Punjab-Haryana High Court
State Bank Of Patiala vs Central Board Of Direct Taxes And Ors. on 7 September, 1993
Equivalent citations: [1994]207ITR190(P&H)
JUDGMENT A.L. Bahri, J.
1. Sixteen civil writ petitions filed by the petitioner for different assessment years are being disposed of. The judgment is prepared in C. W. P. No. 11863 of 1989.
2. In this petition filed under articles 226 and 227 of the Constitution, the petitioner-State Bank of Patiala, a body corporate, constituted under the State Bank of Patiala (Subsidiary Bank and Controls) Act, 1959, seeks a writ of certiorari quashing the order dated June 13, 1989, annexure P-1 passed by the Central Board of Direct Taxes declining to interfere in the matter of proceedings initiated under Section 148(1) of the Income-tax Act by issuing a notice, annexure P-2, dated March 25, 1988, and also for quashing of the aforesaid notice and further directing the respondents including the Commissioner of Income-tax and the Inspecting Assistant Commissioner (Assessment), Patiala, not to reassess the petitioner for the assessment year 1972-73. The petitioner is an assessee since the assessment year 1961-62 under the Income-tax Act, 1961. The assessment proceedings for the assessment years 1971-72 to 1986-87 were completed under Section 143(3) of the Act. On March 25, 1988, notice, annexure P-2, was issued by respondent No. 3 under Section 148(1) of the Act on the ground that respondent No. 3 had reasons to believe that income of the petitioner-bank chargeable to tax for the assessment year 1972-73 (year ending December 31, 1971), had escaped assessment within the meaning of Section 147(a) of the Act. The notice required the petitioner to submit a return in the prescribed form within 30 days thereof. Since the notice did not mention the reasons on the basis of which it could be said that there was escapement of income from assessment within the meaning of Section 147 of the Act, on enquiry such reasons were disclosed contained in annexure P-3, dated June 17, 1989.
3. The reasons disclosed are summarised as under :
The bank transferred debts which could not be recovered (doubtful of recovery) to a separate account styled as Protested Bills Account and stopped adding interest on accrual basis, a system to be followed under the mercantile business system on the ground that interest could be charged under orders of the civil court under Section 34 of the Code of Civil Procedure. Such interest on such accounts for the assessment year 1972-73 was about Rs. 3,05,000 which the bank had failed to disclose and include in the taxable income. In this manner, the bank did not disclose fully and truly all material facts necessary for the assessment. The bank alleged that the matter was discussed with the assessing authority and it was conveyed that the notices were issued in view of the decision rendered by the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102. The bank, hence, filed a reply to the notice, copy annexure P-4. Another detailed reply was filed to the notice under Section 148(1) of the Act on January 19, 1988, copy annexure P-5. It was asserted in these replies that on the basis of the decision of the Supreme Court referred to above, the proposed reopening of the assessment was without jurisdiction. It was made clear that no interest in the Protested Bills Account was being credited on accrual basis and the interest in such accounts was credited to interest account only after its actual receipt from the borrower. The action of the authorities was wholly without jurisdiction in view of Section 147(a) of the Act in respect of the assessment year 1972-73. The grounds given were briefly as follows ;
(i) The method of accounting adopted by the bank from the day it took over from the then Bank of Patiala, i.e., with effect from April 1, 1960, was on cash receipt basis as far as the Protested Bills Account was concerned. Up to the assessment year 1960-61, the Bank of Patiala was exempt from the payment of income-tax.
(ii) The interest on the amounts transferred to the Protested Bills Account was being debited at the time of interest actually realised in execution of the decree that may be passed in such cases and such income was offered for tax. Such accounts as transferred to the Protested Bills Account were not normal accounts. It was beyond the control of the bank to recover interest on the principal as the accounts became highly irregular and disputed.
