TMI Blog1984 (9) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... to account their assets backing and securities and guarantees offered by them or on their behalf to the bank, the bank stops charging interest and closes these accounts by transferring their outstanding debit balances to an account called ' protested bills account ' Steps to realise such loans are initiated including realization of securities, enforcing guarantees, filing suits in appropriate courts, etc., depending on the facts and circumstances of each individual debtor. 3. In between the good debtors and the bad debtors, referred to above, there is a third category of debtors, a shade nearer the latter than the former, from whom recoveries of interest and principal are not regular, and the bank starts having doubts about the repaying capacity of these debtors. It styles such debts as ' sticky advances '. Interest is charged on such accounts in the normal course, by debiting the respective debtors' accounts, but corresponding credit is not given to interest account, instead interest suspense account is credited. The bank's version with regard to these debts is given in para 3.5 of its statement of facts, given to the Commissioner (Appeals) in the following words : " In case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the working of the scrutiny process, the bank has placed on record the case histories of numerous cases on record as per pages 108 to 164, 167 to 192 and 193 to 246 of the first paper book and pages 1 to 82 of the second paper book. 7. The bank's claim for bad debts on the basis of the above data aggregated to Rs. 29,20,91,437. The above amount has been worked out after adjusting the realizations of Rs. 2,79,53,930 in respect of debts, which had been written off as bad in earlier years, but from whom recoveries were nevertheless made during the previous year under consideration to the above extent. (For details reference may be made to para 7 of the assessment order.) 8. The interest credited by the assessee-bank to ' interest suspense account ' in respect of ' sticky allowances ' worked out to Rs. 7,02,78,411 during the previous year under consideration. 9. The IAC, who made the assessment in the present case, has not accepted the assessee's claim in respect of both the aforementioned items and has, accordingly, made additions to the assessee's total income. According to him, the debts, claimed to have become bad during the previous year, did not in fact become bad during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the assessee for that previous year '. The aforesaid principle of write off in the previous year is subject to adjustment as per the provisions of clauses (iii) and (iv) of sub-section (2) of section 36. As per clause (iii), the claim for bad debt may be allowable in the previous year even if the write off is not in that previous year, provided it has been done in the accounts of some earlier previous year, as per clause (iv), the ITO may disallow the claim of the debt in the previous year, even though write off has been done in the previous year on the ground that the debt has not become bad during the previous year. The duty of the ITO, however, does not end with the disallowance. He has further to find out if the debt became bad ' in any earlier previous year not falling beyond the period of four previous years immediately preceding the previous year in which such debt or part is written off ', and give a finding to that effect and once he gives such a finding he is duty bound to modify the completed assessment of the relevant previous year in terms of sub-section (6) of section 155 of the Act. 10.4 The above provisions clearly establish that whereas the writing off of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Its converse position is taken care of by sub-section (4) of section 41, according to which, if the ultimate recovery is ' greater than the difference between the debt or part of the debt and the amount so allowed as bad debt, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered '. 10.7 A broad review of the statutory scheme for allowance of bad debts, thus, emphasises repeatedly that claim of bad debt is founded on a judicious and bona fide balancing of subjective and objective factors regarding the recoverability of a debt or part thereof and at best is an ' estimate ' at the relevant time, subject to the final correction of the errors of judgment, if any, by the objective facts ultimately emerging in course of time. Clauses (iii) and (iv) of sub-section (2) of section 36 visualize the possibility of difference of opinion as to the ' estimate ' between the assessee and the ITO, and in that came the estimate of the ITO, if found correct on the touchstone of appellate procedure, would stand, but even this is subject to correction by the objective facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted earlier. The objectivity and impersonality of these successive reviews is not doubted by the revenue. In fact, the bank has placed on record the entire material on the basis of which it came to the conclusion that certain debts, or part thereof, had become bad during the previous year under consideration. It is worthwhile noting here that most of the claims relate to part of the debts, i.e., such parts as have become irrecoverable during the previous year according to the bank's estimate. The claim of the bank has been rejected by the IAC wholesale by giving, inter alia, the following two reasons : (i) that the assessee-bank has not been able to show that the amounts in question were ' good immediately before the previous year ', and that it has not given ' any indication as to why a particular item of debt or a part thereof can be said to have become a bad debt during the year ', and (ii) that details of only some loans exceeding Rs. 1 lakh were given by the assessee. 