Calcutta High Court
Grindlays Bank P.L.C. vs Commissioner Of Income-Tax on 12 March, 1991
Equivalent citations: [1993]201ITR148(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1978-79, the following questions of law have been referred to this court :
"1. Whether, on the facts and in the circumstances of the case and in view of the circular of the Central Board of Revenue dated October 6, 1952, read with the subsequent Circular dated October 9, 1984, issued by the Central Board of Direct Taxes, the Tribunal was justified in treating as the income of the assessee the sum of Rs. 2,40,77,729 being the interest on sticky advances and/or debts doubtful of recovery credited during the year in question to the interest suspense account ?
2. Whether, in view of the majority judgment of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102, the Tribunal was justified in holding that the question whether interest on sticky loans credited to the interest suspense account is taxable has been finally concluded by the said majority judgment ?
E. A. No. 894 (Cal) of 1966 :
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in terms of Section 36(1)(iv) of the Income-tax Act, 1961, and Rules 87 and 88 of the Income-tax Rules, 1962, and the Board's Notification No. 100 (F. 44A)/8/64/ITJ, dated October 21, 1965, in setting aside the order of the Income-tax Officer in allowing 100 per cent, of the claim for initial contribution to the assessee's Staff Pension Scheme in respect of past services of its members?"
2. It is not disputed that the third question is covered by the judgment of this court in I. T. Ref. No. 113 of 1985 (CIT v. Union Carbide (India) Ltd.), where the judgment was delivered on February 5, 1990. In that view of the matter, we do not intend setting out the facts relating to the third question. Following the said decision, we answer the third question in the negative and in favour of the assessee.
3. We now turn to the facts relating to the first and second questions :
The assessee claimed that the sum of Rs. 2,40,77,729 being interest on sticky advances and/or debts doubtful of recovery credited during the relevant accounting year to the interest suspense account and not to the profit and loss account is not taxable. The assessee credited the aforesaid interest on sticky advances to the interest suspense account as per circular No. 41(V-6) D of 1952, dated October 6, 1952, issued by the Central Board of Revenue. The assessee, by relying upon the aforesaid circular, claimed that the interest credited by the assessee to the interest suspense account is to be excluded from the taxable income. It was the case of the assessee that the Central Board of Revenue, since August 25, 1924, has recognised that interest credited to the interest suspense account and not to the profit and loss account on sticky and/or doubtful debts is not to be included in the income of the assessee. The assessee all throughout has been following the said practice of suspensing the interest on debts which are doubtful of recovery as per the instructions issued by the Board from time to time. However, in the draft assessment order, the Income-tax Officer proposed a disallowance of Rs. 4,02,56,628 being the gross interest credited to the interest suspense account during the previous year. The Inspecting Assistant Commissioner was of the opinion that the circular dated October 6, 1952, has been withdrawn by the CBDT's Circular dated June 20, 1978, and in view of the Board's instructions contained in circular dated June 20, 1978, the whole amount credited in the previous year to the interest suspense account is to be included in the total income. However, he made adjustments for an amount of Rs. 44,75,464 being the amount of bad debts written off during the year and not debited to the profit and loss account and an amount of Rs. 1,17,03,435 being the amount transferred to the interest account. So, he directed that the balance amount of Rs. 2,40,77,729 should be added to the total income of the assessee-bank. The Income-tax Officer followed this direction. On appeal, the Commissioner of Income-tax (Appeals ) upheld this addition, relying on the decision of the Kerala High Court in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336.
4. It was contended for the assessee before the Tribunal that this view of the Commissioner of Income-tax (Appeals) is not sustainable in view of the circulars of the Board. Opposing this contention, the Departmental Representative pointed out that this decision of the Kerala High Court has been upheld by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 and, as such, the finding of the Commissioner of Income-tax (Appeals) should be upheld. In reply, the authorized representative for the assessee contended that the effect of the circulars was not considered by the Supreme Court and, as such, the relief can be and should be given to the assessee-bank in view of the circulars of the Board which are favourable to the assessee. The authorised representative for the assessee sought to place before the Tribunal all that transpired between him and the Bench in the Supreme Court during the hearing of the said case. But the Tribunal declined to be addressed on such matters as this was not part of the judgment of the Supreme Court relied upon by the Departmental Representative.