4. The bank also took up the stand that it was entirely for the bank to adopt a method of accounting as regards the Protested Bills Account and the method of accounting was on cash receipt basis. The Central Board of Direct Taxes had issued a Circular No. 491, dated June 30, 1987 (see [1987] 166 ITR (St.) 149), permitting the financial institutions to change the method of accounting to cash receipt basis even if they had been following the method of crediting interest on accrual basis. A copy of the circular was annexed as annexure P-6. The assessing authority having taken no interest to drop the proceedings, the bank approached the Central Board of Direct Taxes, respondent No. 1, through representation dated April 28, 1988, annexure P-7. The said representation was rejected, vide order dated June 13, 1989, copy annexure P-1. It is in these circumstances that the bank approached this court in this writ petition.
5. While contesting the writ petition the respondents, in their written statement filed, took a preliminary objection that the writ petition was liable to be dismissed on the ground of alternative remedy being available to the bank. The alternative remedy was by way of an appeal to the first appellate authority and thereafter to the Income-tax Appellate Tribunal and finally by reference to the High Court. At this stage only notice had been issued to the petitioner-bank and the bank could take all available objections or grounds in the reply filed thereto. On the merits, it was stated that replies to the notices were filed. The ratio of the decision of the Supreme Court in the case of State Bank of Travancore [1986] 158 ITR 102 is applicable to the facts of this case. The practice adopted by the bank to credit the account on receipt basis was not correct as the accounts were maintained on mercantile basis. The action of the assessing authority in issuing notice under Section 148(1) read with Section 147(a) of the Income-tax Act was within jurisdiction. The sticky loans were irregular accounts, likewise the protested bills account was also irregular, there being no difference in substance. The decision of the apex court in the case of State Bank of Travancore [19861 158 ITR 102 was applicable in the case in hand. It was sought to be clarified that for the assessment year 1972-73 action was initiated under Section 147(a) of the Act whereas in the subsequent year 1973-74, under Section 147(b) of the Act. A replication was filed by the petitioner controverting the allegations of the respondent. It was asserted that the notices issued were without jurisdiction and were liable to be quashed in exercise of the extraordinary jurisdiction under articles 226 and 227 of the Constitution. A distinction was drawn between sticky accounts and protested bills accounts. Sticky accounts were stated to be irregular accounts whereas the protested bills account was such wherein, without recourse to law, the amount had become irrecoverable. The petitioner-bank was maintaining the hybrid system of accounting and not the mercantile system. Thus with respect to such accounts where the amounts could not be recovered without recourse to law, the amount of interest was added only on its receipt and not on accrual basis. Annexure P-9 was filed to indicate that for the assessment year 1962-63 when the appeal was filed, the bank had taken the stand that the bank was maintaining a protested bills account of such loans recovery of which was doubtful and interest used to be added only on its recovery. Thus, it was known to the Department that the bank was maintaining such an account much prior to the assessment year in dispute and it was not a case where the bank had not disclosed the material facts correctly and truly.
6. We have heard counsel for the parties at great length. Shri J.N. Kaushal, Senior Advocate, appearing on behalf of the petitioner-bank, has argued that on the facts and circumstances of the present case the notices issued to the petitioner-bank to reopen the assessments already framed were without jurisdiction and the notices should be quashed. Shri R.P. Sawhney, learned counsel for the Revenue, while controverting the contention of the petitioner-bank, has argued that the alternative remedy of appeal is available to the bank and the notices were validly issued for reassessment and even otherwise disputed questions of fact cannot be gone into in the present proceedings. Both counsel have referred to several judicial decisions in support of their contentions. Before reference is made to those decisions, it is necessary to refer to the reasons or the material facts on the basis of which such notice was issued which are contained in annexure P-3, as follows :
"The assessee-bank transferred the debts doubtful of recovery to a separate account. Although the assessee-bank followed the mercantile system of accounting, no interest on accrual basis is charged to such account on the ground that charge of interest vests with the civil court under Section 34 of the Civil Procedure Code. The court may in its opinion allow any rate of interest to be charged after the decree. The interest as and when recovered from the debtors as per the court's decree is credited to the interest account and is shown as income of the bank in the year of recovery. Thus factually the interest on advances doubtful of recovery is charged on cash basis. Since the assessee follows the mercantile system of accounting it cannot do so. Legally, it has to show the interest on debts doubtful of recovery on accrual basis which has not been done by the assessee.