10.11 On appeal, the learned Commissioner (Appeals) did not regard the second ground advanced by the IAC as a real hurdle in the assessee's way. He pointed out and, in our opinion, very fairly, that : ". . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, taking into account the assets backing of a debtor and the securities and guarantees held by the bank and the claims of rival creditors on the debtor, even though legal proceedings initiated against the debtor have not yet concluded. The pendency of a litigation need not necessarily keep the hope of full recovery of the loan alive. If the hope is genuinely lost, the stage of write off of the bad debt is reached, and the claim of bad debt ought to be admitted. What has, therefore, to be examined is whether the bank's claim that it has the hope of recovery in a given case is genuine. If all the relevant factors have been properly considered and the bank's conclusion regarding prospects of recovery being nil has been bona fide reached after such consideration as a prudent businessman would bestow in the normal course, there is no justification to reject the claim of bad debt on the ground that the debt has not been proved to be ultimately irrecoverable. There is likely to be a difference in the estimate of bad debt made by an assessee on the basis of hope having been lost and the ultimate outcome of the effort to recover. It is inherent in the provisions of clause (ii) of sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dhanjibhai Bardanwala's case, and Sarangpur Cotton Mfg. Co. Ltd.'s case. 10.13 The learned standing counsel had also pointed out that in at least one of the debtor's cases, namely, Braithwate's Ltd., the amount written off included not only the principal amount but also the interest credited to interest suspense account, which was never offered for taxation and that the latter could never be claimed as bad debt in view of the provisions of sub-clause (a) of clause (i) of sub-section (2) of section 36. This objection of the learned counsel is correct and the learned Commissioner (Appeals) will bear it in mind while reconsidering the assessee's claim for bad debts. The learned counsel for the bank acknowledged the correctness of the above submission and observed that, in fact, the interest credited to interest suspense account had not been included in the write off, though inadvertently it had been mentioned in the note as having been included. Be that as it may, the interest credited to interest suspense account cannot be claimed as bad debt because the said interest was never included in the total income of the bank and the learned Commissioner (Appeals) will bear this fact in mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the latter, and that this distinction in the two types of debts by the bank went to show that interest income did accrue and arise on sticky advances, whereas it did not result in respect of debts transferred to protested bills account. 11.3 There is, in our opinion, considerable merit in the departmental contention. The system of accounting consistently followed by the bank is mercantile in respect of its banking business and simply because what the bank does is not to credit interest on what it chooses to call sticky advances to profit and loss account and instead credits the same to interest suspense account, it cannot be said that the method of accounting has been changed. The method of accounting continues to be mercantile and the only change is in the head of account to which the interest is to be credited. The bank chooses to credit it to the interest suspense account, rather than to the interest account, but for that reason the nature of credit does not change. If it is of income nature, it will be added to the total income wherever it might be shown in the accounts. The method of accounting, it will be remembered, does not create income ; it merely accounts for it after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest income on such advances accrued to the assessee-bank during the previous year. 11.6 Despite it, however, it was open to the bank to show that the said right was merely theoretical and insubstantial for the source from which the income flamed had itself dried up and had become sterile as a result of which the income did not flow out of it, even though in theory it should. The assessee has been able to show such position in the case of debts transferred to protested bills account. In the case of such debts, even though the assessee's right to receive interest is in law intact, the factual position on the ground has made the said right of mere theoretical interest because the financial condition of the debtors has deteriorated and they are in no position to return even the principal, what to say of interest in such cases it can very well be said that the accrual of the right to receive interest has no content and is hollow and that, in fact, no income results therefrom. It is because of this, namely, the erosion of the source, that the income also dries up and as a result, the bank does not debit interest to protested bills account nor passes a credit entry therefor i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l.) have no affinity with those of the present case. In that case, the loan given by the assessee-company was being disputed by the debtor and he had stopped paying interest to the assessee-company and since 1-4-1966, even the assessee-company had stopped charging interest from the debtor and had filed suit for the recovery of the loan in the High Court of Calcutta. The ITO, nevertheless, held that interest had accrued on the said sum in the previous year corresponding to the assessment year 1969-70. The above view was negatived by the Tribunal which held on facts that the principal