Delhi High Court
Punjab National Bank vs Deputy Commissioner Of Income Tax on 28 September, 1999
Equivalent citations: (2000)66TTJ(DEL)847
ORDER
Phool Singh, JM.
This appeal, preferred by the assessee, arises out of Commissioner (Appeals)'s order dt, 28-1-1993 relating to the assessment year 1989-90. As many as seven grounds were taken up by the assessee in this appeal but on the date of hearing the learned counsel pointed out that assessee approached the Committee on Disputes (Bharat Sarkar) Cabinet Secretariat, to resolve the inter se disputes in between different departments of the Government of India and in the case in hand the said committee permitted the assessee to pursue ground No. 2 in the grounds of appeal alone and rest of the grounds were not allowed to be pursued by the assessee. Copy of order of committee on disputes as communicated to the assessee is appearing at pp. 1 to 3 of the paper book and perusal thereof shall show that ground No. 2 involving issue of taxability of interest on sticky advances alone was to be pursued by the assessee. In view of this learned counsel did not press ground Nos. 3 to 7 and the same are rejected as such. Ground Nos. 1 is general in nature and requires no comments.
2. The only ground No. 2 which remains to be decided involves the addition of Rs. 22,60,70,917 on account of alleged accrual of interest on protested advances (sticky advances) made by the assessing officer which were confirmed by the Commissioner (Appeals).
3. The assessee is one of the biggest nationalised bank and it filed its return of income for the assessment year 1989-90 showing total loss of Rs. 87,33,75,540. During the assessment proceedings the assessing officer noted that assessee had not included in its income the interest on sticky advances which were treated by the bank as "protested advances" i.e. advances which were doubtful of recovery. The assessing officer called upon the assessee to show as to why interest on sticky advances be not added to the income. The assessee submitted vide letter dt. 7-12-1991, mentioning therein that interest on sticky advances wad not liable to be taxed view of the method of accounting followed by the assessee bank. According to the assessee it has two categories of customers-(1) customers whose loans and advances were recoverable and regular; and (2) customers whose advances were doubtful of recovery and were not operational. According to the assessee in the case of first category of customers, the interest and part principal was being recovered at regular intervals and interest income was duly debited to customer's account and credited to interest account on accrual basis but in the second category of customers, the recovery of loan or advances were neither regular nor possible. The periodical review of all such accounts was undertaken by the bank and if it was found that a particular customer's account had been stagnant or litigation initiated by the bank or for any other reason the account of such customer was not fully operational and amount was not likely to be recovered, these accounts were designated as "protest advances". The bank discontinued its method of charging the periodical interest in such accounts nor interest was debited to such accounts nor any corresponding credit was being given either to interest or suspense account. In case there was any recovery over and above the principal in the protest account then the same was credited to the bank's income or interest account. It was also argued that bank was following hybrid system of accounting wherein interest on protest advances was accounted for on receipt basis while other interest on regular accounts was being credited on accrual basis. The assessee also filed photo copies of one sample ledger of protest advance register showing therein that no interest had either been debited to its account nor credited to interest account or suspense account. It was also submitted that this system of accounting with regard to protest advance was being followed by the bank regularly and consistently since 1957. According to the assessee the decision of Apex Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) was not applicable as in that case State Bank of Travancore was following mercantile system of accounting in respect of sticky advances also and interest amount was being debited to the party's account on accrual basis at predetermined periodicals and credited to the said interest account styled as "interest suspense account" and in view of this their Lordships concluded that income which had already accrued according to the method followed by the bank is to be included in its total income. The assessee pleaded further that assessee bank was not following that system of accounting in the case of protest advances but for that the assessee was following cash system of accounting for so many years then the said system of accounting should be accepted in view of the provisions of section 145 of the Income Tax Act. The assessee also placed reliance on the decision of Madras High Court in the case of ClT v. E. T. E. T Sunder Rajan (1975) 99 ITR 226 (Mad) to support the plea that assessee can employ one method of accounting for one class of customers and another method for another class of customers.