5. The Tribunal, after considering the decision of the Supreme Court in State Bank of Travancore [1986] 158 1TR 102, held that it is not open to the assessee to contend on the basis of the said circulars which were before the Supreme Court that the interest on sticky loans credited to the interest suspense account is not taxable. According to the Tribunal, the question has been finally concluded by the majority decision of the Supreme Court in State Bank of Travancore [1986] 158 ITR 102 that interest on sticky loans credited to the interest suspense account is taxable. The Tribunal, therefore, dismissed the appeal of the assessee.
6. At the hearing before us, Dr. Pal, the learned advocate for the assessee, has contended that the question has not been concluded by the decision of the Supreme Court in State Bank of Travancore [1986] 158 ITR 102. He has analysed the said judgment and endeavoured to find out the true purport of the said judgment. Dr. Pal contends that, before the Supreme Court, reliance was placed upon the Circular dated October 6, 1952, and the letter from the Under Secretary, Central Board of Direct Taxes, dated April 16, 1973, and also the letter dated November 21, 1973, of the Reserve Bank of India. Reference was also made to the later Circular dated June 20, 1978, which was issued subsequent to the decision of the Kerala High Court in State Bank of Travancore [1977] 110 ITR 336. In the judgment of the Supreme Court, however, the subsequent Circular dated October 9, 1984, was not referred to.
7. Dealing with the aforesaid circulars, Sabyasachi Mukharji J. (as he then was), delivering the majority judgment in State Bank of Travancore [1986] 158 ITR 102, 139, observed that it was contended "that as such claims have been allowed to be exempted for more than half a century and the practice had transformed itself into law, this position should not have been deviated from."The said contention was, however, not accepted by the learned judge. The learned judge observed that "this submission, of course, cannot be accepted".
8. The learned judge also observed that "in these appeals, we are not concerned with the actual effect of these circulars and these need not be set out and examined ".
9. The learned judge further observed (at page 139 ) that "the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed and the feasibility ". Dr. Pal contends that it is in the light of the aforesaid observations that the learned judge further observed that "the earlier circulars being executive in character cannot alter the provisions of the Act". According to the learned judge, "these were in the nature of concessions and could always be prospectively withdrawn". Having observed as aforesaid, the learned judge further pointed out that "however, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act."( emphasis supplied )
10. Dr. Pal has contended that a combined reading of the aforesaid observations makes it clear that what was argued before the Supreme Court was that, for half a century, the claims have been allowed to be exempted and there should not be any deviation from the said practice. The learned judge pointed out that how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed and the feasibility. There is no doubt about that proposition. But the learned judge himself has pointed out that (at page 139) "on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us "and the court is not going to adjudicate upon them. Hence, the learned judge pointed out that "we are not concerned with the actual effect of these circulars and these need not be set out and examined". His Lordship accepted the argument of the Revenue as an abstract proposition of law that "the circulars cannot detract from the Act ". But the adjustments of the rights of the parties in view of the circular which gives concession and which, according to the learned judge, can be withdrawn only prospectively, are matters which were not at all considered by the learned judge himself and the question as to how far the circulars giving concession or beneficial circulars are binding upon the Department have not been decided by the Supreme Court. (emphasis * supplied).
11. Dr. Pal has further contended that the latest circular dated October 9, 1984, clearly points out that subsequent withdrawal of the beneficial circulars/instruction can be with prospective effect only and, as such, the question of taxability of interest on doubtful debts credited by banking companies to suspense accounts will have to be decided up to the assessment year 1978-79 in the light of the Board's Circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978.
12. According to Dr. Pal, from the assessment year 1979-80 onwards, the said circular provided that doubtful debts credited to suspense accounts by banking companies will be subject to tax but interest charged in the account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year or later, the actual recovery only will be subjected to tax in the respective years. According to the said circular of 1984, this procedure will apply to the assessment year 1979-80 and onwards. The learned judge himself has taken the view that the circulars issued by the Central Board of Direct Taxes in respect of the non-taxability of the interest credited to the interest suspense account are giving certain concessions or are beneficial circulars. Sabyasachi Mukharji J. (as His Lordship then was) in the case of CIT v. Swedish East Asia Co. Ltd. , held that "whenever there was any instruction, which is in favour of the assessee, the I. T. authorities or those who were in charge of the execution of the I. T. Act would not be permitted to go back on those instructions or circulars because there was some kind of representation made to the assessee and so the I. T. authorities could not be allowed to approbate and reprobate and they were estopped from disputing the policy enunciated in the instructions or the circulars. But that does not mean that such a provision entitled the I. T. authorities including the CBDT to issue instructions or circulars curtailing the provisions of the Act or curtailing the relief to which the assessee is otherwise entitled under the law".
