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income-tax Officer Vs. Oriental Bank of Commerce Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1983)3ITD226(Delhi)
Appellantincome-tax Officer
RespondentOriental Bank of Commerce Ltd.
Excerpt:
.....where the interest amounts are realised periodically without any difficulty, in respect of sticky accounts which are determined on the advice of the auditors and the reserve bank of india, the assessee-bank right from the inception, was following a special system of accounting, whereby the respective interest amount of each of the sticky accounts is only debited to the customer but, simultaneously credited to the 'interest supense account'. in this type of cases, the interest income is accounted for by the assessee-bank on actual realisation basis. thus, when customer pays both the principal and the interest pursuant to the mutual discussion, the interest income so received by the bank is put forward as an income and not otherwise. to say in other words, in regard to the sticky.....
Judgment:
1-11. [These paras are no reproduced here as they involve minor issues.] 12. The next common ground by the revenue pertains to the deletion of the additions of Rs. 4,58,958 (assessment year 1975-76) and Rs. 7,88,739 (assessment year 1976-77) representing interest accrued and credited to 'interest suspense account'. The stand of the assessee-bank, as is clear from its letters dated 22-6-1978 and 28-8-1978, was that though it normally followed mercantile system of accounting with regard to its normal banking business where the interest amounts are realised periodically without any difficulty, in respect of sticky accounts which are determined on the advice of the auditors and the Reserve Bank of India, the assessee-bank right from the inception, was following a special system of accounting, whereby the respective interest amount of each of the sticky accounts is only debited to the customer but, simultaneously credited to the 'interest supense account'. In this type of cases, the interest income is accounted for by the assessee-bank on actual realisation basis. Thus, when customer pays both the principal and the interest pursuant to the mutual discussion, the interest income so received by the bank is put forward as an income and not otherwise. To say in other words, in regard to the sticky account, the method of accounting followed, regarding interest thereon, is of accounting the same on realisation basis. This established method of accounting, according to the assessee, has been in existence for a number of years and stood accepted by the department for those years. Further, according to the assessee, this method of accounting is also backed by the circulars by the CBDT dated 6-9-1952 and 16-4-1973. This stand of the assessee was not acceptable to the ITO who brought the aforesaid amounts of 'interest suspense account' to tax as income of the assessee by observing as under: The bank is maintaining its accounts on mercantile basis and, hence, the amount of interest accrued on the loans given by it constitutes its income. Furthermore, having regard to the Kerala High Court decision in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336 the amount in question is chargeable to tax in the hands of the bank.

To buttress this view, the ITO relied on the directions of the IAC in this behalf reproduced in the assessment orders.

13. Aggrieved by these additions, the assessee brought the matter by way of appeals before the Commissioner (Appeals), who has deleted the above additions by agreeing with the assessee that it was regularly following the hybrid system of accounting, as was the case of the assessee before the ITO and that the method of accounting was regularly followed by him (sic). The decision of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336, relied upon by the ITO is distinguishable and the aforesaid additions could not be made in view of decision of the Tribunal, Cochin Bench, Cochin, in [IT Appeal Nos.

822 (Coch.) of 1976-77 and 600 of 1977-78 decided on 23-9-1978] as also the circulars of the CBDT relied upon by the assessee and those circulars even though they were withdrawn on 20-6-1978, being in force in the year under consideration and so were binding on the ITO in view of the ratio of the decision of the Full Bench of the Kerala High Court in CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334.

14. In the appeals filed by the revenue, the departmental representative strenuously argued that the alleged hybrid system of accounting urged by the assessee and accepted by the Commissioner (Appeals) was not proved, more so, when the interest in respect of constituents other than those of sticky advances have been returned on mercantile system of accounting. The assessee in respect of the same business cannot have two different systems of accounting. Further, the view taken by the ITO was supported by the ratio of the decision of the Kerala High Court in the case of State Bank of Travancore (supra).

These arguments are controverted by the representative for the assessee, Mr. Ganeshan, who has relied on the orders of the Commissioner (Appeals) which; according to him, find support from the ratio of the following decisions : CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. & Har.), CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.) and CIT v. Raigharh Jute Mills Ltd. [1981] 132 ITR 702 (Cal.).

In reply, these arguments are controverted by the departmental representative.

