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Income Tax Appellate Tribunal, “A”, BENCH KOLKATA
Before: SHRI A. T. VARKEY, JM & DR. A.L. SAINI, AM
आदेश / O R D E R Per Dr. A. L. Saini, AM: The captioned appeals filed by the assessee, pertaining to Assessment Years 2003-04, 2004-05 & 2006-07 are directed against the separate orders passed by ld. Commissioner of Income Tax(Appeals)-4, Kolkata, which in turn arise out of separate assessment orders passed by Assessing Officer u/s 147/143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
These three appeals are related to the same assessee pertaining to different Assessment Years, common and identical issues are involved therefore, these appeals have clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
We take first assessee’s appeal in ITA No.2552/Kol/2017 for Assessment Year 2003-04. The grounds of appeal raised by the assessee are as follows:
“1. FOR that the Ld. CIT(Appeals) was wrong and unjustified in upholding the initiation of proceedings u/s.147 of the I. T. Act, 1961 and making of the re-assessment u/s.147/143(3). He failed to appreciate that the conditions precedent for reopening of the
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assessment did not exist and were not satisfied in this case. There was no fresh material and the reopening of assessment was on mere change of opinion. 2. FOR that the Ld. CIT(Appeals) erred in upholding the addition made by the A.O. as notional interest on loan of Rs.228.38 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 3. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before or at the time of hearing of this appeal.”
The facts of the case which can be stated quite shortly are as follows: the assessee company filed its return of income on 28.11.2003 declaring total loss of Rs. (-)16,42,54,240/-. The Return of Income of the assessee was processed u/s 143(1) of the Act on 16.12.2003. Subsequently, the assessee`s case was selected for scrutiny and assessment u/s 143(3) of the Act was completed on 31.03.2006 at a total loss of Rs. 13,68,37,447/-.
Later on, the assessing officer noticed that there was reason to believe that income chargeable to tax had escaped assessment. As per assessing officer there were two reasons for reopening the assessment u/s 147 of the Act. These two reasons for reopening are as follows:
(i).Non-accounting of interest income on loan amounting to Rs.228.38 lakhs even though the management of the company considered it good and recoverable.
(ii).Loss on foreign exchange on notional basis.
Therefore, assessing officer was of the view that there was reason to believe that income chargeable to tax had escaped assessment, therefore he issued notice u/s 148 of the Act on 28.11.2007.
During the assessment stage, the assessee objected to the reasons as being wrong, illegal and unjustified and not valid reasons for reopening. On merit also assessee submitted before AO that the assessee company was following the same system on a consistent basis and disallowance in one year will complicate the issue in other years also. The assessee also submitted before AO that reopening was also wrong regarding
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the non-accounting of income on loan since whether interest is to be charged or not on a loan is a business decision to be taken by Management. Assessee submitted before the AO that after considering the bad position of debtor companies, mutual decision was taken not to charge interest and that debtors had also not claimed deduction of interest. It was submitted that the interest represents the interest accrued till Financial Year 1999- 2000 which has already been accounted for and included in income of earlier years and there was no underassessment of income.
However, AO rejected the contention of the assessee and held that Clause 18 of schedule 22(b) Notes on account of the assessee`s Balance Sheet clearly states that no interest income on loan amounting to Rs.228.38 lacs had been accounted for during the year considering the financial health of other companies. However, the Management of the company considered the outstanding principal amount of Rs 228.38 lacs and interest receivable amounting to Rs 137.66 lacs thereon as good and recoverable. Since the company was following mercantile system of accounting as disclosed in the tax audit report, it was required to credit the interest on loans of Rs 228.38 lacs given to other companies, to the Profit and Loss account unless the amount was declared bad debt. The same amount was not added back during assessment u/s 143(3) of the Act. Therefore, the AO in the reopened assessment, made addition to the tune of Rs 1,37,66,000/-.
