9911796707
TMI Blog2002 (12) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid to the Reserve Bank of India is not disallowable ?" On a perusal of the statement of case as provided by the Tribunal it appeared that the Revenue had initially sought for referring as many as six questions for the opinion of this court. However, the Tribunal finding that two of the questions being academic in nature, inasmuch as similar questions had been answered by this court earlier did not deem it fit to refer the same. In respect of the other four questions the Tribunal has thought it fit to refer as is now referred for our opinion. The facts as emerge from the statement of facts by the Tribunal is that the respondent-assessee a nationalised bank carrying on the business of banking had been following the mercantile system of accounting for the purpose of computing its profits. The assessee had adhered to the mercantile system of accounting in respect of its transactions uniformly. However, it appears that in respect of certain categories of loans considered to be sticky loans which comprised three types of transactions, viz., (1) suit filed accounts ; (2) claims lodged accounts ; and (3) accounts provided for bad and doubtful debts, the interest income on these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the stand of the assessee. The Revenue appealed to the Appellate Tribunal, and the appeal having been dismissed by the Tribunal the Revenue had sought for reference of these questions for our opinion. The facts leading to the third question that has been referred for our opinion are that the assessee in the course of its banking activity is governed and regulated by the provisions of the Banking Regulation Act, 1949, and it is imperative that the assessee was required to comply with the provisions of section 24 of this Act in the course of its business activities and for having not complied with the same had been levied with the penal interest under the provisions of section 24(4)(a) of this Act which in all amounted to a sum of Rs. 10,37,035 during the accounting period relevant for the assessment year in question. It is the case of the assessee-bank that this amount paid by way of penal interest for certain infractions of the provisions of the Banking Regulation Act, 1949, being incidental and in the course of the business activities of the assessee and which was beyond the control of the assessee, should be allowed as a deductible expenditure under the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such the interest amount should be brought to tax without waiting for the receipt of such income. It is the submission of learned counsel in this regard that the apex court had occasion to consider the concept of real income in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 and it has been very clearly pointed out by the apex court that the accrual or arisal of the income is not dependent on the volition of the parties or on the conduct of the parties such as making entries in the books of account or in the ledgers indicating the debits and credits to the customer's account and to the bank's interest account, etc., but happens because of the operation of the law, because of the provisions of the Act, namely, section 5 of the Act, and having regard to the transactions between the parties. It is submitted that in respect of an assessee following the mercantile system of accounting the moment the assessee becomes entitled for receiving the income which had pens even at the stage of accrual or arisal the income becomes taxable and it cannot be postponed to any further period. If this principle is to be applied to the facts of the present case it is very obvious that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of accounting in respect of the interest on sticky loans for the past more than 35 years and that the Department having not only permitted but also having recognised the hybrid system of accounting followed by the assessee whereby the assessee has adopted the cash system, only in respect of interest on sticky loans and the mercantile system of accounting in respect of all other transactions. On this basis, it is the contention of the assessee that there is no reason why the assessee should not be permitted to follow the same system in the accounting year relevant for the assessment year in question. On this aspect the assessee's stand is that the Department having not taken any objection to the levy of tax on the method of accounting that is followed by the assessee for all these years the Revenue is not entitled to deny that method of accounting for the assessment year in question alone and to compel the assessee to follow the mercantile system of accounting even in respect of the interest on sticky loans. It is the case of the assessee that the assessee having been permitted to follow this hybrid system of accounting and no action having been taken for long on such hybrid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 and 1988-89, respectively). The Division Bench of this court had answered all these questions by the earlier decisions on different dates in favour of the assessee and against the Revenue. In this view of the matter, though it would have been proper for us to simply follow the opinion expressed by the earlier Division Bench and dispose of this reference also as learned standing counsel for the Revenue brought to our attention the orders passed in those references and submitted that the Bench having not given adequate reasonings for not following the decision of the apex court which is relied upon in this reference also in support of its case and the earlier Division Bench having proceeded on the