15. We have given consideration to the above arguments. The CBDT by its circular dated 6-10-1952 had informed the officers of the department, by its earlier circular of 1924, that the CBDT had held that interest accruing to a money-lender on loans entered in a suspense account, because of an extremely unlikelihood of their being recovered, need not be included in the assessee's taxable income, if the ITO is satisfied that there is really little probability of the loans being repaid. The CBDT, according to the said circular, considered it desirable to extend the principle just mentioned hereinbefore, to banks which instead of transferring the doubtful debts to a suspense account credited the interest on such debts to that account, provided the ITO is satisfied that the recovery is practically probable. It is correct that the said circular was withdrawn on 20-6-1978, but the said circular was very much there not only at the beginning of the year under consideration but, throughout the entire year ending 31-12-1974/31-12-1975. Since the said circular was in force on the dates just mentioned hereinbefore, the same was binding on the ITO in view of the ratio of the decision of the Full Bench of the Kerala High Court in the case of B.M. Edward India Sea Foods (supra). According to this decision, the instructions contained in a circular of the CBDT which was in force on the first day of the assessment year will be applicable and the ITO was bound by it, even though he passed the assessment order subsequent to the withdrawal of the said circular.

16. Since the said circular was binding on the ITO making the assessments of the assessee for the years under consideration and since the question regarding an advance by the assessee-bank to a customer/ constituent being sticky is decided by it on the recommendations of the auditors/the Reserve Bank of India and so there cannot be any doubt about the accounts in respect of which the interest was credited to 'interest suspense account' in each of the years under consideration.

Since the accounts were not proved to be sticky, the ITO could not in the assessments of the assessee for the years under consideration bring the amounts of interest, credited to 'interest suspense account' in the years under consideration to tax as the income of the assessee for the years under consideration in view of the aforesaid circular of the CBDT. Holding likewise, we uphold the order of the Commissioner (Appeals) in this behalf.

17. Section 145(1) of the Income-tax Act, 1961 ('the Act') lays down that : (1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.

18. It is not the case of the ITO in the assessment order that the proviso to Section 145(1) is attracted in the present case. We, therefore, now apply our minds to the main provision of Section 145(1).

Primarily, amongst Indian businessmen, there are currently two principal systems of book keeping. There is, firstly, the cash system, in which the record is maintained on actual receipt and actual disbursement, entries being posted when money or money's worth is actually received, collected or disbursed. There is, secondly, mercantile system in which the entries are posted in the books of account on the dates of transaction, i.e., on the date on which the right accrues or liability is incurred irrespective of the date of payment. Besides, the cash system and the mercantile system, there are innumerable other systems of accounting, which may be called hybrid in which certain elements and incidents of cash and mercantile system are combined-CIT v. A. Krishnaswami Mudaliar [1964] 53.ITR 122 (SC).

19. In CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226, their Lordships of the Madras High Court have laid down that 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. If such different methods are employed regularly and consistently, the profits have to be computed in accordance with the respective method, provided it results in a proper determination of the true profits.

20. Keeping in view the aforesaid decisions, if we come to the facts of the present case, we find that the assessee for the last many years has been consistently following a method of accounting in respect of its business as a banker, namely, to normally follow mercantile system of accounting with regard to normal banking business, where the interest is realised periodically without any difficulty, but in respect of sticky accounts, the bank follows a special system of accounting, i.e., debiting the customer and crediting the 'interest suspense account'.

The decision regarding a particular advance being sticky or not, is taken by the bank on the advice of the auditors and the Reserve Bank of India. In this type of cases, the income is accounted for by the assessee-bank on actual realisation basis. To say in other words, the assessee has been following a hybrid system of accounting in the manner explained hereinbefore arid that system was being followed regularly for the last many years. Under this system, the assessee in respect of accounts other than the sticky ones, is returning the interest income on mercantile system of accounting, but in respect of sticky advances, as determined by it from time to time on the advice of the auditors and the Reserve Bank of India, it is returning income on cash basis, i.e., as and when received. It cannot be disputed that on the basis of the aforesaid method of accounting which has been accepted in the past, the income under the head 'Profits and gains of the business or profession' of the assessee can properly be deduced. We hold likewise.

21. Since this hybrid method of accounting is regularly followed by the assessee and the income taxable under the head 'Profits and gains of the business or profession' can properly be deduced therefrom, the Commissioner (Appeals) was justified in deleting the aforesaid additions made by the ITO in respect of the amounts standing to the credit of 'interest suspense account', pertaining to the sticky accounts for each of the years under consideration.

22. The ratio of the decision of the Kerala High Court in State Bank of Travancore's case (supra) relied upon by the departmental representative is distinguishable, as correctly held by the Cochin Bench of the Tribunal in [IT Appeal Nos. 822 (Coch.) of 1976-77 and 600 (Coch.) of 1977-78], with which we fully agree. Further, the view taken by us also finds support from the ratio of the three decisions relied upon by the representative for the assessee, Mr. Ganeshan, referred to in paragraph 14 above.

23&24. [These paras are not reproduced here as they involve minor issues.]


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