Aggrieved by the order of the ld. AO, the assessee filed an appeal before the ld. CIT(A) who has confirmed the action of the Assessing Officer.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The ld Counsel for the assessee reiterated the submissions made before the authorities below, and on the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. Let us first examine the reasons recorded by the assessing officer, which is reproduced below:
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We note that during the original assessment proceedings u/s 143(3) of the Act, the assessee company submitted Audited Balance wherein clause-18 of schedule- 11(B), is part of Notes on Accounts, which contained the information about interest accrued on loan. As a matter of policy the company has not accrued interest on the loan of Rs.228.38 lakhs. This information has been examined by the assessing officer during original assessment proceedings u/s 143(3) of the Act. In reassessment proceedings, the AO took the stand that the assessee company has not accrued interest on the loan of Rs.228.38 lakhs, therefore income has escaped assessment. We note that this is not a tangible material for reassessment, as this material was already examined by AO during the original assessment u/s 143(3), therefore reassessment proceedings on the issue that “the assessee company has not accrued interest on the loan of Rs.228.38 lakhs” is not valid because it is tantmount to review of the original assessment proceedings which is not permitted under the Act. Therefore, it is abundantly clear that there is no tangible material to reopen the concluded assessment u/s 143(3) of the Act.
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We note that in CIT vs. Kelvinator of India Ltd. 256 ITR 1 the Full Bench of the Delhi High Court was considering a case of reopening u/s 147 within 4 years from the end of the assessment year. The Court held that when a regular order of assessment is passed in terms of section 143 (3) of the Act, a presumption can be raised that such an order has been passed on application of mind. It was held that if it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong. We note that in assessee’s case under consideration 4 years have not been elapsed. However, it was held in the case of Kelvinator of India (supra) that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. On appeal by the department to the Supreme Court in the case of Kelvinator of India (supra) (reported in 320 ITR 561(SC)) it was held that though the power to reopen under the amended section 147 is much wider, one needs to give a schematic interpretation to the words “reason to believe” failing which section 147 would give arbitrary powers to the AO to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. The AO has no power to review; he has the power to re- assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the AO. Hence, after 1.4.1989, the AO has power to re- open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. In reassessment proceedings, the AO took the stand that “the assessee company has not accrued interest on the loan of Rs.228.38 lakhs”, therefore income has escaped assessment. We note that the
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issue relating to “accrued interest on the loan of Rs.228.38 lakhs” has already been examined by AO during the original assessment proceedings u/s 143(3) of the Act, hence it is not a new tangible material therefore reassessment proceedings is bad in law and not valid in the eye of law. We note that in the case of Indian and Eastern Newspaper Society Vs. CIT 119 ITR 996, wherein it was held that an error discovered on a reconsideration of the same material (and no more) does not give AO power to assume jurisdiction to make reassessment. The aforesaid view on the above proportion has been reiterated by the Apex Court in A.L.A.Firm vs. CIT 183 ITR 285.
We note that Ld. CIT(A) failed to appreciate that the A.O. has already made the scrutiny assessment u/s.143(3) in the assessee`s case and looked into all details and documents including audited balance sheet and Tax Audit Report submitted to him and has made several additions on the basis of said Balance sheet and Tax Audit Report. From the reasons recorded (Page-3 of Paper Book) it is clear that the assessment has been reopened on the basis of Clause-18 of Schedule-22(B) of Notes on Accounts given in the Balance sheet. The said balance sheet and clause-18 alleged by the A.O. was already before the A.O. during the original assessment proceedings and has been examined by him. There was no new material so as to believe that the income chargeable to tax has escaped assessment. Our view is fortified by the decision of the Coordinate Bench of ITAT, Cuttack in the case of Mahanadi Coalfields Ltd.-Vs- ACIT in ITA No.329/CTK/2014 in which the Tribunal has quashed the reassessment order after considering the decision of the Hon'ble Supreme Court in the case of CIT -Vs- Kelvinator of India Ltd. reported in 320-ITR-561 (SC) (supra).
Therefore, it is abundantly clear that in the assessee`s case under consideration there is no any tangible material to reopen the concluded proceedings, as the issue relating to “accrued interest on the loan of Rs.228.38 lakhs” had already been examined by AO during the original assessment u/s 143(3) of the Act, which was completed on 31.03.2006, hence we quash the reassessment proceedings.
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In the result, appeal filed by the assessee in ITA No.2552/Kol/2017 for Assessment Year 2003-04, is allowed.
Now we shall take ITA No.2553 and 2554/Kol/2017 for Assessment Years 2004-05 & 2006-07 and to adjudicate these appeals we take lead case in ITA No.2553/Kol/2017 for Assessment Year 2004-05. The grounds of appeal raised by the assessee in its lead case are as follows:
“1. FOR that the Ld. CIT(A) erred in upholding the addition of Rs.34,39,500/- made by the A.O as notional interest on loan of Rs.229.30 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 2. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before or at the time of hearing of this appeal.”
