1997 (5) TMI 85 - AT - Income Tax

Assessing Officer, Assessment Order, Assessment Year, Debatable Issue, Hybrid System, Interest On Sticky Loans

Issues Involved:

1. Validity of the CIT's revisional jurisdiction under section 19 of the Interest-tax Act.
2. Taxability of interest on sticky loans.
3. Taxability of export subsidy received from the Reserve Bank of India.

Issue-wise Detailed Analysis:

1. Validity of the CIT's Revisional Jurisdiction under Section 19 of the Interest-tax Act:

The assessee challenged the CIT's order setting aside the Assessing Officer's (AO) order, claiming it was erroneous and prejudicial to the revenue's interest. The assessee argued that the AO had considered all claims, including interest on sticky loans and export subsidy, and that the AO is not required to discuss every claim in detail in the assessment order. The assessee relied on several judgments, including Venkatakrishna Rice Co. v. CIT and CIT v. Gabriel India Ltd., to support the argument that the AO's order cannot be deemed erroneous simply due to a lack of detailed discussion.

The Departmental Representative argued that the AO failed to properly adjudicate the claims, especially in light of the Supreme Court's judgment in State Bank of Travancore v. CIT, which held that interest on sticky loans is taxable. The CIT's notice indicated that the AO's order was erroneous for not considering the capital subsidy and interest credited to the interest suspense account.

The Tribunal upheld the CIT's order, agreeing that the AO did not apply his mind properly. The Tribunal noted that the AO allowed the assessee's claim without proper discussion, despite the contentious nature of the issues. The Tribunal concluded that the AO's order was indeed erroneous and prejudicial to the revenue's interests, justifying the CIT's revisional jurisdiction.

2. Taxability of Interest on Sticky Loans:

The assessee argued that it had adopted a hybrid system of accounting since 1960-61, crediting interest on sticky loans to a suspense account, which was accepted by the revenue. The assessee relied on the Tribunal's order for the assessment year 1961-62 and various judgments, including CIT v. Citibank N.A., to argue that interest on sticky loans should not be taxed on an accrual basis if the hybrid system is followed.

The Departmental Representative contended that the Supreme Court's judgment in State Bank of Travancore's case applied, which held that interest on sticky loans is taxable if the mercantile system is followed. The DR argued that the AO failed to consider this judgment and that the assessee's method of accounting was not clearly disclosed in the returns.

The Tribunal found that the assessee had consistently followed the hybrid system of accounting since 1961-62, which was accepted by the revenue. The Tribunal distinguished the assessee's case from the State Bank of Travancore's case, noting that the latter applied to those following the mercantile system. The Tribunal concluded that the assessee's claim regarding interest on sticky loans was justified and directed the AO to allow the claim.

3. Taxability of Export Subsidy Received from the Reserve Bank of India:

The assessee argued that the export subsidy received from the RBI is a reward for services rendered to exporters and should not be considered as interest. The assessee relied on the M.P. High Court's judgment in its own case for earlier years and various Supreme Court judgments to support this argument.

The Departmental Representative argued that the export subsidy compensates for the lower interest rates charged to exporters under the export credit scheme and should be considered as interest. The DR relied on the Karnataka High Court's judgment in CIT v. Vijaya Bank, which held that such subsidies are taxable as interest.

The Tribunal agreed with the Departmental Representative, noting that the export subsidy compensates for the loss of interest due to lower rates charged under the export credit scheme. The Tribunal found that the export subsidy falls within the definition of interest under section 2(7) of the Interest-tax Act and is chargeable to tax. The Tribunal upheld the CIT(A)'s order on this issue.

Conclusion:

The appeals were partly allowed, with the Tribunal upholding the CIT's revisional jurisdiction and the taxability of export subsidy while allowing the assessee's claim regarding interest on sticky loans.

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