TMI Blog1994 (1) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... red or written off as bad debts, the amount in the suspense account was reduced. The Assessing Officer considered the method adopted by the assessee being not acceptable to the Department in view of the principles laid down by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 regarding taxability of interest accrued on sticky loans or doubtful debts. The Assessing Officer referred to the discussion made in the said judgment by the Supreme Court relating to the concept of real income ultimately holding that it was not permissible by crediting the interest amounts on sticky loans to suspense account, to term interests already accrued as non-accrued. The Assessing Officer also referred to the instructions issued by the CBDT in Instruction No. 1586, dated 5-2-1986 holding that the interest on doubtful debts should be brought to tax. The Assessing Officer thereafter stated that in absence of the particulars relating to the details of interest accrued on doubtful debts, which the assessee had been asked by the Assessing Officer to furnish, he worked out the said interest at the bank's average lending rate of 15% on the debit balance in the doubtful debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the CBDT, by its Circular No. 491, dated 30-6-1987 urged the Department to accept the change in the method of accounting from mercantile system to cash system in respect of interest on sticky loans in the case of State Financial Corporations, provided the change was accepted by the IDBI/RBI. The Assessing Officer held that the distinction sought to be established by the assessee from the facts found in the case of State Bank of Travancore was not existing. He stated that the assessee was mainly following mercantile system of accounting and it could not be said that the assessee had switched over to the cash system. He also stated that the CBDT circular referred to by the assessee related only to interest accounts of State Financial Corporations and was not applicable to banking companies. Finally, he estimated the interest on sticky loans at the figure of Rs. 5,22,34,000 for the assessment year 1981-82 and added back the amount in the reassessment order. So far as the assessment year 198283 is concerned, for the same reasons as in the earlier year, he added back an amount of Rs. 6,82,36,000 by way of estimated interest on sticky loans in the original assessment itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a manner was not at all permissible. He also relied on the decision of the Calcutta High Court in the case of James Finlay Co. v. CIT [1982] 137 ITR 698 and of the Kerala High Court in the case of CIT v. Kerala Financial Corpn. [1985] 155 ITR 228 in support of his contention that a change to hybrid system as done by Vysya Bank was not permissible at all. He raised the question as to whether the so-called change, as taken recourse to, by the assessee was at all bona fide. He stated that the change had been brought about by the assessee merely for the purpose of reducing its tax liability after delivery of the Supreme Court judgment in the case of State Bank of Travancore. 4.2 The learned DR also brought to our attention discussion made by the Supreme Court in its judgment under consideration relating to the earlier judgment of the Supreme Court in the case of CIT v. K.R.M.T.T. Thiagaraja Chetty Co. [1953] 24 ITR 525 and also relating to another judgment of the Supreme Court in the case of CIT v. Chamanlal Mangaldas Co. [1960] 39 ITR 8. He also placed reliance on two judgments of the Karnataka High Court in the case of Karnataka State Financial Corpn. v. CIT [1988] 174 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Vysya Bank Ltd. is concerned, it was following purely the mercantile system of accounting till assessment year 1986-87. From assessment year 1987-88, however, it made a slight modification in the said system. It discerned sticky loans and started not taking into consideration the interest on such loans. In the case of State Bank of Travancore that particular bank had actually taken into consideration interests even on sticky loans. Accounts of the respective parties had duly been debited with the interest amounts. However, instead of crediting the said interest amounts to Interest Account, the State Bank of Travancore credited the interest amounts to a separate account called "Interest Suspense Account". Vysya Bank Ltd., did not adopt that practice. On the other hand, it did not bring the interest on sticky loans to its accounts at all from assessment year 1987-88 onward. On the other hand, it resorted to the method of cash system of accounting in respect of such interests, viz., these interests would be credited to the profit and loss account only when the interests would actually be received by the bank. So far as Syndicate Bank and Canara Bank are concerned, they have not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no change in the method of accounting and that the assessee had not abandoned its claim of interest and accordingly the amounts were assessable on accrual basis. In the present cases, interest has not at all been credited in the accounts of any of the assessees. There