax Act, similar claim of the assessee was allowed without making any discussion in his order dated 6-1-1989 whereas both the assessment orders were passed by the same Assessing Officer. Prior to the assessment year 1986-87 the assessee did not put a note about its claim for the interest on sticky loans as was put in the return for the assessment year 1986-87. The return for the assessment year 1986-87 was filed by the assessee on 28th June, 1986 after delivery of the judgment in the State Bank of Travancore's case (supra) by the Hon'ble Apex Court. Since the assessee has raised a new ground for his claim, in view of the Supreme Court judgment, the circular issued by the CBDT and the Tribunal judgment, it is incumbent upon the Assessing Officer to discuss and adjudicate this issue in detail in his order. It is true that the Assessing Officer is not under obligation to discuss each and every claim in his order but the controversial or debatable issues require proper consideration and adjudication by the Assessing Officer.
8. The learned DR has further drawn our attention to the order sheet of the Assessing Officer for the assessment year 1986-87 which is placed at page 49 of the compilation of the revenue and submitted that the proceedings for assessment under the Interest-tax Act were started on 28-10-1988 by the predecessor of the Assessing Officer Mr. Swatantrakumar, but the proceedings were concluded on 6-1-1989 without going into the merits of the case. The said facts are reflected from the two entries made on 6-1-1989 and the assessment order under the Interest-tax Act was passed horridly. She has further argued that the same Assessing Officer has taken two contrary views in two assessment orders passed within an interval of about two months. She has further drawn our attention to the two letters written by the assessee which dealt with the claim of capital subsidy and the interest on sticky loans and submitted that these letters were available on record before the Assessing Officer but he has not considered the same while adjudicating the claim of the assessee. The facts available on record are sufficient to establish that the Assessing Officer has not applied his mind while passing an order and as such his order is erroneous and prejudicial to the interests of the revenue. Our attention was also drawn to the fact that in the preceding assessment year the Tribunal has also rejected the claim of the assessee after relying upon the judgment of the Hon'ble Apex Court in the case of State of Travancore's case (supra). The learned Departmental Representative argues that the judgments quoted by the assessee are not applicable to the instant case as each and every case is to be decided on its own facts.
9. We have heard the rival submissions of the parties and carefully perused the orders of the authorities below and the documents placed on record. The judgments quoted by the assessee were also carefully perused by us and we agree with the contentions of the assessee that for invoking the revisional jurisdiction under section 19 of the Act, the CIT must be satisfied with the facts that the order of the Assessing Officer was erroneous and prejudicial to the interests of revenue. The contention of the assessee is also acceptable to us that the Assessing Officer is not supposed to discuss each and every claim of the assessee but each and every case should be examined on its own facts and circumstances in the light of the available judicial pronouncements and the relevant provisions of law. In the instant case, there is no dispute that since 1960-61 the assessee has been adopting hybrid system and crediting the interest on sticky loan to suspense account and the said treatment was accepted by the revenue. After relying upon the Tribunal's order for the assessment year 1961-62 the assessee has filed the return under the Interest-tax Act for assessment year 1985-86 in which he did not offer the export subsidy and interest on sticky loans to tax nor did it furnish any note to this effect, but for the assessment year 1986-87 the assessee has furnished a note to the return and a covering letter in which the reasons of non-offering the interest on sticky loan to tax were given. The return for the assessment year 1986-87 was filed on 18-6-1986 after the delivery of the land mark judgment of the Supreme Court in the case of State Bank of Travancore's (supra) in which their Lordships have held that the interest on sticky loans is exigible to tax if the assessee has been maintaining the books of account by adopting the mercantile system. It appears to us that this judgment prompted the assessee to give a note about his treatment to the interest on sticky loans. Besides, the assessee has also filed two letters in which he has justified his claim of non-offering the export subsidy and interest on sticky loans to tax. The assessment order was passed on 6-1-1989 after assessment order passed under the Income-tax Act for the assessment year 1985-86 in which the claim of the assessee with regard to the interest on sticky loans was rejected by the Assessing Officer. This fact cannot be ignored that the assessment orders under the Income-tax Act and under the Interest-tax Act for the assessment year 1986-87 were passed by the same Assessing Officer, Mr. Swatantrakumar. In the assessment order under the Income-tax Act, the claim of the assessee was rejected, but in the assessment order under the Interest-tax Act the claim of the assessee was allowed. No reasons are available on record as to why the same Assessing Officer has taken a contrary view at the interval of two months in two assessment orders under different Acts for the same assessment year. This factor cannot be ignored that in the earlier assessment years 1983-84 and 1984-85 the CIT (Appeals) had disallowed the claim of the assessee with regard to interest on sticky loans vide its order dated 16-3-1988 against which the appeal of the assessee was pending before the Tribunal at the time when the assessment order was passed by the Assessing Officer under the Interest-tax Act. When there is an overwhelming evidence on record that the allowability of the claim of interest on stick loans is a debatable issue, the claim of the assessee should not have been allowed without making any discussion in the assessment order by the Assessing Officer. No doubt the Assessing Officer is not supposed to discuss each and every claim of the assessee in detail but he cannot shut his eyes over the surrounding evidence and circumstances and the material on record while passing an assessment order. It is also brought to our notice that the set aside assessment order has been passed in which the claim of the assessee was rejected which was confirmed by the CIT (Appeals) and is still pending before us for disposal. The facts and circumstances of the case lead us to deduce that the Assessing Officer has not applied his mind and we are, therefore, of the view that the order of assessment is erroneous and prejudicial to the interests of the revenue and the CIT has properly exercised his jurisdiction. Accordingly we uphold the order of the CIT and dismiss the appeals of the assessee.
