S.R. Rajasekhara Murthy, J.
1. These references arise out of a common order passed by the Income-tax Appellate Tribunal, Bangalore Bench, made in ITA Nos. 1, 2, 3, 4/Bang/1980 for the assessment years 1976-77, 1977-78 and 1978-79 in the case of the respondent-assessee.
2. At the instance of the Commissioner of Income-tax, Karnataka, Bangalore, the following common question of law is referred for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the interest credited to the suspense account is not chargeable to interest-tax ?'
3. The assesses company is a banking company and had received interest on loans and advances during the previous years relevant to the three assessment years in question.
4. The assesses company credited the interest that accrued during the three relevant accounting years, viz., Rs. 78,910, Rs. 67,330 and Rs. 38,591, respectively, to an account styled as 'Interest Suspense Account'. The assessee had not taken credit and shown it in the profit and loss account for the three years, since suits had been filed against the debtors in respect of the loans and the interest thereon and the assesses company was not sure of recovering the said sums. The Income-tax Officer rejected this claim and added back such interest and brought it to tax for the three assessment years under the Interest-tax Act.
5. The assesses company filed appeals against the assessment orders, inter alia, challenging the Income-tax Officer's orders bringing the interest to tax under the Interest-tax Act. The Appellate Assistant Commissioner (AAC) allowed the appeals and held that the interest that accrued to the assesses company during the three years which had been credited to the suspense account should be deleted from assessment for all the three years.
6. Being aggrieved by the orders of the Appellate Assistant Commissioner, the Department filed appeals before the Appellate Tribunal. The Tribunal dismissed the appeals of the Department and upheld the order of the Appellate Assistant Commissioner. In dismissing the appeals, the Tribunal followed its orders in ITA Nos. 195 to 197 of 1979 in the case of Corporation Bank Ltd., Mangalore.
7. This court in ITRC No. 175 of 1982 arising out of ITA No. 195 of 1979 in the case of Corporation Bank Ltd. : 157ITR509(KAR) answered the questions referred therein in the affirmative and in favour of the assessee. The second question in the said reference was :
'Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the interest of Rs. 54,485 taken directly to the interest suspense account is not assessable to income-tax ?'
8. The point for consideration in these references is :
Whether the opinion given by this court in ITRC No. 175 of 1982 governs the questions that arise in these references.
9. It is argued by Sri Srinivasan on behalf of the Department that Corporation Bank's case : 157ITR509(KAR) does not govern these references since the interest credited to suspense account which was the subject-matter of assessment in Corporation Bank's case : 157ITR509(KAR) was not interest which was taxed under the Interest-tax Act. No doubt, the assessee in ITRC No. 175 of 1982 was also a bank. But the interest that had accrued to the assessee therein represented the sums of interest on loans, the recovery of which was considered doubtful. It was not a case of an assessment of income under the Interest-tax Act, whereas the assessment of interest income was under the Income-tax Act.
10. This court answered the question in ITRC No. 175 of 1982 in the affirmative and in favour of the assessee in the said reference by merely following the Circular of the Central Board of Direct Taxes. The Board had extended such benefit to banking companies also under the said Circular.
11. Shri S. P. Bhat, learned counsel appearing for the assesses company, has, however, strenuously urged that there should not be any difference in the treatment of the interest for purposes of assessment which is the subject-matter of these references and the ratio of the decision in Corporation Bank's case : 157ITR509(KAR) should be applied.
12. It is his contention that the sums of interest which had been credited to the suspense account for the three years should not be considered for bringing it to charge under the Interest-tax Act also. According to him, any interest that accrues and is credited to a suspense account, should not be brought to charge, in view of the Circular which was followed by this court in Corporation Bank's case : 157ITR509(KAR) , irrespective of the assessability whether under the Income-tax Act or under the Interest tax Act.
13. Another submission of Sri Bhat is that the said interest would not be exigible to tax under the Interest-tax Act, since the interest had not accrued to the assesses company during the relevant year. The matter was in litigation and suits were pending and the chances of recovering the interest also were bleak.
14. In support of his contention, Sri Bhat has relied upon a few decisions of High Courts.
15. Firstly, the decision of the Madras High Court in CIT v. Motor Credit Co. P. Ltd. : 127ITR572(Mad) , has been relied upon. The Madras High Court has held in that case that there could be no hypothetical accrual and there can be no assessment of an illusory interest. The assessees in that case were financiers who had advanced monies to two firms for purchase of motor vehicles on hire-purchase basis. It happened that the routes were taken over by the Government and for the default in making payments, the buses were seized by the financiers. In those circumstances, the High Court held that it would be unreasonable and unrealistic to tax the interest income on the assumption that it had accrued to the assessee even though the routes had been taken over by the Government under a scheme of nationalisation.
16. Sri Bhat has also relied upon a judgment of the Bombay High Court in (i) Tata Iron Steel Co. Ltd. v. N. C. Upadhyaya : 96ITR1(Bom) and (ii) Calcutta Investment Co. Ltd. v. CIT : 142ITR120(Cal) .
17. These decisions do not bear on the question that arise in this reference.
18. Sri Srinivasan, on the other hand, has relied upon the following decision of the Kerala High Court in State Bank of Travancore v. CIT : 110ITR336(Ker) .
19. In this case, the Kerala High Court held that interest on sticky advances which was not credited in its accounts should be treated as interest accrued and liable to be taxed as income on the basis of the mercantile system of accounting followed by the assessee.
20. Sri Srinivasan has also relied upon a decision of the Madras High Court in CIT v. Express Newspapers Ltd. : 124ITR117(Mad) , on a similar issue.
21. The assessee's counsel is, therefore, not correct in relying on the circular issued by the Board with reference to assessment under the Income-tax Act. It is no doubt true that the same income by way of interest is exempt from tax under the Income-tax Act by virtue of the circular. But, it is somewhat incongruous that the same benefit is not available under the Interest-tax Act. In our view, the appeal should be to the Board, rather than to the court, which can only apply and interpret the law as it stands.
22. The alternative plea of the assessee is that the entire amount of interest is taxed for each year and it cannot be the aggregate interest taken in the assessment order cannot be treated as the interest that accrued during the relevant previous years (sic).
23. There is force in the contention of Sri Bhat. As could be seen from the assessment orders, it appears to us that it is the aggregate amount of interest that the debtors owed to the assesses bank up to the date the suits were filed that was subjected to tax in each year. This is a matter for the Tribunal to decide and give suitable directions after such enquiry as is necessary.
24. In view of the above discussion, we answer the question in the negative and in favour of the Department and hold that the interest credited to the suspense account during the three years in question is chargeable to tax under the Interest-tax Act.
25. The question is answered accordingly with no orders as to costs.