3.1. The assessing officer considered the submissions and noted that undisputedly the assessee was not charging interest on sticky advances by either crediting the interest to suspense account or debiting to party's account with quantum of interest. However, he noted that as per practice of charging of interest followed by the assessee, interest accrued or arose to the assessee on regular interval even though there may not be any recovery from particular customers. For this the assessing officer took into consideration the agreements executed in between assessee bank and different customers in which bank was supposed to charge interest on accrual basis and got right to recover the interest from customers and even to file suits for recovery in case of default. He also took into consideration that bank shifted to cash system of charging of interest according to health code prescribed by the Reserve Bank of India. But assessing officer was of the opinion that hybrid system of accounting does not permit this type of change in the method of accounting where for certain number of years or for some period interest was charged on mercantile basis and after certain period interest is accounted for on cash basis. He placed reliance on the decision of ITAT "D" Bench Delhi in the case of Oriental Bank of Commerce v. Asstt. CIT in ITA Nos. 3321 and 3322/Del/1985 involving assessment years 1980-81 and 1980-81 decided on 21-9-1989 in which the Bench has taken into consideration the concept of income as defined in section 5 of the Act. According to the assessing officer the income generated our of any business or trade is the result of its transaction and it is only proper that the transaction alone should be the basis for the determination of the true character of the income i.e. it is on accrual or receipt basis. He was of the opinion that accounting follows the nature of transaction for the business and not the vice versa. On the basis of nature of transaction in between the assessee-bank and customers it was noted by assessing officer that accounting method adopted by the assessee should be in consonance with the trade practice followed by the bank and in case that practice has not been followed, it may not reflect the true state of affairs. The assessing officer took into consideration the provision of section 145 of the Act which was to be read in connection with section 5 of the Act and was of the opinion that concept of true or real income cannot be foreign to its normal business or trade practice. The assessing officer was also of the opinion that assessee's bank cannot unilaterally modify the terms of the contract as was agreed to in between the parties wherein interest was recoverable on accrual basis.
3.2 The assessing officer was fully alive to the fact that Tribunal Delhi Bench in the case of assessee itself for assessment year 1975-76 and 1976-77 had recognised the hybrid system followed by the assessee to be reasonable and also came to the conclusion that interest on sticky advances credited to the interest suspense account cannot be treated as the bank's income but the conclusion arrived at by the Tribunal was on the basis of Central Board of Direct Taxes Circular issued in 1952 which was fully applicable. However, the assessing officer was of the view that case of the assessee was fully covered by the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT (supra) and he also placed reliance on same case law and made the addition of Rs. 22,60,70,917 on account of interest accrued on protest advances to the total income of the assessee against which the assessee came in appeal before the Commissioner (Appeals).
3.3. It was pleaded before the Commissioner (Appeals) that decision of Apex Court in the case of State Bank of Travancore v. CIT (supra) was not applicable to the facts before him as in that case the bank was debiting interest to the constituents of the bank and further crediting it to a suspense account, while in the case in hand the assessee was not debiting the interest to the customer's account nor crediting it to the suspense account. The procedure being adopted by the assessee-bank was explained in the way that once assessee-bank found that such accounts have become stagnant or litigation was initiated by the bank against such customers the accounts of such customers were designated as protest advances and such accounts were frozen in the books of account resulting into the discontinuance of charging of interest at periodical intervals of such account. These amounts of interest were also neither debited to profit & loss account nor shown in the balance sheet and thus ratio of Apex Court in the case of State Bank of Travancore v. CIT (supra) was not applicable. The other plea was that assessee had been following cash system of accounting for these advances and mercantile system for other transactions for a number of years and in case any part of interest is recovered on protest advances the same is shown as taxable in the year of receipt. The Commissioner (Appeals) considered the facts and noted that two different methods of accounting cannot be maintained for different transactions of the same assessee for the same assessment year in respect of one business nor the assessee can unilaterally alter the system of accounting in respect of particular transaction. The amount credited in the protest advance register is to be taken as assessee's income and it is immaterial that such accruals are entered in one register or another by whatever name called. It was also noted by the Commissioner (Appeals) that if bank has itself recorded the accrual of interest with reference to any particular amount in any account by whatever name called, it cannot plead that entry in such a register or account is for its private satisfaction and interest is illusory or non-existent. It was also observed by Commissioner (Appeals) that nobody prevented the bank from claiming any unrealized interest as a bad debt if it was found to be irrecoverable. He also took into consideration the provisions of section 43D brought to the statute by Finance (No. 2) Act, 1991 effective with effect from 1-4-1991, by which the interest on sticky loans was held to be no-taxable, but, according to the Commissioner (Appeals), this provision has not been made applicable with retrospective effect indicating that such accrual of interest was taxable prior to 1-4-1991. He, therefore, confirmed the action of assessing officer against which assessee is in appeal.