10. ITA Nos. 1 & 2/Ind./93 - These appeals are emanated from the assessment orders passed in compliance with the direction of the CIT, Bhopal, vide its order dated 22-3-1991 under section 19 of the Interest-tax Act. Briefly stated, the facts of the case have already been discussed in the earlier I.T.A. Nos. 1 & 2/Ind./91. In the assessment order the Assessing Officer disallowed the claim of the assessee with regard to the interest on sticky loans after relying upon the judgment of the Apex Court in State Bank of Travancore's case (supra). The claim of the export subsidy was also disallowed by the Assessing Officer after relying upon the judgment of the Karnataka High Court in the case of CIT v. Vijaya Bank [1989] 175 ITR 611/[1988] 41 Taxman 34 (Kar.). The assessee carried the matter before the CIT (Appeals) but did not find favour from him. Now, on both these issues the assessee is before us.
11. The first grievance of the assessee is that the CIT (Appeals) has erred in confirming the order of the Assessing Officer who has disallowed the claim of the assessee of crediting the interest on bad and doubtful loans to interest suspense account and not taking it to the profit and loss account.
12. The learned counsel for the assessee, Mr. Dinesh Vyas, senior advocate, has submitted before us that the Assessing Officer as well as the CIT (Appeals) has wrongly interpreted the judgment of the Apex Court in the case of State Bank of Travancore's case (supra). In fact that judgment is applicable to those banks and financial institutions which were adopting mercantile system, but in the instant case the assessee has been adopting the hybrid system of accounting since 1960-61 after the Board resolution passed on 27th August, 1960 whereby it was resolved that in the case of sticky loans where the interest was not realisable, it should be placed in the suspense account. Since assessment year 1960-61 the assessee has changed its accounting method from mercantile system to hybrid system and stated crediting interest on sticky loans to the interest suspense account. Whenever this interest was recovered, it was taken to profit and loss account and offered to tax. The method of accounting was accepted by the revenue for a considerable period. The learned counsel for the assessee has drawn our attention to the orders of the Tribunal in the assessee's case for the assessment year 1960-61 which is placed at pages 52 to 57 of the compilation of the assessee in ITA Nos. 470 and 471/Ind./89 in which the method of accounting adopted by the assessee as hybrid system was accepted and approved. Mr. Vyas has drawn our attention to the case of State Bank of Travancore's (supra) in which their Lordships have observed at page 140 that the income of the assessee will have to be determined according to the provisions of the Act in consonance with the method of accounting regularly employed by the assessee. The method of accounting regularly employed by the assessee helps the computation of income, profits and gains under section 28 of the Act and the taxability of that income under that Act will then have to be determined. The question is whether the income which has been computed according to the method of accounting followed regularly by an assessee can be dominated or diminished by any notional or real income. This has to be judged in the light of well settled principle our attention was also drawn to the letter of the CBDT which was discussed in this judgment by the Apex Court in which the CBDT has advised that where the accounts were kept on mercantile basis, interest was taxable irrespective of whether the same was credited to the suspense account or to interest account. The learned counsel for the assessee has further drawn our attention to the Board Circular No. 491, dated 30th June, 1987 reported at 166 ITR 149 (St.) issued after pronouncement of this judgment in the case of State Bank of Travancore's case (supra) whereby they have issued instructions to the Revenue Officers to accept the cash system of accounting of interest of those State Financial Corporations which 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 these State Financial Corporation, is legally, valid and bona fide. In this circular the CBDT has also considered that this judgment of the Apex Court is applicable to those Financial Corporations or banks whose system of accounting was on mercantile basis.
