THE COMMISSIONER OF INCOME TAX V. THE ANDHRA BANK

RC/80/2000

AI Insights

The case involves Andhra Bank, which followed a mercantile system of accounting and did not debit interest on loans that became non-revenue yielding after three years, nor did it offer these as income for assessment. The Assessing Officer added back estimated interest on such accounts, which was contested by the bank. The first Appellate Authority and the Tribunal had granted relief to the bank, which was challenged by the Revenue in the High Court. The Supreme Court's judgment in UCO Bank vs. Commissioner of Income-Tax, which referenced various Circulars from the Central Board of Direct Taxes, particularly the one dated October 9, 1984, was pivotal in deciding the first question in favor of the bank. The second question regarding the guest house expenditure was decided against the bank, adhering to the statutory prohibition under Section 37(4) of the Income Tax Act.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 718993 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 04-02-2014
• Assessment Year: misc
• Other Referred Cases: UCO Bank vs. Commissioner of Income-Tax, State Bank of Travancore vs. Commissioner of Income Tax, Britannia Industries Limited vs. Commissioner of Income-tax and Another
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Keywords: Bad debts; Interest Accrual; Mercantile system of accounting; Taxability of interest; Guest house expenditure
• Section: 37(4)

Judgement Text

"HON’BLE SRI JUSTICE G. CHANDRAIAH & HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.80 of 2000 JUDGMENT:- ( per Hon’ble Sri Justice Challa Kodanda Ram) At instance of the Revenue, the following question of law, which arises from the Common Order dated 04.12.1997 of the Tribunal in I.T.A.Nos. 1956 & 1959/Hyd/90 and 1943/Hyd/92 for the assessment years 1979-80 to 1982-83, has been referred for the opinion of this Court. 1. “Whether the I.T.A.T. is correct in law in holding that no interest accrues on advances not written off as bad debts, after the institution of suits for recovery even in the case of an assessee which follows mercantile system of accounting? For the assessment year 1989-90, there is another question of law referred which reads as follows: 2. Whether on the facts and in the circumstances of the case, the I.T.A.T. was justified in allowing the expenditure incurred on guest house in spite of the prohibition against allowing the expenditure under Section 37(4) of the I.T. Act?” So far as question No.1 is concerned, the issue relates to charging of interest on the sticky and bad debts. The assessee – Andhra Bank was following mercantile system of accounting and in the process, the loans which have become sticky and not yielding any revenue after three years were not being debited with interest and the said component was not being offered as income for the purpose of assessment. The Assessing Officer had added back on estimate basis the interest on such bad and sticky accounts though the assessee by itself had not offered the same for the purpose of assessment. The first Appellate Authority, having considered the facts on record and following the Tribunal’s earlier order for the assessment year 1983-84 had granted relief and deleted the addition made by the Assessing officer. The Tribunal confirmed the same by following its own earlier order in I.T.A.Nos.28/Hyd/89 and 1072/Hyd/89 and also other orders. Against the orders of the Tribunal, the above questions of law said to be arising from the orders of the Tribunal have been referred to this Court. The issue raised is no more res integra and the same is now settled by the judgment of the Supreme Court in the case o f UCO Bank vs. Commissioner of Income-Tax[1]. The Supreme Court had distinguished its earlier judgment in State Bank of Travancore vs. Commissioner of Income Tax[2] wherein it is held that from time to time, the Central Board of Direct Taxes (C.B.D.T.) had issued Circulars in exercise of its powers under Section 119 of the Income Tax Act with respect to the method of accounting and treatment of the interest accruing to a money lender on loans entered in the suspense account arising on account of their likelihood of not being recovered. The Apex Court had referred to the Circulars issued from time to time and finally by referring to the Board Circular dated 09.10.1984 held in favour of the assessee by noticing the Board Circular to the following effect: “Interest in respect of doubtful debts credited to suspense account by the banking companies will be subject to take to interest charged in an account where there has been no recovery for three consecutive accounting years will not be subject to tax in the 4th year and onwards. However, if there is any recovery in the 4th year or later, the actual amount recovered only will be subject to tax in the respective years. This procedure will apply to the assessment year 1979-80 and onwards. The Board’s Instruction No.1186, dated June, 20, 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 October 6, 1952, as the said Circular was withdrawn only in June, 1978. The new procedure under the Circular of October 9, 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 Central Board of Direct Taxes’ Circular of October 6, 1952, would be applicable; while from the assessment year 1979-80, the Central Board of Direct Taxes’ circular of October 9, 1984, is made applicable. In the present case, the assessment was made on the basis of the Central Board of Direct Taxes circular of October 9, 1984, since the assessment pertains to the assessment year 1981-82 to which the circular of October 6, 1984 is applicable. In the light of the judgment of the Supreme Court, clarifying the legal position so far as Question No.1 is concerned, the same is required to be answered in favour of the assessee and against the Revenue. So far as Question No.2 is concerned, the same is covered by the judgment of the Supreme Court reported in Britannia Industries Limited vs. Commissioner of Income-tax and Another[3] in favour of the Revenue and against the assessee. Accordingly, Reference is answered. No order as to costs. Miscellaneous Petitions, if any pending, shall stand disposed of as infructuous. _______________ G. CHANDRAIAH, J 04-02-2014 ____________________ CHALLA KODANDA RAM, J bcj [1] [1999] 237 ITR 889 [2] [1986] 158 ITR 102 (SC) [3] [2005] 278 ITR 546 (SC) "