The interest accrued on such advances during the period relevant to the assessment year 1972-73 was about Rs. 3,05,000 which the assessee has failed to disclose and include in its taxable income.
In view of these facts, I have reasons to believe that, by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment of the year under consideration, income chargeable to tax has escaped assessment for the assessment year 1972-73. The reasons recorded supra get support from the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102."
7. The preliminary objection raised on behalf of the Revenue is that at this stage only notice under Section 148 read with the provisions of Section 147 of the Income-tax Act has been issued. It would be open to the petitioner to take all available objections in the reply to be filed in response to the notice raising the disputed questions as well as questions of law arising therefrom. It would further be open to the petitioner if any order of reassessment is passed to have recourse to the remedy of appeals and reference to the High Court. In support of his contention reliance has been placed on the decision of this court in M.M. Mahajan v. GTO [1992] 194 ITR 184. The firm known as Messrs. Mahajan International sold the running business of this firm with all its assets and liabilities to another firm, Panipat Foods Limited. The Inspecting Assistant Commissioner, however, fixed the market value of the assets sold at a much higher price than the price at which they were actually sold. Notices under Section 16(1)(a) of the Gift-tax Act were issued to the partners of the firm, Messrs. Mahajan International, to treat the difference as worked out above as a gift. Such notices were challenged in the writ petition. A preliminary objection was taken on behalf of the Revenue that the writ petition was not maintainable as alternative remedies of appeal and reference as provided under the Act could be resorted to. A Division Bench of this court upheld the objection and dismissed the writ petition holding as under (at page 185) :
"A plain reading of the provisions of the Gift-tax Act would show that it is open to the petitioners to seek their appropriate remedy by filing a reply to the notice served upon them and if they are aggrieved by any order that may be passed thereon, they have available to them the further remedy of appeal. Such being the circumstance, no occasion is provided here for entertaining the present writ petitions. The petitioners are, accordingly, relegated to their alternative remedies under the Act."
8. In VXL India Ltd. v. ITO [1988] 173 ITR 124, this court again took a similar view. A notice under Section 147 of the Income-tax Act was issued to the assessee which was sought to be challenged in the High Court. The writ petition was dismissed and a Letters Patent Appeal filed against the aforesaid decision of the learned single judge was also dismissed. The learned single judge had held that there was a prima facie case to believe that the Income-tax Officer had some information in his possession, in consequence of which he might have entertained a reason to believe that income chargeable to tax had escaped assessment. Since the proceedings were at the stage of issuing a notice under Section 147 of the Act, the Bench observed that there was some material or information in the possession of the Income-tax Officer which was sufficient to invoke the provisions of Section 147 of the Act. These questions could not be decided under Article 226 of the Constitution. It is the duty of the Income-tax Officer to decide in the assessment proceedings the objections raised by the assessee. The appeal was dismissed. A special leave petition filed against the aforesaid decision was dismissed by the apex court in VXL India Ltd, v. ITO--(S. L. P. (Civil) Nos. 3806-3809 of 1988, [1988] 171 ITR (St.) 48). A perusal of the judgment aforesaid would show that not only disputed questions of fact, but the question of jurisdiction could also be raised in the objections filed in response to the notice issued under Section 148 of the Income-tax Act and the Income-tax Officer is obliged to adjudicate upon it. The scope of Article 226 of the Constitution was also under consideration of by the Supreme Court. In Kirpa Ram Ramji Dass v. ITO [1982] 135 ITR 68, the Division Bench of this court dealt with the matter of adequacy or otherwise of the material for issuance of notice under Section 147 of the Act. It was held that it was not for the High Court to go into the adequacy or inadequacy of the material and so long as the relevant material is there before a notice is issued, the court in writ jurisdiction cannot hold that the notice issued was without jurisdiction. Titaghur Paper Mills Co. Ltd. v. State of Orissa [1983] 142 ITR 663 ; [1983] 53 STC 315 (SO, was a case wherein a claim was made for deduction on account of sales made to registered dealers in respect of inter-State sales. The claim of the assessee was declined and it approached the High Court in a writ petition. The High Court dismissed the same and thereafter the matter was taken to the Supreme Court. While dismissing the appeal, the Supreme Court observed as under (headnote) :
"The Act provided for a complete machinery to challenge an order of assessment and the orders of assessment in the case could only be challenged by the mode prescribed by the Act and not by a petition under Article 226 of the Constitution of India. The Act provided for an adequate safeguard against an arbitrary or unjust assessment. The assessees had a right to prefer appeals under Section 23(1) of the Act subject to their payment of the admitted amount of tax as enjoined by the proviso thereto, and as regards the disputed amount of tax they had the remedy of applying for stay of recovery to the Commissioner under Clause (a) of the second proviso to Section 13(5) of the Act."
