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TMI Blog2020 (1) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings u/s 143(3) of the Act, hence it is not a new tangible material therefore reassessment proceedings is bad in law and not valid in the eye of law. We note that in the case of Indian and Eastern Newspaper Society Vs. CIT [ 1979 (8) TMI 1 - SUPREME COURT ] wherein it was held that an error discovered on a reconsideration of the same material (and no more) does not give AO power to assume jurisdiction to make reassessment. The aforesaid view on the above proportion has been reiterated by the Apex Court in A.L.A. Firm vs. CIT [ 1991 (2) TMI 1 - SUPREME COURT ] CIT(A) failed to appreciate that the A.O. has already made the scrutiny assessment u/s.143(3) in the assessee`s case and looked into all details and documents including audited balance sheet and Tax Audit Report submitted to him and has made several additions on the basis of said Balance sheet and Tax Audit Report. From the reasons recorded (Page-3 of Paper Book) it is clear that the assessment has been reopened on the basis of Clause-18 of Schedule-22(B) of Notes on Accounts given in the Balance sheet. The said balance sheet and clause-18 alleged by the A.O. was already before the A.O. during the original assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a consolidated order is being passed for the sake of convenience and brevity. 3. We take first assessee s appeal in ITA No.2552/Kol/2017 for Assessment Year 2003-04. The grounds of appeal raised by the assessee are as follows: 1. FOR that the Ld. CIT(Appeals) was wrong and unjustified in upholding the initiation of proceedings u/s.147 of the I. T. Act, 1961 and making of the re-assessment u/s.147/143(3). He failed to appreciate that the conditions precedent for reopening of the assessment did not exist and were not satisfied in this case. There was no fresh material and the reopening of assessment was on mere change of opinion. 2. FOR that the Ld. CIT(Appeals) erred in upholding the addition made by the A.O. as notional interest on loan of ₹ 228.38 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 3. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before or at the time of hearing of this appeal. 4. The facts of the case which can be stated quite shortly are as follows: the assessee company filed its return of income on 28.11.2003 declaring total loss of Rs. (-)1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacs thereon as good and recoverable. Since the company was following mercantile system of accounting as disclosed in the tax audit report, it was required to credit the interest on loans of ₹ 228.38 lacs given to other companies, to the Profit and Loss account unless the amount was declared bad debt. The same amount was not added back during assessment u/s 143(3) of the Act. Therefore, the AO in the reopened assessment, made addition to the tune of ₹ 1,37,66,000/-. 5. Aggrieved by the order of the ld. AO, the assessee filed an appeal before the ld. CIT(A) who has confirmed the action of the Assessing Officer. 6. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. The ld Counsel for the assessee reiterated the submissions made before the authorities below, and on the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Kelvinator of India (supra) (reported in 320 ITR 561(SC)) it was held that though the power to reopen under the amended section 147 is much wider, one needs to give a schematic interpretation to the words reason to believe failing which section 147 would give arbitrary powers to the AO to re-open assessments on the basis of mere change of opinion , which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. The AO has no power to review; he has the power to reassess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the AO. Hence, after 1.4.1989, the AO has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. In reassessment proceedings, the AO took the stand that the assessee company has not accrued interest on the loan of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Now we shall take ITA No.2553 and 2554/Kol/2017 for Assessment Years 2004-05 2006-07 and to adjudicate these appeals we take lead case in ITA No.2553/Kol/2017 for Assessment Year 2004-05. The grounds of appeal raised by the assessee in its lead case are as follows: 1. FOR that the Ld. CIT(A) erred in upholding the addition of ₹ 34,39,500/- made by the A.O as notional interest on loan of ₹ 229.30 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 2. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before or at the time of hearing of this appeal. 11. Brief facts qua the issue are that during the assessment proceedings the AO noticed that in the notes of accounts under Schedule-22 forming a part of the balance sheet, the assessee company had not credited in profit and loss account, the interest income accrued during the relevant financial year on principal amount of ₹ 229.30 lakh, considering the same as doubtful of recovery. But the principal Loan of ₹ 229.30 lakh was considered as good and recoverable. Since the assessee company is following merca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest on the above loans. The note on account under Schedule 22 of nots to accounts is a routine one and it does not say about the interest accrued during the year but speak about interest of ₹ 137.25 lacs receivable upto 31.03.2000. The ld Counsel provided a copy of the balance sheet which is enclosed as annexure-H. We note that Ld. CIT(A) failed to appreciate the arguments of the assessee that no interest was accrued after 01.04.2000 which was mutually agreed with the loan debtor. It was a Board of Director's decision (Page-13 of the Paper Book) that no interest will be charged w.e.f. 01.04.2000. Therefore, question of any interest accruing after 01.04.2000 does not arise at all. In fact in assessment year 2001-2002 which was the first year of non-charging of interest, no addition has been made on account of accrued interest and thus Board's decision has been accepted by the A.O. Now making an addition in A.Y.2003-2004 and A.Y 2004-05 on account of accrued interest which has been accepted in earlier year, is wrong. For that we rely on the following judgments: (i)..The Hon`ble Supreme Court in the case of UCO Bank -Vs - CIT - 237-ITR-889 (SC), held as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth edn., at page 1089, state as follows : 'Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the loan account. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised. - Vide State Bank of Travancore's case (supra) (p. 120). The assessee's method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. 5. Under section 145 of the Act, income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated 20-6- 1978 is modified to this extent. The same circular has also further clarified that up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier circular dated 6-10- 1952 as the said circular was withdrawn only in June 1978. The new procedure under the circular of 9-10-1984 will be applicable for and from the assessment year 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Board's circular of 6-10-1952 would be applicable; while from the assessment year 1979-80, the Board's circular of 9-10- 1984 is made applicable. In the present case, the assessment was made on the basis of the Board's circular of 9-10-1984, since the assessment pertains to the assessment year 1981-82 to which the circular of 6-10-1984 is applicable. What is the status of these circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. The question whether interest earned, on what have come to be known as 'sticky' loans, can be considered as income or not until actual realisation, is a question which may arise before several ITOs exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such 'accrual' of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119. Such a circular is binding under section 119. The circular of 9-10-1984, therefore, provides a test for recognising whether a claim for interest can be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 12(1B). 8. A similar view of the Board's circulars has been taken in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/ 7 Taxman 13 (SC) by a Bench of two Judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. The Bench has held that circulars of Board are legally binding on the revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnitlal C. Javeri's case (supra) this Court observed that circulars issued by the Board under section 119 are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji Co. v. CIT [1990] 183 ITR 1/ 49 Taxman 87, a Bench of three Judges of this Court has also taken the view that circulars beneficial to the assessee which tone down the rigour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 10-1952 and its withdrawal by the second circular of 20-6-1978. The majority appears to have proceeded on the basis that by the second circular of 20-6-1978, the Board had directed that interest in the suspense account on 'sticky' advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of 9-10-1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of 9-10-1984, does not appear to have been pointed out to the Court. What was submitted before the Court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circum-stances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged in the light of the provisions of the Act, the principles of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact, State Bank of Travancore's case (supra) has already been distinguished in the case of Keshavji Ravji Co. (supra) by a Bench of three Judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It, being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force, it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Act. 13. The appeal is, therefore, allowed and the question is answered in favour of the assessee and against the department. Civil Appeal Nos. 9885-87 of 1996 and 10408 of 1996 14. These two appeals are filed by Tamil Nadu Industrial Investment Corpn. Ltd. The question raised is similar to the question which we have considered in Civil Appeal No. 235 of 1996 pertaining to the United Commercial Bank Ltd. In these two appeals, the relevant assessment years are 1972-73. 1973-74, 1974-75 and 1976-77. During these assessment years the circular which was in force was the circular of 6-10-1952. This circular, unlike the later circular of 9-10-1984 which applies to banking companies, applies to interest accruing to a money-lender on loans entered in a suspense account because of the extreme unlikelihood of their being recovered. The circular is widely wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were also allowed by the Assessing Officer in subsequent years. These facts lead to the inescapable conclusion that realisation of even the principal amount was in jeopardy and, therefore, there cannot be said to be any real accrual of income by way of interest. We find no fault in this view taken by the Tribunal and are of the opinion that no substantial question of law arises for our consideration. 12. The appeal is dismissed. 14. We note that Hon`ble Supreme Court in the case of UCO Bank -Vs - CIT - 237-ITR- 889 (SC) has held that tax should be imposed on the real income. We note that ld Counsel placed before the Bench the resolution of Board of Directors of the assessee company which clearly states that recovery of the interest is doubtful therefore interest had not been accrued by the assessee company. We note that there is no real accrual of interest to the assessee-company in respect of the loan advanced by it. Considering the bad financial position of the debtor companies, the management of the Company decided not to charge interest on the loans w.e.f. 01.04.2000 as mutually agreed with the loan debtor ( vide Board Resolution noted above). Therefore, we find force in the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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