premise that the decision of the apex court rendered in State Bank of Travancore v. CIT [1986] 158 ITR 102, having been subsequently noticed in the case of UCO Bank v. CIT [1999] 237 ITR 889 (SC), though it was noticed the said earlier decision in State Bank of Travancore's case [1986] 158 ITR 102 (SC) was explained and that was not followed having regard to the circulars that held the field at the relevant point of time it may be still necessary to look into these aspects of the matter f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the following decisions in support of his submission that the interest income on sticky loans also should be included in the accounting year corresponding to the assessment year in question on accrual basis, the income being real in nature and the assessee having become entitled to receive this income and not having given up its right to receive the same at any time before the income became due to the assessee. The decisions are : (1) E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) (2) CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) ; (3) CIT v. Swadeshi Cotton and Flour Mills Private Ltd. [1964] 53 ITR 134 (SC) (4) CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) (5) CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) (6) Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) (7) CIT v. V. Sampangiramaiah [1968] 69 ITR 159 (Mys) (8) CIT v. A. B. V. Gowda [1986] 157 ITR 697 (Karn) ; (9) State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) (10) UCO Bank v. CIT [1999] 237 ITR 889 (SC) ; (11) K. R. M. T. T. Thiagaraja Chetty and Co. v. CIT (No. 2) [1953] 24 ITR 535 (SC) (12) State Bank of India v. CIT [1986] 157 ITR 67 (SC) ; and (13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in ITRC Nos. 807 and 808 of 1998 dated January 24, 2000, in the case of CIT v. Vysya Bank Ltd. Before we take up discussion on the case law cited and relied upon by learned counsel in support of their respective submissions we think it will be profitable to mention as to what is the real controversy in issue and what issues are required to be addressed by this court to answer the reference. In this regard unfortunately learned counsel have not zeroed in on the real controversy that is required to be resolved as it arises in the context of the facts of the present case but have proceeded to support their respective submissions without so much as addressing as to point out either the fallacy or the irrelevance of the number of decisions relied upon by their counter part. To appreciate the real controversy it is necessary to understand the basic scheme of the Income-tax Act. Under the Act the total income of an assessee earned during the period of 12 months known as the previous year is brought to tax in the following or subsequent year known as the assessment year applying the rate/rates of the Income-tax Act as provided by the Finance Act of each year corresponding to an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is to be subjected to tax not much choice is given either to the Revenue or to the assessee but it is dependent on the application of the provisions of the Act. It is in this back ground that learned counsel for the Revenue is canvassing the submissions that even the interest attributable to the sticky loans having accrued or arisen to the assessee during the previous year relevant to the assessment year in question and such an income being also real in nature and the assessee having not either renounced or given up the right to receive such income before such accrual or arisal and, on the other hand, the assessee having consciously indicated that it is entitled for such interest even on sticky loans which the borrowers from the bank were not in a position to pay, the assessing authority is duty bound to include this income as part of the total income of the assessee computed for the previous year in question and the mere fact that it was not being so included in the earlier years would not make any difference to the legal position and as such the assessment for the year by which the interest on sticky loans has been included in the total income of the assessee shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity or any contravention of any of the provisions of the Act by the assessee in following the method of accounting which it has been doing then there is no scope for compelling the assessee to offer such income to tax for the accounting period other than the one in which the assessee has to offer the income to tax as per the method of accounting followed by the assessee. In this situation we will briefly refer to the various decisions cited by learned counsel and indicate our conclusions on the same. In E. D. Sassoon's case [1954] 26 ITR 27, the Supreme Court was concerned with the liability of an assessee which had sold away its rights to receive certain income in the nature of commission paid at a percentage of the profits earned by the principal company payable to its managing agent which in turn had been assigned in favour of the two other companies by the assessee. The question was whether in respect of the assessment year 1944-45 the assessee was liable to pay tax on accrual basis in respect of the proportionate income attributable to the part of the year prior to the assignment effected by the assessee. Under the managing agency terms the assessee was entitled to receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the transferor-company and the transferees also having received the entire commission then only will be liable in respect of such income attributable under the entire commission and were liable to tax. We are afraid that the principle