Brief facts qua the issue are that during the assessment proceedings the AO noticed that in the notes of accounts under Schedule-22 forming a part of the balance sheet, the assessee company had not credited in profit and loss account, the interest income accrued during the relevant financial year on principal amount of Rs.229.30 lakh, considering the same as doubtful of recovery. But the principal Loan of Rs.229.30 lakh was considered as good and recoverable. Since the assessee company is following mercantile system of accounting and the principal amount of loan was considered as good and recoverable than interest income accrued during the relevant financial year is treated as income in the hand of the assessee company from the relevant assessment year. Considering that the assessee company has charged interest @ 15% p.a., an amount of Rs.34,39,500/- was treated by AO as income from interest on principal amount of loan for Rs.229.30 lakh for the relevant assessment year and added back to the total income of the assessee company.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the order passed by the Assessing Officer.
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We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The ld Counsel for the assessee reiterated the submissions made before the authorities below, and on the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. Let us first examine the Board resulation passed by the company about its policy decision not to charge interest on loan, which is reproduced below:
We note that this ground is against the addition of Rs. 34,39,500/- for alleged accrued interest on the loan of Rs. 229.30 lacs. No interest was accrued on the loan of Rs. 229.30 lacs as alleged. It is stated by the ld Counsel that whether the interest is to be charged or not on the loan, is solely a business decision to be taken by the management. After considering the bad financial position of the debtor companies, the management decided not to charge interest on the loans w.e.f. 01.04.2000 as mutually agreed with the loan debtor and accordingly no interest is being charged in their accounts since F.Y. 2000-01. The ld Counsel further submitted before us that the interest does not accrue automatically unless the debtor agrees to pay the interest. From the confirmation of the accounts by the debtors filed in the assessment proceedings it appear that the debtors
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have also not provided and claimed deduction of interest on the above loans. The note on account under Schedule 22 of nots to accounts is a routine one and it does not say about the interest accrued during the year but speak about interest of Rs. 137.25 lacs receivable upto 31.03.2000. The ld Counsel provided a copy of the balance sheet which is enclosed as annexure-H.
We note that Ld. CIT(A) failed to appreciate the arguments of the assessee that no interest was accrued after 01.04.2000 which was mutually agreed with the loan debtor. It was a Board of Director's decision (Page-13 of the Paper Book) that no interest will be charged w.e.f. 01.04.2000. Therefore, question of any interest accruing after 01.04.2000 does not arise at all. In fact in assessment year 2001-2002 which was the first year of non-charging of interest, no addition has been made on account of accrued interest and thus Board's decision has been accepted by the A.O. Now making an addition in A.Y.2003-2004 and A.Y 2004-05 on account of accrued interest which has been accepted in earlier year, is wrong. For that we rely on the following judgments:
(i)..The Hon`ble Supreme Court in the case of UCO Bank -Vs - CIT - 237-ITR-889 (SC), held as follows: “3. We have to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. It is the case of the assessee that in respect of loans which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realised by the bank. Hence, they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of income-tax. 4. The method of accounting which is followed by the assessee-bank is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realised. A mixed method of accounting is, thus, followed by the assessee- bank. This method of accounting adopted by the assessee is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing, the relevant passage
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occurring at page 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore's case (supra). It is as follows : "'Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverable interest being credited to revenue, and distributed as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward, and not treated as profit until actually received.'" (p. 120) Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth edn., at page 1089, state as follows : "'Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the loan account. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised." - Vide State Bank of Travancore's case (supra) (p. 120). The assessee's method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. 5. Under section 145 of the Act, income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the ITO, the income cannot properly be deduced there, the computation shall be made in such manner and on such basis as the ITO may determine. In the present case, the method employed is entirely for a proper determination of income. 6. For this same reason, and to aid proper determination of income, the Board had issued Circular No. 41(V-6)D of 1952, dated 6-10-1952. The Circular, inter alia, stated that "interest accruing to a money-lender on loans entered in the suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee's taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It is considered desirable to extend this principle to banks which, instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the Income-tax Officer is satisfied that recovery is practically improbable." This circular was in force till 20-6-1978 when the Board issued a circular, dated 20-6-1978 withdrawing with immediate effect the earlier circular of 6-10-1952. The reason for the withdrawal of the circular of 1952 is set out in the circular of 20-6-1978. The reason is stated thus : "the Board has been advised that where accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether the interest is credited to suspense account or to interest account. The Kerala High Court has also expressed the same view in the case of State