is also no question of interest income being taxable on accrual basis inasmuch as all the assessees are claiming that they follow cash system of accounting in respect of interests on sticky loan. We will refer to this particular point at a later stage. In any case, it would suffice to say that this particular decision of the Calcutta High Court does not fit into the facts of the present cases. In the case of Kerala Financial Corpn. as decided by the Kerala High Court, interest amount was transferred to suspense account under advice from the RBI. It was held that no change in the system of accounting had taken place. As discussed in the earlier sub-paragraphs, there is no case of interest amount having been taken into consideration in the present matters. This particular decision also does not seem to be of much help to the Department. 8.2 The learned DR has raised the issue whether, the change in the metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 206 and Karnataka State Financial Corpn. v. CIT [1988] 174 ITR 212 have also been referred to by the learned DR. The first judgment as above does not seem to be much relevant to the present cases. In case of the second judgment again, the Karnataka High Court had actually held that the earlier circular and instructions regarding interest on sticky advances had been withdrawn and the CBDT issued an instruction on 20-6-1978, that where accounts were kept on mercantile basis, interest was taxable irrespective of whether the same was credited to suspense account or to interest account. The High Court furthermore stated that the instruction issued by the CBDT was binding on the income-tax authorities. The High Court furthermore stated that since the Tribunal had made its order on 25-10-1978, it had to follow the instruction issued in June 1978 and hence, interest on sticky loans was includible in the total income of the assessee for the assessment year 1976-77. With due respect to the above decision of the High Court, we have to state that the Tribunal, while discharging its judicial duties, is not bound by any of the circulars of the CBDT inasmuch as the Tribunal is not an authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sticky loans, which was not an income of the assessee in a realistic sense inasmuch as there was very limited chance of receiving that interest. The change in the method of accounting, therefore, should be considered as bona fide by all accounts. In this connection, we take into account the decision of the Allahabad High Court, as relied upon by Shri Vishnu Bharath in the case of New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 wherein it is stated that though it is open to an assessee to change his method of accounting. the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years. We duly take into consideration the submission of the learned counsel that the change in this particular case was effected after taking into account the pros and cons of the matter relating to determination of profits in a realistic manner and in a more or less permanent way inasmuch as the change was not reversed back at a later year. We also find that the Allahabad High Court observed in the said judgment that it is not incumbent upon an assessee to follow a purely cash method of accounting or purely mercantile s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to be considered with reference to commercial and business realities of the situation and not with reference to his system of accounting. 9.6 Shri Vishnu Bharath has also placed reliance on the following decisions in support of his contention relating to non-taxability of interest on sticky loans: (i) CIT v. Chari and Ram [1949] 17 ITR 1 (Mad.); (ii) CIT v. Smt. Singari Bai [1945] 13 ITR 224 (All.); (iii) CIT v. K. Doddabasappa [1964] 54 ITR 221 (Mys.); and (iv) Juggilal Kamlapat Bankers v. CIT [1975] 101 ITR 40 (All.). We do not consider that so many decisions as relied upon by Shri Vishnu Bharath are necessary for deciding the issue, which could actually be taken care of by relying on the other decisions already taken into consideration by us. In this connection, however, we want to take due note of the observation made by the Supreme Court in the case of Investment Ltd. v. CIT [1970] 77 ITR 533 at page 537: "...A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts.....A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities..." 9.7 It has been stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollow one system of accounting in respect of one source and another system in respect of other sources." Due note may be taken in this connection of the decision of the Madras High Court in the case of CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226. At page 231 of the said reported judgment, the Madras High Court observed as follows : "An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis." Shri Gupte also argued by referring to the discussion made by the Supreme Court at pages 152 and 154 of the reported judgment in the case of State Bank of Travancore relating to the cases decided by the Madras High Court in Motor Credit Co. (P.) Ltd.'s case and Punjab Haryana High Court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 that the