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TMI Blog2022 (12) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... the omission in Section 43D. Although, the amendment was sought to be made effective w.e.f. 1st April, 2018, but it was liable to be treated as retrospective in nature. In order to arrive at this view, reliance is made on the decision of Hon ble Supreme Court in Allied Motors case [ 1997 (3) TMI 9 - SUPREME COURT] It serves no purpose that the assessee, which is a non-scheduled bank, should include the NPAs/sticky loans in the relevant assessment year and then claim it as a bad debt in the next assessment year. There is no quarrel with the preposition of law settled by the judgments relied upon by the learned counsel for the appellant, but in view of the decision given in Allied Motors [ 1997 (3) TMI 9 - SUPREME COURT] we are of the opinion that the view taken by the Tribunal that the assessee was required to tax the interest on the sticky loans/NPAs on receipt basis, is liable to be upheld. Appeal dismissed. - ITA Nos. 82 & 83 of 2018 - - - Dated:- 7-12-2022 - The Hon ble Ms. Justice Sabina, Judge And The Hon ble Mr. Justice Sushil Kukreja, Judge. For the Appellant : Mr. Vinay Kuthiala, Senior Advocate with Ms. Vandana Kuthiala , Advocate For the Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank was not certain about the recovery of principal amount/interest. Hence, the bank had not made any entries in its books of account for the years in question with regard to interest due on NPA accounts. The assessing officer held that the assessee was required to show the interest on NPAs as income and consequently the income of the assessee was recomputed by the assessing officer by including the interest, which was liable to accrue on the loans etc. Assessee filed appeals before the Commissioner of Income Tax Appeals and the appeals were allowed by the appellate authority. 8. Aggrieved against the orders passed by the appellate authority, the revenue approached the Tribunal by way of appeals. Appeals with regard to assessment years 2012-13 and 2013-14 were clubbed and were dismissed by the Tribunal vide impugned order dated 31st January, 2018. 9. Learned counsel for the appellant-revenue has submitted that the assessee was a non-scheduled bank and was following mercantile system of banking. Hence, the assessee was required to credit the income of NPA or sticky loans and could claim the same as bad debt in the next year. The assessee could not draw any benefit under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of situation or the reality of a particular situation makes an income not to accrue, then very different considerations would apply. But where interest has accrued and the assessee has debited the account of the debtor the difficulty of the recovery would not make the accrual non-accrual of interest. 65. In CIT v. Devi Films (P) Ltd., the Madras High Court held that the regular mode of accounting only determined the mode of computing the taxable income and the point of time at which the tax liability was attracted. It would not determine or affect the range of taxable income or the ambit of taxation. It was further held that where no income had resulted, it could not be said that income had accrued merely on the ground that the assessee had been following the mercantile system of accounting. Even if the assessee made a credit entry to that effect still no income could be said to have accrued to the assessee according to the Madras High Court. If no income had materialised, it was pointed out, there could be no liability to tax on any hypothetical accrual of income based on the mercantile system of accounting followed by the asessee that had to be taken into account, but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot having accrued to the assessee. Sethuraman, J. who delivered the judgment of the bench noted the distinction between the James Finlay's case and the case before him in the Madras High Court. Dealing with the Calcutta case, Sethuraman, J. observed at page 395 that the waiver of interest would be inconsistent with the entries in the books, since the interest had been credited to the suspense account. As in the instant case before us in these appeals the learned judges of the Madras High Court also referred to Morvi Industries Ltd. where affirming the Calcutta High Court decision, it was found that the relinquishment by the assessee of its remuneration after it had become due was of no effect and that the amount was liable to be taxed. The Madras High Court felt that this Court had considered only in the light of the system of accounting followed by the assessee and further observed that this Court in the aforesaid decision had not been referred to the notion of real income. It is unfortunate that the High Court chose to side-track a binding decision of this Court on a wholly untenable ground. 11. Learned counsel for the appellant has also placed reliance on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out any order as to costs. 13. Learned counsel for the respondent, on the other hand, has opposed the appeals and has submitted that the Tribunal has rightly dismissed the appeals filed by the revenue. Admittedly, respondent Assessee is a non-scheduled bank. Suspense account is required to be created by each bank as per Reserve Bank of India Instructions. There was no justification in the assessee paying tax with regard to the sticky loans and then claim it as a bad debt in the next year. Section 43D of the Income Tax Act was substituted by Finance Act 1999 (27 of 1999) w.e.f. 1st April, 2000, whereas, it had been earlier inserted by Finance Act 1991 w.e.f. 1st April, 1991. Initially the said Section was applicable to scheduled bank, but thereafter, it was amended and was also made applicable to cooperative bank w.e.f. 1st April, 2018. A perusal of the objects at the time of addition of co-operative banks in Section 43D reveals that the same was done with an intention to cure the defect. 