amount had become a bad debt, that there was no chance of recovery of interest, that, therefore, the assessee was not charging interest and that there was, in the circumstances, no accrual of interest. The above finding was upheld by the Hon'ble High Court. It is pertinent that these facts have no similarity with those of the present case. Here the bank does not regard the sticky advances as bad debts, rather it regards them as capable of yielding interest and so charges interest thereon. There is no question, therefore, of holding on the basis of the ratio of Raigharh Jute Mills Ltd.'s case that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Govindram [1965] 57 ITR 630 in support of his submissions. We have gone through the facts of the said case and find that they have no relevance whatsoever to the facts of the present case. The assessee there was a member of an AOP, and its share in the profits and losses of the said firm was considerably more than the interest of Rs. 25,000 on its investment with the said association, which was credited to the capital account of the assessee. The ITO ignored the losses but included the above interest in the assessee's income. On these facts, it was for determination whether the assessee did earn the income as alleged by the ITO. Their Lordships pointed out that the ' entries relating to interest payable to the two members of the association were posted merely for apportionment of the losses suffered by it and did not represent the real income of the two members '. The principle that real income alone is assessable and that accounting entries may not necessarily be a guide as to the accrual of income and that there may, in fact, be no income even when entries in the accounts might have been made to show the accrual of income, is unexceptional. There can hardly be a debate on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep it in the suspense account and that, therefore, it could not be said that the claim for interest had been given up. The amount was, in the circumstances, held to be includible in the total income. The Hon'ble High Court further pointed out that the alteration in book-keeping and transfer of amount to the suspense account could not be termed as change in the method of accounting. The above observations have an apt relevance to the facts of the present case and so in our opinion, apply to the facts of the present case. 11.13 The facts of Catholic Bank of India v. CIT [IT Reference No. 28 of 1963] (copy placed on record) also have remarkable similarity with the facts of the present case. It was held by the Hon'ble Kerala High Court in that case that the interest accruing on sticky advances was includible in the total income and merely because the bank stopped crediting the said interest to the profit and loss account, the interest did not cease to accrue, nor by not crediting it in the profit and loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contentions to be considered. There can be little quarrel with the principle stated as above. But on facts we find that the decision of the Tribunal relied upon by ' A ' has proceeded on the factual presumption that " the loans themselves were not reliable, and therefore, no part of the interest could he realised. . . " [Emphasis supplied]. If these facts had been found by us, our conclusion would also be similar. But we have found on facts that it was not correct to regard ' sticky loans ' as ' not realisable '. Loans which are not realisable are transferred by the assessee to the protested bills account, and no interest is thereafter charged on such loans. Loans, which are not of the above nature, though they may be having a tendency of being difficult, are kept separate and are styled as ' sticky '. Interest is charged by the bank on such loans and this itself demarcates these loans from loans transferred to the protested bills account. The above factual position and the distinction between the two types of loans were never brought to the attention of our learned brothers. They regarded ' sticky loans ' on the same footing as loans transferred to the protested bills account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k. There are two parties with which the agreement in question is reached by the bank and both agreements combined together constitute one indivisible whole. On the one side is the foreign export of machines and on the other is the Indian importer of the same. The foreign exporter wants the deferred payment for the machines to be guaranteed before the supply of the machines to the Indian importer. The bank provides this guarantee of repayment by the Indian importer of the deferred value in agreed instalments. For effecting this, the bank enters into an agreement with the foreign supplier of the machines, the proforma of which has been placed on record at serial Nos. 66 to 70 of the first paper book. According to clause 6 of this format, the bank provides ' irrevocable ' and ' unconditional ' guarantee to the foreign exporter that : " Usance Promissory Notes made by our customers . . . . shall be duly paid by our customers on their respective due dates to the intent and purpose that in case our customers fail to pay any such Usance Promissory Notes on their respective due dates for any reason or cause whatsoever . . . . we shall pay to you .... On demand and without demur in writin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the statutory auditors. The order of the learned Commissioner (Appeals) on this point is, therefore, hereby confirmed. 