13. The learned counsel for the assessee, Mr. Vyas, has further carried us to the judgment of the Bombay High Court in the case of CIT v. Citibank N. A. [1994] 208 ITR 930/75 Taxman 433 in which their Lordships have thoroughly considered and discussed the judgment of the State Bank of Travancore's case (supra) and finally concluded that where the bank, following the mercantile system of accounting for most of its transactions, but keeping separate account for problem loans and crediting the interest on problem loans only on actual receipt and the said system of accounting was accepted by the income-tax authorities in earlier years, then the interest on problem loans is not assessable to tax on the basis of accrual in subsequent assessment years. He has also drawn our attention to the judgment of the Hon'ble Apex Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 submitted that for understanding the ratio decided of a judgment, the judgment should be read in toto. He has drawn our attention to the observations of the Apex Court that it is neither disallowable nor permissible to pick out a word or sentence from the judgment of the Supreme Court divorce from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment had to be considered in the light of the questions which were before the Court. Mr. Vyas further invited or attention to the judgment of the Supreme Court passed in CIT v. Orissa State Financial Corpn. [SLP No. 5736 of 1993] reported at 201 ITR 27 (St.) whereby their Lordships did not think that an interference if called for it this matter in view of the Circular No. 491 of June 30, 1987 issued by the CBDT. In that case the Hon'ble High Court of Orissa has answered the question, whether interest credited to the interest suspense account with respect to loans in connection with which many suits have been filed by the assessee, could be added back to the income of the assessee, in favour of the assessee and against the revenue. He also relied on the judgment of the Madras High Court in the case of CIT v. Jaylakshmi Trading Co. [1995] 214 ITR 660 in which the State Bank of Travancore's case (supra) was discussed by their Lordships.
14. Our attention was also drawn to another judgment of the Hon'ble High Court of Rajasthan in the case of CIT v. Rajasthan Financial Corpn. in which their Lordships have discussed the State Bank of Travancore's case (supra) and distinguished it from other cases and finally held that if the assessee following the hybrid system of accounting for interest on sticky loans on receipt basis, which was accepted by the revenue in the past, the revenue cannot take a different view in succeeding years, The learned counsel for the assessee has also drawn our attention to the returns and its covering letter filed for the assessment year 1986-87 in which a specific note about the treatment of the interest on sticky loans was given. Prior to the assessment year 1986-87 this note was not given only because of the reason that the hybrid system of accounting was accepted by the revenue, but for the assessment year 1986-87 a specific note was given to make the position clear that the assessee's case is not covered by the judgment of the Apex Court in State Bank of Travancore's case (supra). Our attention was also drawn to a certificate furnished by the assessee in which they have specifically stated that whenever any recovery/receipt is made in the sticky account where the principal amount was/is under jeopardy and interest was/is kept in interest suspense account, it is debited to the interest suspense account and credited to the interest account which form part of the profit and loss account. This procedure is in practice since 1961-62 till date. Mr. Vyas further argues that though certain view has been taken by this Tribunal in the assessee's case for the assessment years 1983-84 and 1984-85, but each and every assessment year should be considered separately and principle of res judicata is not applicable to the income-tax cases. Unfortunately, all these judgments which are placed at the time of arguments of this appeal could not have been placed by the assessee during the hearing of the appeal for the assessment years 1983-84 and 1984-85. Moreover, some of the judgments were rendered after the pronouncement of the judgment of this Tribunal in those cases. Now, when other High Court have already expressed their view on the applicability of the State Bank of Travancore's case (supra), these views should be considered and the observations of the Tribunal in the earlier case may be ignored while adjudicating this issue afresh.
