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TMI Blog1989 (9) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... e defaulting parties and in respect of those who have not only been irregular in their repayments but also whose financial positions appear to be bad, as per enquiries made by the bank's staff, these are treated as sticky advances, in the sense that there is every likelihood of the debt becoming bad. In such cases, the bank had formulated a rule of debiting the parties account with the normal interest but took the credit to the interest suspense account, meaning that the extent of interest lying to the credit of this suspense account is either income that might be lost and irrecoverable and which requires a careful watch to be kept. The past practice in such cases had been that most of it were not recovered either due to reconciliation with the party on the basis of possible recovery of the principal and many such factors. This practice of mixed accounting method was followed for a number of years and this fact was accepted by the Tribunal in the case of the assessee for the asst. years 1975-76 1976-77, vide order dated 16th August, 1982, a copy of which has been placed at pages 4 to 20 of the paper book. His plea further was that the hybrid or the mixed accounting having been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1979-80 and onwards. His plea was that the CIT(A) had failed to appreciate that when the ITO had concluded the assessment for the asst. year 1980-81, the said circular was not issued and therefore could not have been considered by the ITO. His further grievance was that the CIT(A) a subordinate authority to the Central Board of Direct Taxes could not refuse to apply the circular, especially a beneficial circular such as the one issued by the Board. He pleaded that the CIT(A) went beyond his jurisdiction in refusing to follow the circular. He therefore pleaded that the circular has a binding force on the revenue. 3. The learned Senior DR Sh. Shah vehemently supported the orders of the authorities below and contended that the Board not being a superior authority when compared to the Supreme Court, the law pronounced by the Supreme Court would have to be applied. He pleaded by referring to the Calcutta High Court ruling in James Finlay Co. v. CIT [1982] 137 ITR 698, that, the character of the transaction does not change by subsequent by crediting the interest to the suspense account. 4. We have given our very careful considerations to the contentions of either side. 4.1 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction of the business and not the reverse, i.e., the transaction following accounts. It is therefore wholly improper even to suggest that the manner of accounting would be the deciding factor as to the true nature of the business transaction. The pulse of the operations of any bank is its right to demand interest on its advances, which is why the interest meter starts running the moment the advance or loan has been utilised by the party. The bank also adjusts to begin with the interest amount whenever any party makes a lump sum repayment or even where the party says the repayment is towards principal though the interest had not been paid and whatever balance is remaining is given credit towards capital account. The bank only allows the outer time limit of payment of interest, like every quarter, half year or annual etc., after which the bank starts its second meter of charging interest on delayed payment of interest. All these factors go clearly to indicate that right from the stage go, the bank's income on account of interest on loans advanced by it commences as per its generally followed trade practice. If it were to follow the system of allowing the parties to pay as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be in consonance with the trade practice followed by the bank and if it is not so then the system of accounting followed by it cannot be said to reflect the true state of affairs. The Legislatures have recognized this feature of the trade practice, which is why as a guide to the assessing authority, sec. 145 has been enacted by them. The words "method of regularly employed by the assessee" used in sec. 145 has to be read in conjunction with sec. 5, for otherwise, it might lead to conflicting situations of items being treated as income per sec. 5 but as per sec.145, since the assessee has adopted to follow a particular system of accounting of the transaction, which might be just the opposite of the one in sec. 5, then the very meaning of the term income, its manner of earning by an assessee, would be taken to a ridiculous extent, making the statue a laughing subject. This is aptly clear by the reading of sub-clause (2) to sec. 145, which gives the power to the assessing officer to determine the true income of the business, in cases where the true income could not be deduced from the manner or the method of accounting followed by an assessee. Therefore the concept of the true or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued in 1952, which was withdrawn in June, 1978, was fully applicable for the two asst. years 1975-76 1976-77. Secondly, the method of crediting the interest to suspense account and accounting for it in the year of receipt was consistently followed, which method once having been accepted, the department could not raise its objection against such method in a subsequent year. The third reason which weighed in the minds of the Members was that the bank had acted on the advice of its auditors and the Reserve Bank ofIndia. As observed earlier, the crucial factor which would determine the character of income being the transaction itself, the accounting necessarily has to conform to the nature of transaction, in relation to the true concept of income as defined u/s 5 of the I.T. Act, not having been dealt with by the tribunal for the two asst. years 1975-76 1976-77, these being material factors for deciding the issue under consideration and all the more necessary to be dealt in