laid down by the Supreme Court in this case and the ratio of the case does not in any way further the case of the Revenue in the instant case. We fail to understand or appreciate the relevance of this decision to the facts of the present case particularly in the context of the question that has been referred for our opinion. CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) is the next case referred to and relied upon by learned counsel for the Revenue. In this case the question for consideration was as to what point of time income accrues or arises. It was held that if in reality income accrued or arose in a subsequent year it cannot be relegated or brought to tax as income of an earlier year on the basis that it is attributable to the transaction effected in the earlier year. The facts were that the assessee was a contractor supplying bread to Government hospitals and had, under one such contract supplied bread to the Government hospital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64] 53 ITR 134, the Supreme Court was concerned with the question as to when actually the liability is incurred by the assessee for claiming the expenditure as a deduction. The assessee was following the mercantile system of accounting and in terms of an award made on January 13, 1949, the assessee was liable to pay a sum of Rs. 1,08,325.9 annas 3 paise, by way of profit bonus to its employees. The assessee debited the amount for the current year 1947 corresponding to the assessment year 1948-49. It was held that the liability for payment of profit bonus was determined only under the award dated January 13, 1949, and it was also in fact paid during this calendar year and the question of debiting this amount to the profit and loss accounts made up during the current year 1949 by reopening such accounts does not arise at all even assuming that the assessee is following the mercantile system of accounting, in as much as this was a liability which arose for the first time under the award and the scheme of the Income-tax Act is not provided for reopening of accounts for an assessment period on the basis of determination of liability subsequently though relatable to the earlier period, j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the proviso to section 13 involved in the case proceeded to examine the appeal before it at the instance of the Revenue and concluded that the High Court was in error in holding that the assessee having maintained its accounts in the cash system it was not open to the Income-tax Officer to add to the receipts from the business the value of the stock-in-trade at the end of the year in determining the profits of business for the year in question and accordingly allowed the appeal holding that the Assessing Officer was entitled to ascertain the true profits and income of the assessee under the proviso to section 13 of the Act and as such the assessee was liable on the income computed as per the assessment order. This is a case wherein the return filed by the assessee computing the profits of business had been specifically rejected by the Assessing Officer who was of the view that the method of accounting followed by the assessee did not disclose or help in determining the true profits of the assessee. It is no doubt true even under the provisions of section 145, the proviso to section 145(1) of the Act does confer such a power on the Assessing Officer but unfortunately the inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant for the assessment year and ascertaining the income for this year. Existence of power is one thing but exercise of that power in the manner and for the purpose for which it is meant is another thing. The Revenue is not able to demonstrate as to in what manner and for what reasons the Assessing Officer has exercised the power under section 145(1) to reject the returns of the assessee. In the absence of this basic foundation we are afraid that the decision relied upon by learned counsel for the Revenue does not help the Revenue to answer the reference in its favour. The next decision relied upon by learned counsel for the Revenue is CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). In this case the Supreme Court rejected the plea of the assessee that as the assessee had been following a particular system of valuing its stock-in-trade for a long number of years and had made that the basis for determining the profits and, on the other hand, reversing the decision of the High Court held that the Assessing Officer was duty bound under the provisions of section 145 of the Income-tax Act as to whether the system of accounting adopted by the assessee though had been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 31, 1955, and actual payment having been deferred till the passing of the annual accounts by the managed company the subsequent relinquishment of this right by resolutions of its board by the assessee-company had not in any way diverted or reduced this income which already accrued to the assessee and as such the assessee was liable to pay tax on the income attributable to such commission also. This was a case where subsequent to the accrual of income the assessee sought to purge itself of the same by its own resolution. This was not approved by the Supreme Court holding that the income which accrues or arises under the provisions of the Act and as per the law cannot be wished away by the voluntary act of an assessee. It was pointed out that if the income never reaches the assessee then alone it will be a different proposition. However, this decision is also of not much avail to the Revenue inasmuch as the assessee is not seeking to divest the income but is only contending