1988 (2) TMI 22 - HC - Income Tax

Business Expenditure, Deduction U/S 36(1)(viii), Disallowance, Entertainment Expenditure, Income, Income Tax Authorities, Instructions Issued By CBDT, Interest, State Financial Corporation

Summary

Issues Involved:
1. Disallowance of entertainment expenditure under section 37(2B) of the Income-tax Act.
2. Entitlement to deduction under section 36(1)(viii) of the Income-tax Act.
3. Inclusion of interest on "sticky loans" in the total income for the assessment year 1976-77.

Detailed Analysis:

1. Disallowance of Entertainment Expenditure:
The first issue pertains to whether the Tribunal was correct in upholding the disallowance of Rs. 26,280 as entertainment expenditure under section 37(2B) of the Income-tax Act. The court noted that due to the amendment of section 37(2B) by the Finance Act, 1983, with retrospective effect from April 1, 1976, entertainment expenditure has been completely disallowed. Consequently, the question was answered in the affirmative and against the assessee.

2. Entitlement to Deduction under Section 36(1)(viii):
The second issue involves whether the assessee is entitled to a deduction under section 36(1)(viii) of 2/7ths of Rs. 51,29,454 as held by the Tribunal, or 40% of the same as claimed by the assessee. The court referred to its previous decision in the case of Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206. Based on the reasons stated in that order, the court upheld the Tribunal's view, concluding that the assessee was entitled to a deduction of only 2/7ths of Rs. 51,29,454.

3. Inclusion of Interest on "Sticky Loans":
The third issue concerns whether the interest of Rs. 11,40,862 on "sticky loans" should be included in the total income of the assessee for the assessment year 1976-77. The assessee had credited this interest to a suspense account instead of the profit and loss account, based on instructions from the Central Board of Direct Taxes (CBDT) and the Reserve Bank of India (RBI). The Income-tax Officer included this amount in the computation of income, but the Appellate Assistant Commissioner and the Tribunal upheld the assessee's claim, relying on the CBDT's instructions.

The court examined the binding nature of CBDT circulars, referencing the Supreme Court decisions in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 and K. P. Varghese v. ITO [1981] 131 ITR 597, which held that such directions are binding on departmental authorities. However, the court also considered the Supreme Court's decision in State Bank of Travancore v. CIT [1986] 158 ITR 102, which ruled that interest on sticky loans credited to a suspense account is taxable, even if earlier CBDT circulars suggested otherwise. The court noted that the CBDT had withdrawn the relevant circulars by a letter dated June 20, 1978, and therefore, the earlier instructions could no longer be relied upon by the assessee.

Given these considerations, the court answered the third question in the negative and in favor of the Revenue, concluding that the interest on sticky loans should be included in the total income for the assessment year 1976-77.