by us presently, for the assessee had sought to point out the distinctive feature of its case and the one decided by the Supreme Court in the case of State Bank of Travancore, we have re-examined the issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus needs to be excluded from the total income. Justice Shri Sabyasachi Mukharjee and Justice Shri Ranganath Mishra were of the view that the concept of real income would be applicable and that this must be applied with circumspection and must not be called upon to defeat the fundamental principles of the law of income-tax as developed. They observed "mere improbability of recovery where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency rather than to be carried away by common cliches. Though the concept of 'real income' is a well recognized one, it cannot be introduced as an outlet of income from the taxman's net for the assessment on the plea that though shown in account books as having accrued, the same became a bad debt and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking business where the core of the transaction is the right to enforce and receive, whether it is paid or not by the party. As observed earlier, the Tribunal for the earlier years had no occasion to consider this concept of income, the transaction being the starting point and it is that which would determine the method of accounting to be followed and not vice versa, we have to necessarily, in the light of these factors to take the contrary view of the matter. The view in this regard is that notwithstanding the manner or the method of accounting followed by the assessee consistently and so accepted by the revenue in the earlier years, and if such a method does not reflect the true income of the business transactions of the assessee then the revenue cannot be precluded from computing of the income to include the income based on the true concept of income in the subsequent assessment years. We as the creatures of law and expected to apply the law as it stands and have to necessarily apply the law in its proper perspective and it is the duty of the courts to ensure that the fundamental concepts of business and incomes are not lost sight of especially when considering the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follow the business transaction and since the accounting of the interest on sticky advances when excluded from the profits, the true profits and gains could not be deduced therefrom and therefore, even as per these rulings, in the circumstances of the case, the rejection of the accounts is only proper. The learned DR had placed reliance on James Finlay Co's case for the proposition that by mere debiting of interest to suspense account without giving up of the claim, the income cannot be said to not to accrue to the assessee. This ruling supports the view we have taken that the accrual or otherwise of income would depend on the transaction and not the accounting method followed. We accordingly reject the argument that the hybrid system of accounting followed by the assessee, accepted by the Tribunal as well in the earlier years, should be accepted as proper method and on that basis only the income of the assessee should be computed, as totally baseless, for the detailed reasonings given above. 4.6 The learned counsel Sh. Manian had drawn our reference to the Board's circular issued in Sept. 84 and had placed reliance on a number of rulings for the proposition that the beneficial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lars/instructions can be with prospective effect only. As such the question of taxability of interest of doubtful debts credited by Banking Companies to suspense account will have to be decided upto asst. year 1978-79 in the light of the Board's circular No. 41(V6) dt.6-10-52as the said circular was withdrawn only in June, 1978. The new procedure as laid down in para 3 above will be applicable for and from asst. year 1979-80. All pending disputes on this issue should be settled in the light of these instructions. 4.7. The reading of the above circular/instructions issued by the Board indicates that the interest on doubtful debts which have been credited to the interest suspense account, which represented items or parties from whom there had been no recovery in the three consecutive earlier years, from the fourth year onwards, such interest would not be added to the income but would be includible in the total income of the year of their actual receipt. This circular so issued by the Board did not exist when the ITO made the assessment for the asst. year 1980-81, i.e. on26-7-84. The circular was very much in existence when the CIT(A) heard the appeal for the asst. year 1980-81 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 4.9 Connected with the above is the issue relating to the allowing of deduction of bad debts or the interest included and assessed as income in the past on accrual basis, which debt and interest has become bad and has been written off, the ITO shall examine these items as well and allow deduction of such bad debts. The common issue for both the assessment years under appeal is accordingly disposed of. 5. For assessment year 1980-81 there is one other issue, relating to the unclaimed cash orders and drafts, which has been treated as income by the authorities below. This issue is fully covered in favour of the assessee as per the order of the Tribunal in the case of the assessee for the asst. year 1979-80, wherein the finding was that these do not relate to any trading liability and therefore sec. 41(1) could not be applied at all. The parties are in full agreement that the facts and circumstances as the same as in the earlier asst. year 1979-80. We therefore, respectfully following the earlier order of the Tribunal, hold that the sec. 41(1) had been wrongly applied and accordingly exclude the same from the total income of the assessee. 6. For the asst. year 1981-82, two add ..... X X X X Extracts X X X X X X X X Extracts X X X X
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