9. On the other hand, Mr. Jagan Nath Kaushal, learned counsel for the petitioner, has argued that availability of alternative remedy per se is no bar to entertaining a petition under Article 226 of the Constitution, more so when the question of initial jurisdiction or violation of rules of natural justice is pleaded. At the initial stage of the writ petition if objection is raised, the writ could be dismissed. However, at the final stage the matter should be gone into on merits. To support this contention, reliance has been placed on the decision of the single judge of this court in Prem Ex-Servicemen Co-operative Tenant's Farming Society Ltd. v. State of Haryana [1977] PLJ 211. In paragraph 23 of the judgment, it was observed that there could be a case where no useful purpose would be served by resorting to the alternative remedy. The High Court could exercise its discretion to interfere under Article 226 of the Constitution. In Ramchandra Prasad Baid v. State of Bihar, AIR 1972 Patna 387, a single judge of the Patna High Court commented upon the wide scope of the Article 226 of the Constitution in the matter of granting remedies in paragraph 8 of the judgment. It was observed as under (headnote) :
"The powers of High Court under the Article are wide enough. Though generally the court does not interfere where alternative remedy is available, still once the court admits an application, the court can grant relief even when an alternative remedy is available."
10. In L. Hirday Narain v. ITO [1970] 78 ITR 26 ; AIR 1971 SC 33, in paragraph 12 of the judgment, the Supreme Court observed about the effect of the alternative remedy. Since the High Court had entertained the petition and had given a hearing on the merits, it was observed that the petition could not thereafter be rejected on the ground that the statutory remedy was not availed of. The aforesaid decision was relied upon by the Madhya Pradesh High Court in Durlabhkumar v. District Judge, AIR 1973 MP 175.
11. Normally, the parties should approach the authorities under the statute for settlement of disputes. The High Court in the exercise of jurisdiction under Article 226 of the Constitution is not expected to act as an appellate authority or a revisional authority on the orders passed by the authorities under the statute when orders are challenged having been passed without jurisdiction that the resort can be had to the provisions of Article 226 of the Constitution. This broad proposition is of course subject to the condition that if the facts on the basis of which the jurisdiction of the authority taking action under the statute is questioned are disputed, it would not be appropriate to interfere in the exercise of the powers under Article 226 of the Constitution. The parties should be relegated to the remedy available under the statute to raise disputed questions of fact on the merits as well as on the question of jurisdiction. It is in this context that the present case is to be approached to determine prima facie as to whether the notice issued by the Income-tax Officer under Section 148 read with Section 147 of the Act is based on some material to hold that such order was passed without jurisdiction or not. If, prima facie, it is held that there was some material on the basis of which notices could be issued, further disputed questions of fact are not necessarily to be gone into in this petition and the parties should be relegated to the ordinary remedy available under the Act.
