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TMI Blog1994 (4) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting for its banking business was mercantile, the Tribunal was right in law in holding that the interest recorded in the memorandum account in the relevant previous year was not liable to inclusion in the assessee's total income having regard to the provisions of sections 28 and 145 of the Act ?" The facts of the case giving rise to this reference, briefly stated, are as follows: (a) The assessee is a banking company (hereinafter referred to as "the assessee-bank"). The relevant assessment years are 1973-74, 1974-75 and 1975-76. The assessee-bank followed a policy of classifying the loans into "ordinary loans" and "problem loans". "Problem loans" were those which were problematic from the point of view of recoverability. In order to ensure effective credit control, the assessee used to scrutinise the loan portfolio at regular intervals and classify the loans into different categories. All loan accounts in respect of which interest payments were not forthcoming for a period of 180 days or more and in respect of which the principal amounts were in jeopardy were placed on a non-accrual basis in the books of account of the assessee and the interest thereon was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l assessment made by him. The above amounts were added to its income for the two assessment years by reopening the assessments under section 147(b) of the Act whereas for the assessment year 1975-76, the addition was made in the original assessment itself. (b) The assessee appealed against the orders of reassessment for the first two years and the order of assessment for the third year before the Commissioner of Income-tax (Appeals). The Commissioner affirmed the reopening of the assessments for the first two assessment years. However, on the merits, for all the three years the Commissioner decided in favour of the assessee on the ground, inter alia, that the assessee had been following the system of accounting regularly and consistently. (c) The Revenue appealed to the Tribunal. The Tribunal upheld the order of the Commissioner (Appeals) and dismissed the appeals of the Revenue. It was observed by the Tribunal that it was not a case where the assessee had changed its method of accounting and was trying to show that the same were bona fide and should be accepted. On the contrary, it was a case where the assessee has all along been following a particular system of accounting reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, renumber question No. 2 as question No. 1 and reframe it as under: "(1) Whether, on the facts and in the circumstances of the case and having regard to the system of accounting followed by the assessee-bank in its banking business, the Tribunal was right in law in holding that the interest recorded in the memorandum record in the relevant previous year was not liable to inclusion in the assessee's total income having regard to the provisions of sections 28 and 145 of the Income-tax Act, 1961 ?" Question No. 1 referred by the Tribunal is renumbered as question No. 2 and it shall be answered only if our answer to question No. 1 is in the negative and in favour of the Revenue. We now turn to the merits of question No. 1 set out above. We have perused the facts of the case and carefully gone through the order of the Tribunal and also the findings recorded by it. On perusal of the same, we find that the Tribunal has arrived at the following findings of fact : (1) That in order to ensure effective credit control, the assessee-bank had been following a policy of classifying certain loans as problem loans from the point of view of recoverability; (2) That for this purpose, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, whether it is incumbent upon the assessee to follow either of the two known systems of accounting, i.e., the cash system or the mercantile system of accounting. Though the cash system and mercantile system of accounting are the two most common systems of accounting prevalent in the country, there can be no dispute about the fact that there are also innumerable other systems of accounting besides these two systems. Such systems are commonly known as "hybrid systems of accounting". In such a system, there is certain element of both cash and mercantile systems. An assessee following such a system may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. If an assessee follows such a hybrid system and in respect of certain loan transactions does not follow the mercantile system of accounting for debiting interest to the accounts of the parties and crediting the same to the profit and loss account, no fault as such can be found with the system followed by the assessee. The only power the Income-tax Officer has in such cases is the power under the proviso to section 145(1) of the Act which permit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above decision is wholly misplaced in view of the factual findings of the Tribunal in this case. According to the assessee, in the case before the Supreme Court, the admitted position was that interest was charged on the doubtful loans by the assessee by debiting the concerned parties but instead of crediting the same to the profit and loss account, such interest was credited to a separate account called "Interest suspense account". It was in such circumstances, the Supreme Court held that having received the amount of interest in respect of the loans in question and having debited the parties with the amount of interest on such loans, it was not open to the assessee to keep the amount away from the assessable profits merely by not crediting it to the profit and loss account but to a separate interest suspense account. We have considered the rival submissions. We have carefully perused the above cited decision of the Supreme Court. The facts of the case as set out by Sabyasachi Mukharji J. (as his Lordship then was) in his judgment on page 134 of the report, so far as relevant, are as follows : The assessee was a subsidiary bank of the State Bank of India. It used to main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho had himself shown certain income in his accounts on the mercantile basis as income, can claim the same to be excluded from his income for the purpose of taxation by resorting to the real income theory. The Supreme Court was required to answer how far the concept of real income could defeat accrual of income in any particular case according to the well recognised theory of accounting principles which are accepted by the legal standards so far followed. It is evident from the above that before the Supreme Court, it was not the case of the assessee that the income had not accrued to it. The assessee itself had maintained its accounts in respect of the so-called "sticky" loans on the mercantile basis and debited the accounts of the parties with the amount of interest which formed part of its income. The assessee, however, wanted to keep the said amount separately in an "Interest suspense account" to avoid taxation in the relevant assessment year by resorting to the real income theory, which was not approved by the Supreme Court. The position is just the reverse in the case before us. Here the undisputed position is that the accounts of the parties were not debited with the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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