15. In oppugnation, the learned Departmental Representative, Mrs. Swati Patil, has submitted that this issue is squarely covered by the Tribunal's order passed in the assessee's case for the assessment years 1983-84 and 1984-85. She has drawn our attention to the assessment orders for the assessment years 1985-86 and 1986-87 which are placed at pages 21 and 38 respectively of the compilation of the revenue in which method of accounting has not been mentioned. She has also drawn our attention to the original return and revised return for the assessment year 1985-86 which are placed at pages 51 to 56 in which the assessee failed to mention the method of accounting. Mrs. Patil further submitted that in the audit report it was mentioned that the method of accounting employed by the bank is generally mercantile except certain items at expenditure prevailing and other establishment expenditure accounted for on cash basis. The learned D.R. further argued that the judgments quoted by the assessee are distinguishable to the assessee's case and as such are not applicable. The Note about the treatment of interest on sticky loan was only given in the return for the assessment year 1986-87 to find an escape from the judgment of the State Bank of Travancore's case (supra) which in fact covers the case of the assessee. This type of note was never given by the assessee either alongwith the return or by a separate letter, for assessment year 1985-86. In fact after the Pronouncement of the judgment by the Apex Court the assessee has changed its method of accounting from mercantile to hybrid system, She has drawn our attention to the letter of the revenue dated 25-6-1987 which is placed at page No. 82 in which the assessee was specifically asked to furnish the system of accounting and even in reply to this letter which is placed at page 84 of the compilation of the revenue, the assessee could not furnish the system of accounting. As such, the system of accounting of the assessee was on mercantile basis and the interest accrued on sticky loans in liable to tax in view of the Supreme Court judgment. Besides, the learned Departmental Representative strongly relied on the findings of the CIT (Appeals).
16. We have heard the rival submissions of the parties and carefully examined the orders of the authorities below and the documents placed by the parties. The judgments quoted by the parties are carefully perused by us. We have perused the order of the Tribunal in the assessee's case for the earlier assessment years i.e., 1983-84 and 1984-85 in which the Tribunal has taken a view that the assessee's case is squarely covered by the Supreme Court judgment in the case of State Bank of Travancore's case (supra). It is also observed that all these judgments which are relied on by the assessee were not placed before the Tribunal during hearing of those appeals. Since the judgment of the Apex Court in the case of State Bank of Travancore's (supra) has been considered and discussed by various High Court and they have expressed their views on the applicability of the State Bank of Travancore's case (supra), we feel it proper to adjudicate this issue afresh in the light of the various judicial pronouncements. It is apparent from the documents on record that the Board resolution was passed on 27th August, 1960 in which it was observed that in the case of sticky loans where the interest is not realisable, it should be placed to interest suspense account. It is also evident from record that from the assessment year 1960-61 the assessee has changed its system of accounting from mercantile system of hybrid system and started crediting the interest on bad or doubtful loans (stickly loans) to the interest suspense account. It is also clear from the certificate of the assessee that whenever any recovery/receipt is made in the stickly account, where the principal amount was/is under jeopardy and interest was/is kept in the interest suspense account, it is debited to interest suspense account and credited to interest account which forms part of profit and loss account. This contention of the assessee is not rebutted by any documentary evidence. From a perusal of the Tribunal's order for the assessment year 1961-62 it appears to us that the assessee has changed the method of account in the previous year relevant to the assessment year 1960-61 and in that assessment year the change in the system of accounting was accepted and approved by the Tribunal against which no appeal was preferred by the revenue. Thereafter, the same system of accounting was adopted by the assessee in succeeding assessment years and the revenue has accepted the same. It is true that the assessee did not put a note in the return for the assessment year 1985-86 about the treatment of interest on sticky loans given by the assessee but in the assessment year 1986-87 a specific note to this effect was given in the covering letter as well as in the return. When the return for the assessment year 1986-87 was filed, the judgment in the case of State Bank of Travancore is case (supra) had been rendered by the Hon'ble Apex Court. In this back drop it appears to us that the assessee had put a note to make his claim about the interest on sticky loans more clarificatory that it is based on the Tribunal's order for the assessment year 1961-62 which has been accepted by the Department. We do not find anything on record whereby it can be evinced that the assessee has been following only mercantile system upto the assessment year 1985-86.
