TMI Blog1993 (9) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner (Assessment), Patiala, not to reassess the petitioner for the assessment year 1972-73. The petitioner is an assessee since the assessment year 1961-62 under the Income-tax Act, 1961. The assessment proceedings for the assessment years 1971-72 to 1986-87 were completed under section 143(3) of the Act. On March 25, 1988, notice, annexure P-2, was issued by respondent No. 3 under section 148(1) of the Act on the ground that respondent No. 3 had reasons to believe that income of the petitioner bank chargeable to tax for the assessment year 1972-73 (year ending December 31, 1971), had escaped assessment within the meaning of section 147(a) of the Act. The notice required the petitioner to submit a return in the prescribed form within 30 days thereof. Since the notice did not mention the reasons on the basis of which it could be said that there was escapement of income from assessment within the meaning of section 147 of the Act, on enquiry such reasons were disclosed contained in annexure P-3, dated June 17, 1989. The reasons disclosed are summarised as under: The bank transferred debts which could not be recovered (doubtful of recovery) to a separate account styled as Prot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Protested Bills Account and the method of accounting was on cash receipt basis. The Central Board of Direct Taxes had issued a Circular No. 491, dated June 30, 1987, permitting the financial institutions to change the method of accounting to cash receipt basis even if they had been following the method of crediting interest on accrual basis. A copy of the circular was annexed as annexure P-6. The assessing authority having taken no interest to drop the proceedings, the bank approached the Central Board of Direct Taxes, respondent No. 1, through representation dated April 28, 1988, annexure P-7. The said representation was rejected, vide order dated June 13, 1989, copy annexure P-1. It is in these circumstances that the bank approached this court in this writ petition. While contesting the writ petition the respondents, in their written statement filed, took a preliminary objection that the writ petition was liable to be dismissed on the ground of alternative remedy being available to the bank. The alternative remedy was by way of an appeal to the first appellate authority and thereafter to the Income-tax Appellate Tribunal and finally by reference to the High Court. At this sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly and truly. We have heard counsel for the parties at great length. Shri J. N. Kaushal, Senior Advocate, appearing on behalf of the petitioner-bank, has argued that on the facts and circumstances of the present case the notices issued to the petitioner-bank to reopen the assessments already framed were without jurisdiction and the notices should be quashed. Shri R. P. Sawhney, learned counsel for the Revenue, while controverting the contention of the petitioner-bank, has argued that the alternative remedy of appeal is available to the bank and the notices were validly issued for reassessment and even otherwise disputed questions of fact cannot be gone into in the present proceedings. Both counsel have referred to several judicial decisions in support of their contentions. Before reference is made to those decisions, it is necessary to refer to the reasons or the material facts on the basis of which such notice was issued which are contained in annexure P-3, as follows : "The assessee-bank transferred the debts doubtful of recovery to a separate account. Although the assessee-bank followed the mercantile system of accounting, no interest on accrual basis is charged to such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners of the firm, Messrs. Mahajan International, to treat the difference as worked out above as gift. Such notices were challenged in the writ petition. A preliminary objection was taken on behalf of the Revenue that the writ petition was not maintainable as alternative remedies of appeal and reference as provided under the Act could be resorted to. A Division Bench of this court upheld the objection and dismissed the writ petition holding as under (at page 185) : "A plain reading of the provisions of the Gift-tax Act would show that it is open to the petitioners to seek their appropriate remedy by filing a reply to the notice served upon them and if they are aggrieved by any order that may be passed thereon, they have available to them the further remedy of appeal. Such being the circumstance, no occasion is provided here for entertaining the present writ petitions. The petitioners are, accordingly, relegated to their alternative remedies under the Act." In VXL India Ltd. v. ITO [1988] 173 ITR 124, this court again took a similar view. A notice under section 147 of the Income-tax Act was issued to the assessee which was sought to be challenged in the High Court. The writ peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te): "The Act provided for a complete machinery to challenge an order of assessment and the orders of assessment in the case could only be challenged by the mode prescribed by the Act and not by a petition under article 226 of the Constitution of India. The Act provided for an adequate safeguard against an arbitrary or unjust assessment. The assessees had right to prefer appeals under section 23(1) of the Act subject to their payment of the admitted amount of tax as enjoined by the proviso thereto, and as regards the disputed amount of tax they had the remedy of applying for stay of recovery to the Commissioner under clause (a) of the second proviso to section 13(5) of the Act. " On the other hand, Mr. Jagan Nath Kaushal, learned counsel for the petitioner, has argued that availability of alternative remedy per se is no bar to entertaining a petition under article 226 of the Constitution, more so when the question of initial jurisdiction or violation of rules of natural justice is pleaded. At the initial stage of the writ petition if objection is raised, the writ could be dismissed. However, at the final stage the matter should be gone into on merits. To support this contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of jurisdiction. It is in this context that the present case is to be approached to determine prima facie as to whether the notice issued by the Income-tax Officer under section 148 read with section 147 of the Act is based on some material to hold that such order was passed without jurisdiction or not. If, prima facie, it is held that there was some material on the basis of which notices could be issued, further disputed questions of fact are not necessarily to be gone into in this petition and the parties should be relegated to the ordinary remedy available under the Act. The provisions of sections 147 and 148 of the Income-tax Act providing for reassessment proceedings to be initiated were under consideration by the apex court in a number of decisions. In CIT v. A. Raman and Co. [1968] 67 ITR 11, while referring to the provisions of the Income-tax Act aforesaid vis-a-vis the powers of the High Court to exercise jurisdiction under article 226 of the Constitution, it was observed as under (headnote): "The High Court exercising jurisdiction