COMMISSIONER OF INCOME-TAX VS INDIAN OVERSEAS BANK LTD.
1998 P T D 2397
[222 I T R 77]
[Madras High Court (India)]
Before Thanikkachalam and Jayarama Chouta, JJ
COMMISSIONER OF INCOME-TAX
versus
INDIAN OVERSEAS BANK LTD.
Tax Case No.1281 and Reference No.448 of 1980, decided on 31/07/1995.
Income-tax---
----Capital gains---Computation of capital gains---Deductions---Cost of acquisition--- Banking company---Nationalisation of Bank---Compensation awarded---Sticky advances credited to separate account but on which Bank had paid income-tax---Deductible from compensation as part of cost of acquisition---Indian Income Tax Act, 1961, Ss.45 & 48.
Consequent upon the nationalisation of banks and acting under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 the banking business of the assessee-company was taken over by the nationalised institution, the Indian Overseas Bank, on July 18, 1969. For the assessment year 1970-71, the assessee worked out a capital loss of Rs.19,19,539 originally and subsequently at a revised figure of Rs.29,06,396. This was based on the value of the undertaking as on December 31, 1968. The Income-tax Officer, in working out the capital gains, reduced the cost of acquisition of the assets by a sum of Rs.19,78,065 which represented what was called rebated interest. On account of peculiar system of noting outstandings adopted by the assessee from year to year where an account was not active for a period such as six months or more, the interest accruing to the assessee in this account was not transferred to the profit and loss account but to a separate account called "rebated interest account". According to the assessee, this represented actual interest accrued. The Tribunal held that the sum of Rs.19,78,065 was deductible. On a reference:
Held, that the assessee followed the mercantile system of accounting. The sum of Rs.19,78,065 was credited for the assessment year 1970-71. This was not a bad debt or even an amount which was not recoverable. The assessee had paid income-tax on this amount. As and when the advance become operative the corresponding amounts would be transferred from the rebated interest account to the profit and loss account. Therefore, the amount accumulated in the rebated interest account could not be treated as liabilities. The Tribunal was right in holding that the sum of Rs.19,78,065 representing "rebated interest" should be added to the "cost of acquisition" of the assessee undertaking as on July 18, 1969, and should, therefore, be deducted from the compensation received by the assessee for the purpose of computing the "capital gains" assessable for the assessment year 1970-71.
CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC); State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Kar.) ref.
N. V. Balasubramaniam for the Commissioner.
C. V. Mahalingam for the Assessee.
JUDGMENT
In compliance with the direction of this Court contained in T.C. No.472 of 1977, the Tribunal has referred the following question for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.19,78,065 representing 'rebated interest' should be added to the 'cost of acquisition' of the assessee undertaking as on July 18, 1969, and should, therefore, be deducted from the compensation received by the assessee for the purpose of computing the 'capital gains' assessable for the assessment year 1970-71?"
Consequent upon the nationalisation of banks and acting under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the banking business of the assessee-company was taken over by the nationalised institution, the Indian Overseas Bank, on July 18, 1969. For the assessment year 1970-71, the assessee worked out a capital loss of Rs.19,19,539 originally and subsequently at a revised figure of Rs.29,06,396. This was based on the value of the undertaking as on December 31, 1968. The Income-tax Officer, in working out the capital gains, reduced the cost of acquisition of the assets by a sum of Rs.19,78,065 which represented what was called "rebated interest". On account of a peculiar system of noting outstandings adopted by the assessee from year to year where an account was not active for a period such as six months or more, the interest accruing to this account was not debited (sic) to the profit and loss account but to a separate account called "rebated interest account". According to the assessee, this represented actual interest accrued but was not in the method of account followed merely debited (sic) to the profit and loss account direct. The Income-tax Officer held that this interest had not been credited and could not be taken account of since there was uncertainty of realisation of the disputed loans and advances. On appeal, the Appellate Commissioner held that the sum of Rs.19,78,065 should not be deducted from the value of the advances. Accordingly, the Appellate Assistant Commissioner deleted the sum of Rs.19,78,065.
On appeal, the Appellate Tribunal found that the sum of Rs.19,78,065 really represented amounts which should have been debited to the party's account and transferred to the profit and loss account. The mere fact that in respect of parties where the accounts were not active for a period entries for interest were not passed regularly, it did not mean that this interest had not accrued to the assessee or could not be claimed by the assessee. Therefore, according to the Tribunal, this amount does not represent any bad debt as misunderstood by the Income-tax Officer. Accordingly, the Tribunal confirmed the order passed by the Appellate Assistant Commissioner and held that the assessment be reduced by Rs.19,78,065.
Learned standing counsel for the Department submitted that the debt itself was doubtful and it was shown by the assessee as can be seen from the fact that a separate account of rebated interest was made out. Therefore, the sum of Rs.19,78,065 could not be excluded. It was also pointed out that the bank never treated this interest as its income. Learned standing counsel further submitted that the Tribunal, instead of following the provisions? contained in section 45 read with section 48 of the Act, misdirected itself in following the accounting principles for granting the relief to the assessee in so far as the sum of Rs.19,78,065 is concerned. According to learned standing counsel, the loan in the present case is a sticky loan and the interest due thereon is the income of the assessee as per the decision of the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102. Learned standing counsel contended that the Tribunal has not ascertained what is the cost of acquisition and what is the value of improvement in order to ascertain the value of the undertaking for the purpose of levying capital gains tax under section 45 of the Act. For these reasons, it was submitted that the Tribunal was not correct in holding that the assessee is entitled to a deduction of a sum of Rs.19,78,065 from the assessment.
