FILIM DIVN.CORPRN. V. COMMISSIONER

SJC/113/1996

AI Insights

The case involves appeals challenging the judgment and order of the Income Tax Appellate Tribunal, Cuttack Bench, which pertained to the change in the method of accounting from mercantile to cash system by a government undertaking. The core legal question was whether the Tribunal was correct in refusing to accept this change despite the assessee being a government undertaking, which presumably lacked a malafide motive to avoid tax on interest income. The Supreme Court referenced its decision in U.Co. Bank v. Commissioner of Income Tax, which addressed similar issues regarding the taxability of interest on 'sticky advances' and the applicability of executive circulars under section 119 of the Income-Tax Act.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 726012 (HC-CUTTACK)
• Appeal Type: Others
• Pronouncement Date: 31-07-2019
• Assessment Year: misc
• Other Referred Cases: U.Co. Bank v. Commissioner of Income Tax, State Bank of Travancore vs. CIT, Navnit Lal (C.) Javeri vs. K.K. Sen, AAC, K.P. Varghese vs. ITO, Keshavji Ravji and Co. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Government Undertaking; Income Tax; Interest income; Mercantile to Cash System; Malafide Motive
• Section: 119; 145

Judgement Text

" S.J.C. Nos.111, 112 and 113 of 1996 10. 31.07.2019 Heard learned counsel for the parties. By way of these appeals the petitioner has challenged the judgment and order of the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack passed in R.A. Nos.2, 3, 4 & 5/CTK of 1995 arising out of ITA Nos.128, 129/CTK/89 & 185 & 186/CTK/90 respectively. This Court while admitting the matter on 6.9.2000 formed the following question of law: “The defect is ignored. Heard learned counsel of the parties. The Income Tax Appellate Tribunal, Cuttack Bench, Cuttack is called upon to submit the statement of the case in respect of the following question : - “Whether or not under the facts and in the circumstances of the case the Tribunal knowing that the assessee was a Government undertaking and therefore could not have malafide motive to avoid any tax on interest income was right in refusing to accept the change in method of accounting from mercantile to cash system adopted by the assessee on the basis of actual interest realised ?” The application is accordingly allowed.” However, the issue involved in these SJCs is now settled by the decision of the Hon’ble Supreme Court in the case of U.Co. Bank v. Commissioner of Income Tax, reported in (1999) 237 ITR 889 (SC), relevant paragraphs of which are reproduced below: “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 vs. CIT (1986) 158 ITR 102, decided by a Bench of three judges of this Court by a majority of two to one. This judgment directly deals with interest on “sticky advances” which have been debited to the customer but taken to the interest suspense account by a S.J.C. No.113 OF 1996 -2- banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central 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 October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 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 circumstances 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 recognized 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 Navnit Lal (C.) Javeri vs. K.K. Sen, AAC (1965) 56 ITR 198, or the subsequent decision in K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 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 of the Income-Tax Act were not placed before the Court in -3- the correct perspective because the later circular continuing certain benefits to the assesses 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 the State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-Tax Act 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 situation would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri vs. K.K. Sen (1965) 56 ITR 198 (SC). In fact State Bank of Tranvancore vs. CIT (1986) 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. vs. CIT (1990) 185 ITR 1 (SC), 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 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 -4- 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 amount 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 October, 9, 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.” In that view of the matter, the issue is answered in favour of the assessee-petitioner. The SJCs are accordingly disposed of. AKK .\u0002\u0002..........\u0002\u0002\u0002\u0002 ( K.S. Jhaveri ) Chief Justice \u0002\u0002\u0002\u0002\u0002\u0002.\u0002\u0002.. ( K.R.Mohapatra ) Judge "