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TMI Blog1994 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-Tax A. N. Z. Grindlays Bank Versus Commissioner of Income-Tax KULDIP SINGH. and B. L. HANSARIA. JUDGMENT The judgment of the court was delivered by B. L. HANSARIA J.- In this batch of appeals, we are concerned with the question as to how interest accruing on "sticky advances" has to be taxed. The appellants being various leading financial institutions of the country, the answer has to be not on "sticky ground" but on terra firma. We would not, however, be required to labour hard to base our conclusion on firm ground because much of the ground has already been covered by a three-judge Bench of this court which decided the case of State Bank of Travancore v. CIT [1986] 2 SCC 11 ; [1986] 158 ITR 102 (SC). Thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting, such interest should be taxed only when it is really recovered. The majority too had no reservation in accepting the submission that the income which really accrues can be taxed. The question examined was when can such an income be said to have really accrued ? Mukharji J. observed in paragraph 67 (at page 154) of the judgment that whether an accrual has taken place or not must be judged on the principles of the real income theory ; and in determining whether the income is hypothetical or real, various factors have to be taken into account. The learned judge observed that it would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact whether income has accrued or not. (7) 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. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits." In so far as the method of accounting is concerned, which has been dealt with by sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case (see [1933] 1 ITR 94) has not said anything to the contrary. As against the above, Tulzapurkar J., stated that even under the mercantile system of accounting, it is only the accrual of real income which is chargeable to tax, which aspect has to be decided on commercial principles having regard to the business character of the transactions and the realities and specialities of the situation and cannot be determined by adopting a purely theoretical or doctrinaire or legalistic approach. The learned judge then observed in paragraph 19 (at page 126 of 158 ITR) that he failed to understand why interest on sticky loans, which has theoretically accrued but has not factually resulted or materialised at all should not be regarded as hypoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated in its proposition No. (3) above, which is that where a debt has become bad, deduction would be allowed. We would, therefore, observe that though Misra J., while agreeing with Mukharji J., stated, inter alia, in paragraph 74 (at page 156 of 158 ITR) that in a taxing statute, where the law is clear, considerations of even injustice do not afford justification for exempting income from taxation, as opined in Mapp v. Oram [1969] 3 All ER 215 (HL), no injustice would really be caused in the cases at hand, inasmuch as if the advance in question can ultimately be established to have become a bad debt, the assessee would be entitled to refund of the tax already paid by him in this regard. This has not been disputed by Shri Ramamurthy appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . P. Varghese v. ITO [1981] 131 ITR 597, in which it was observed at page 613 that circulars issued under the aforesaid provisions are binding on all officers "even if they deviate from the provisions of the Act". As to what was sought to be conveyed by the word "deviate" is not clear to us. This much, however, is apparent that this court did riot mean, while saying as above, that circulars can override any provision of the Act or, to put it in the language of Mukharji J., detract from the Act. Though Shri Salve has urged that the decision in Varghese's case [1981] 131 ITR 597 (SC) has been affirmed by a Constitution Bench in C. B. Gautam v. Union of India [1993] 199 ITR 530 (SC), reference to that case shows that Varghese's case [1981] 131 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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