12. The provisions of Sections 147 and 148 of the Income-tax Act providing for reassessment proceedings to be initiated were under consideration by the apex court in a number of decisions. In CIT v. A. Raman and Co. [1968] 67 ITR 11, while referring to the provisions of the Income-tax Act aforesaid vis-a-vis the powers of the High Court to exercise jurisdiction under Article 226 of the Constitution, it was observed as under (headnote):
"The High Court exercising jurisdiction under Article 226 of the Constitution has power to set aside a notice issued under Section 147(b) of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information : the court may also determine whether from the information the Income-tax Officer may have reason to believe that income chargeable to tax has escaped assessment. But the jurisdiction of the court extends no further. Whether on the information in his possession he should commence proceedings for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act : if he has information from which it may be said, prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court exercising powers under Article 226 of the Constitution to set aside or vacate the notice for reassessment on a reappraisal of the evidence.
In a petition under Article 226 of the Constitution, the taxpayer may challenge the validity of a notice under Section 147 of the Income-tax Act, 1961, on the ground that either of the conditions precedent does not exist, but an investigation whether the inferences raised by the Income-tax Officer are 'correct or proper' cannot be made."
13. A similar view was taken by the Supreme Court in Calcutta Discount Co, Ltd. v. ITO [1961] 41 ITR 191, in respect of a similar provision in the Indian Income-tax Act, 1922. In some of the High Courts the aforesaid provisions were also under consideration. In CIT v. Agarwalla Brothers [1991] 189 ITR 786 (Patna), the decision in Calcutta Discount Co. Ltd.'s case [1961] 41 ITR 191 (SC), was referred to while dealing with the scope of Section 147 of the Income-tax Act, 1961. It was held as under (headnote):
"(i) that the fact that a particular construction had not been shown in the accounts of the assessee was not relevant since this circumstance had not been recorded as one of the reasons for initiating the proceedings under Section 147(a) ;
(ii) that the Tribunal had found, after examining the entire record, that there had been no failure to disclose primary facts on the part of the assessee. The reassessment was, therefore, not valid ;
(iii) that penalty had been imposed consequential to the reassessment. Since the reassessment had been set aside, the order of the Tribunal cancelling the penalty levied under Section 271(1)(c) of the Act was also legal."
14. CIT v. Madhavnagar Cotton Mills Ltd. [1992] 195 ITR 444, the Bombay High Court, relying upon Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC), observed as under (headnote) :
"Mere reason to believe that income has escaped assessment is not enough to give the Income-tax Officer jurisdiction to reopen an assessment under Section 147(a) of the Income-tax Act, 1961. There must also be material to show that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The duty of the assessee is to disclose only primary facts and it is for the Income-tax Officer to draw correct inferences of facts or law from the primary facts."
15. Shri Jagan Nath Kaushal, senior advocate, appearing on behalf of the petitioner has argued that the facts as stated in the notice and the reasons accompanying it go to prove that the petitioner-bank was following a hybrid system of accounting, i.e., a mixed system of accounting which is also the case of the petitioner-bank in the writ petition. That being so, it was not required of the petitioner to add interest on accrual basis as is done in the mercantile system of accounting. The petitioner-bank was crediting interest in the protested bills account as and when any recovery was effected, i.e., the amount recovered under the decrees passed by the court. In support of this contention reliance has been placed upon the decision of the Supreme Court in the case of State Bank of Travancore [1986] 158 ITR 102. In the said case, the Supreme Court has referred to different systems of accounting such as the mercantile system, cash system and hybrid system. On the facts the aforesaid decision is not helpful in deciding the present case. In that case, the bank had debited the account of the loanee with the amount of interest accrued. However, subsequently the same was transferred to the suspense account and thus it was held that the interest had accrued and the mere fact that it was doubtful and then transferred to the suspense account will not make it exigible to tax. The Supreme Court in the case of State Bank of Travancore [1986] 158 ITR 102, in its judgment, at page 155, laid down the propositions as emerging as under :
"(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued, but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits."