that within the method of accounting followed and permitted the interest income attributable on sticky loans can be brought to tax as and when received under the cash system and not on accrual or arisal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court rendered in A. Gajapathy Naidu's case [1964] 53 ITR 114. In this view of the matter, the High Court did not find any reason to interfere with the view taken by the Tribunal and rejected the contention of the Revenue. Sri E. R. Indrakumar, learned counsel appearing for the Revenue placing reliance on this decision of the court submits that if interest income has accrued during the accounting period relevant for the assessment year in view of such legal position it is not open to the Assessing Officer to accept the stand of the assessee that it may be offered as income in the later year and as such cannot be brought to tax during the accounting year relevant for the assessment year. Again there are two distinguishing features. The first is in the case on hand we are concerned with the interest income relevant for one accounting year assessable in the assessment year. This is not a case of income which had accrued over a period of time being brought to tax in one assessment year. Secondly, there is no dispute on the accrual of the interest income during the accounting period in question. What is contended on behalf of the assessee is having regard to the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing, which had been permitted and which it has followed for the accounting year corresponding to the assessment year in question also. If that is the controversy these decisions do not bear upon the controversy in issue and does not advance the case of the Revenue. Sri Indra Kumar, learned senior counsel, has placed strong reliance on the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. In this case, the Supreme Court had occasion to consider as to the concept of "real income" and once the income is "real" and the income which is required to be brought to tax on accrual basis accrues or arises to an assessee, there is no escape from bringing to tax such income in the corresponding assessment year. The Supreme Court also approved in this context, of the observations made by the learned author Kanga in his Commentary on the Income Tax Act, 1961, 5th edition, occurring at page 665, which was quoted and approved by the Supreme Court. The particular sentence on which stress is laid by learned senior standing counsel for the Income-tax Department is : ". . . having adopted a regular method of accounting, the assessee cannot be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must 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 extension of such a value judgment to such a field is pregnant with the possibility of misuse and should be treated with caution ; otherwise one would be on sticky grounds. One should proceed cautiously and not fall a prey to the shifting sands of time. As a result of the aforesaid discussion, the following propositions emerge : (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 accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s our attention to a decision in UCO Bank v. CIT [1999] 237 ITR 889 (SC) and submits that in so far as this decision did not really in any way alter or dilute the law laid down by the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102 the concept of real income and income being brought to tax on accrual basis, continues to be as enunciated and clarified by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. Accordingly, he submitted that in the instant case there is no escape for the assessee from offering the interest on so called sticky loans, in the assessment year corresponding to the accounting period, when such income accrued and the assessee not offering the same to tax in such assessment year, but contending that the interest if and when realised will be offered to tax in the corresponding assessment year, cannot be accepted and the Tribunal is in error in permitting the assessee to do so. There is no difficulty in understanding the concept of "real income" or in holding that an interest which is required to be offered to tax on accrual or arisal basis, has to be offered to tax in the corresponding assessment year based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated September 30, 1999, ITRC Nos. 602 and 603 of 1998 dated October 1, 1999, ITRC Nos. 807 and 808 of 1998 dated January 24, 2000, and also FFRC No. 21 of 1998 dated December 8, 1999 in this context. Learned counsel for the assessee has also drawn our attention to the provisions of section 145 of the Act which provides for method of accounting that could be followed by the assessee in the context of income chargeable under the head "Profits and gains of business or profession". He submits that the assessee had been permitted to follow the hybrid system of accounting way back in the year 1953 and the Department not only permitted the assessee for such change over to cash system of accounting in respect of interest on sticky loans, but has also accepted the returns filed by the assessee for all subsequent years offering its income to tax determined on such hybrid system of accounting. In support of such submission, Mr. K. P. Kumar, learned counsel has placed reliance on a decision of the Bombay High Court in CIT v. Citibank N. A. [1994] 208 ITR 930. It has been held in this case that it is open to a bank to follow the hybrid system of accounting under which the mercantile system o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more and the assessee's income offered to tax on the basis of such hybrid method of accounting. Though