On the other hand, learned counsel appearing for the assessee submitted that the rebated interest represents as much interest accrued as other interest. On account of a peculiar system of noting outstanding adopted by the assessee from year to year, where if an account is not active for a period such as six months or more, the interest accruing to his account is not debited (sic) to the profit and loss account but to a separate account called rebated interest account as and when the accounts get worked on again, the interests accruing or received are transferred to the profit and loss account and accounted for as income. The credit is given to a suspense account. This is not a bad debt or even an amount not recoverable. Learned counsel further pointed out that since the assessee is adopting the mercantile system of accounting, the above said income credited and the assessee has also paid tax on such income. For these reasons, it was stated that the Tribunal was correct in holding that the assessee is entitled to deduction of Rs.19,78,065 from the assessment of that year.
We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The fact remains that consequent on the nationalisation of banks and acting under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the banking business of the assessee was taken over by the Indian Overseas Bank. The assessee worked out a capital loss of Rs.19,19,539 on the transfer. This figure was subsequently modified to Rs.29,06,396. The undertaking was taken over on July 18, 1969. The assessee had drawn up a balance-sheet as on July .18, 1969. On the basis of this, the capital loss was worked out by the assessee again on Rs.59,33,891. This was done by revaluing the assets and adding an amount of Rs.19,78,065 as rebated interest. According to the assessee, it follows the mercantile system of accounting and Rs.19,78,065 was credited in this assessment year. This is not a bad debt or even an amount not recoverable. The assessee had paid income-tax on this amount. According to the assessee, the system of accounting followed by it is such that when the loan amount is not recoverable for a period of six months or more, it will be mentioned under the head "rebated, interest account'. As and when the interests accrued or received, they were transferred to the profit and loss account and accounted for as income. Ultimately, the assessee claimed the abovesaid sum of, Rs.19,78,065 as part of the value of the undertaking taken over under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. While considering the sticky loan and the interest accrued thereon, the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102 has held as under (headnote):
'...the interest on sticky' advances had accrued according to the mercantile system of accounting and the appellant had debited the respective parties with the interest. After the close of the accounting year, the appellant, without giving up the interest, which it could have, as a bad debt, did not offer it for taxation but carried it to the Interest Suspense Account'. Carrying a certain amount which had accrued as interest without treating it as a bad debt or irrecoverable interest but keeping it in suspense account was repugnant to section 36(1)(vii) read with section 36(2) of the Income tax Act, 1961. The concept of real income could not be so read as to defeat the object and the provision of the statutory enactment. Even if in a given circumstance, the amount might be taken to the Interest Suspense Account for accounting purposes, that would not affect its taxability as such. The interest on 'sticky' advances was rightly treated as income which had accrued to the appellant. "
In CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, the Supreme Court, while considering the provisions of sections 2(14), 45, 48(ii), 49, 50 and 55(2)(3) of the Income tax Act, held as under (at page 299).
"Section 45 is a 'charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them, can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income Tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.
The point to consider then is whether if the expression 'asset' in section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying -the profits and gains on this transfer.
The mode of computation and deductions set forth in section 48 provide the principal basis for quantifying. the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under the head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset;
(ii) the cost of acquisition of the capital asset...'
What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indicate that section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is subsection (2) of section 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain."
Therefore, for levying capital gain tax under section 45 read with section 48, capital gain has gain has got to be ascertained after deducting from the total value of the undertaking the cost of acquisition and the cost of improvement. If there is no cost of acquisition, then there could be no question of levying capital gain tax under section 45 of the Act. A similar question came up for consideration before the Karnataka High Court in Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 wherein the High Court, considering the provisions of sections 2(14), 45 and 48 of the Income Tax Act, read with the Banking Companies (Acquisition and Transfer of Undertakings) Act, held as under (headnote):
"The term capital asset as defined in section 2(14) of the Income Tax Act, 1961, has a wide meaning and includes every kind of property as generally understood except those that are expressly excluded in the definition. A business undertaking as a whole would constitute a capital asset within the meaning of section 2(14). However, in deciding whether income-tax can be levied on capital gains, the following points have to be taken into account ---(i) There are assets of different nature, those involving cost in the acquisition and those which could be acquired by way of production in which the cost element cannot be identified. But none of the provisions pertaining to 'capital gains' suggest that they include an asset in the acquisition of which no cost at all can be conceived; (ii) the cost of acquisition mentioned in section 48 implies a date of acquisition; and (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be described as an ' asset' within the meaning of section 45 and, therefore, its transfer is not subject to income-tax under the head 'Capital gains'."
In the present case, according to the assessee, the Income-tax Officer erred in reducing from the cost of the acquisition a sum of Rs.19,78,065 on the ground that this cannot be treated as interest due to uncertainty of realisation of the disputed loan and advances without proper, appreciating the nature of "rebated interest account. " The amount of Rs.19.78,065 represents accumulated interest receivable as advances which had been outstanding for a period beyond such specified periods without operation and, therefore, not credited to the profit and loss account. As and when the advances become operative the corresponding amounts would be transferred from the rebated interest account to the profits and loss account.
Therefore, the amount accumulated in the rebated interest account could not be treated as liabilities even though for the purpose of preparation of the balance-sheet they are included in the liabilities side. The assessee paid income-tax on this account. According to the decisions cited supra, this kind of sticky loans are income of the assessee. Therefore, there is no question of excluding this amount while ascertaining the cost of acquisition. In the instant case, the question is whether this kind of sticky loan can be included in the cost of acquisition. The answer is yes. Accordingly, the order passed by the Tribunal ire. holding that sticky loan should not be excluded while ascertaining the cost of acquisition is in order. Thus, we answer the question referred to us in the affirmative and against the Department. No cost. Counsel's fee Rs.1,000.
M.B.A./1518/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.