16. It may be observed that from the facts as stated in the reasons for initiating action against the petitioner in the notice, annexure P-3, it cannot be spelled out that the petitioner-bank was following a particular system of accounting and it continued following the same for years together. It is primarily a question of fact to be raised and decided before the authorities under the Act. The stand of the Revenue that the bank was following the mercantile system of accounting is substantiated from the returns furnished by the bank and shown in court. Against the relevant column providing the system of accounting followed by the assessee, three modes were mentioned, i.e., mercantile/cash/mixed. The assessee had scored off "cash" and "mixed" leaving "mercantile". Thus at this stage it cannot be assumed that the assessee, the petitioner-bank, disclosed that it was following the mercantile system of accounting. If that is so it cannot be said from the contents of the notices and the reasons accompanying them that the petitioner had disclosed all the material facts truly in the returns leaving the authorities to find out the truth. May be the assessee was following a hybrid system of accounting, i.e., mixed or both systems of accounting, i.e., mercantile as well as cash. However, the question for consideration would be as to whether the assessee had disclosed the aforesaid such systems of accounting being followed at the time of filing returns. Reliance was placed on the decision of the Nagpur High Court in Fatehchand Chhakodilal v. CIT [1945] 13 ITR 198. At page 202, it was observed while referring to the decision of the Privy Council in Feroz Shah v. CIT [1933] 1 ITR 219, that :
"In the 'cash basis' method of accountancy, on the other hand, a record is kept of actual receipts and actual payments, entry being made only when money is actually collected or disbursed. If an assessee regularly employs this cash method of account his income will be computed on the cash basis and if in fact he regularly employs some reasonable and consistent combination of the cash and mercantile systems, for example, following the one system for some kinds of transactions and the other for other kinds of transactions, his income will be computed accordingly."
17. In New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 (All), at page 397, it was observed as under :
"It is not incumbent upon an assessee to follow a purely cash method of accounting or a purely mercantile method of accounting. It can be a mixture of both. It is no doubt open to the assessee to change his method of accounting, but the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years."
18. In J.K. Bankers v. CIT [1974] 94 ITR 107 (All), while referring to Sections 10, 12 and 13 of the Indian Income-tax Act, 1922, it was observed that the income earned by way of interest on money-lending business would be income assessable to tax. With respect to the method of accounting to be followed by the assessee, it was observed (headnote) :
"It was open to the assessee to follow one system of accounting in respect of one source and another system in respect of the other source. The assessee followed the mercantile system in respect of its income from business. That does not mean that the assessee should be compelled to adopt the same system of accounting in respect of income falling under Section 12."
19. The Supreme Court in CIT v. McMillan and Co. [1958] 33 ITR 182, while commenting upon the right of the assessee to adopt any method of accounting, observed as under (at page 197) :
"The Income-tax Officer may proceed in one of three ways : (1) he may fail to apply his mind to the statutory duty imposed on him by Section 13 and its proviso and may accept the assessee's method of accounting without at all considering if, (a) the method was regularly employed, and (b) if the income, profits and gains of the assessee can be properly deduced therefrom ; (2) he may apply his mind and decide in favour of the assessee that the method is both regular and acceptable (in the sense that income, profits and gains can be properly deduced therefrom) ; or (3) he may decide against the assessee and hold that the method is either not regularly employed or is unacceptable."
20. Similar view was taken in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC). Thereafter the matter was considered by the Supreme Court in State Bank of Travancore's case [1986] 158 ITR 102, already referred to above.