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Bank of Travancore v. CIT [1977] 110 ITR 336. The amount of such interest is, therefore, includible in the taxable income." The withdrawal of the circular of 6-10- 1952 which had been in force for thirty-six years was on account of the decision of the Kerala High Court in State Bank of Travancore's case (supra). The Board, however, issued another circular of 9-10-1984 under which the Board decided that "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an 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 amount recovered only will be subjected to tax in the respective years. This procedure will apply to assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated 20-6- 1978 is modified to this extent." The same circular has also further clarified that up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier circular dated 6-10- 1952 as the said circular was withdrawn only in June 1978. The new procedure under the circular of 9-10-1984 will be applicable for and from the assessment year 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Board's circular of 6-10-1952 would be applicable; while from the assessment year 1979-80, the Board's circular of 9-10- 1984 is made applicable. In the present case, the assessment was made on the basis of the Board's circular of 9-10-1984, since the assessment pertains to the assessment year 1981-82 to which the circular of 6-10-1984 is applicable. What is the status of these circulars ? Section 119(1) of the Act provides that, "The Board may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board : Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions". Under sub-section (2) of section 119, without prejudice to the generality of the Board's power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to the assessees the guidelines, principles or procedures to the followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board, thus, has powers, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in the manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper
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administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. The question whether interest earned, on what have come to be known as 'sticky' loans, can be considered as income or not until actual realisation, is a question which may arise before several ITOs exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such 'accrual' of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119. Such a circular is binding under section 119. The circular of 9-10-1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered.
In the case of Navnitlal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC), the legal effect of such circulars is, inter alia, considered by a Bench of five Judges of this Court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act, 1955 which came into force on 1-4-1955. The Government, however, realised that 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 would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in the Parliament 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 30-6-1955. Accordingly, a circular was issued by the Board of Revenue on 10-5-1955 pointing out to all ITOs 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 bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before 30-6-1955 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 despite the new section. This circular was held by this Court as binding on the revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the Court did not look upon this circular as being in conflict with section 12(1B).
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A similar view of the Board's circulars has been taken in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/ 7 Taxman 13 (SC) by a Bench of two Judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. The Bench has held that circulars of Board are legally binding on the revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnitlal C. Javeri's case (supra) this Court observed that circulars issued by the Board under section 119 are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1/ 49 Taxman 87, a Bench of three Judges of this Court has also taken the view that circulars beneficial to the assessee which tone down the rigour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. This Court, however, clarified that the Board cannot pre-empt a judicial interpretation of the scope and ambit of a provision of the Act. Also a circular cannot impose on the taxpayer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the law is the exclusive domain of the Courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act.
In the case of C.B. Gautam v. Union of India [1993] 199 ITR 530 at page 546/[1992] 65 Taxman 440, a Bench of five Judges of this Court considered as enforceable, Instruction No. 1A88 issued by the Board relating to the enforcement of the provisions of Chapter XX-C of the Act. The Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this Court in K.P. Varghese's case (supra).
There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore's case (supra) decided by a Bench of three Judges of this Court by a majority of two to one. The judgment directly deals with interest on 'sticky advances' which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of 6- 10-1952 and its withdrawal by the second circular of 20-6-1978. The majority appears
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to have proceeded on the basis that by the second circular of 20-6-1978, the Board had directed that interest in the suspense account on 'sticky' advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of 9-10-1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of 9-10-1984, does not appear to have been pointed out to the Court. What was submitted before the Court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circum-stances of the 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 feasibility". The Court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this Court in Navnitlal C. Javeri's case (supra), or the subsequent decision in K.P. Varghese's case (supra) also do not appear to have been pointed out to the Court. Since the later circular of 9-10-1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second Judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law.
The said circulars under section 119 were not placed before the Court in the correct perspective because the later circular continuing certain benefits to the assessee was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice.
In the premises, the majority decision in State Bank of Travancore's case (supra) cannot be looked upon as laying down that a circular which is properly issued under section 119 for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five Judges in Navnitlal C. Javeri'scase (supra). In fact, State Bank of Travancore's case (supra) has already been distinguished in the case of Keshavji Ravji & Co. (supra) by a Bench of three Judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It, being
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in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of 9-10- 1984 also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or 'sticky' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years, the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received.
