TMI Blog1998 (3) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... o the amounts outstanding in the accounts of such debtors. The assessee, however, did not give up its rights and claims of charging interest on the amounts outstanding against such debtors but such interest was not debited to the debtors' accounts on accrual basis but was incorporated in separate memorandum record maintained by the assessee-bank for this purpose. As a consequence, no interest income on such loans and advances was recognised in the consolidated income and expenditure account of the assessee year after year. According to the assessee, on certain debtors' account having become doubtful of recovery under the parameters applied by the bank, the assessee followed thereafter cash system of accounting in respect of interest chargeable on such accounts. Subject to this exception, the assessee followed accrual basis or mercantile system of accounting in respect of its interest income on loans and advances made by the bank to its customers. This method of accounting which was being regularly employed by the assessee was accepted by I.T. Authorities in the assessment orders of earlier years, but from assessment year 1980-81 onwards the assessing authorities disputed this metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of loans and advances in ordinary course, followed cash system of accounting in respect of sticky loans. The judgment of the Hon'ble Supreme Court in the case of the State Bank of Travancore did not apply on these special facts of the assessee for the reason that unlike the former bank, there was no accrual of interest under the method of accounting which the assessee followed in respect of sticky loans. 4. Dr. Debi Pal argued that hybrid system of accounting is now well established system of accounting and it is not necessary for an assessee to merely choose between mercantile system of accounting or cash system of accounting. Under the provisions of Income-tax Act a method of accounting regularly employed by an assessee has to be accepted unless it could be shown that the method of accounting regularly employed by an assessee was not proper for the purpose of ascertainment of the income, on the facts and in the circumstance, of an assessee. In the case of a commercial bank, adoption of cash system of accounting for interest on sticky loans, was justified and in keeping with well-recognised principles of accounting. Extracts from 'Statements and Standards Accounting' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of loans other than sticky loans. While deciding the matter, the Tribunal specifically considered the arguments of Revenue based on the judgment of the State Bank of Travancore's case and a host of other High Court judgments including Calcutta High Court judgments in Reform Flour Mills (P.)Ltd v. CIT [1981] 132 ITR 184/[1980] 4 Taxman 531, James Finlay Co. v. CIT [1982] 137 ITR 698/[1981] 6 Taxman 222 and Snow White Food Products Co. Ltd v. CIT(No.1) [1983] 141 ITR 847. The ITAT, Bombay order in the case of Industrial Credit Investment Corpn.of India Ltd. was challenged before the Hon'ble Bombay High Court and as per the judgment in CIT v. Industrial Credit Investment Corpn. of India Ltd. [1991] 189 ITR 126 the Hon'ble Bombay High Court held that the finding of the Tribunal that the Supreme Court decision in the case of State Bank of Travancore was not attracted on the facts of ICICI did not give rise to any referable question of law. Thereafter, Dr. Debi Pal referred to ITAT, Calcutta order dated 30th March, 1992 in the case of Allahabad Bank v. I.A.C [IT Appeal No. 116 (Cal.)of 1988] and pointed out that in that case also the Tribunal found that change-over to cash syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years 1981-82 to 1988-89 and 199091 and the same were liable to be deleted. However, without prejudice the ld. counsel argued that insofar as the sticky loans where the assessee had already filed suits for recovery were concerned, the Assessing Officer had no basis for making assessment of any income on accrual basis in view of the provisions of section 34 of Code of Civil Procedure. This power vested in the Court only where the suits were pending adjudication. 7. Shri Jaydev Saha, Senior Counsel engaged by the department for these appeals argued that the assessee had not brought complete facts on record in support of his contentions. It was not established that the assessee was consistently following hybrid system of accounting. It was not known as to at what point of time this change of method of accounting had been introduced. It was also not established that the assessee did follow this hybrid system of accounting in all these assessment years. It was also not clear from the facts as to on what basis the distinction between sticky loans and non-sticky loans was drawn. Reading from the assessment orders the ld. counsel for the department argued that these facts were not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material distinction between the facts of the assessee's case and that of State Bank of Travancore. The substantive facts remained the same. The assessee cannot therefore escape from the ratio of the Supreme Court judgment in the case of State Bank of Travancore. Merely not debiting the account of the party was not the substance of the matter. The ld. senior counsel brought our attention to the judgment of the Hon'ble Calcutta High Court in the case of James Finlay Co. and argued that in that case the Hon'ble Calcutta High Court have clearly held that unless specifically given up, the assessee could not prevent the accrual of interest income. The assessee in the instant appeals had merely brought a change in the modalities under the same head of income without bringing any substantive change in relation to its rights and claims in respect of income arising on sticky loans. 