Orissa High Court
Commissioner Of Income-Tax vs Orissa State Financial Corporation on 6 March, 1992
Equivalent citations: [1993]201ITR595(ORISSA)
Author: A. Pasayat
Bench: A. Pasayat
JUDGMENT A. Pasayat, J.
1. Since the points at issue are common in both the cases, they are disposed of by this judgment which shall govern both of them. At the instance of the Revenue, questions have been referred to this court under Section 256(1) of the Income-tax Act, 1961 (in short, "the Act"), by the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, "the Tribunal"). The assessment years involved are 1980-81 and 1981-82. The questions referred for 1980-81 are as follows :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that, in the case of an assessee maintaining accounts on the mercantile system, the amount of interest which accrued on doubtful debts was not includible in the income of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the total income on which deduction under Section 36(1)(viii) is allowable should be computed before making deduction in terms of Section 36(1)(viii) of the Income-tax Act, 1961 ?"
2. For the assessment year 1981-82, the following question has been referred :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 86,39,464 credited in the 'interest suspense account' on account of interest accrued was not includible in the profits of the assessee ?"
3. The background facts in which these references have arisen are as follows :
M/s. Orissa State Financial Corporation, Cuttack (hereinafter referred to as " the assessee"), is established under the State Financial Corporations Act, 1951 (in short," the Financial Act"). The assessee has been following the mercantile system of accounting and crediting interest on the loans advanced by it to various parties to the profit and loss account on accrual basis. Some loans of the Corporation were overdue and could not be recovered and proceedings under Sections 29 and 31 of the Financial Act were initiated against the defaulters in various forums. The assessee also filed suits for realisation of the amounts. Such loans in respect of which proceedings under Sections 29 and 31 of the Financial Act are taken and suits are filed are termed by the assessee as well as similar other financial institutions of other States as " sticky loans". Evidently, they are not easily recoverable. It is in respect of the loans for recovery of which cases have been filed in various courts that the question of calculation of interest on accrual basis from the time when litigation starts in various courts arose. The assessee was calculating interest on accrual basis as usual even in respect of such loans which were pending in various courts. But, from April 1, 1973, the assessee changed the method of accounting because it felt that crediting interest in respect of such loans would be unrealistic and a correct financial picture is not reflected. The Reserve Bank of India also issued a letter to change the method of accounting followed by the assessee. Accordingly, changes were effected from April 1, 1973, in that so far as the interest on the loans for recovery of which cases are pending in various courts were not reflected in the profit and loss account, they were credited to a separate account known as the " interest suspense account". Interest on the basis of actual receipts after termination of litigation was reflected in the profit and loss account. Under Section 32(6) of the Financial Act, the District Judge is competent to investigate the claim of the assessee in accordance with the provisions contained in the Code of Civil Procedure, 1908 (in short," the Code " ). According to the assessee, pendente lite interest is to be granted by the court at its discretion. It is only in respect of pendente lite interest that the question of changing the method of accounting arose. In accordance with the change of method of accounting, the assessee filed its returns for the assessment year 1974-75 onwards. Initially, the returns filed by the assessee for the assessment years 1974-75 and 1975-76 were accepted but, subsequently, proceedings for reassessment were initiated. Contemporaneously, the assessment for 1976-77 was taken up. The Assessing Officer found that, once a particular system of accounting is adopted and, by following that system, interest has accrued, it is not open to the assessee to claim that interest has not accrued. Accordingly, the assessments were made on accrual basis. On appeal, the Commissioner of Income-tax (Appeals), Orissa, held that reopening of assessments under Section 147(b) for the assessment years 1974-75 and 1975-76 on the basis of the Revenue audit objections was not tenable in law. On merits also, he held that there was nothing wrong in the method adopted by the assessee.
