BANQUE NATIONALE DE PARIS VS COMMISSIONER OF INCOMETAX, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 3227 (1999)

(a) C.B.R. Circulars--

----Powers of CBDT---CBDT cannot issue a circular which would override or detract from provisions of Act---Indian Income Tax Act, 1961, S.119.

Circulars cannot override or detract from the provisions of the Act inasmuch as section 119 of the Income Tax Act, 1961, has empowered Central Board of Direct Taxes to issue orders, instructions or directions for the proper administration of the Act. This has been laid down by the Supreme Court in Kerala Financial Corporation v. CIT (1994) 210 ITR 129. The judgment of the Supreme Court was not .per incuriam. The decision in Navnit Lal C. Javeri v. K.K. Sen, AAC of IT (1965) 56 ITR 198 (SC) was specifically considered by the Supreme Court in K.P. Varghese v. ITO (1981) 131 ITR 597 which in turn was specifically considered by the Supreme Court in Kerala Financial Corporation v. CIT (1994) 210 ITR 129. In the circumstances, the doctrine of per incuriam is not applicable. The decision of the Supreme Court in Kerala Financial Corporation v. CIT (1994) 210 ITR 129 is final and binding.

(b) Income-tax---

----Income---Accounting---Interest---Accrual of income ---Assessee following mercantile system of accounting---Interest on sticky advances accrues and is assessable---Indian Income Tax Act, 1961.

Interest of Rs.3,76,443 accrued the assessee on sticky advances in the previous year relevant to the assessment year 1975-76 which the Inspecting Assistant Commissioner included in the assessee's income. In appeal, the Commissioner of Income-tax (Appeals) deleted the same and this was upheld by the Tribunal. On a reference it was contended that in view of the Circular bearing No.201/21/84-ITA-II, dated October 9, 1984, interest on doubtful debts could not be charged to tax:

Held, that having regard to the admitted fact that the assessee's method of accounting was mercantile, the interest on sticky advances was liable to be assessed. The decision of the Supreme Court in Kerala Financial Corporation v. CIT (1994) 210 ITR 129 is final and binding and the said decision was clearly applicable to the controversy now sought to be raised on behalf of the assessee bank.

State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and Kerala Financial Corporation v. CIT (1994) 210 ITR 129 (SC) fol.

B.S. Bajaj & Sons v. CIT (1996) 222 ITR 418 (P&H); CIT v. Sriram Agarwal (1986) 161 ITR 302 (Pat.); Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913 (SC); Gautam (C.B.) v. Union of India (1993) 1999 ITR 530 (SC); Navnit Lal C. Javeri v. K. K. Sen, AAC of IT (1965) 56 ITR 198 (SC); State Bank of Travancore v. CIT (1977) 110 ITR 336 (Ker.) and Varghese (K. P.) v. ITO (1981) 131 ITR 597 (SC) ref.

(c) Income-tax---

----Interest on securities---Business---Discount on treasury bills---Assessable as interest on securities---Indian Income Tax Act, 1961.

Discount on treasury bills is assessable as interest on securities.

British Bank of the Middle East v. CIT (1998) 233 ITR 251 (Bom.) fol.

(d) Income-tax---

----Business expenditure---Disallowance of expenditure beyond prescribed limit---Expenditure resulting in benefit or amenity to exployees-- Expenditure on repairs and maintenance of flats owned or leased by company for housing employees---Expenditure must be taken into account for purposes of S.40A(5)---Indian Income Tax Act, 1961, S. 40A(5).

Expenses incurred on the repairs and maintenance of the flats owned by and/or taken on lease by the company ought to be considered as perquisites for the purposes of computing the disallowance under section 40A(5).

Lubrizol India Ltd. v. CIT (1991) 187 ITR 25 (Bom.) fol.

R. Muralidharan with S.E. Dastur, Senior Counsel instructed by Crawford Bayley & Co. for the Assessee.

R.V. Desai and B.M. Chatterjee for the Commissioner.

JUDGMENT

S. H. KAPADIA, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions of law for the opinion of this Court at the instance of the assessee as well as at the instance of the Revenue:

At the instance of the assessee:

"(1) Whether, on the facts and in the circumstances of the case, discount on treasury bills is assessable as income from business and not as 'interest on securities' consequently it is necessary to apportion the expenses by way of salaries and perquisites for purposes of section 40A(5) of the Act?

(2) Whether, on the facts and in the circumstances of the case the Tribunal was right in law in holding that the expenses incurred on the repairs and maintenance of the flats owned by and/or taken on lease by the company ought to be considered as perquisites for the purposes of computing the disallowance under section 40A(5) of the Act?"