13.1 The bank had paid subsidy of Rs. 17,19,712 to its associate banks during the previous year. It has been disallowed by the revenue on the ground that the same had been paid out of integration and development fund, referred to in section 36 of the State Bank of India Act, 1955. This fact is denied by the bank and it is urged by it that it paid the subsidy to the associate banks in the normal course of business in terms of section 48 of the State Bank of India (Subsidiary Banks) Act. It is also brought to our attention that under section 32(1) of the State Bank of India Act, the State bank is to act as the agent of the RBI, and under sub-section (4) of section 32 " The State Bank may transact any business or perform any functions entrusted to it under sub-section (1) either by itself or through a subsidiary bank . . . ." In view of this relationship between the State Bank of India and its associate banks, the payment of subsidies by the State Bank of India to associate banks is to further the business of the bank and so expenditure in question was a legitim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant as per the provisions of section 36(2) of the State Bank of India Act, 1955 '. He gives no factual basis for the aforesaid presumption in his order, nor was it the basis of disallowance by the ITO. He disallowed it ' since such payment is not an expenditure laid out for the assessee's business and it does not in any way result in any benefit by way of earning of any income . . .'. This reasoning, however, does not appeal to us for the reasons given above. Accordingly the addition made is hereby deleted. 14. The assessee-bank has maintained four provident/pension funds. The rules governing them have been placed on records. They are recognised by the Central Government. The funds in question are governed by the trustees and stand deposited with the State Bank of India, who are obliged to pay interest on such funds at stipulated rates. Rule 13 of the State Bank of India Employees' Provident Fund reads as follows : " All monies of the fund except sums withdrawn under rules 14, 15, 16 and 36 shall be deposited in the bank in an account styled ' The Trustees of the State Bank of India Employees' Provident Fund ' and interest thereon at the appropriate rate (as hereinafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the amount is clearly deductible under section 37. The addition made is, therefore, hereby deleted. 15.1 The assessee earned dividend income. The Commissioner (Appeals) has directed that the net income under this head be computed after deducting collection charges at the rate of 10 paise per Rs. 100. The assessee challenges the correctness of the above order. It is pointed out to us that the assessee is a banker and as such it collects dividend income in the course of its normal business and that whatever be the expenditure on this account is allowed as a deduction from the business income and so nothing remains for deduction from dividend income and so the Commissioner (Appeals) was wrong in directing that 10 paise per Rs. 100 be estimated as cost of collection. It is pointed out to us that such reasoning has been accepted by the Tribunal in respect of the bank's assessment for the assessment years 1972-73 and 1975-76 vide IT Appeal Nos. 811 and 812 (Cal.) of 1979 dated 20-7-1983, and that the same should be accepted this year also, as it was accepted in respect of the assessment year 1976-77 vide IT Appeal Nos. 607 and 662 (Cal.) of 1981 dated 30-4-1984. 15.2 We have our r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is not the assessee's case that no expenditure was incurred by it in collecting dividends for itself. Its case is : whatever be the expenditure, it was business expenditure and has, therefore, to be allowed under the head ' Profits and gains of business or profession '. Such an approach appears to us to be opposed to the mandatory provision of the statute and its scheme. We, therefore, reject the assessee's contention in this regard. We derive support for our stand from the following authorities : United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) and CIT v. New India Investment Corpn. Ltd. [1978] 111 ITR 948 (Cal.). 15.3 It is true that the view that we have taken above is opposed to that expressed by our brothers in income-tax appeals referred to above. But the question involved is purely one of law and as per the decision of the Hon'ble Calcutta High Court in the case of Namdang Tea Co. Ltd. v. CIT [1982] 138 ITR 326, no Bench of the Tribunal binds another Bench of the Tribunal in matters of law. Apart from that, we are bound by the ratio of the Calcutta High Court decision cited above [i.e., New India Investment Corpn. Ltd.'s case] which was not brought to the att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the Commissioner in respect of these items. Their disallowance is in accordance with the ratio of the Full Bench decision of the Hon'ble Kerala High Court in CIT v. Forbes, Ewart Figgis (P.) Ltd. [1982] 138 ITR 1 and, accordingly, we confirm the same. 16.4 As regards motor car expenses, however, we find that the addition is not justified. The bank employees have been granted free use of motor cars for the purpose of official work only. If they use the motor cars for their personal work, Rs. 150 per month is deducted from them if it is a car of 16 horse power and above, and at the rate of Rs. 100 per month if the car is of horse power lower than 16. The use of cars for personal purposes, for the charges recoverable as above is restricted to 500 kms. in a month. If somebody's journey exceeds the above limit, he is to be charged extra at the rate of Rs. 20 for 100 kms. The addition made by the revenue on this account is based not on facts but on estimate. Before an estimate can be made, one has to show that an expenditure of the nature mentioned in clause (ii) of sub-section (5) of section 40A has been, in fact, incurred. If the incurring of such an expenditure is establish ..... X X X X Extracts X X X X X X X X Extracts X X X X
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