17. We do not find any force in the arguments of the revenue that since the assessee has failed to mention the method of accounting against a respective column in the return, it means that the assessee has not been following the hybrid system. For the assessment year 1985-86 in an audit report the assessee had specifically mentioned that there is no change in the method of accounting employed in the immediately preceding previous year. For the assessment year it has been specifically mentioned in the return as well as in the annual report that the interest on certain sticky advances and all the protested bills, accounts, is being accounted on cash basis. After considering all the relevant documents we are of the view that the assessee has changed its system of accounting from the assessment year 1961-62. When it becomes a subsidiary of the State Bank of India. Now the question comes whether the assessee's case is covered by the Supreme Court judgment in the case of State Bank of Travancore's case (supra). In the case of State Bank of Travancore's case (supra) their Lordships of the Supreme Court have made detailed discussions with respect to the sticky loans and the interest accrued thereon with various systems of accounting. Their Lordships have discussed the circulars issued after the pronouncement of the judgment in the State Bank of Travancore's case (supra) by the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336. The facts of the State Bank of Travancore's case (supra) discussed in this judgment are that the State Bank of Travancore's case (supra) indubitably maintained its accounts on mercantile basis and had regularly adopted it. In this judgment their Lordships did not express any opinion for those assessee who are maintaining books of account on hybrid system though this system was recognised to be proper and legal by their Lordships. Their Lordships have held that where the cash system is adopted, there is no question of bad debts or outstanding at all, but in the case of mercantile system, against the book profit, some of the bad debts may have to be set off when they are found to be irrecoverable. Besides this, cash system and the mercantile system, there are numerable system of accounting which may be called hybrid or heterogenous in which certain element and incidence of cash and mercantile system are combined. Their Lordships have discussed various methods of accounting and have held that the income of the assessee will have to be determined according to the provisions of the Act in consonance with the method of accounting regularly employed by the assessee. The method of accounting regularly employed by the assessee helps the computation of income, profits and loss accounts under section 28 of the Act and the taxability of that income under the Act will then have to be determined. The question is whether the income which has been computed according to the method of accounting followed regularly by an assessee can be diminished by any notion of real income. This has to be judged in the light of the well settled principles.
18. The judgment of the Apex Court was thoroughly considered and discussed by the Hon'ble Bombay High Court in the case of Citibank, N. A. (supra). In that case the assessee had been following hybrid system of accounting and interest on problem loans was credited only on actual receipt basis. The system was accepted by the Income-tax authorities in earlier years. Their Lordships of the Bombay High Court after giving a thoughtful consideration to the State Bank of Travancore's case (supra) made the following observations :
"Though the cash system and mercantile system of accounting are the two most common systems of accounting prevalent in the country, there are also innumerable other systems of accounting besides these two systems. Such systems are commonly known as "hybrid systems of accounting". In such a system, there is a certain element of both dash and mercantile systems. As assessee following such a system may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. If an assessee follows such a hybrid system and in respect of certain loan transactions does not follow the mercantile system of accounting for debiting interest to the accounts of the parties and crediting the same to the profit and loss account, no fault as such can be found with the system followed by the assessee. The only power the Income-tax Officer has in such cases is the power under the proviso to section 145(1) of the Income-tax Act, 1961 which permits him, on being satisfied that the method employed by the assessee is such that his income cannot be properly deducted therefrom, to compute his income upon such basis and in such a manner as he may determine.
The assessee-bank followed a policy of classifying loans into ordinary loans and problem loans. Problem loans were those which were problematic from the point of view of recoverability. In order to ensure effective credit control, the assessee used to scrutinise the loan portfolio at regular intervals and classify the loans into different categories. All loan accounts in respect of which interest payments were not forthcoming for a period of 180 days or more and in in respect of which the principal amounts were in jeopardy were placed on a non-accrual basis in the books of account of the assessee and the interest thereon was not debited in the books to such accounts or credited to the profit and loss account. The assessee, however, maintained a memorandum record of interest due on such accounts. If any interest recorded in the memorandum record was subsequently received by the assessee, it was taken into account as interest received. This procedure was consistently followed by the assessee bank. Following the same in the assessment year 1973-74, the assessee bank did not credit 8 parties to whom loans had been advanced with interest due on such loans. Similar was the case for the assessment years 1974-75 and 1975-76. This system had been accepted by the Revenue. However, for the assessment years 1973-74, 1974-75 and 1975-76, the Income-tax Officer held that the amount of interest recorded in the memorandum record was liable to be included in the income of the assessee as its accrued income. The Tribunal found that though the assessee had been following generally for most of the transactions the mercantile system of accounting it was following a different system of accounting for certain category of loans, the recovery whereof was doubtful. There was also a clear finding of the Tribunal that the method of accounting followed by the assessee in respect of the loans in question was not the mercantile system of accounting. It held that the interest was not assessable on the basis of accrual for the assessment years 1973-74 to 1975-76.