13. Dr. Pal contends that the above view of the Division Bench of the Calcutta High Court has been accepted in several decisions of other High Courts. He has also pointed out that in Keshavji Ravji and Co. v. CIT[1990] 183 ITR 1, the Supreme Court examined the question particularly in relation to the observation of Sabyasachi Mukharji J. (as His Lordship then was) in State Bank of Travancore v. C1T and observed that the circular which gives a benefit or which gives a concession is binding upon the Revenue authorities.
14. Dr. Pal also contends on the basis of the Kerala Full Bench decision in CIT v. B. M, Edward, India Sea Foods [1979] 119 ITR 334, that the circular conferring privileges and rights on assessees will remain effective until it is recalled or withdrawn. The circular of 1978 recalling or withdrawing the circular of 1952 was issued in June, 1978. Hence, the Central Board of Direct Taxes in the later circular of 1978 observed that the earlier circular of 1952 will be applicable up to the assessment year 1978-79, because, as held by the Kerala Full Bench, a circular, by retrospective operation, cannot affect the rights to have the assessment made and completed in accordance with the circular as it stood on the first day of the assessment year. Dr. Pal has submitted that special leave was refused by the Supreme Court against the decision of the Kerala Full Bench (see 140 ITR (St.) 1).
15. He has drawn our attention to the decision of the Patna High Court in CIT v. Sriram Agrawal [1986] 161 ITR 302. There, the Patna High Court considered the Supreme Court's decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 and observed as follows (at page 309) :
"The observations in State Bank of Travancore v. CIT made by Sabyasachi Mukharji J. to the effect that the circulars being executive in character cannot alter the provisions of the Act run counter to the observations of Gajendragadkar C. J. in the case of Navnitlal C. Javeri . The latter being a judgment of five judges and the former of three judges, I am bound to follow the case of Navnitlal C. Javeri ."
16. It is, therefore, submitted that the observation of Sabyasachi Mukharji J. ( as His Lordship then was ) that "the circulars cannot detract from the Act"has to be read properly in the context of what His Lordship has said in the earlier paragraphs. In any event, the said observation cannot overrule the larger Bench decision in Navnitlal C. Javeri which was decided by a Bench of five judges and the decision of the larger Bench is to be followed in preference to that of the smaller Bench.
17. He has drawn our attention to the decisions of the Supreme Court in Union of India v. K. S, Subramanian, and in State of Uttar Pradesh v. Ram Chandra Trivedi, , where the Supreme Court held that if there be any conflict between the views expressed by larger and smaller Benches of the Supreme Court, the proper course for a High Court in such a case is to try to find out and follow the opinion expressed by the larger Benches of the Supreme Court in preference to those expressed by smaller Benches of the Supreme Court which practice, hardened as it has into a rule of law, is followed by the Supreme Court itself.
18. On the other hand, the contention of Mr. Moitra, learned counsel for the Revenue, is that after the decision of the Supreme Court in State Bank of Travancore [1986] 158 ITR 102, it is not open to the asscssee to contend, as is sought to be done, that the Supreme Court has not considered the effect of the said circular. In fact, the said circular was referred to and was duly considered by the Supreme Court in arriving at its decision.
