1989 (9) TMI 165 - AT - Income Tax

Assessing Officer, Assessment Year, Earlier Decision, Hybrid System, Income Tax Authorities, Interest Income, Supreme Court, Total Income, True Nature

Summary

Issues Involved:
1. Taxability of interest on sticky advances credited to an interest suspense account.
2. Application of the Central Board of Direct Taxes (CBDT) circular on interest from doubtful debts.
3. Treatment of unclaimed cash orders and drafts as income.
4. Deduction of higher percentage out of entertainment expenses and deduction under Section 80G.
5. Claim of bad debts and interest under Section 214.

Issue-wise Detailed Analysis:

1. Taxability of Interest on Sticky Advances:
The assessee, a government-owned bank, followed a hybrid system of accounting for interest income. For regular customers, it adopted the mercantile system, while for defaulting customers, it adopted the cash system. The bank credited interest from sticky advances to an interest suspense account, indicating the likelihood of non-recovery. The bank argued that this practice was recognized by the Tribunal in earlier assessment years (1975-76 & 1976-77). The Tribunal, however, held that the method of accounting must reflect the true nature of the business transactions. The Supreme Court's ruling in the State Bank of Travancore case was cited, emphasizing that income accrues based on the right to enforce recovery. Therefore, the Tribunal concluded that the hybrid system of accounting could not be insisted upon by the assessee, as it did not reflect the true income as per Section 5 of the Income-tax Act, 1961.

2. Application of the CBDT Circular on Interest from Doubtful Debts:
The assessee relied on a CBDT circular issued in September 1984, which stated that interest on doubtful debts credited to a suspense account would not be taxed if there was no recovery for three consecutive years. The CIT(A) had refused to apply the circular, citing the Supreme Court's decision. However, the Tribunal noted that the circular was binding on the department and directed the assessing officer to apply it. The Tribunal remanded the issue back to the assessing officer to exclude interest from the fourth year onwards if there had been no recovery for the past three years, and to include such interest on actual receipt basis.

3. Treatment of Unclaimed Cash Orders and Drafts as Income:
For the assessment year 1980-81, the issue of unclaimed cash orders and drafts being treated as income was raised. The Tribunal found that this issue was covered in favor of the assessee in the earlier assessment year (1979-80), where it was held that Section 41(1) could not be applied as these did not relate to any trading liability. The Tribunal excluded these amounts from the total income of the assessee, following the earlier order.

4. Deduction of Higher Percentage Out of Entertainment Expenses and Deduction Under Section 80G:
For the assessment year 1981-82, the assessee raised two additional grounds. The first related to the deduction of a higher percentage out of entertainment expenses as relatable to staff. The Tribunal found no infirmity in the authorities' orders, which restricted the deduction to 20%. The second issue related to the deduction under Section 80G. The Tribunal directed the assessing officer to allow the deduction to the extent of certificates provided by the assessee.

5. Claim of Bad Debts and Interest Under Section 214:
For the assessment year 1981-82, the assessee did not press the claim for bad debts, and this ground was treated as dismissed. Another ground related to interest under Section 214 was raised but was not pursued in the appeal before the CIT(A), and thus, it did not arise from the CIT(A)'s order.

Conclusion:
The appeals were allowed in part, with specific directions to apply the CBDT circular on interest from doubtful debts and to exclude unclaimed cash orders and drafts from the total income. The Tribunal upheld the authorities' orders on the deduction of entertainment expenses and directed the assessing officer to allow the deduction under Section 80G based on provided certificates. The claim for bad debts was dismissed, and the issue of interest under Section 214 was not considered.