Held, that evidently this was not a case falling under the proviso to section 145(1) in view of the categorical finding of the Tribunal in this regard. Besides, the Income-tax Officer himself had been accepting this system which had been followed by the assessee in the past as a proper method of accounting and profits had in fact been determined on the basis thereof in the past as well as in two of the three assessment years under consideration. The fact that the assessee, for its convenience, kept a separate note of all those parties in whose cases the mercantile system of accounting had not been followed and the interest on the amounts due from them had not been debited to their accounts could not in any way militate against the fact that the assessee was not following the mercantile system of accounting in respect of the loans in question. The system of accounting followed in respect of interest on such loans was in fact the cash system. The above system of accounting followed by the assessee did not in any way affect the real income of the assessee because as soon as the amount of interest was recovered on any such loan, a record of which was kept in the form of a memorandum record, it was treated as the income of the assessee of that year and subjected to taxation. The Tribunal was right in law in holding that the interest shown in the memorandum record by the assessee in the relevant previous years was not liable to inclusion in the assessee's total income having regard to the provisions of sections 28 and 145."
We do agree with the contention of the assessee that the burden of proving that there has been a change in the regular method of accounting employed by the assessee is on the department. After a careful perusal of the judicial pronouncements of various High Court, this has become abundantly clear that the State Bank of Travancore's case (supra) is applicable to those assessees who are regularly following the mercantile system of accounting and not to those assessees who are following hybrid system of accounting. Since it has been established that the assessee has been following hybrid system of accounting since 1961-62, the State Bank of Travancore's case (supra) is not applicable to the assessee. Keeping in view the aforesaid judicial pronouncements of the Bombay High Court and Rajasthan High Court and the documents on record, we are of the view that the assessee's claim with regard to the interest on sticky loans is justified and it is entitled to relief. Accordingly, we set aside the order of the CIT (Appeals) and restore the matter to the file of the Assessing Officer with the direction to allow the claim of the assessee with respect to the interest on sticky loans.
19. The next grievance of the assessee is that the CIT (Appeals) has erred in confirming the order of the Assessing Officer who has included export subsidy in the chargeable interest. The learned counsel for the assessee submitted that the charging section of the Income-tax Act should be strictly construed. As per section 4 of the Act chargeable interest accrued in the previous year can only be taxed as interest tax. In section 5 in which the scope of chargeable interest is defined says that the interest of any previous year of a credit institution shall be the total amount of interest accruing or arising to the credit institution in the previous year. He further argued that the language of this section is quite unambiguous and clear that only the total amount of interest accrued to the credit institution in the previous year will be called as chargeable interest and is exigible to tax. He also relied on the judgment in the case of CIT v. National Taj Traders [1980] 121 ITR 535/[1979] 2 Taxman 546 (SC) in which their Lordships have held that principle of strict interpretation does not apply to machinery provisions. All parts of section to be construed together so as to make consistent enactment of all statutes. He further relied on the judgment of the Apex Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 in which their Lordships have held that there is no scope for importing into the statute words which are not there. Such importation would be not to construe but to amend the statute. Even if there be a casus omissus the defect can be remedied only by legislation and not by judicial interpretation. He further relied on the judgment of Apex Court in the case of Banarsidas v. ITO [1964] 53 ITR 100 in which their Lordships have held that the rule of construction that a taxing statute must be couched in express and unambiguous language and if a case is not covered within the four corners of its provisions no tax can be imposed by inference or by analogy or by trying to prove into the intentions of the legislature and by considering what was the substance of the matter, applies only to a taxing provision and has no application to a provision which does not create a charge for the tax but lays down the machinery for its calculation for the procedure for its collection.