21. Shri Kaushal, learned counsel for the petitioner-bank, has vehemently argued that when the initial assessment was framed, the authorities could, if a little probe had been made, discover that the petitioner-bank was crediting interest on bad debts in their account, which stood transferred to the protested bills account. The authorities, therefore, had no jurisdiction on such material already produced by the assessee to initiate reassessment proceedings. In support of this contention reliance has been placed on the decision of the Supreme Court in Gemini Leather Stores v. ITO [1975] 100 ITR 1. On the facts of that case, it was observed that it was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the appellant to disclose fully and truly all material facts. Thus, the Income-tax Officer could not have recourse to Section 147(a) to remedy the error resulting from his own oversight. It would be a question of fact to be established in each case to find out whether the Income-tax Officer has jurisdiction to issue tbe notice for reassessment. In the Calcutta High Court in East Coast Commercial Co. Ltd. v. ITO [1981] 128 ITR 326, the assessee had disclosed the transaction. It was subsequently that the question arose whether such a transaction was genuine or not. There was no evidence that such a transaction was bogus and thus it was observed that sanction for notice accorded by the Central Board of Direct Taxes was without application of mind. Reference may be made to the other decision of the Supreme Court in Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT [1986] 159 ITR 624, wherein it was observed (headnote) :
"(ii) that the fact that the Income-tax Officer could have in the original assessment proceedings found out the correct position by further probing did not exonerate the appellant from the duty to make a full and true disclosure of material facts."
22. In this case also, it was observed (headnote) :
"that whether there was such non-disclosure of primary facts as had caused escapement of income from assessment was basically a question of fact."
23. A perusal of the judgments aforesaid would show that it is entirely the option of the assessee as to which system of accounting is to be adopted and followed. He can also change the method of accounting but he is supposed to act bona fide, i.e., disclose this fact to the authorities at the time of filing the returns. In the facts and circumstances of the present case, at the time of filing the returns the petitioner-bank disclosed only one system of accounting, i.e., mercantile. Under that system, obviously, the bank was supposed to debit the accounts of the loanees with the amount of interest on accrual basis. Otherwise without further disclosing the change in the method of accounting or following any other method that such interest was not being shown on accrual basis but was shown in the Protested Bills Account on cash basis or mixed accounting basis, it cannot be said that the bank had disclosed all material facts truly. The assessee of course can change the method of accounting at a given time and the case of the petitioner, as argued, is that the petitioner changed the system of accounting particularly in respect of such loans, recovery of which was doubtful, though the petitioner was following the mercantile system of accounting, i.e., adding such interest on accrued basis. On such loan accounts which were transferred to the protested bills account as and when any recovery was effected after filing suits, interest was shown therein as income. In support of this contention reliance was placed on the grounds of appeal filed by the petitioner-bank earlier for the assessment year 1962-63, annexure P-9 suggesting therein that the bank was not accepting the order of the assessing authority, which was being challenged on that account.
24. Learned counsel for the Revenue argued that such an assertion can hardly be treated as a disclosure of true facts in the return for the relevant year with respect to the change of method of accounting much less bona fide.
25. Learned counsel for the petitioner referred to the decision of the Orissa High Court in CIT v. Orissa State Financial Corporation [1993] 201 ITR 595. However, on a perusal of the judgment it is clear that interest was first credited on accrual basis but with effect from April 1, 1973, the assessee changed the method of accounting because it felt that reflecting interest in respect of such loans would be unrealistic and a correct financial picture is not reflected. Thus such interest was credited to a separate account known as interest suspense account. This was done under some directions of the Reserve Bank of India. It was in accordance with the changed method of accounting that the return was filed for the assessment year 1974-75. It was held that (headnote) :
"Interest did not accrue during the whole of the period during which suits were filed for the recovery of loans, and awarding of interest for the period was within the discretion of the court. 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."