At the instance of the Revenue:

"(3) Whether, on the facts and in the circumstances of the case, having regard to the admitted fact that the assessee's method of accounting was mercantile, the Tribunal was right in holding that the interest of Rs.3,76,449 for the assessment year 1975-76 was not liable to inclusion in the total income of the assessee?"

Both learned counsel for the parties state that as far as question No. 1 is concerned, the controversy therein is squarely covered by the decision of this Court in British Bank of the Middle East v. CIT (1998) 233 ITR 251. In view of this, following the above decision, question No. 1 is answered in the negative, i.e., in favour of the assessee and against the Revenue.

As regards question No.2, both learned counsel for the parties state that the controversy therein is covered by the decision of this Court in Lubrizol India Ltd. v. CIT (1991) 187 ITR 25. Question No.2 is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

As regards question No.3, the interest of Rs.3,76,443 accrued to the assessee on sticky advances in the previous year relevant to the assessment year 1975-76 which the Inspecting Assistant Commissioner included in the assessee's income. In appeal, the Commissioner of Income-tax (Appeals) deleted the same following his earlier order for the assessment year 1973-74 which came to be upheld by the Tribunal. That order of the Tribunal became final as the Department did not seek reference. Hence, following its earlier decision, the tribunal in the present assessment year 1975-76 came to the conclusion that interest on sticky advances cannot be included in the assessee's income. However, relying upon the judgment of the Kerala High Court in State Bank of Travancore v. CIT (1977) 110 ITR 336, since upheld by the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102, the Department sought reference which was opposed by the assessee. The assessee relied upon the judgment of the Bombay High Court in CIT v. Central Bank of India. In the light of different views held by different High Courts the Tribunal referred the, above question No.3 to this Court for opinion.

Learned counsel for the assessee, however, contended that in view of the Circular bearing No.201/21/84-ITA-II, dated October 9, 1984, interest on doubtful debts cannot be charged to tax. He contended that the view expressed by the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102 that the circular issued by the Board cannot detract from the Act is a view which is in direct conflict with the earlier view of the apex Court in Navnit Lal C. Javeri v. K.K. Sen, AAC of IT (1965) 56 ITR 198. According to learned counsel for the assessee even the circular which deviated from the provisions of the Act would still be binding on the Assessing Officer. According to learned counsel this was the view expressed by the Supreme Court in Navnit Lal C. Javeri's case (1965) 56 ITR 198 which was also followed subsequently by the Supreme Court in Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913 and in K.P. Varghese v. ITO (1981) 131 ITR 597. Learned counsel for the assessee accordingly submitted that the view expressed by the Constitution Bench of the Supreme Court in Navnit Lal C. Javeri's case (1965) 56 ITR 198 was not brought to the notice of the Supreme Court in the subsequent decision in State Bank of Travancore's case (1986) 158 ITR 102 and since the judgment of the Supreme Court in Navnit Lal C. Javeri's case (1965) 56 ITR 198 was delivered by the Constitution Bench of five Judges, the opinion of the larger Bench must prevail. At this stage, we may mention that we invited the attention of learned counsel for the assessee to the subsequent decision of the Supreme Court in Kerala Financial Corporation v. CIT (1994) 210 ITR 129 in which an identical contention was raised on behalf of the assessee. After considering the judgment of the Supreme Court in K.P. Varghese's case (1981) 131 ITR 597 which has followed the judgment of the Constitution Bench of the Supreme Court in Navnit Lal C. Javeri's case (1995) 56 ITR 198, the apex Court came to the conclusion that the circulars issued by the Board cannot detract from the provisions of the Income-tax Act. In this connection, the Supreme Court observed at page 134 as follows:

"Shri Salve has made heroic efforts to satisfy us that the majority view may be taken as per incuriam inasmuch as it had not applied its mind to the effect of some circulars issued by the concerned authorities as empowered by section 119 of the Act. This is sought to be brought home to us by referring to the observations of Mukharji, J., at the end of paragraph 42 (at page 139 of 158 ITR) that in the appeals the Court was 'not concerned with the actual effect of these circulars and these need not be set out and examined.' This observation had been made after noting the circulars to which the attention of the Court had been drawn.

Though it is correct that among the circulars brought to the notice of the Court the one which Shri Salve mentions, namely, that issued in October, 1984, was not brought to the notice of the Bench deciding the aforesaid case, that is not material, because we are in agreement with Mukharji, J., when he stated at the end of paragraph 43 (at page 139 of 158 ITR) that the circulars 'cannot detract from the Act'."