4. The learned counsel Shri G.C. Sharma appearing for assessee had pointed out that assessee had been following the hybrid system of accounting since 1957 by which the amount of interest on protest advances was being shown on cash basis and on other transactions the assessee was following the mercantile system of accounting. According to him this fact has also been noted by the assessing officer as well as Commissioner (Appeals). According to Shri. G. C. Sharma Advocate the issue had been before the Tribunal Delhi Bench since 1973-74 onwards and Tribunal decided this issue in favour of assessee for assessment year 1973-74 to 1976-77. A copy of order of Tribunal for these assessment years is appearing at pp. 65 to 117 of the paper book. However in assessment year 1977-78 the issue was decided against the assessee but again in assessment year 1978-79 to 1979-80 the matter again was decided in favour of the assessee and reference application is pending before the High Court. In assessment year 1980-81 again the matter was decided against the assessee and reference application is pending before the Tribunal. According to the learned counsel for the assessee once the authorities below had admitted that assessee was following the cash system of accounting in respect of interest on protest advances and in respect of regular accounts the assessee was following mercantile system, then such action of the assessee has got recognition by different High Courts and reliance was placed on the decision of Madras High Court in the case of E. T. E. T Sunder rajan (supra). Not only this Tribunal Bangalore Bench in the case of Dy. CIT v. Syndicate Bank & Ors. (1995) 51 TTJ (Bang-Trib) 365 has taken into consideration the decision of Allahabad High Court in the case of J. K. Bankers v. CIT (1974) 94 ITR 107 (All) in which it has been laid down that it was open to assessee to follow one system of accounting in respect of one source and another system in respect of another source. The plea of the assessee is that in view of this well-recognised system of accounting followed by the assessee since 1957, the amount of interest on sticky advances was not assessable to tax. The view of Hon'ble Supreme Court in the case of State Bank of Travancore (supra) was also distinguished and the learned counsel vehemently placed reliance on the decision of Tribunal "B" Bench New Delhi in the case of Oriental Bank of Commerce v. Dy. CIT (ITA No. 331/Del/93) decided on 23-2-1999 in which on identical facts the Tribunal after considering the decision of Bombay High Court in the case of CIT v. City Bank (1994) 208 ITR 930 (Bom-Trib); Tribunal Bombay Bench decision in the case of IAC v. Bank of Baroda (1990) 38 TTJ (Bom) 183; Tribunal Cuttack Bench decision in the case of ITO v. Orissa State Finance Corporation (1991) 39 TTJ (Ctk-Trib) 603 and the other decision of Tribunal Bombay Bench in the case of Syndicate Bank & Ors. (supra) concluded that addition on account of the alleged interest amount on sticky loans was not taxable. The other decision cited by the learned counsel is that of the Apex Court in the case of UCO Bank v. CIT (1999) 10 DTC 2 (SC) : (1999) 237 ITR 889 (SC) and submitted that same view as taken by Tribunal Delhi Bench in the case of Oriental Bank of Commerce (supra) be followed and appeal be allowed.