14. In support of his arguments, learned counsel for the respondent has placed reliance on the judgment of Hon ble Supreme Court in Allied Motors (P.) Ltd. versus Commissioner of Income-Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of India and Ors. [1991] 189 ITR 70., It was held that amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of statutory Interpretation, 4th Edn. Page 291, It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. In fact the amendment would not serve its object in such a situation unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained. 15. Learned counsel for the respondent has also placed reliance on the judgment of Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received. xxx xxx xxx Under Section 145 of the Income-Tax Act, 1961, 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 assessee; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income- tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as the Incometax Officer may determine. In the present case the method employed is entirely for a proper determination of income. xxx xxx xxx The question whether interest earned, on what have come to be known as sticky loans, can be considered as income or not until actual realization, is a question which may arise before several income tax officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining 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 consistent with the provisions of Section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... October, 1952 as the said Circular was withdrawn only in June, 1978. With effect from 1979-80 the new procedure prescribed under the 1984 circular would apply. The procedure prescribed is not relevant for our purposes. But it is clear that the circular issued in 1978 was effectively set aside and rendered ineffective. 9. Therefore, the assessment year in question in this appeal should have been dealt with by the Department in accordance with the 1952 Circular under which the interest on doubtful loans could not be brought to tax. 10. The decision of the High Court on the first question, having been based on the decision in State Bank of Travancore [1986] 158 ITR 102 (SC) must be held to be incorrect in view of the subsequent judgment of this Court in the case of UCO Bank Vs. CIT [1999] 237 ITR 889. 17. Learned counsel for the respondent has also placed reliance on the judgment of Hon ble Supreme Court in Commissioner of Income-Tax versus Alom Extrusions Ltd. [2009] 319 ITR 306 (SC), wherein it has been held as under:- 16. We find no merit in these civil appeals filed by the Department for the following reasons: firstly, as stated above, Section 43-B [main se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x law should be disallowed under Section 43-B of the Act while computing the business income of the previous year? That was a case which related to Assessment Year 1984-1985. The relevant accounting period ended on June 30, 1983. The Income Tax Officer disallowed the deduction claimed by the assessee which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under Section 43-B which, as stated above, was inserted with effect from April 1, 1984. It is also relevant to note that the first proviso which came into force with effect from April 1, 1988 was not on the statute book when the assessments were made in the case of Allied Motors (P) Limited (supra). However, the assessee contended that even though the first proviso came to be inserted with effect from April 1, 1988, it was entitled to the benefit of that proviso because it operated retrospectively from April 1, 1984, when Section 43-B stood inserted. This is how the question of retrospectively arose in Allied Motors (P) Ltd. [1997] 224 I.T.R. 677. This Court, in Allied Motors (P) Limited [1997] 224 I.T.R. 677 held that when a proviso is inserted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be read as retrospective. It would, therefore, operate from April 1, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that the Finance Act, 2003, will operate with effect from April 1, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of the Finance Act, 2003. 17. Before concluding, we extract hereinbelow the relevant observations of this Court in the case of Commissioner of Income Tax, Bangalore vs. J.H. Gotla, reported in [1985] 156 I.T.R. 323, which reads as under: We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the relevant previous year. These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years. 19. In the present case, at the time of assessment years in question, Section 43D of the Act did not refer to non-scheduled banks and only referred to scheduled banks. However, by Finance Act 2017, Cooperative banks were also included in the definition of Section 43D w.e.f. 1st April, 2018. At the time of passing of the Bill, it was specifically mentioned that the amendment will take place w.e.f. 1st April, 2018 and will accordingly apply in relation to assessment year 2018-19 and subsequent years. Hence, the learned counsel for the revenue has vehemently argued that Section 43D was not retrospective in nature, but it was to take effect w.e.f. 1st April, 2018. 20. On the other hand, learned counsel for the assessee has submitted that the amendment was to be interpreted, in terms of the objects, it sought to achieve and as the amendment was curative in nature to provide level playing field to the co-operative banks vis- -vis scheduled bank and to rationalize the scope of Section 43D, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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