26. The help of this decision could only be taken if from the facts of the present case, it could be established that in fact the bank had been crediting interest on recovery basis and had been submitting the returns accordingly. As per the stand of the Revenue in the present case, it is yet to be established by the petitioner-bank and that too before the authorities under the Act in response to the notices issued that interest recovered on cash basis and not on accrual basis was included in the income as offered for assessment. The income-tax returns shown during arguments did not categorically specify that income earned as such was offered for assessment. Learned counsel for the petitioner-bank referred to the facts as stated in the reasons for issuing the notices that it was the stand of the Revenue itself that such income was shown in the accounts on recovery basis. From that, it cannot be inferred in our view that such income was offered for assessment or the assessee had disclosed truly the material facts. The notices issued thus cannot be quashed at this stage. It would be for the authorities to determine on the facts, if proved, that though in their returns it was mentioned that only the mercantile system of accounting was being followed but factually other systems were also being followed and the interest credited was actually subject to tax. On behalf of the Revenue reliance was placed on the decision of the Calcutta High Court in Allahabad Bank v. CIT [1992] 194 ITR 575. The assessment year was 1962-63 and the assessment was framed on the basis of the facts disclosed in the return. The assessee had not charged any interest on bad and doubtful debts nor were any such sums credited to the suspense account. Action was initiated-on notices and the Tribunal held the notices to be valid. The High Court held on reference that the Tribunal was right in holding that the income had escaped assessment due to the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. The High Court observed as under (headnote) :
"In order that proceedings for reassessment can be initiated under Section 147(a) of the Income-tax Act, 1961, there must be material to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year'. The section postulates a duty on every assessee to disclose fully and truly all material facts necessary for the assessment. The obligation is to disclose facts, secondly, those facts are material; thirdly, the disclosure must be full and, fourthly, true. What facts are material and necessary for assessment will differ from case to case."
27. The aforesaid decision would be fully applicable to the facts and circumstances of the case so far brought on the record.
28. It has been argued by Shri Kaushal that it is the real income which is assessable to tax. The income which has not accrued cannot be subjected to tax. Reliance has been placed on the decision of this court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619. This decision was approved by the Supreme Court as stated. On facts there was no dispute that the financial position of the borrower was weak. He was in huge arrears of income-tax and had filed appeals before the Tribunal relating to the penalties. It was with that knowledge that the assessee did not charge interest in the case of such debtors whose financial position was weak which method was accepted by the Tribunal for the earlier assessment year. Thus, it was observed that no income on account of interest in borrower's account should be added to the assessee's income. With respect to the mercantile system of accounting, it was observed as under (headnote) :
"Even in the mercantile system of accountancy an assessee could forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee. Since it was not possible for the assessee to recover from B the sum of Rs. 10 lakhs, the assessee was justified in not charging interest thereon and the interest was rightly forgone by it"
29. The ratio of the decision aforesaid is not helpful in deciding the case at this stage. The authorities are yet to go into the question of bad debts on which recovery of interest or principal is doubtful. At this stage suffice it to say that no doubt the petitioner-bank is following the mercantile system but no case of change of system was pleaded at the time of filing of the returns that at this stage a finding could be recorded that in fact the petitioner had reverted to any other system of accounting. The Bombay High Court in Navin R. Kamani v. S.S. Shahane, ITO [1990] 185 ITR 408, while maintaining the orders of the authorities, observed that they did not suffer from any error of law. The records showed that no claim regarding change in the method of accounting had been made before the income-tax authorities. There was no evidence that the interest was irrecoverable.
30. Hence the orders of the authorities were valid. The position where the assessee had filed civil suits against the borrowers and thus had not credited interest in their accounts would be entirely different. In such like cases it has been observed that it is the real income which is assessable to tax and the assessee was not obliged to credit interest in the account of such a bad borrower. (CIT v. Raigharh Jute Mills Ltd. [1981] 132 ITR 702 (Cal) and State of Madhya Pradesh v. Nathabhai Desaibhai Patel, AIR 1972 SC 1545).
31. It is not considered necessary to refer to two other points raised in the case as to whether notices were issued under Section 147 (a) or (b) of the Act and its effect though on behalf of the petitioner-bank it was argued that on determination of such questions it could be held that the proceedings would be without jurisdiction. Such questions are left to be decided by the authorities concerned as the same would be dependent on the facts to be pleaded and proved. Such questions of jurisdiction cannot be decided on assumed facts.
32. For the reasons recorded above, the writ petitions are dismissed.