conditions in these two cases are exactly like those in the assessee's own case and, hence, the dictum of the respective courts in those cases holding in favour of non-accrual of interest income should be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that firstly, maintenance of accounts on a hybrid system is not at all irregular provided the profits of the concern can be deduced correctly therefrom. In the instant cases, all the three assessees have started maintaining accounts in respect of interest on sticky loans on cash basis, whereas all the other accounts are being maintained on mercantile basis. There is nothing to conclude that the principles of accountancy have been ravished thereby. In fact, because of the very nature of the sticky loans, recovery of the principal amounts in respect of which itself is extremely doubtful, consideration of further interest thereon and inclusion of the same in the profits of a bank cannot be considered to be a realistic method of arriving at the true profits of the bank. The directives issued by the Reserve Bank of India in 1989 also support the cases of the assessees. We do not find any reason to hold that treatment of interest on sticky loans on cash basis would not lead to a proper determination of the income of the assessees. Finally, therefore. we hold that the hybrid system of accounting as being followed by the three assessees is perfectly valid and in view of the cash syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. CIT [1983] 140 ITR 272 that expenses of this type are of capital nature. He also contended that the decision of the Karnataka High Court, in Hindustan Machine Tools Ltd. (No. 3)'s case should not be considered as an authority on this matter inasmuch as the Karnataka High Court held that only filing fees in connection with the issue of shares to be of revenue nature and did not take into consideration the ambit of various types of expenses required to be incurred in connection with the issue of new shares. 14. We do not find much relevance to the decision of the Supreme Court in the case of India Cements Ltd. to the present case. The matter decided by the Supreme Court was relating to the expenses incurred in connection with raising of loans for business purpose and it had nothing to do with issue of new share capital. At the same time again, we find that the Madras High Court has held in the case of Kisenchand Chellaram (India) (P.) Ltd. that fees paid to the Registrar of Companies for increasing capital should be treated to be of the nature of revenue expense. In arriving it that decision, the Madras High Court merely took into consideration whether the expense was incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1987-88 against the decision of the CIT(A) deleting the addition of Rs. 50,725 under rule 6D. The Assessing Officer mentioned in the assessment order that the total travelling expenses as per the Tax Audit Report was Rs. 24,99,815 and that, however, the details as required under rule 6D were not furnished in respect of this particular expenditure. The Assessing Officer added back an amount of Rs. 50,000 on estimate as probable amount of disallowance under rule 6D. He also added back an amount of Rs. 9,525 out of the director's travelling expenses. The CIT(A), however, stated that he found that the details had been furnished and that the disallowance had been worked out in accordance with the Tax Audit Report. He also stated that the figure of disallowance of Rs. 24,99,815 as per the Tax Audit Report had got to be accepted. In that view, he deleted the addition of Rs. 59,925. We are, however, unable to find that the amount of Rs. 24,99,815 was actually added back in the computation of income originally as per the Tax Audit Report. We feel, therefore, that the disallowance is justified in absence of the actual details as required by the Assessing Officer. Hence, we reverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of disallowance under section 40A(5). This issue is also found to be covered in favour of the assessee by the judgment of the Karnataka High Court in the case of CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340. In this regard also, therefore, we refuse to interfere with the direction of the CIT(A). 21. The Department has also raised a ground that the CIT(A) erred in deleting the disallowance in respect of penal interest paid by the assessee to the Reserve Bank of India. This particular issue is also found to have been decided in favour of the assessee by the ITAT, Bangalore Bench, in two of its earlier judgments in the assessee's own case viz., (i) ITA No. 750 (Bang.)/1985, order dated 5-3-1988 for assessment year 1981-82, and (ii) ITA No. 1228/Bang/1986. order dated 24-10-1990 for assessment year 1984-85. Following the said line, therefore, we hold that for this year also, the decision of the CIT(A) is correct and refuse to interfere with his finding. 22. In the result, Appeals No. ITA 1912/Bang/ 1989 in the case of M/s. Syndicate Bank, for assessment year 1987-88, ITA Nos. 1282 1283 (Bang.)/1990 in the case of M/s. Canara Bank for assessment years 1981 82 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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