1995 P T D 1212
[210 I T R 129]
[Supreme Court of India]
Present: Kuldip Singh and B.L. Hansaria, JJ
KERALA FINANCIAL CORPORATION and others
Versus
COMMISSIONER OF INCOME TAX
(Civil Appeals arising out of Special Leave Petitions (Civil) Nos. 6354 and 6355 of 1985, with Special Leave Petitions (Civil) Nos. 20013 of 1991, 7487 and 7489 of 1992 and 1875 of 1993.
(Special Leave Petitions (Civil) Nos. 6354 and 6355 of 1985 (Kerala Financial Corporation v. CIT) were against the judgment and order, dated October 24, 1984, of the Kerala High Court in Income Tax References Nos. 279 and 280 of 1979. The judgment of the High Court is reported as CIT v. Kerala Financial Corporation (1985) 155 ITR 228 (Ker.).
(Special Leave Petition (Civil) No. 20013 of 1991 (Banaras State Bank v. CIT) was against the judgment and order, dated July 26, 1991, of the Allahabad High Court in Income Tax Reference No. 109 of 1991.
(Special Leave Petitions (Civil) Nos. 7487 and 7489 of 1992 and 1875 of 1993 (ANZ Grindlays Bank v. CIT) were against the judgments and orders, dated June 3, 1991, March 12, 1991 and March 12, 1991, of the Calcutta High Court, respectively in Income Tax References Nos. 73 of 1988, 76 of 1987 and 266 of 1986).
(a) Income tax---
----Income---Accrual---Mercantile system of accounting---Bank---"Sticky loans"---Interest debited to debtor and credited to suspense account---Interest accrues.
Interest accrued on "sticky advances", which is debited to the account of the debtor on the mercantile system of accounting but the corresponding credit is taken to the suspense account, has to be treated as income of the assessee and as such taxable.
State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) fol.
(b) Circulars of Central Board of Revenue---
---- Cannot detract from or override provisions of Act---Indian Income Tax Act, 1961, S.119.
A circular of the Central Board of Direct Taxes under section 119 of the income Tax Act, 1961, cannot override or detract from the Act, inasmuch as what section 119 has empowered is to issue orders, instructions or directions for the "proper administration" of the Act or for such other purposes specified in subsection (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be. destructive of all the known principles of law as that would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament.
CIT v. Kerala Financial Corporation (1985) 155 ITR 228 affirmed.
CIT v. Maharajadhiraja Kameshwar Singh (1933) 1 ITR 94 (PC); Gautam (C.B.) v. Union of India (1993) 199 ITR 530 (SC); Mapp v. Oram (1969) 3 All ER 215 (HL); State Bank of Travancore v. CIT (1990) 186 ITR 187 (SC) and Varghese (K.P.) v. I.T.O. (1981) 131 ITR 597 (SC) ref.
P.S. Poti, Senior Advocate (N. Sudhakaran, Advocate with him) for Appellant in the appeal arising out of Special Leave Petitions (Civil) Nos. 6354 and 6355 of 1985.
H.N. Salve, Senior Advocate (Mrs. A.K. Verma and P.D. Tyagi, Advocates of Messrs J.B. Dadachanji & Co. with him) for Appellants in the appeals arising out of the other special leave petitions.
J. Ramamurthy and B.B. Ahuja, Senior Advocates (B.K. Prasad, B.S. Ahuja and D.S.Mehra, Advocates with them) for Respondents.
JUDGMENT
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).
Those advances are called "sticky" in commercial parlance whose recovery becomes highly improbable or doubtful. The interest accruing on such advances are debited to the concerned parties by those institutions which maintain their accounts on the mercantile system, and at the same time instead of carrying such an interest to the profit and loss account, the same is credited to a separate account styled suspense account or interest suspense account.
In State Bank of Travancore's case (1986) 158 ITR 102, this Court was called upon to decide as to how accrual of interest on such advances has to be taxed under the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The Bench differed in its ultimate conclusion and the majority view was taken by Mukharji, J., as he then was, with whom Misra, J., as he then was agreed. Tulzapurkar, J. was in the minority. As leading legal luminaries of the taxation world had appeared to assist this Court in answering the aforesaid question, all that could reasonably be said on both the sides was done by persuasive and forceful arguments advanced, inter alia, by Shri Palkhivala, Shri Desai and Dr. Pal. The fundamentals of law and principles of taxing, income were brought to the notice of the Court alongwith many decided cases of various Courts of the country and the English law.
The crux of the argument on behalf of the assessee was that accrual of interest on such advances does not produce real income, and so, despite the mercantile system of 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 value judgment only. It was opined that the question has to be considered from the point of view of real income "taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together; but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued, cannot be made "no income".
The learned Judge thereafter formulated eight propositions, which according to him emerged as a result of the discussion undertaken. These propositions mentioned in paragraph 69 read as below (at page 155):
"(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
(2) The concept of real income would apply where there has been a surrender of income which, in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue.
(3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed.
(4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act.
(5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee.
(6) The conduct of the parties in treating the income in a particular manner is material evidence 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 section 145 of the Act, to which our attention has been invited by Shri Salve also, Mukharji, J. stated in paragraph 46 (at page 140) that the method of accountancy -regularly employed by the assessee helps the computation of income, profits and gains under section 28 of the Act and the taxability of that income under .the Act will then have to be determined. The question in this context is whether the income which has been computed according to the method of accounting followed regularly by an assessee can be diminuted or diminished by any notion of real income, which aspect has to be judged in the light of the well-settled principles. What these principles are, we have already noted.
Shri Salve has, in this connection, brought to our notice the decision of the Privy Council in CIT v. Maharajadhiraja Kameshwar Singh (1933) 1 ITR 94 at pages 101-102 of which it has been stated that what the Income Tax Officer has to compute is the assessee's income and when the assessee "so chooses to treat it". This observation has relevance only qua the method of accounting adopted by the assessee. If it be the mercantile system, the assessee chooses to treat the income on the basis of accrual of the same; but if the assessee were to adopt the cash system, he chooses to treat the income actually received as his income. Once the selection relating to the method of accounting has been made, what has, been observed by Mukharji J, in paragraph 46 (at page 140 of 158 ITR) follows. The Privy Council'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 /10/.