2002 (7) TMI 90 - HC - Income Tax

Business Expenditure, Disallowance Of Expenditure, Expenditure On Running And Maintance Of Motor Cars, Expenditure On Salary And Dress Allowance Of Drivers - (i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in upholding the rejection of method of accounting of interest on sticky loans credited to Interest Suspense Account consistently followed by the assessee in the assessment years 1961-62 onwards and accepted by the Department? - (ii) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in upholding the taxation of interest on sticky loans credited to Interest Suspense Account contrary to the decision consistently taken in the preceding years not to tax? - (iii) Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the expenditure on salary and uniform allowance paid to drivers was hit by the provisions of section 37(3A)?

Issues:
1. Assessment of interest on sticky loans credited to 'Interest Suspense Account'.
2. Taxation of interest on sticky loans contrary to previous decisions.
3. Taxability of expenditure on salary and uniform allowance paid to drivers under section 37(3A).

Analysis:

Issue 1: Assessment of interest on sticky loans credited to 'Interest Suspense Account'
The court considered whether interest accrued on doubtful loans, credited to the 'Interest Suspense Account' by the assessee-bank but not recovered, should be liable for income tax assessment. The Revenue argued that even if the interest is difficult to recover, its accrual makes it taxable under section 5 of the Income-tax Act. However, the assessee relied on a circular by the Central Board of Direct Taxes, stating that interest on doubtful debts credited to suspense account by banks would not be taxed unless actually recovered. The court referred to a Supreme Court decision that upheld the circular's validity, concluding that the interest suspense account was not taxable from the assessment year 1979-80 onwards. Therefore, questions related to this issue were answered against the Revenue.

Issue 2: Taxation of interest on sticky loans contrary to previous decisions
The court examined whether the Appellate Tribunal was justified in upholding the taxation of interest on sticky loans credited to the 'Interest Suspense Account,' contrary to previous decisions. The court referred to the circular by the Central Board of Direct Taxes, which clarified the tax treatment of such interest. Relying on a Supreme Court judgment, the court held that the interest suspense account was not liable to be taxed from the relevant assessment years. Consequently, questions related to this issue were answered against the Revenue.

Issue 3: Taxability of expenditure on salary and uniform allowance paid to drivers under section 37(3A)
Regarding the expenditure on salary and uniform allowance paid to drivers, the court analyzed the applicability of section 37(3A) and (3B) before their deletion. The dispute centered on whether the dress allowance paid to drivers fell within the purview of sub-section (3A), which limits deductions for specified items exceeding a certain threshold. The court found that the expenditure claimed on dress allowance by the assessee-bank exceeded the threshold and was not allowable under the head "Profits and gains of business or profession." Therefore, this issue was answered against the assessee.

In conclusion, the court resolved the issues raised in the income-tax references, answering questions in favor of the assessee regarding the assessment of interest on sticky loans and against the assessee concerning the expenditure on salary and uniform allowance paid to drivers. The judgment disposed of both references without any order as to costs.

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