TMI Blog1988 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest of Rs. 11,40,862 on 'sticky loans' is not includible in the total income of the assessee for the assessment year 1976-77?" The first two questions have been referred at the instance of the assessee, the Karnataka State Financial Corporation, Bangalore, and the third question is referred at the instance of the Commissioner of Income-tax, Karnataka-11, Bangalore. As far as the first question is concerned, in view of the amendment of section 37 (2 B) of the Act by the Finance Act, 1983 (Act I 1 of 1983), with retrospective effect from 1-4-1976, the question has to be answered in the affirmative and against the assessee, as by the said amendment the entertainment expenditure has been completely disallowed. As far as the second question is concerned, the matter is concluded by the order of this court in the case of Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206. For the reasons stated in the said order, the view taken by the Tribunal has to be upheld and, consequently, the question is answered to the effect that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, to the Government of Haryana, wherein it is opined by the Board that the amounts kept in suspense account under the heads 'Interest, Commission, etc.', will not be assessable to tax. However, it will be necessary for the assessee to maintain a systematic method of accounting in respect of doubtful debtors, subject to checks and counter-checks. We shall, therefore, be glad if you will please adopt an appropriate accounting procedure for unrealised interest on sticky loans, in consultation with your auditors. 2. Please acknowledge receipt. Yours faithfully, (Sd) Asst.Chief Officer." The letter of the Board reads: "Sir, I am directed to refer to your D.C. No. 30TTA (HR) 11864 dated March 15, 1973, on the above subject. The Board is of the view that the amounts kept in suspense account under the heads 'Interest, Commission, etc.,' will not be assessable to tax. However, the assessee must maintain a systematic method of accounting in respect of doubtful debtors subject to checks and counter checks. Yours faithfully, (Sd) Mr. S. K. Nigam, Under Secretary, Central Board of Direct Taxes." The Income-tax Officer was of the View that as the assessee was following the merca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Appellate Tribunal, the Commissioner sought for reference and accordingly, the third question has been referred for the opinion of this court. Sri Sarangan, learned counsel for the assessee, submitted that the direction issued by the Board was binding on all the authorities of the Department in view of section 119 of the Act and that, therefore, the Appellate Assistant Commissioner was right in upholding the claim of the assessee for deduction of the amount of interest on sticky loans credited to the suspense account and the Tribunal was right in confirming the said view. There is no doubt that the directions issued by the Board in its letter dated April 16, 1973, extracted earlier, expressly states that the amount of interest kept in suspense account, is not assessable to tax. Learned counsel for the Revenue, however, submitted that the Circular issued was not in consonance with the provisions of the Act and, therefore, neither the Appellate Assistant Commissioner nor the Tribunal was right in upholding the claim of the assessee relying upon the said directions. He also submitted that the question has to be answered in favour of the Revenue in view of the decisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vasan, learned counsel for the Revenue, however, submitted that in view of the decision of the Supreme Court in State Bank of Travancore [1986] 158 ITR 102 (SC), the circular issued by the Board cannot be regarded as binding on the Department and the assessee cannot enforce the said circular. In the aforesaid case, the question which had been referred for the opinion of the Kerala High Court (ITR Nos. 27 to 29 of 1971 decided on March 22, 1973) was as follows ([1986] 158 ITR 107) : "(1) Whether, on the facts and in the circumstances of the case, the addition of the sums of Rs. 67,170, Rs. 47,777 and Rs. 57,889, representing interest on 'sticky' advances, as income for the assessment years 1965-66, 1966-67 and 1967-68, respectively, was justified in law ?" The Kerala High Court answered the question against the assessee following its earlier judgment in State Bank of Travancore v. CIT [1977] 110 ITR 336. The correctness of the said view was challenged before the Supreme Court. The view taken by the High Court was upheld. The contention of the bank based on the letter of the Board dated April 16, 1973, on which the assessee relied in this case was negatived. The relevant portio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before were in consonance with the accepted principles of accountancy and these instructions have held the field for over 53 years. It was also submitted that as such claims have been allowed to be exempted for more than half a century and the practice had transformed itself into law, this position should not have been deviated from. This submission, of course, cannot be accepted. The question of how far the concept of real income enters into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed and the feasibility. The earlier circulars, being executive in character, cannot alter the provisions of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject matter to be adjudicated by us, and, as rightly contended by counsel for the Revenue, the circulars cannot detract from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry but taking the interest merely in suspense account cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such accounts from inclusion in the total income. The matter has, therefore, been re-examined in consultation with the Ministry of Law. The Board have been advised that where accounts are kept on the 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. 4. In view of this, Circular No. 41/V-6/D of 1952, dated 6th October, 1952, and clarifications issued in cases of financial institutions are withdrawn with immediate effect. 5. Immediate review may be undertaken and remedial action by way of initiation of proceedings under section 147(b) or section 263 may be taken in respect of assessments which have been completed in accordance with the Board's instruction and clarification referred to in paras I and 2 above." From the contents of the above instruction, it is clear that the earner circular on which the assessee relies was withdrawn. Learned counsel for the Revenue pointed out that though the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this court cannot answer similar question differently. If the circular dated April 16, 1973, had not been withdrawn and the decision by the three judge Bench in Travancore Bank's case [1986] 168 ITR 102 (SC), was solely on the ground that the 1973 circular of the Board ran counter to the wording of the relevant sections of the Act, there would have been considerable force in the contention of the assessee that in view of the larger Bench decision of the Supreme Court in Navnit Lai C. Javeri's case [1965] 56 ITR 198 (SC), as explained and reiterated in the case of Varghese [1981] 131 ITR 697 (SC), the circular must be held to be binding on the authorities. But, in the instant case, as the Board itself withdrew the said direction in its subsequent letter dated June 20, 1978, the assessee could no longer rely on the earlier direction. As can be seen from the relevant paragraph of the judgment, extracted earlier, though there is an observation that the earlier circular being executive in character cannot prevail over the provisions of the Act, the question was answered on an interpretation of sections 28, 29 and 36 of the Act, for the reason that the Board itself had withdrawn it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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