Sri K. P. Kumar, learned counsel for the assessee, has placed reliance on a few more decisions as indicated and discussed below, namely : (1) CIT v. Industrial Credit and Investment Corporation of India Ltd. [1991] 189 ITR 126 (Bom) ; (2) CIT v. North Arcot District Co-operative Spinning Mills Ltd. [1984] 148 ITR 406 (Mad) ; (3) CIT v. M. P. Financial Corporation [1997] 227 ITR 888 (MP) ; (4) CIT v. Rajasthan Financial Corporation (No. 1) [1998] 229 ITR 246 (Raj) ; and (5) CIT v. Andhra Pradesh Industrial Infrastructure Corporation [1999] 236 ITR 648 (AP). These are all decisions essentially touching upon the question as to what system of accounting can be permitted to be followed by an assessee ; as to whether the assessee can follow the dual system of accounting, namely, when the assessee is permitted to follow the hybrid system of accounting and what are the consequences in permitting an assessee to follow the cash system of accounting in respect of a portion of its income while the mercantile system of accounting is followed in general. As already indicated, we are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting for other receipts, was not really raised or arose for consideration either before the Commissioner (Appeals) or before the Appellate Tribunal. In fact, this is a question which can arise in the context of permitting an assessee to follow a particular method of accounting as provided under the provisions of section 145 of the Act. This controversy did not arise before the authorities below inasmuch as the Revenue itself had permitted the assessee to follow such hybrid system of accounting and had continued to permit the assessee including in the accounting period corresponding to the assessment year 1987-88. When once the Revenue itself had permitted offering the income to tax only as a sequel to the method of accounting that is followed and on the determination of income based on such method of accounting, the Appellate Commissioner as well as the Tribunal have obviously concluded that the assessee was justified in not offering the income attributable to the interest on sticky loans as in respect of other income the assessee had been permitted to follow the cash system of accounting which enabled an income to be brought to tax on actual receipt basis" and the assessee havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the Reserve Bank of India as "liable extent". Elaborate submissions have been made by learned counsel for the Revenue and learned counsel for the assessee on this aspect of the matter also. The assessee being a banking company, is required to observe the statutory conditions and requirements to be followed under the Banking Regulation Act, 1949. Section 24 of this Act compels a banking company to maintain unencumbered approved security of a value of not less than 20 per cent. of the total of its demands and time liabilities at the close of business on any given date. This obligation is on all banking companies once the two year period has elapsed from the commencement of the Act. Section 24(2A) of the Act imposes further additional obligations in respect of a banking company which is a scheduled bank and requirement of filing monthly returns, furnishing the particulars of assets maintained by it for the purpose of compliance with the requirements of statutory minimum. Section 24(4) of the Act provides for levy of penalties in the form of penal interest at three per cent. above the bank rate in respect of shortfall at the end of every alternate Friday. The bone of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment can be considered as one arising in the course of business and incidental to the business which may perhaps be allowed as an item of deductible expenditure. A deductible expenditure of this nature necessarily should come within the scope of section 37 of the Income-tax Act. Sri Indra Kumar, learned counsel for the Revenue, while drawing attention to section 24 of the Banking Regulation Act, submits that non-compliance with the requirement therein amounts to infraction of the statutory provision and an express penalty has been provided for such an infraction under section 24, sub-sections (4)(a) and (4)(b) of the Banking Regulation Act. Learned counsel submits that the provisions of section 24 have a specific purpose to serve and it is a provision which is enacted keeping in view a larger public interest and is a safety device. It is not left to the volition of the banking companies like the assessee, to comply or not to comply, but there is a compulsion and non-compliance attracts the penalty. It is submitted that under such circumstances, the amount paid for non-compliance with such a statutory requirement can never be characterised as compensatory in nature though the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the said export was in contravention of the provisions of the Customs (War Powers) Act, 1915, and the relevant instructions issued by the Board of Customs and Excise, the Attorney General sued the company for penalty. This action was settled by consent on the agreement of the company to pay a mitigated penalty of 2000 pounds and on such payment, amputations against the company were withdrawn and the company was absolved of its culpability. The assessee-company in fact had incurred 560 and odd pounds of expenditure in defending the proceedings. This amount was sought to be claimed as a loss which the company had incurred and incidental to its business and as such a deductible expenditure. While the Commissioners for Inland Revenue had allowed the same as a deduction, in appeal, the High Court reversed the same holding that the item of expenditure paid