10. the ld. counsel for the Department thereafter brought our attention to another judgment of the Hon'ble Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. It was argued that in that case the Hon'ble High Court have held that when the assessee simultaneously in respect of certain transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the ld. counsel for the Department were based on mercantile system of accounting whereas the assessee's case is based on hybrid system of account. He further argued that various Calcutta High Court judgments relied upon by the Revenue were not applicable on the facts and circumstances of the assessee-bank's case because it was not a case of a particular transaction. The assessee followed cash method of accounting in respect of a distinct class of transactions after careful and rational classification. It was not as if the assessee declared some isolated transactions to be sticky loans for the purpose of avoidance of tax liability. As against this in the cases relied upon by the Revenue the assessees had chosen to follow cash system of accounting in respect of certain isolated transactions only. 13. We have carefully considered the rival submissions and perused the orders of the authorities below. The case of the Revenue before us mainly is that as far as the facts of the case were concerned, there was not any material distinction between those in the case of State Bank of Travancore and the case of the assessee. The only distinction drawn was on the basis of entries made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 36 (PC), Keshav Mills Ltd v. CIT [1953] 23 ITR 230 (SC), CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) and so on. The Courts have also clearly recognised the fact that there may be different amounts of income resulting in a particular year on the same facts of the case depending upon which method of accounting has been employed. The only legal requirement is that the method of accounting once employed should be regularly followed by the assessee. As held by the Hon'ble Supreme Court in the case of A.Krishnaswami Mudaliar an assessee ought to get the advantage and suffer the disadvantage of the method of accounting employed by him and on such accounting system being regularly maintained, it may happen that in a particular year the Revenue may gain but in another year the assessee may gain. We are, therefore, clearly of the view that the method of accounting followed by the assessee cannot be assailed on the ground that in another case on a different method of accounting having been employed, the assessment of income at a higher amount was made. The only ground on which method of accounting followed by an assessee can be assailed is that it is not a proper method. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Furthermore, it is seen by us that the dispute in this behalf is not a new dispute which has come up for consideration before us for the first time. The ld. counsel for the assessee have cited three widely reported decisions of Income-tax Appellate Tribunal Benches of Bombay, Calcutta and Bangalore. He has relied upon the judgments of the Hon'ble Bombay High Court and Rajasthan High Court which have been delivered on these very specific issues. The judgments of the Calcutta High Court relied upon by the Revenue and various other arguments have all been considered in detail in the Tribunal orders which were subsequently upheld by the High Courts. We do not find any Tribunal order or High Court judgment in which any contrary view is taken. 15. In view of the discussions in the foregoing paragraphs, we hold that the assessee's grounds of appeal for various years in this behalf must succeed. We direct deletion of all additions made/confirmed by the authorities below in respect of assessment years 1981-82 to 1988-89 and 1990-91 on the basis of accrual of interest on the loans categorised by the assessee as sticky loans. 16. The second major issue arising in these appeals relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capital gains or capital loss. With regard to the purchase of shares and securities on and after 1-1-1985 the assessee may be held to be a trader and the assessee may be permitted to value closing stock of such shares and securities on the basis of the changed method of accounting. Thus, the closing stock of shares and securities held by the assessee on 31-12-1985 and onwards should be valued on twin basis of cost in respect of past acquisition and market rate in respect of subsequent acquisition on the basis of the cut-off date of 1-1-1985. 17. During the course of hearing before us the ld. counsel for the assessee argued that these securities and shares have been acquired by the assessee-bank in compliance to the directions of R.B.I. These could not be considered investments made by the assessee-bank as it had no choice in the matter and has necessarily been required to purchase them. The market price of these shares and securities steadily declined but the assessee was obliged to show them in the books of account at cost only. As a result, the assessee over course of years incurred huge loss which were not reflected in the books of account and income-tax returns. Somewhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. counsel for the assessee further argued that it was true that the assessee had changed its method of accounting. But this change of method of accounting became necessary because otherwise the books of account of the assessee reflected distorted results without taking into account that the market price of these shares was substantially lower. After this change of method of accounting was effected, the assessee has followed the changed method of accounting regularly and consistently in all subsequent assessment years. The assessee was entitled to make this change in the method of accounting. The ld. counsel cited a number of case laws and placed particular emphasis on the judgment of the Hon'ble Calcutta High Court in 114 C.T.R. 271 (Cal.) and Snow White Food Products Co. Ltd's case 141 ITR 847. 21. The ld. counsel for the assessee argued that the claim made by the assessee in this behalf are perfectly in order. An identical issue came to be considered by the Hon'ble Karnataka High Court in the case of CIT v. Corporation Bank Ltd. [1988] 174 ITR 616/41 Taxman 161. In that case also the assessee valued the closing stock of shares and securities on cost basis but in the retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. counsel for the assessee argued that in the books of account of the assessee the shares and securities were valued at cost only because in the case of an assessee engaged in the banking operations it was not appropriate to show the assets in poor light. Hence, exemption from the Finance Ministry was obtained to value the shares and securities in the final accounts of the assessee-bank on cost basis only. The attention of the Hon'ble Calcutta High Court was not drawn to these special facts when the reference in the case of UCO Bank was argued. The ld. counsel argued that in the case of UCO Bank the attention of the Hon'ble Calcutta High Court was also not drawn to the Supreme Court judgment in the case of investment Ltd v. CIT [1970] 77 ITR 533. The Ld. counsel for the assessee placed reliance on the paragraph appearing at pages 537-38 in 77 ITR. He, therefore, urged that having regard to the special facts of the case and judgment of the Hon'ble Supreme Court in the case of Investment Ltd. which have not been noticed in the judgment of the Hon'ble Calcutta High Court in the case of UCO Bank the Tribunal may allow the present assessee's appeals in this behalf. 