20. The learned counsel for the assessee has further argued that the export subsidy received by the assessee is a reward for the services rendered by the assessee to the exporters. He also relied on the judgment of the M.P. High Court in the assessee's case for the assessment years 1975-76 to 1980-81 reported at 172 ITR 24, in which question, under reference was whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the amounts charged by the assessee for delayed payment of bills are in the nature of interest on the advances and liable to be taxed under the Interest-tax Act and the Hon'ble High Court has answered that the right to charge the amount for delay in the payment of bills accrued to the assessee by virtue of the provisions of section 32 of the Negotiable Instruments Act, 1881 and in accordance with the terms of the agreement entered into by the assessee with its constituents in pursuance of which bills were purchased by the assessee. On account of the delayed payment of the bills purchased by the assessee, the assessee became entitled to liquidated damages by way of compensation as stipulated in the agreement. The right of the assessee to charge the amount did not, therefore, arise on account of any delay in the repayment of any loan or advance made by the assessee. The provisions of Income-tax Act were attracted only in respect of interest on loans and advances. It was further argued by him that since there was a direct judgment of our own jurisdictional High Court, the judgment of the Karnataka High Court in the case of Vijaya Bank's (supra) cannot be relied upon for disallowing the claim of the assessee. Mr. Vyas has further drawn our attention to section 17(1)(iv) of the Income-tax Act and submitted that the same analogy can he drawn while construing the charging sections of Income-tax Act. Our attention was also drawn to the provisions of section 28(4) of the Income-tax Act and it was submitted that after applying the same analogy, the subsidy received by the assessee cannot be included in the definition of interest. He also drew our attention to export credit scheme which is placed at page 9 of the compilation of the assessee. In clause 4 of the scheme, the subsidy will be paid provided that the institution claiming subsidy does not levy or charge any service or other charges except such charges, not being of the nature of interest, as are permitted or required to be charged in respect of the said loan, advance, bill or any other credit under the rules of Foreign Exchange Dealers Association of India. He has also drawn our attention to sub-clause (iii) and (iv) of clause (4) and submitted that the export subsidy is only given to those institutions who served the exporters as per the export credit scheme. As per clause 4 of the scheme if any institution has claimed subsidy in respect of the export credit, and subsequently it becomes ineligible for subsidy in respect of that credit for any reason whatsoever, it shall refund the subsidy, claimed earlier. He further argued that the Interest-tax Act came into force in the year 1974 after the export credit scheme which was announced in the year 1968. In the light of this scheme, the export subsidy granted to the assessee by the Reserve Bank of India cannot be considered as a part of interest. Nothings has been specifically mentioned in the relevant section. If there is a gap in the stable. Court is not empowered to fill up the gap.
21. In oppugnation Mrs. Swati Patil, the learned Department Representative, has strongly relied on the findings of the CIT (Appeals). She has argued that since there is no direct judgment of our own jurisdictional High Court on the issue involved in this appeal, the judgments of other High Courts in which this issue has been discussed in detail should be followed. The judgment of our own High Court in the case of CIT v. State Bank of Indore [1988] 172 ITR 24/[1987] 35 Taxman 491 (MP) has no relevance to the controversy of the case as in that judgment their lordships have observed that on account of the delayed payment of the bills purchased by the assessee, the assessee became entitled to liquidate the damages by way of compensation as stipulated in the agreement, & the right of assessee to charge the amount did not, therefore, arise on account, of any delay in return of any loan or advance made by the assessee. As such, the provision of Interest-tax Act was not attracted. But in the instant case, as per the export subsidy scheme the assessee has to provide the export credit to the exporters at a lower rate of interest, provided under the scheme. The loss in interest suffered by the assessee is compensated by the Reserve Bank of India in granting the export subsidy to the assessee. Had the assessee not advanced the loan to the exporters in accordance with the export credit scheme, it would not have referred a loss in the interest. As such, the export subsidy granted by the Reserve Bank of India is itself interest in nature and its nature cannot be changed though it is not paid by the borrower. She has drawn our attention to section 2(7) of the Interest-tax Act in which the word 'interest' has been defined and submitted that the interest tax was brought on the statute in the year 1974 after the export credit scheme which was announced in the year 1968. In the definition of interest certain payments are excluded from the purview of the definition of the interest but there is no mention about the capital subsidy in the definition of the interest. Had it been the intention of the legislature, they would have excluded it from the definition of interest by making specific mention of export subsidy. She further submitted that this issue was discussed in detail by the Karnataka High Court in the case of Vijaya Bank's (supra) and the facts of that case are identical to the instant case and their Lordships have held in that case that the subsidy was paid towards interest and, therefore, the payment made by the Reserve Bank of India to the assessee was nothing but interest under section 2(7) of the Interest-tax Act, 1974.
