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TMI Blog1999 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... total income. The Income-tax Department completed the assessment for the assessment year 1981-82 on February 28, 1985, by following the Central Board of Direct Taxes Circular No. F. 201/21 of 1984 ITA-II, dated October 9, 1984, excluding from the total income of the assessee, the said sum of Rs. 49,15,435 while computing the total income of the assessee. The Commissioner of Income-tax on examination of the assessment records considered the exclusion of the said sum of Rs. 49,15,435 to be erroneous and prejudicial to the interests of the Revenue. By his order dated March 5, 1987, he included the said amount in the total income of the assessee. On appeal, the Income-tax Appellate Tribunal, by its order dated October 14, 1988, allowed the appeal of the assessee. A reference was made to the High Court (see [1993] 201 ITR 162), at the instance of the Revenue under section 256(1) of the Income-tax Act. The following question was referred to the High Court : "Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the Commissioner of Income-tax's order under section 263 of the Income-tax Act, holding that when the assessment was comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an interest suspense account and carried forward and not treated as profit until actually received." Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, ninth edition, 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 v. CIT [1986] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular of October 6, 1952, which had been in force for twenty-six years was on account of the decision of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336. The Central Board of Direct Taxes, however, issued another circular of October 9, 1984, under which the Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to the assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated June 20, 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 October 6, 1952, as the said circular was withdrawn only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or -in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised 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 Income-tax Officers exercising jurisdiction in different parts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K. P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P. N. Bhagwati and E. S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K. P. Varghese v. ITO [1981] 131 ITR 597. There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K. K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the Department was a judgment of a Bench of two judges of this court in Kerala Financial Corporation v. CIT [1994] 210 ITR 129, where this court, following the majority view in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), held that interest which had accrued on a "sticky" advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes 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. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can overrid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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