5. As against it the learned Departmental Representative vehemently placed reliance on the order of assessing officer and that of Commissioner (Appeals) as well as on the decision of the Supreme Court in the case of State Bank of Travancore (supra) but in the end the learned Departmental Representative also placed reliance on the decision of Hon'ble Supreme Court in the case of UCO Bank (supra) referred to by the learned counsel for the assessee and submitted that said decision of Apex Court is the latest one and their Lordships have taken into consideration the latest circular of Central Board of Direct Taxes issued on 9-10-1984, and the plea of the learned Departmental Representative was that matter be restored back to the assessing officer who will examine the issue of taxability in view of this Circular dated 9-10-1984, issued by the Central Board of Direct Taxes which is held to be binding on Income Tax Authorities by the Hon'ble Apex Court.
6. We have considered the rival submissions and perused the record as well as gone through the case laws cited by the respective representatives of the parties. It has been found admitted fact that assessee had been following cash system in respect of interest amount on sticky loans and mercantile system of accounting in respect of regular advances over a number of years and issue had travelled up to Tribunal since assessment year 1973-74 onwards and some times the issue had been decided in favour of assessee and some times against the assessee as referred to by the learned counsel for the assessee. The learned counsel for the assessee has referred to the latest decision of Apex Court in the case of UCO Bank (supra) during the course of argument and learned Departmental Representative has also placed reliance on this decision. This decision of Apex Court is the latest one and their Lordships have noted the facts in detail. The assessee bank viz. UCO Bank was not showing interest on sticky advances in profit & loss account but taking that amount to separate suspense account. This practice being followed by the assessee was held to be accepted mode of treatment of notional income in accounting practice. Their Lordships have not followed the decision of Apex Court in the case of State Bank of Travancore v. CIT (supra) and noted specifically that some of the decisions of Supreme Court were not cited before the Apex Court on the issue about the binding nature of circular issued by Central Board of Direct Taxes, Their Lordships have laid down that Central Board of Direct Taxes under section 119 of the Income Tax Act had power to tone down the rigour of the law and ensure a fair enforcement of its provisions by issuing circulars in exercise of its statutory power under section 119 of the Act which are binding on the authorities in the administration of the Act. Their Lordships have also laid down that circular as contemplated therein cannot be adverse to the assessee but power given to Central Board of Direct Taxes is for the purpose of just, proper and efficient management of work of assessment and in public interest. Their Lordships took into consideration the Central Board of Direct Taxes Circular No. 41(V-6D) of 6-10-1952, which provided that interest accruing to a money lender on loans entered in the suspense account because of the extreme unlikelihood of there being recovery need not be included in the assessee's taxable income if the Income Tax Officer was satisfied that there was really little probability of the loans being repaid. This circular was in force till 20-6-1978, when Central Board of Direct Taxes issued circular withdrawing the earlier Circular dated 6-10-1952, on the basis of decision of Kerala High Court in the case of State Bank of Travancore v. CIT (1977) 110 ITR 336 (Ker). Their Lordships have also taken into consideration the another Circular dated 9-10-1984, issued by the Central Board of Direct Taxes which was made applicable for and from assessment year 1979-80. That circular provides that interest to be excluded from income if for three years such interest on sticky loans is not actually received and thereafter the interest will be added as income only when actually received. Their Lordships laid down that Central Board of Direct Taxes Circular dated 9-10-1984, will be binding on all the Income Tax Authorities and matter was decided accordingly as the assessing officer in that case had followed that circular. The controversy involved in the present case before us is also to be disposed of in view of the ratio of their Lordships in the latest decision in the case of UCO Bank v. CIT (supra). If we apply that ratio to the facts, it transpires that assessing officer has not examined the issue of addition in respect of interest on sticky/protest advances in view of the Central Board of Direct Taxes Circular dated 9-10-1984 referred to by their Lordships in the case referred to above and thus we have no option but to restore the matter to the file of the assessing officer who will examine the controversy afresh and for that he will look into the nature of all sticky advances and if there was no receipt in respect of the amount of interest for continuous three years the amount of interest will not be assessed to tax after three years but interest amount shall be assessed to tax as and when it is received. In other words the assessing officer shall examine the case afresh in doing so he will afford an opportunity of being heard to the assessee.
For statistical purposes, appeal is allowed.