22. We have heard the rival submissions of the parties and have carefully examined the orders of the authorities below and the judgments quoted by the parties. We agree with the contentions of the assessee that a casus omissus cannot be supplied by the Court except in the case of a clear necessity and when reason for it is found in the four corners of the statute itself, but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of the statue or section must be construed together and every clause of section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if little construction of a particular clause leads to manifestly or anamolous results which could not have been intended by the legislature. With respect to the interpretation of the statute the Hon'ble Supreme Court has held in the case of Banarsidas (supra) that a taxing statute must be caused in express and unambiguous language and if a case is not covered within the four corners of its provisions, no tax can be imposed by inference or by analogy or by trying to probe into the intention of the legislature and by considering what was the substance of the matter, applies only to taxing provisions and has no application to the provision which does not create a charge for the tax but lays down the machinery for its calculation or the procedure for its collection. It is well established principle of construction of statute that, where a would or phrase of doubtful meaning has received a clears judicial interpretation, the subsequent statute which incorporates the same would or the same phrase in a similar context must be construed so that the word or phrase is interpreted according to the meaning that has previously been assigned to it. We have carefully examined section 2(7) of the Act in which the word 'interest' has been defined and we feel it proper to reproduce the same for ready reference :-
"interest means interest on loans and advances made in India and includes -
(a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and
(b) discount on promissory notes and bills of exchange drawn or made in India, but does not include -
(i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);
(ii) discount on treasury bills;"
By a plain reading of the definition of interest it has become indubitably clear that the legislature has excluded certain payments from the definition of interest. This Interest-tax Act was brought in the statute in the year 1974 after the export credit scheme which was introduced in the pear 1968. While introducing this Act, the legislature was well aware about the export credit scheme. Had there been any intention to exclude the export subsidy from the definition of interest, they would have put the export subsidy alongwith the other receipts which are excluded from the definition of interest. The issue came up before the Karnataka High Court in the case of Vijaya Bank's (supra) and they have discussed this issue in detail with the following observations :-
"In the course of its banking activities. The assessee advanced money on export at the shipment stage. The Reserve Bank of India subsidised the interest if the lending bank charged interest at a specified rate lower than the normal rate of interest under the scheme known as the Export Credit (Interest Subsidy) Scheme, 1968. To make up the loss of interest to a certain extent on such transactions, the Reserve Bank of India gave subsidy, The assessee claimed before the Income-tax Officer for the relevant years in question that the amount given as subsidy by the Reserve Bank of India under the Scheme was not taxable because it represented the subsidy and not interest and, therefore, was not chargeable to tax under the Interest-tax Act, and that the subsidy was paid not by the borrower but by a different agency and hence was not interest paid on loan or advance.
That under clause 2(i) of the Export Credit (Interest Subsidy) Scheme, 1968, the subsidy was paid by the Reserve Bank to offset a part of the loss incurred by the assessee as a result of charging interest at a rate lower than the normal rate of interest. The subsidy was dependent upon the loan or advance being given and a lower rate of interest being charged. If the borrower had been allowed to pay at the normal rate of interest to the bank and if he had been subsidised by the Reserve Bank of India towards payment of interest, the assessee could not have raised the sort of contention it had raised. Such a contention could not be raised by the assessee merely because the Reserve Bank of India directly paid the subsidy. The subsidy was paid towards interest and, therefore, the payment made by the Reserve Bank of India to the assessee was nothing but interest under section 2(7) of the Interest-tax Act, 1974. Moreover, consideration could flow from a person other than the borrower (in this case, the Reserve Bank of India) and the payment, therefore, did not lose the character of interest. Therefore, the subsidy could be included in the chargeable interest under section 5 of the Interest-tax Act, 1974."
23. We have also carefully perused the judgment of the jurisdictional High Court in the assessee's case reported at State Bank of Indore's (supra) and find that the judgment is not applicable to the assessee's case being distinguishable on facts. In that fact case their Lordships have decided the nature of payment received on account of delayed payment of the bills purchased by the assessee and held that the right to charge the amount for delay in the payment of bills accrued to the assessee by virtue of the provisions of section 32 of the Negotiable Instruments Act, 1881 and in accordance with the terms of the agreement entered into by the assessee with its constituents in pursuance of which bills were purchased by the assessee. Therefore, the right of the assessee to charge the amount did not arise on account of any delay in the payment of any loan or advance made by the assessee. With respect to the export subsidy which was granted to the assessee by the Reserve Bank of India on account of charging low rate of interest prescribed under the Export Credit Scheme. On export credit from the exporters, we do not find any observation of our own jurisdictional High Court. This issue has been raised before the Hon'ble Karnataka High Court and their Lordships have finally held after making a detailed discussion that the export subsidy falls within the definition of interest and chargeable to tax as per clause 4 of the Interest-tax Act. We have carefully examined the export credit scheme, but no inference, as suggested by the assessee, can be drawn in favour of the assessee. It is a settled principle of law by various judicial pronouncements that the subordinate Courts are bound to follow the judicial pronouncements of other High Court in case there is no direct observation of their own jurisdictional High Courts. For the reasons discussed above, we are of the view that the export subsidy granted to the assessee by the Reserve Bank of India does not lose the character of interest though it is not paid by the borrower. Accordingly, we concur with the view of the CIT (Appeals) and dismiss this ground of the assessee.
24. In the result, the appeals of the assessee are partly allowed.