4. The Revenue challenged the correctness of the orders before the Tribunal. The Tribunal was of the view that there was no embargo on the change of method of accounting and the only condition postulated was that it must be a bona fide change. It also upheld the Commissioner's view that, for 1974-75, reopening of the proceedings on the basis of the audit note was not in order. Reliance was placed on the decision in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC). But, so far as 1975-76 is concerned, it was held that reopening was made on the basis of the instruction of the Central Board of Direct Taxes and, therefore, was valid. It, however, endorsed the view of the Commissioner of Income-tax (Appeals) on the merits. Ultimately, therefore, all the appeals were dismissed. So far as assessment years 1974-75 and 1976-77 are concerned, the Revenue moved for reference under Section 256(1) of the Act and on applications being rejected by the Tribunal, moved this court by applications under Section 256(2) of the Act for 1974-75 and 1976-77. Directions were given in these cases, i.e., S.J.C. Nos. 57 and 58 of 1982 for reference. Though the correctness of the view of the Tribunal relating to the changed system of accounting was a question of law, we did not answer that in view of our judgment that reassessment proceedings could not be initiated mechanically relying on an audit objection. So far as S.J.C. No. 58 of 1982 relating to the assessment year 1976-77 is concerned, we refused to answer the question referred, because the question urged by the Revenue did not arise out of the order of the Tribunal. We find that no reference has been instituted for the assessment year 1975-76. Learned counsel for the parties are not in a position to indicate clearly as to what has happened to the subsequent assessments, i.e., for the assessment years 1977-78, 1978-79 and 1979-80, because two reference applications with which we are concerned, as indicated above, relate to the assessment years 1980-81 and 1981-82. For the assessment years in question, the Tribunal followed its earlier view so far as assessability is concerned. An additional question for the assessment year 1980-81 which was not involved for the previous years related to the mode of computation of deduction under Section 36(1)(viii) of the Act. The total income on which deduction under Section 36(1)(viii) is allowable was held by the Tribunal to be computable before deduction of relief under that provision for the relevant year. For coming to such conclusion, the Tribunal relied on the view expressed in another case (Industrial Promotion and Investment Corporation of Orissa Limited in I.T.A. No. 22/CTK/84, disposed of on January 8, 1986 ). On being moved under Section 256(1) of the Act, the questions have been referred for the assessment years in question.
5. The primary stand of learned counsel for the Revenue is that the assessee changed the method of accounting from mercantile system to cash system in respect of accrued interest on " sticky loans" after the close of the accounting year. Without giving up the interest which it could have claimed as a bad debt in case of non-realisation it did not offer it for taxation, but carried it to the interest suspense account. According to him, keeping in a suspense account, a certain amount which had accrued as interest, without treating it as bad debt or irrecoverable interest, was repugnant to Section 36(1)(vii) read with Section 36(2) of the Act. The concept of real income should not be extended to such an extent as to defeat the object and the provision of the statutory enactment. Even if, in a given circumstance, the amount might be taken to the interest suspense account for accounting purposes, that would not affect its taxability as such. Interest on sticky advances was rightly treated as the income which had accrued to the assessee and, therefore, the Commissioner of Income-tax (Appeals) and the Tribunal were not justified in not approving the mode of accounting. Strong reliance is placed in support of the plea on a decision of the apex court in State Bank of Travancore v. CIT [1986] 158 ITR 102. Learned counsel for the assessee, however, submits that the facts involved in the case at hand are materially different from the case which was under consideration by the apex court in State Bank ofTravancore [1986] 158 ITR 102. The Tribunal, while dealing with the assessment for the years 1974-75, 1975-76 and 1976-77, had highlighted the background facts. According to the Tribunal, an assessee can unilaterally change the method of accounting subject to the condition that the change is effected in good faith and is bona fide, and that the real state of affairs is reflected. The Tribunal found that there was no dispute that the change effected by the assessee with regard to interest realisable from persons against whom cases are pending was done in good faith. It, therefore, did not feel it necessary to consider the controversial issue as regards the real income concept.
6. In our view, the case which was under consideration of the apex court in State Bank of Travancore [1986] 158 ITR 102 did not relate to cases where suits had been filed. The situation is different where the interest relates to cases covered by suits. Under Section 34 of the Civil Procedure Code, awarding of interest from the date of suit till the date of decree is within the discretion of the court. According to this provision, the plaintiff is entitled to interest even for the period pendente lite, but at what rate he cannot say, until the court determines the same. It would not be possible for the plaintiff in such a situation to say that interest is accruing to him, from year to year, pending the suit, at a particular rate. Accrual to the plaintiff is on the date of decree. Therefore, interest does not accrue during the whole of the period during which suits are filed for recovery of loans, and awarding of interest for the period was within the discretion of the court which was yet to pronounce its judgment. This is a distinct feature which was absent in State Bank of Travancore [1986] 158 ITR 102 (SC). A view similar to ours has been expressed by the Allahabad High Court in CIT v. Uttar Prudesh Financial Corporation [1992] 194 ITR 282 and the Calcutta High Court in C1T v. Nasharpara Jute Mills Co. Ltd. [1983] 141 ITR 384. The Tribunal, therefore, was right in holding that the sum credited in the " interest suspense account" on account of interest accrued was not includible in the profits of the assessee. So far as the second question for 1980-81 is concerned, we had an occasion to deal with a similar case in C/Tv. Industrial Promotion and Investment Corporation of Orissa [1993] 199 ITR 761 in S.J.C. No. 42 of 1987, disposed of on February 21, 1992. The Tribunal relied on the decision in the said case to decide in favour of the assessee. We have affirmed the view of the Tribunal. Therefore, we answer the question in the affirmative and in favour of the assessee.
7. The references are disposed of accordingly.
S.K. Mohanty, J.
8. I agree.