We do not see any inconsistency or contradiction between the circular so issued and section 145. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119. As such, the circular would be binding on the department. The other judgment on which reliance was placed by the department was a judgment of a Bench of two Judges of this Court in Kerala Financial Corpn. v. CIT [1994] 210 ITR 129/ 75 Taxman 573, where this court, following the majority view in State Bank of Travancore's case (supra) held that interest which has accrued on a 'stricky' advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Board cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force, it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Act. 13. The appeal is, therefore, allowed and the question is answered in favour of the assessee and against the department.
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Civil Appeal Nos. 9885-87 of 1996 and 10408 of 1996 14. These two appeals are filed by Tamil Nadu Industrial Investment Corpn. Ltd. The question raised is similar to the question which we have considered in Civil Appeal No. 235 of 1996 pertaining to the United Commercial Bank Ltd. In these two appeals, the relevant assessment years are 1972-73. 1973-74, 1974-75 and 1976-77. During these assessment years the circular which was in force was the circular of 6-10-1952. This circular, unlike the later circular of 9-10-1984 which applies to banking companies, applies to interest accruing to a money-lender on loans entered in a suspense account because of the extreme unlikelihood of their being recovered. The circular is widely worded to include within its ambit a public financial institution such as the assessee. In view of this circular which was then in force and which was binding on the assessing authorities, these two appeals also have to be allowed for reasons which we have set out in Civil Appeal No. 235 of 1996. These appeals are also, therefore, allowed and the question referred is answered in favour of the assessee and against the department.”
(ii) Hon`ble Delhi High Court in the case of CIT –Vs- Goyal M. G. Gases Pvt. Ltd. – 303-ITR-159 (Delhi) held as follows:
“10. The principle that the Supreme Court applied was that even if the accounts are maintained in the mercantile system, what has to be seen is whether income can be said to have really accrued to the assessee. In support of this principle, reliance was placed upon CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) which approved the view taken by the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.), Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) as well as Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC). In the penultimate paragraph of the judgment, the Supreme Court held as follows :— "The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration." 11. Applying the law laid down by the Supreme Court, what has to be seen in the present case is whether there was any real accrual of interest to the assessee. Both the CIT(A) as well as the Tribunal came to the conclusion that there was no real accrual of interest. It has been noted that the interest had not even been recorded by the assessee in its books of account. The assessee had also issued a notice to the parties under section 138 of the Negotiable Instruments Act for dishonour of cheques issued by all (except one of the debtors) followed by initiation of appropriate proceedings. The debts were written off as bad debts and were also allowed by the Assessing Officer in subsequent years. These facts lead to the inescapable conclusion that realisation of even the principal amount was in jeopardy and, therefore, there cannot be said to be any real accrual of income by way of interest. We find no fault in this view taken by the Tribunal and are of the opinion that no substantial question of law arises for our consideration. 12. The appeal is dismissed.”
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We note that Hon`ble Supreme Court in the case of UCO Bank -Vs - CIT - 237-ITR- 889 (SC) has held that tax should be imposed on the real income. We note that ld Counsel placed before the Bench the resolution of Board of Directors of the assessee company which clearly states that recovery of the interest is doubtful therefore interest had not been accrued by the assessee company. We note that there is no real accrual of interest to the assessee-company in respect of the loan advanced by it. Considering the bad financial position of the debtor companies, the management of the Company decided not to charge interest on the loans w.e.f. 01.04.2000 as mutually agreed with the loan debtor ( vide Board Resolution noted above). Therefore, we find force in the argument of the ld. Counsel and therefore, in the light of the judgment of Hon’ble Supreme Court in the UCO Bank (supra) addition made by the A.O. for Rs. 34,39,500/- as notional interest on loan given is hereby directed to be deleted.
In the result, appeals filed by the assessee in ITA No.2553 and 2554/Kol/2017 for Assessment Years 2004-05 & 2006-07, are allowed
Order pronounced in the open court on this 20/01/2020.
Sd/- Sd/- (A. T. Varkey) (A. L. Saini) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; Dated:20./01/2020 RS, Sr.PS
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आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :
अपीलाथ� / The Assessee- Uniworth Limited 2. ��यथ� / The Respondent.- ACIT, Circle-11, Kolkata. 3. आयकर आयु"त(अपील) / The CIT(A), 4. आयकर आयु"त / CIT #वभागीय �&त&न'ध, आयकर अपील�य अ'धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड* फाईल / Guard file.
//True Copy// By Order
Assistant Registrar, I.T.A.T, Kolkata Benches, Kolkata.