under article 226 of the Constitution has power to set aside a notice issued under section 147(b) of the Income-tax Act, 1961, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide, the order of the Tribunal cancelling the penalty levied under section 271(1)(c) of the Act was also legal. " CIT v. Madhavnagar Cotton Mills Ltd. [1992] 195 ITR 444, the Bombay High Court, relying upon Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC), observed as under (headnote) : " Mere reason to believe that income has escaped assessment is not enough to give the income-tax Officer jurisdiction to reopen an assessment under section 147(a) of the Income-tax Act, 1961. There must also be material to show that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The duty of the assessee is to disclose only primary facts and it is for the Income-tax Officer to draw correct inferences of facts or law from the primary facts." Shri Jagan Nath Kaushal, senior advocate, appearing on behalf of the petitioner has argued that the facts as Stated in the notice and the reasons accompanying it go to prove that the petitioner-bank was following a hybrid system of accounting, i.e., a mixed system of accounting which is also the case of the petitioner-bank in the writ petition. That being so, it was not required of the petitioner to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. It may be observed that from the facts as stated in the reasons for initiating action against the petitioner in the notice, annexure P-3, it cannot be spelled out that the petitioner-bank was following a particular system of accounting and it continued following the same for years together. It is primarily a question of fact to be raised and decided before the authorities under the Act. The stand of the Revenue that the bank was following the mercantile system of accounting is substantiated from the returns furnished by the bank and shown in court. Against the relevant column providing the system of accounting followed by the assessee, three modes were mentioned, i.e., mercantile/cash/mixed. The assessee had scored off "cash" and "mixed" leaving "mercantile". Thus at this stage it cannot be assumed that the assessee, the petitioner-bank, disclosed that it was following the mercantile syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of its income from business. That does not mean that the assessee should be compelled to adopt the same system of accounting in respect of income falling under section 12. " The Supreme Court in CIT v. McMillan and Co. [1958] 33 ITR 182, while commenting upon the right of the assessee to adopt any method of accounting, observed as under (at page 197) : "The Income-tax Officer may proceed in one of three ways : (1) he may fail to apply his mind to the statutory duty imposed on him by section 13 and its proviso and may accept the assessee's method of accounting without at all considering if, (a) the method was regularly employed, and (b) if the income, profits and gains of the assessee can be properly deduced therefrom ; (2) he may apply his mind and decide in favour of the assessee that the method is both regular and acceptable (in the sense that income, profits and gains can be properly deduced therefrom) ; or (3) he may decide against the assessee and hold that the method is either not regularly employed or is unacceptable." Similar view was taken in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC). Thereafter the matter was considered by the Supreme Court in State Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adopted and followed. He can also change the method of accounting but he is supposed to act bona fide, i.e., disclose this fact to the authorities at the time of filing the returns. In the facts and circumstances of the present case, at the time of filing the returns the petitioner-bank disclosed only one system of accounting, i.e., mercantile. Under that system, obviously, the bank was supposed to debit the accounts of the loanees with the amount of interest on accrual basis. Otherwise without further disclosing the change in the method of accounting or following any other method that such interest was not being shown on accrual basis but was shown in the Protested Bills Account on cash basis or mixed accounting basis, it cannot be said that the bank had disclosed all material facts truly. The assessee of course can change the method of accounting at a given time and the case of the petitioner, as argued, is that the petitioner changed the system of accounting particularly in respect of such loans, recovery of which was doubtful, though the petitioner was following the mercantile system of accounting, i.e., adding such interest on accrued basis. On such loan accounts which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegorically specify that income earned as such was offered for assessment. Learned counsel for the petitioner-bank referred to the facts as stated in the reasons for issuing the notices that it was the stand of the Revenue itself that such income was shown in the accounts on recovery basis. From that, it cannot be inferred in our view that such income was offered for assessment or the assessee had disclosed truly the material facts. The notices issued thus cannot be quashed at this stage. It would be for the authorities to determine on the facts, if proved, that though in their returns it was mentioned that only the mercantile system of accounting was being followed but factually other systems were also being followed and the interest credited was actually subject to tax. On behalf of the Revenue reliance was placed on the decision of the Calcutta High Court in Allahabad Bank v. CIT [1992] 194 ITR 575. The assessment year was 1962-63 and the assessment was framed on the basis of the facts disclosed in the return. The assessee had not charged any interest on bad and doubtful debts nor were any such sums credited to the suspense account. Action was initiated on notices and the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio of the decision aforesaid is not helpful in deciding the case at this stage. The authorities are yet to go into the question of bad debts on which recovery of interest or principal is doubtful. At this stage suffice it to say that no doubt the petitioner-bank is following the mercantile system but no case of change of system was pleaded at the time of filing of the returns that at this stage a finding could be recorded that in fact the petitioner had reverted to any other system of accounting. The Bombay High Court in Navin, R. Kamani v. S. S. Shahane, ITO [1990] 185 ITR 408, while maintaining the orders of the authorities, observed that they did not suffer from any error of law. The records showed that no claim regarding change in the method of accounting had been made before the income-tax authorities. There was no evidence that the interest was irrecoverable. Hence the orders of the authorities were valid. The position where the assessee had filed civil suits against the borrowers and thus had not credited interest in their accounts would be entirely different. In such like cases it has been observed that it is the real income which is assessable to tax and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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