TMI Blog2020 (1) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings is bad in law and not valid in the eye of law. We note that in the case of Indian and Eastern Newspaper Society Vs. CIT [ 1979 (8) TMI 1 - SUPREME COURT ] wherein it was held that an error discovered on a reconsideration of the same material (and no more) does not give AO power to assume jurisdiction to make reassessment. The aforesaid view on the above proportion has been reiterated by the Apex Court in A.L.A.Firm vs. CIT 1991 (2) TMI 1 - SUPREME COURT CIT(A) failed to appreciate that the A.O. has already made the scrutiny assessment u/s.143(3) in the assessee`s case and looked into all details and documents including audited balance sheet and Tax Audit Report submitted to him and has made several additions on the basis of said Balance sheet and Tax Audit Report. From the reasons recorded (Page-3 of Paper Book) it is clear that the assessment has been reopened on the basis of Clause-18 of Schedule-22(B) of Notes on Accounts given in the Balance sheet. The said balance sheet and clause-18 alleged by the A.O. was already before the A.O. during the original assessment proceedings and has been examined by him. There was no new material so as to believe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment Years, common and identical issues are involved therefore, these appeals have clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 3. We take first assessee s appeal in ITA No.2552/Kol/2017 for Assessment Year 2003-04. The grounds of appeal raised by the assessee are as follows: 1. FOR that the Ld. CIT(Appeals) was wrong and unjustified in upholding the initiation of proceedings u/s.147 of the I. T. Act, 1961 and making of the re-assessment u/s.147/143(3). He failed to appreciate that the conditions precedent for reopening of the assessment did not exist and were not satisfied in this case. There was no fresh material and the reopening of assessment was on mere change of opinion. 2. FOR that the Ld. CIT(Appeals) erred in upholding the addition made by the A.O. as notional interest on loan of ₹ 228.38 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 3. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before or at the time of heari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest income on loan amounting to ₹ 228.38 lacs had been accounted for during the year considering the financial health of other companies. However, the Management of the company considered the outstanding principal amount of ₹ 228.38 lacs and interest receivable amounting to ₹ 137.66 lacs thereon as good and recoverable. Since the company was following mercantile system of accounting as disclosed in the tax audit report, it was required to credit the interest on loans of ₹ 228.38 lacs given to other companies, to the Profit and Loss account unless the amount was declared bad debt. The same amount was not added back during assessment u/s 143(3) of the Act. Therefore, the AO in the reopened assessment, made addition to the tune of ₹ 1,37,66,000/-. 5. Aggrieved by the order of the ld. AO, the assessee filed an appeal before the ld. CIT(A) who has confirmed the action of the Assessing Officer. 6. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l function to take benefit of its own wrong. We note that in assessee s case under consideration 4 years have not been elapsed. However, it was held in the case of Kelvinator of India (supra) that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. On appeal by the department to the Supreme Court in the case of Kelvinator of India (supra) (reported in 320 ITR 561(SC)) it was held that though the power to reopen under the amended section 147 is much wider, one needs to give a schematic interpretation to the words reason to believe failing which section 147 would give arbitrary powers to the AO to re-open assessments on the basis of mere change of opinion , which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. The AO has no power to review; he has the power to reassess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly clear that in the assessee`s case under consideration there is no any tangible material to reopen the concluded proceedings, as the issue relating to accrued interest on the loan of ₹ 228.38 lakhs had already been examined by AO during the original assessment u/s 143(3) of the Act, which was completed on 31.03.2006, hence we quash the reassessment proceedings. 9. In the result, appeal filed by the assessee in ITA No.2552/Kol/2017 for Assessment Year 2003-04, is allowed. 10. Now we shall take ITA No.2553 and 2554/Kol/2017 for Assessment Years 2004-05 2006-07 and to adjudicate these appeals we take lead case in ITA No.2553/Kol/2017 for Assessment Year 2004-05. The grounds of appeal raised by the assessee in its lead case are as follows: 1. FOR that the Ld. CIT(A) erred in upholding the addition of ₹ 34,39,500/- made by the A.O as notional interest on loan of ₹ 229.30 lacs. He failed to appreciate that no interest was accrued or receivable by the assessee on the said loans. 2. THAT the assessee craves leave to alter, amend, modify any of the grounds and/or take additional ground before o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged or not on the loan, is solely a business decision to be taken by the management. After considering the bad financial position of the debtor companies, the management decided not to charge interest on the loans w.e.f. 01.04.2000 as mutually agreed with the loan debtor and accordingly no interest is being charged in their accounts since F.Y. 2000-01. The ld Counsel further submitted before us that the interest does not accrue automatically unless the debtor agrees to pay the interest. From the confirmation of the accounts by the debtors filed in the assessment proceedings it appear that the debtors have also not provided and claimed deduction of interest on the above loans. The note on account under Schedule 22 of nots to accounts is a routine one and it does not say about the interest accrued during the year but speak about interest of ₹ 137.25 lacs receivable upto 31.03.2000. The ld Counsel provided a copy of the balance sheet which is enclosed as annexure-H. We note that Ld. CIT(A) failed to appreciate the arguments of the assessee that no interest was accrued after 01.04.2000 which was mutually agreed with the loan debtor. It was a Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore's case (supra). It is as follows : 'Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverable interest being credited to revenue, and distributed 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.' (p. 120) Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth edn., 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether the interest is credited to suspense account or to interest account. The Kerala High Court has also expressed the same view in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336. The amount of such interest is, therefore, includible in the taxable income. The withdrawal of the circular of 6-10- 1952 which had been in force for thirty-six years was on account of the decision of the Kerala High Court in State Bank of Travancore's case (supra). The Board, however, issued another circular of 9-10-1984 under which the Board 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 assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated 20-6- 1978 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections specified there or otherwise. The Board, thus, has powers, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 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 forego the advantage when required to wield it in the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is shown that they had been genuinely refunded to the respective companies before 30-6-1955. Accordingly, a circular was issued by the Board of Revenue on 10-5-1955 pointing out to all ITOs that it was likely that some of the companies 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 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 30-6-1955 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). 8. A similar view of the Board' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and 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's case (supra). 10. 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's case (supra) decided by a Bench of three Judges of this Court by a majority of two to one. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits to the assessee was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not 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. 11. In the premises, the majority decision in State Bank of Travancore's case (supra) cannot be looked upon as laying down that a circular which is properly issued under section 119 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 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. 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 Corpn. v. CIT [1994] 210 ITR 129/ 75 Taxman 573, where this court, following the majority view in State Bank of Travancore's case (supra) held that interest which has accrued on a 'stricky' 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 Board cannot be ignore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [1960] 39 ITR 706 (Bom.), Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) as well as Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC). In the penultimate paragraph of the judgment, the Supreme Court held as follows :- The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. 11. Applying the law laid down by the Supreme Court, what has to be seen in the present case is whether there was any real accrual of interest to the assessee. Both the CIT(A) as well as the Tribunal came to the conclusion that there was no real accrual of interest. It has been noted that the interest had not even been recorded by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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