19. We have considered the rival contentions. In Navnital C. Javeri [1965] 5G ITR 198, the Supreme Court was considering the validity of Section 12(1B) read with Section 2(6A)(e) of the Indian Income-tax Act, 1922. These provisions were introduced in the Act by the Finance Act, 1955, which came into operation on April 1, 1955. In deciding the constitutionality of the impugned provisions, the Supreme Court observed as follows ( at page 202) :
"There is another material circumstance which cannot be ignored. It appears that when these amendments were introduced in Parliament, the Hon'ble Minister for Revenue and Civil Expenditure gave an assurance that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment year 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. It was realised by the Government that unless such a step was taken, the operation of Section 12(1B) would lead to extreme hardship, because it would have covered the aggregate of all outstanding loans of past years and that may have imposed an unreasonably high liability on the respective shareholders to whom the loans might have been advanced. In order that the assurance given by the Minister in Parliament should be carried out, a Circular (No. 20 (XXI-6)/55) was issued by the Central Board of Revenue on May 10, 1955. It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under Section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers were, therefore, asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced. In other words, past transactions which would normally have attracted the stringent provisions of Section 12(1B) as it was introduced in 1955 were substantially granted exemption from the operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies, they would not be taken into account under Section 12(1B). Section 12(1B) would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it. "
20. The circular referred to by the Supreme Court was in effect a clarification of the impugned provisions. The taxability of deemed dividend was not at issue, the hardship in the implementation of the impugned provisions was sought to be removed in pursuance of the assurance given by the Minister in Parliament. No argument was advanced before the Supreme Court as to whether the circular, if it detracts from the provisions of the Act, would be binding on the courts in construing such provisions.
21. It is not correct to say that the Supreme Court in State Bank of Travancore [1986] 158 ITR 102, did not consider the effect of the circulars. The observation of the Supreme Court that the Supreme Court was "not concerned with the actual effect of these circulars and these need not be set out and examined"was not made regarding the legal effect of the circulars on the interpretation of the statutory provision ; the observation was confined to what were the contents of these circulars. The Supreme Court then proceeded to say (at page 139 of 158 ITR) :
"The earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act."
22. As we have already noted, a contention was raised before the Supreme Court that the practice of allowing exemption for more than half a century had transformed itself into law and this position should not have been deviated from. The Supreme Court negatived this contention in the following words (at page 139 of 158 ITR) :
"The question of how far the concept of real income enters into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed and the feasibility."
23. It is, therefore, clear that the interest income was liable to be taxed, but the assessee in fact wanted exemption on the basis of the alleged practice. The Supreme Court laid down the true position in law regarding the assessability of the interest on sticky advances. Sabyasachi Mukharji J. (as His Lordship then was) observed (at page 154 of 158 ITR) :
"An accountable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well-settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made 'no income'. (emphasis supplied).
"The extension of such a value judgment to such a field is pregnant with the possibility of misuse and should be treated with caution ; otherwise one would be on sticky grounds. One should proceed cautiously and not fall a prey to the shifting sands of time."(at page 154 of 158 ITR).
"We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches, the concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax as developed."(emphasis supplied)
24. Ranganath Misra J. ( as His Lordship then was ) observed { at page 156 of 158 ITR) :
"I am of the view that Section 36(2) of the Income-tax Act covers the entire field regarding deduction for bad debt. Though the concept of 'real income' is a well-recognised one, it cannot be introduced as an outlet of income from the taxman's net for assessment on the plea that though shown in the account books as having accrued, the same became a bad debt and was not earned at all. It is well settled that the citizen is entitled to the benefit of every ambiguity in a taxing statute but where the law is clear, considerations of hardship, injustice or anomaly do not afford justification for exempting income from taxation."(emphasis supplied )
25. There the Supreme Court laid down in no uncertain terms that if the interest has accrued, by crediting it to a suspense account upon its own ipse dixit, the assessee cannot escape liability from taxation. Under the head "Business ", what is charged are the profits and gains of business and the profits and gains would not escape tax by reason only of the fact that they were not received in the accounting year in money or the equivalent of money or were not deemed to be so received. They were assessable if they had arisen or accrued or were under the Act deemed to have arisen or accrued to the assessee in the accounting year just as much as if they had been received or were deemed to have been received in that year. This principle would be attracted even in cases where an assessee followed the mercantile system of accounting. However, in examining any transaction or situation, the court would have more regard to the reality of the situation rather than the purely theoretical or doctrinaire aspect of it without disregarding the statutory language. The interest in this case has not to be given up. In fact, there was no clear assertion on the part of the assessee to give up the interest. What was done was that interest that had accrued was credited in a suspense account. The assessee was very much keeping alive the claim for interest. It is also not a case of change in the method of accounting. The main contention was that the amount of the debts which were considered to be irrecoverable in the year were, for the time being, kept in the suspense account. Such an alteration in book-keeping could not be termed as a "change in the method of accounting".
