TMI Blog1984 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... rs repayable in half yearly instalments. The interest accruing on the loans is generally credited by it to the interest account on the due dates, even when the amounts are not actually received. These entries are made after debiting the interest to the respective accounts of the customers. Subsequently corresponding credit entries are made in the profit and loss account. Since a large number of loans of various financial corporations including the assessee remained unpaid, the Reserve Bank of India issued a Circular No. IF. D. No. OPR. 1076/a(5)-73-74 dated November 21, 1973 (annexure-A). Advising these corporations not to treat the unrealised interest on sticky loans as income in order that the distributable profits may not be unduly inflated so as to present an untrue picture of their actual income, the Reserve Bank of India stated: "........... it will, therefore, be preferable to credit the amount of unrealised interest to a special account (Interest Suspense Account) instead of the profit and loss account or make a specific provision for unrealised interest to the debit of the profit and loss account equivalent to the amount of such interest credited to the profit and loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the assessee pointed out that, in respect of the doubtful debts, the accrued interest was credited to the Interest Suspense Account on the basis of the letter dated April 16, 1973, addressed by the Board to the Government of Haryana (annexure-B). Apart from this, the only other ground taken was that the decision of this court in State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker) was not applicable to the assessee's case. The arguments urged on behalf of the assessee before the Tribunal are summarised in paragraphs 6 and 7 of the Tribunal's order. They are: It was open to the assessee to change its regular method of accounting and follow the new method regularly, provided the change was bona fide and not with a view to avoiding payment of the correct tax. The change made by the assessee was of such a nature that no income escaped assessment as a result of the change. The decision of this court in State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker) was not applicable to the case of the assessee as that decision was rendered on the basis that the State Bank of Travancore did not adopt a regular method of accounting in respect of sticky advances. No other argument appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the change in the method of accounting regarding the unrealised interest is not bona fide and it cannot be suggested that it has been brought about with a view to avoid payment of tax or reduce the tax liability ........ The Tribunal has not found that the change in the method of accounting as from the year ending March 31, 1973, resulted in a cash system of accounting, in so far as the interest in question was concerned. Nor has the Tribunal found that either the principal or the interest had become irrecoverable. The Tribunal has also not stated that the circular of the Reserve Bank of India suggested a change which was in substance and effect a cash system of accounting whereunder no income was brought into the books until and unless it was actually received. The Tribunal has, however, found that interest did accrue on the due dates, but it was credited to the Interest Suspense Account. The Tribunal has not considered the letter of the Board to the Government of Haryana, and no argument regarding it appears to have been urged before it. It must be noticed that the Tribunal refers to the "interest in respect of loans which have remained unrealised for three years ". It is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its that during the accounting years ending on March 31, 1973, March 31, 1974, March 31, 1975, and March 31, 1976, the assessee changed over, in so far as the interest in question was concerned, from the mercantile system to the cash system of accounting under which no income was chargeable until it was actually received. His third contention is that even assuming that the books were kept not on the cash system of accounting, but on the mercantile system in the true sense of the term or any system based on accrual of income, the amounts credited to the Interest Suspense Account, in the light of the letter of the Board (annexure-B), were not assessable to incometax. It is significant that the amounts due as interest were credited to the Interest Suspense Account account after they were duly debited to the accounts of the parties on the respective due dates, thereby indicating in clear terms that the interest had accrued and became payable, though not actually received, and, therefore, not credited to the interest account or transferred to the profit and loss account. If the change in the method of accounting had resulted in a cash system of accounting where no entries are made unt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of time at which the income is charged. Under the mercantile system of accounting, income is charged when it accrues or arises, whether or not it has been received. " Under this system, the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received ; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." : Per Iqbal Ahmad C.J. in CIT v. Shrimati Singari Bai [1945] 13 ITR 224, 227 (All). On the other hand, under the cash accountancy system, income is not charged until it is received in the accounting year. According to this system, " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off when they are found to be irrecoverable. Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous in which certain elements and incidents of the cash and mercantile systems are combined. " But whichever be the method regularly followed, and dependent on that method, income is assessed under the Act, as stated earlier on the basis of either accrual or receipt, which are the two alternative points relevant to the charge. What the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it : CIT v. Kameshwar Singh [1933] 1 ITR 94, 101 (PC). Where the assessee has all along maintained a mercantile system of accounting and income has accrued under the contract, such income does not cease to be chargeable income by reason only of the fact that it has been credited to a suspense account and has not been transferred to the profit and loss account. Suspense account does not suspend the accrual or chargeability of the income or change its nature (see CIT v. K.R.M.T.T. Thiagaraja Chetty Co. [1953] 24 ITR 525 (SC) and Debaprasanna Mukher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee firm...... The reduction was a part of the agreement ...... .." Accrual of income can be prevented either by contract or by statute. In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC), the latter was the position. The Supreme Court stated that the real profits of businessman could not obviously include the amounts returned by him by way of rebate under statutory compulsion. It is as if he received only the original amount minus the amount to be returned. The amount returned is not a part of the profits at all. So stating, the Supreme Court approvingly referred to the decision of the Bombay High Court in H. M. Kashiparekh Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom), where the concept of real income was expounded, This concept was again approved by the Supreme Court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC), where income did not accrue because of contract. The court held (p. 270): "The commission receivable could have been ascertained only after the managed company made up its accounts. The assessee had given up the commission even before the managed company made up its accounts. Hence, the mere fact that the assessee-company was maintaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest accrues on the due dates, as provided under the contract, and unlike in the case of commission, its accrual does not depend on or await the completion or settlement of accounts. Where income has in law accrued, although not received, such income does not cease to be the real income for the purpose of assessment, even though it has been subsequently given up or kept in suspense account (see Pondicherry Railway Co. Ltd. v. CIT, AIR 1931 PC 165). In State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker), this court had occasion to consider whether a banking company which followed the mercantile system of accounting was liable to be taxed in respect of the interest that had accrued on sticky advances and credited to an Interest Suspense Account. It was held that income had accrued on the due dates and it was, therefore, liable to be taxed. In Catholic Bank of India v. CIT [1964] KLT 653, this court held that the assessee having all along followed the mercantile system of accounting, the non-inclusion of the interest on the sticky advances in pursuance of the direction of the Reserve Bank of India did not exonerate the assessee from liability to pay incometax in respect of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entries made, did arise in the present case. There was no variation in the contract between the assessee and its debtors in respect of the interest receivable. By debiting the interest to the accounts of the customers and crediting the same to the suspense account, the assessee acknowledged the accrual of income. No entry has been made to show that what is stated to have accrued has been written off as irrecoverable interest. There is total lack of material on record to show that, notwithstanding the delay, the debtors were unable or unwilling to pay the interest or the prospect Of its realisation was doubtful or improbable. We find no substance in Sri Dasthur's contention that in the present case the assessee had, in respect of unrealised interest, changed over to cash system of accounting and that the decisions of this court in State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker) and Catholic Bank of India v. CIT [1964] KLT 653 are not applicable to this case as in those two cases there was no finding that the assessee had changed its regular system of accounting. In the present case too there is, in our view, no finding that the change, if any, in the method of accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans to the profit and loss account so as to prevent undue inflation of the distributable profits. That was the only intended effect of the circular. The finding of the Tribunal that the circular saved such accrued income from tax liability is, in our opinion, clearly wrong. We shall now deal with the contention regarding the effect of the letter addressed by the Board to the Government of Haryana. As stated earlier, this letter was not considered by the Tribunal, and its attention was not invited to it on behalf of the assessee at the time of the hearing. Sri Dasthur contends that this is not an ordinary letter but a circular containing " orders, instructions and directions to other income-tax authorities " within the meaning of s. 119 of the Act. We do not agree. The letter which we have extracted above indicates that it was sent to the Government of Haryana in reply to a demi-official letter. What exactly were the contents of that Government letter are not in evidence. A mere letter or clarification of the Board in reply to a communication from the assessee or any other person, who is not an authority within the meaning of s. 116, cannot be regarded as a circular coming withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances, the circular of August 25, 1924, has no application to the facts of this case. The circular of October 6, 1952, extended the principle of the 1924 circular to banks which, " instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the ITO is satisfied that recovery is practically improbable ". It would appear from the wording of this circular that it applied only to a case where the recovery of the principal amount itself was "practically improbable". There is no evidence in this case that that was the position with regard to the recovery of either the principal or the interest. The assessee had no such case before the authorities, and no evidence was placed by it to such effect. All that the assessee said was that the interest was not paid for three years on loans which were secured by mortgages. The state of affairs of the debtors, their ability and willingness to repay the amounts, their general reputation and standing in the society, the chances of recovery by recourse to courts are all matters on which the assessee could have placed evidence, but did not do so. Moreover, the Tribunal had no opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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