as mitigated penalty and towards costs of the litigation cannot at all be characterised as loss to the company connected with or arising out of the trade carried on by the company. Rowlatt J., speaking for the Bench, held that the payment of such a nature which is essentially in the nature of a penalty can never be termed a "bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of penalty for an infraction of law can never be accepted to be an amount laid out as an item of expenditure for the purpose of carrying on of a lawful business of the assessee. The court also held that it must have been a commercial loss in the normal course of the trade and business and not when the amount paid by way of penalty for a breach of law which may be in the course of carrying on of the trade and business of the assessee. The court also held that infraction of law is not a normal incident of business though it is a matter of normal routine that traders may keep on infracting laws. In Prakash Cotton Mills' case [1993] 201 ITR 684, the Supreme Court had occasion to consider the question as to whether the interest paid by an assessee for delayed payment under the Bombay Sales Tax Act, as also the damages paid by the assessee for delayed payment of contribution under the Employees' State Insurance Act was allowable as revenue expenditure under section 37(1) of the Income-tax Act, 1961. Further, the court, while holding that the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of impost notwithsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India and any balances maintained in India by a banking company in current account with the Reserve Bank or the State Bank of India or with any other bank which may be notified in this behalf by the Central Government, including in the case of a scheduled bank the balance required under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), to be so maintained, shall be deemed to be cash maintained in India ; (2A)(a) Notwithstanding anything contained in sub-section (1) or in sub section (2), after the expiry of two years from the commencement of the Banking Companies (Amendment) Act, 1962 (36 of 1962),- (i) a scheduled bank, in addition to the average daily balance which it is, or may be, required to maintain under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), and (ii) every other banking company, in addition to the cash reserve which it is required to maintain under section 18, shall maintain in India, - (A) in cash, or (B) in gold valued at a price not exceeding the current market price or in unencumbered approved securities valued at a price determined in accordance with such one or more of, or combination of, the following methods of valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic holiday, at the close of business on the preceding working day; Provided that every Regional Rural Bank shall also furnish a copy of the said returns to the nationalised bank. (4)(a) If on any alternative Friday, or, if such Friday is a public holiday on the preceding working day, the amount maintained by a banking company at the close of business on that day falls below the minimum prescribed by or under clause (a) of sub-section (2A), such banking company shall be liable to pay to the Reserve Bank in respect of that day's default, penal interest for that day at the rate of three per cent. per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day; and (b) if the default occurs again on the next succeeding alternate Friday, or if such Friday is a public holiday, on the preceding working day, and continues on succeeding alternate Friday or preceding working day, as the case may be, the rate of penal interest shall be increased to a rate of five per cent. per annum above the bank rate on each such shortfall in respect of that alternate Friday and each succeeding alternate Friday or preceding working da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may extend to five hundred rupees for each subsequent alternate Friday or the preceding working day, as the case may be, on which the default continues. (8) Notwithstanding anything contained in this section, if the Reserve Bank is satisfied, on an application in writing by the defaulting banking company, that the banking company had sufficient cause of its failure to comply with the provisions of clause (a) of sub-section (2A), the Reserve Bank may not demand the payment of the penal interest. Explanation.-In this section, the expression 'public holiday' means a day which is a public holiday under the Negotiable Instruments Act, 1881 (26 of 1881)." Sri K. P. Kumar, learned counsel appearing for the assessee, on the other hand, counters the submissions made on behalf of the Revenue by drawing our attention to the history of legislation of the Banking Regulation Act, 1949. Learned counsel by drawing our attention to section 24(2A) of the Act submits that the penal interest payable either under section 24(4)(a) or under section 24(4)(b) for non-compliance with the requirement of section 24(2A) which mandates the banking company to maintain a certain percentage in cash or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 980] 123 ITR 429 (SC). Learned counsel seeks to make a distinction in the present set of facts and has drawn our attention to the following decisions in support of such submissions. CIT v. Pannalal Narottamdas and Co. [1968] 67 ITR 667 (Bom). In this case, the assessee, an importer, had imported certain items which at the time of clearance was found to be irregular by the customs authorities. The customs authorities confiscated the goods and permitted redemption of the same on payment of fine. The assessee paid the fine and got the goods