24. We have care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision given by the Hon'ble Calcutta High Court in the case of UCO Bank. In the case of Investment Ltd. the question was as to whether loss arising on sale of securities was a capital loss or business loss and Their Lordships were concerned as to whether the securities were held by the assessee as an investment or as a stock-in-trade. One of the grounds taken on behalf of the Revenue was that the securities had been valued by the assessee year after year on cost basis, which was indicative that the same had been held by the assessee as investment. If the assessee had held the same as stock-in-trade, he would have valued the same at market price which was lower than the cost. The Hon'ble Supreme Court held the view that from the fact that securities and shares had been valued at cost, no firm conclusion could be drawn. A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness-and does not relate to a method of making up the statutory return for assessment to income-tax." Thus, the Hon'ble Judicial Committee held as early as in 1937 that an assessee cannot ask for two different methods, one for writing books of account for the purposes of his business and another for having his tax liability determined under the Income-tax Act. Along the same lines, the decision was given by the Allahabad High Court in the case of CIT v. Smt. Singari Bai [1945] 13 ITR 224 and Madras High Court in the case of Bangalore Woollen, Cotton Silk Mills Co. Ltd. v. CIT [1950] 18 ITR 423 in which case the question was as to whether an assessee writing books of account under mercantile system of accounting can ask for cash system for the purpose of his income-tax assessment. 28. While dwelling in this order upon the contentions of the parties in relation to the assessability of interest on sticky loans we have seen that the present assessee vehemently argued that the treatment given by him to the interest on sticky loans in the books of account takes his case outside the ratio of the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lone claim in the income-Lax return valuation on the basis of cost or market price, whichever is lower. If for the purpose of giving full effect to the legal position, thus, enunciated by the Hon'ble Calcutta High Court in the case of UCO Bank, it is necessary to rectify the assessments for any other assessment years, he may either on his own or on an application filed by the assessee consider application of the provisions of section 154 of the Act. 30. The third issue which relates to the assessment years 1990-91 and 1991-92 only pertains to the assessee's claim of deduction under the provisions of section 36(1)(viia). The facts of the case, in brief, are that the assessee claimed deduction of Rs. 6.7 crores for assessment year 1990-91 and of Rs. 783.08 lakhs for the assessment year 1991-92. In both the assessment years the Assessing Officer noticed that as per the order of the Ld. CIT(Appeals) in the case of the assessee for the assessment year 1989-90 the deduction under these provisions was required to be restricted to the extent of the exact amount of bad debts written off by the rural branches of the assessee-bank. Since no such bad debts had been written off in these two a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing deduction under section 80M to the assessee. Sri D.B. Sen argued that the authorities below were not entitled to deduct any amount on this basis and placed reliance on the judgment of the Hon'ble Calcutta High Court in CIT v. National Grindlays Bank Ltd. [1993] 202 ITR 559. The ld. senior counsel of the department argued that the assessee in this case was a public sector bank and had wide spread business operation. The business of the assessee was carried out mainly on deposits received from public at large arid, therefore, it could not be that the assessee invested in acquisition of shares without employing the interest bearing deposits received from the customers. Thus, the dividend income earned by the assessee there was bound to be certain interest expenditure. Similarly, having regard to the magnitude of the assessee's operations there was bound to be some administrative expenditure, etc., which should be attributed to earning of dividend income. The Assessing Officer was, therefore, justified to reduce from the gross dividend amount an estimated amount representing such expenditure and allowed deduction under section 80M in respect of net amount only. He placed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious years. The assessee was, therefore, left with no alternative but to claim deduction of the same in the year in which the expenditure came to the assessee's knowledge. The Ld. CIT(Appeals) turned down these contentions on the ground that as the assessee was maintaining mercantile system of accounting, earlier years' expenses could not be claimed as deduction. On consideration, we are unable to agree with this bald proposition. It is true that under the mercantile system of accounting all expenses relating to the business of a particular year have to be accounted f or in that year itself. However, this general rule admits of certain exception, e.g., disputed claims and liabilities. There are also instances where bills and claims were raised by the parties long after the transactions in question. If any electricity bill, telephone bill is not received in time, the assessee would be justified to claim the same in the year in which such demands are received. In other words, any liability which may be considered to have arisen only in a subsequent year has to be allowed as deduction even if the same may be attributable to the business conducted by the assessee in an earlier year. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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