1998 (3) TMI 172 - AT - Income Tax

Issues Involved:
1. Assessability of interest income on sticky loans.
2. Valuation of closing stock of securities and shares.
3. Deduction u/s 36(1)(viia).
4. Deduction u/s 80M.
5. Disallowance of earlier years' expenses.
6. Penalty u/s 273.

Summary:

1. Assessability of Interest Income on Sticky Loans:
The primary issue pertains to the assessability of interest income on sticky loans for assessment years 1981-82 to 1988-89 and 1990-91. The assessee, a nationalized commercial bank, followed a hybrid system of accounting where interest on sticky loans was accounted on a cash basis, contrary to the mercantile system. The assessing authorities, relying on the Supreme Court judgment in "State Bank of Travancore v. CIT" [1986] 158 ITR 102, assessed interest income on an accrual basis, leading to substantial additions to the assessee's income. However, the Tribunal found that the hybrid system is well-recognized and justified for banks, distinguishing the facts from the State Bank of Travancore case. It directed the deletion of all additions made on this basis.

2. Valuation of Closing Stock of Securities and Shares:
The second issue involves the valuation of closing stock of securities and shares for assessment years 1985-86, 1986-87, 1987-88, and 1992-93. The assessee valued these at cost in the books but claimed losses based on market value in tax returns. The CIT(A) directed a bifurcation, treating pre-1985 acquisitions as investments and post-1985 as stock-in-trade. The Tribunal, referencing the Calcutta High Court judgment in "CIT v. UCO Bank" [1993] 200 ITR 68, held that the assessee cannot claim a different valuation method in tax returns than used in the books. The Tribunal directed the AO to follow the UCO Bank judgment and rectify assessments accordingly.

3. Deduction u/s 36(1)(viia):
For assessment years 1990-91 and 1991-92, the assessee's claim for deduction u/s 36(1)(viia) was denied as no bad debts were written off. The Tribunal clarified that the deduction for provision for bad and doubtful debts is independent of actual write-off, provided no double deduction is claimed. The AO was directed to allow the deduction without requiring write-off, excluding interest on sticky loans accounted on a cash basis.

4. Deduction u/s 80M:
The issue of deduction u/s 80M for assessment years 1982-83 to 1985-86, 1987-88, and 1988-89 involved the deduction of estimated expenditure incurred for earning dividend income. The Tribunal restored the matter to the AO to recompute the deduction after allowing the assessee to present facts and submissions, following the Calcutta High Court judgments in "CIT v. National & Grindlays Bank Ltd." [1993] 202 ITR 559 and "CIT v. United Collieries Ltd." [1993] 203 ITR 857.

5. Disallowance of Earlier Years' Expenses:
For assessment years 1990-91 and 1991-92, the disallowance of earlier years' expenses was contested. The Tribunal noted that under the mercantile system, expenses must be claimed in the year they relate to, but exceptions exist for disputed claims or delayed bills. The matter was restored to the AO to allow the assessee to substantiate its claims and review the matter accordingly.

6. Penalty u/s 273:
Regarding the penalty u/s 273 for assessment year 1982-83, the assessee argued that the penalty arose due to uncalled additions by the AO. The Tribunal directed the AO to recompute the penalty after giving effect to the Tribunal's order on the assessment.

Conclusion:
The appeals filed by both the assessee and the Revenue are partly allowed, with directions for reassessment and recomputation based on the Tribunal's findings and legal precedents.

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