released. The Bombay High Court took the view that in the peculiar circumstances of the case, the fine paid by the assessee should be held to be forming part of the price paid for the goods itself and if so, being part of the price at which the goods were purchased, can be allowed as deductible item of expenditure. In the first instance, we are afraid that this decision does not advance the case of the assessee in the present case. We say this for two reasons. The learned judges of the Bombay High Court took the view that the business of the assessee itself being a legal one, the redemption fine being paid for the purpose of redeeming the goods an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our attention to an earlier decision of the Appellate Tribunal in the case of the very assessee and for the assessment year 1981-82 rendered in I. T. A. 750/Bang of 1985. In this appeal, the Tribunal, following its earlier decision and the view taken in the case of Corporation Bank, held that interest payable by the assessee to the Reserve Bank of India under section 42(3) of the Reserve Bank of India Act, is in the nature of an admissible business expenditure and as such the assessee can claim deduction of the same in computing its business profits. The submission of Sri K. P. Kumar, learned counsel for the assessee, in the context of this decision of the Income-tax Appellate Tribunal is that the Revenue having accepted this position as it emerges from the decision of the Appellate Tribunal cannot be permitted to raise the same question subsequently as such legal position had been accepted by the Department in respect of an earlier assessment year. In support of this proposition, learned counsel has placed reliance on two decisions of the Supreme Court, namely, CIT v. Narendra Doshi [2002] 254 ITR 606 and Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219. In the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 24(4)(a) and 24(4)(b) of the Act, cannot be a stumbling block in the way of our examining the scope and the nature of the provisions of section 24(4)(a) and 24(4)(b) of the Act. Learned counsel for the assessee has not placed before us any earlier view of our High Court or the Supreme Court in the context of these provisions. Such being the position, the decisions relied upon by learned counsel for the assessee do not come in the way of our examining question No. 3 referred to us for our opinion which we are required to examine and answer. The real point in issue in the light of the submissions and the given case law is as to the nature of payment under the provisions of section 24(4)(a) and (b) of the Banking Regulation Act, 1949. The object of the Act, as the very name suggests, is to provide for regulation of banking activities, particularly, the object of safeguarding the interest of depositors. It may be noticed that the Banking Regulation Act, 1949, is in fact supplementary to the Reserve Bank of India Act, 1934, which in fact seeks to regulate several aspects of banking. In fact, the Statement of Objects and Reasons to the Bill whereby the Amending Act 36 of 1962 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to demand payment of penal interest on being satisfied by an application made by the defaulting banking company, i.e., that the banking company had sufficient cause for its non-compliance with the requirements of section 24(2A)(a) as provided for in sub-section (8) of section 24. This is an important provision which throws light that the amount in question is not compensatory in nature, but definitely penal and an opportunity is also provided to the defaulting banking company to satisfactorily explain the non-compliance and to avoid the penalty. Notwithstanding such an enabling provision, if a banking company has suffered the penalty under section 24(4)(a) and 24(4)(b) of the Act and has also paid on demand, the only inevitable inference is that the amount is paid by way of penalty and such an amount cannot be characterised as a compensatory payment. One normal characteristic feature of a compensatory payment is that such compensatory payments are levied as a matter of course and with reference to time stipulations. In the instant case, the levy is not with reference to the time stipulation, but the non-adherence to the maintenance of requisite deposit. There is also a larger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying on the business. We do not think that we can permit such an incongruous situation to arise by accepting the submissions made on behalf of the assessee. The activity of banking carried on by the assessee is an activity permitted in law. While carrying on an activity in the nature of business within the limits of law and while so doing if the assessee commits an infraction of the provisions of law it cannot be accepted that the infraction is also part of the carrying on of the business activities of the assessee. The mere possibility that while carrying on its business activity in a lawful manner it is inevitable that there can be some infraction having regard to the nature of the business activity of the assessee cannot by itself change the fact that it was an infraction or an act not permitted under the law. The assessee is expected to carry on its business activities without infraction of any of the provisions of law and neither the assessee can be permitted nor can be condoned if the acts of the assessee are otherwise under the provisions of the very statute which makes that act an infraction of particular statutory provisions. In the instant case as indicated earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X
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