The subsequent judgment of the apex Court in Kerala Financial Corporation's case (1994) 210 ITR 129 has affirmed the view in State Bank of Travancore's case (1986) 158 ITR 102 (SC) that circulars cannot deviate from the Act. We do not find any merit in the contention of the assessee that the judgment of the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129 was per incuriam as it did not consider the decision of the Supreme Court in Navnit Lal C. Javeri's case (1965) 56 ITR 198. As stated hereinabove, the judgment of the Supreme Court in Naunit Lal C. Javeri's case (1965) 56 ITR 198 was followed by the judgment of the Supreme Court in K.P. Varghese's case (1981) 131 ITR 597 which, in turn, has been discussed by the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129 in which it has been laid down following the judgment of the Supreme Court in State Bank of Travancore's case (1986) 158 ITR 102 (SC) that the circulars cannot override or detract from the provisions of the Act inasmuch as section 119 has empowered the Central Board of Direct Tales to issue orders, instructions or directions for the proper administration of the Act. In Kerala Financial Corporation's case (1994) 210 ITR 129 (SC), on the above point, the Supreme Court has observed at page 135 as follows:

"Shri Salve would, however, urge that a little different view of the matter had been taken by a two-Judge Bench of this Court in K.P. Varghese's case (1981) 131 ITR 597, in which it was observed at page 613 that circulars issued under the aforesaid provisions are binding on all officers 'even if they deviate from the provisions of the Act'. As to what was sought to be conveyed by the word 'deviate' is not clear to us. This much, however, is apparent that this Court did not mean, while saying as above, that circulars can override any provisions of the Act or to put it in the language of Mukharji, J., detract from the Act. Though Shri Salve has urged that the decision in K.P. Varghese's case (1981) 131 ITR 597 (SC) has been affirmed by a Constitution Bench in Gautam (C.B.) v. Union of India (1993) 199 ITR 530 (SC), reference to that case shows that K.P. Varghese's case (1981) 131 ITR 597 (SC) was mentioned in paragraph 22 (at page 548 of 199 ITR) while stating that the conclusion arrived at, namely, that the provisions of Chapter XX-C of the Act are to be resorted to only where there is significant undervaluation of the immovable property with a view to evading tax, finds support from the decision in K.P. Varghese's case (1981) 131 ITR 597 (SC). This shows that what was stated about permissibility of circulars to 'deviate' from the provisions of the Act was not the one which was affirmed by the Constitution Bench.

The fact that the circular to which Shri Salve has referred is one which had been issued in exercise of the powers conferred by section 119 of the Act has no significance in so far as the point under consideration, namely, whether the circular can override or detract from the provisions of the Act is concerned, 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 the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by Parliament. Such a contention cannot seriously be even raised.

The result is that we follow and affirm the view taken by the majority by this Court in State Bank of Travancore v. CIT (1986) 158 ITR 102 and hold that the interest which had accrued on the sticky advance has to be treated as income of the assessee and as such taxable. We would add that if ultimately it is established by the assessee that the advance has taken the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law."

In the circumstances, we do not find any merit in the contentions advanced on behalf of the assessee that the decision of the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129 was per incuriam. The said decision is binding on this Court.

Learned counsel for the assessee, however, relied upon the decision of the Patna High Court in CIT v. Sriram Agrawal (1986) 161 ITR 302. The said judgment is delivered on April 21, 1986, i.e., prior to the decision of the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129. Hence, the decision of the Patna High Court has no application to the facts of the present case.

Learned counsel for the assessee also relied upon the decision of the Punjab and Haryana High Court in B.S. Bajaj & Sons v. CIT (1996) 222 ITR 418. As far as the said decision is concerned, it may be mentioned that although reliance was placed in the said case on the decision of the Supreme

Court in Kerala Financial Corporation's case (1994) 210 ITR 129, the Court has made it very clear that it need not go into the controversy as the Circular bearing No.329 (see (1982) 135 ITR (St.) 7), dated February 22, 1982, was only clarificatory and in the circumstances, the High Court refused to go into the decision of the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129. In any event, we do not agree with the view taken by the Punjab and Haryana High Court that there is conflict of opinion between the decisions of the Supreme Court. As stated hereinabove, the decision in Navnit Lal C. Javeri's case (1965) 56 ITR 198 (SC) was specifically considered by the Supreme Court in K.P. Varghese's case (1981) 131 ITR 597 which in turn was specifically considered by the Supreme Court in Kerala Financial Corporation's case (1994) 210 ITR 129. In the circumstances, the doctrine of per incuriam is not applicable in this case.

In the circumstances, we are clearly of the opinion that the decision of the Supreme Court in Kerala Financial Corporations case (1994) 210 ITR 129 is final and binding and the said decision is clearly applicable to the controversy now sought to be raised on behalf of the assessee-bank. We, therefore, hold that the said question is no more res integra. We further hold that question No.3 is squarely covered by the decision of the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102 and in Kerala Financial Corporation's case (1994) 210 ITR 129. Accordingly, question No.3 is answered in the negative, i.e., in favour of the Department and against the assessee .

Reference stands disposed of accordingly with no order as to costs

M.B. A./38/FC

Order accordingly.