26. In our view, the circulars cannot affect the true position in law. The circulars are not in the nature of contemporanea expositio furnishing legitimate aid in construction. The circulars may be binding on the Revenue in administering or executing the provisions of the Act. But these are not binding either on the Tribunal or on the court. ( See CWT v. Balbhadradas Bangur ).
27. There is another aspect of the matter. The first circular of the Board is dated October 6, 1952. Notwithstanding the said circular, the Kerala High Court decided the first case of State Bank of Travancore (being Income-tax References Nos. 27 to 29 of 1971) on March 22, 1973, which was affirmed by the Supreme Court in [1986] 158 ITR 102. The subsequent decision in State Bank of Travancore v. CIT [1977] 110 ITR 336 was rendered by the Kerala High Court on April 1, 1975. It will, therefore, be evident that the 1952 circular of the Board was in force when the aforesaid two decisions of the Kerala High Court were rendered. Even if a circular of the Board may be binding upon the Income-tax Officer in matters relating to the general interpretation of the statute, the circular cannot override judicial decisions rendered on the statute. Where the interpretation is covered by judicial decisions, the circular will not be conclusive even as far as income-tax is concerned. As a matter of fact, no assessing authority or appellate authority or the Tribunal can ignore the decisions of High Courts rendered on an identical issue. That is why, on June 20, 1978, the Board had withdrawn the circular dated October 6, 1952.
28. We may note that the Supreme Court affirmed the subsequent decision of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336, where an identical question arose. The decision of the Supreme Court is reported in State Bank of Travancore v. CIT [1990] 186 ITR 187. There the Supreme Court observed as follows (at page 188) :
"The question raised in these appeals is whether the interest on sticky advances is income for the assessment year 1968-69. The answer to the question is covered by the majority view of this court in State Bank of Travancore v. CIT [1986] 158 ITR 102. Following the said decision, the appeals and application for intervention are dismissed with no order as to costs."
29. We may also refer to a decision of a Division Bench of this court in the case of CIT v. Allahabad Bank [1991] 192 ITR 182 which considered an identical question. In that case, in the assessment year 1974-75, in respect of certain loans which had become doubtful of recovery, the assessee charged interest to the party's account and it was credited to the suspense account instead of to the profit and loss account. The Inspecting Assistant Commissioner was of the opinion that the interest had accrued during the year and that it was income of the year and was liable to be assessed. Hence, the said amount was added back to the total income of the assessee. On appeal, the Commissioner (Appeals) allowed the assessee's claim and deleted the entire amount added by the Inspecting Assistant Commissioner. On appeal by the Revenue, the Tribunal upheld the order of the Commissioner (Appeals).
30. The Division Bench, following the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102, held that the interest on sticky advances was rightly treated as income by the Department which had accrued to the assessee. The Tribunal was, therefore, not justified in deleting the addition made by the Inspecting Assistant Commissioner. The Division Bench observed as follows (at page 183 of 192 ITR j (at page 48 of [1990] 53 Taxman ) :
"The facts of the instant case as well as the facts of the Supreme Court decision in the case referred to above are identical. The learned advocate appearing for the assessee, Mr. Bhattacharjee, contended that most of the circulars including the circular on which reliance was placed by Mr. Bhattacharjee, namely, the circular dated October 9, 1984, were considered by the Supreme Court in the case of State Bank of Travancore [1986] 158 ITR 102. In the case of State Bank of Travancore, the Supreme Court failed to consider the circulars (sic). In view of the earlier decision of the Supreme Court, that question could not be decided by us. In the case of State Bank of Travancore [1986] 158 ITR 102, the Supreme Court clearly pointed out that these circulars in question were executive in character and were in the nature of concessions and, as such, the same could not alter the provisions of the law. The principle of contemporaneous exposition could not be applicable on the basis of the circulars which were issued for the purpose of giving certain concessions. The Supreme Court, after considering the scope and effect of the said circulars, had laid down the law on the question of taxability of interest on 'sticky' loans and advances by the bank and, as such, it is not open to us to take a contrary view. We are not inclined to accept the submissions made by learned counsel on behalf of the assessee."
31. For the foregoing reasons, we answer the first and second questions in the affirmative and in favour of the Revenue.
32. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
33. I agree.