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Bank of Maharashtra Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Reported in(1986)16ITD113(Pune.)
AppellantBank of Maharashtra
Respondentincome-tax Officer
.....not represent real income. for all practical purposes there is no difference between the state bank method and the federal bank method and this is the reason why in these cases the attempt of revenue to rope in illusory interests did not meet with success. the case laws relied upon by the revenue particularly confinance ltd.'s case {supra) and james finaly and co.'s case (supra) are, thus, clearly inapplicable to the facts of the case. although strictly speaking the cbdt circular applies to entries in suspense account only, as mentioned above, as there is no material distinction between this method and the assessee's method, the principles should apply with equal force to the assessee's method. the commissioner (appeals) was, thus, right in holding in favour of the assessee. it may.....
1. The above appeals for 1973-74 and 1974-75 by the revenue and the assessee were heard together and are being disposed of through this common order.

IT Appeal Nos. 246 and 247 (Pune) of 1981 are filed by the assessee against the order of the Commissioner (Appeals) Bombay dated 31-1-1981 for the assessment years 1973-74 and 1974-75 upholding the validity of notices under Section 148 of the Income-tax Act, 1961 ('the Act'). IT Appeal Nos, 268 and 269 (Pune) of 1981 are filed by the revenue against these very orders of the Commissioner (Appeals) challenging the decision regarding method of accounting, etc. Actually the Commissioner (Appeals) did not decide these aspects on merits but directed the ITO to examine the issue de novo in the light of the guidelines provided.

The ITO followed these guidelines and framed fresh assessments dated 7-4-1983 for 1973-74 and 25-3-1983 for 1974-75. Against these orders of the ITO the assessee filed appeal to the Commissioner (Appeals), Pune who decided the same on 26-10-1983. Against this order of the Commissioner (Appeals), the department has come in appeal in IT Appeal Nos. 956 and 957 (Pune) of 1983.

2. On the question of validity of notices under Section 148, Shri Parulekar pointed out that the original assessments were completed on 4-1-1974 and 22-11-1976 respectively. There is nothing to show that there is any under assessment in these orders. However, as seen from the inspection of the records, the assessing authority recorded the reasons as below for issuing notices under Section 148 on 31-3-1978 and 10-1-1979 respectively.

In consequence of information received from the Ministry of Law that the interest due on advances is liable to tax on accrual basis whether charged in the accounts or not, I have reason to believe that the assessee's total income has been underassessed for the assessment year 1973-74 within the meaning of Section 147(6) of the Act. Issue notice under Section 148.

Interest due on some of the advances has not been charged and credited to the profit and loss account. I have, therefore, reason to believe that the assessee's total income has been underassessed within the meaning of Section 147(6). Issue notices under Section 148 for 1973-74.

At the relevant time, the IAC held concurrent jurisdiction with the ITO in terms of Section 125A of the Act. Hence, as a matter of caution two notices were issued.

In consequence of information received from the Ministry of Law that the interest due on advances is liable to tax on accrual basis whether charged in accounts or not. Further as the interest due on some of the advances has not been charged and credited to the profit and loss account, I have reason to believe that Bank of Maharashtra's income for the assessment year 1974-75 has been underassessed within the meaning of Section 147(6) of the Income-tax Act, 1961. Issue notice under Section 148 for 1974-75.

Shri Parulekar submitted that he does not know what is the 'information' from the Ministry of Law and how the authorities came to the conclusion that income has escaped assessment. He, however, admitted that in respect of the open assessment which the IAC was processing, the IAC did put across to the assessee his proposal for taxing interest on accrual basis though not charged in the accounts relying mainly on a Kerala High Court judgment in State Bank of Travancore v. CIT [1977] 110 ITR 336. Against this proposal of the IAC the assessee did approach the Commissioner who would be acting as the IAC for the purpose of Section 144A of the Act. The reasons recorded do not, however, make a reference to the Kerala High Court judgment. Shri Parulekar also admitted that on the occasion of one of the earlier hearings before the Bench, he was shown a telegram dated 31-3-1978 addressed to the Commissioner. Shri Parulekar submitted that such telegram do not constitute information for the purpose of Section 147(6) as its applicability would depend on the facts of each bank and there is nothing to show that the IAC or the ITO applied his mind to this aspect. He was also shown a Circular No. 1186 of the CBDT dated 20-6-1978 under which the CBDT were advised that in mercantile method of accounting interest is taxable irrespective of whether interest is credited to suspense account or not. The assessee does not keep any such suspense account from 1956-57 and this change in the method was accepted by the ITO at the time after due scrutiny. Besides, the CBDT circulars are not retrospective as explained in CITv. B.M. Edward, India Sea Foods [1979] 119 ITR 334 (Ker.)(FB). Further as the existing circular of the CBDT warranted acceptance of the contention in view of Dr. T.P. Kapadia v. CIT [1973] 87 ITR 511 (Mys.), a different High Court judgment should not be followed. Withdrawal of a circular does not affect the legal position as explained in Tata Iron & Steel Co.

Ltd. v. N.C. Upadhyaya [1974] 96 ITR 1 (Bom.). It was further contended, relying on Vimal Chandra Golecha v. ITO [1982] 134 ITR 119 (Raj.) and Ved Parkash Prabhudayal Agarwal v. ITO [1982] 135 ITR 756 (Bom) that failure to give reasons recorded is fatal to the assessment.

3. Shri Parulekar then contended that in spite of the above legal position, the Commissioner (Appeals) erred in upholding the Section 147 action. Para 4 of the Commissioner (Appeals) order proceeds on a wrong basis and does not apply to the facts of the case. We are not really concerned with the source of information but whether the 'information' is sufficient to enable the assessing authority to assume jurisdiction under Section 148. Judicial pronouncements do constitute information as pointed out by the Commissioner (Appeals) relying on Indian & Eastern Newspaper Society v. C1T [1979] 119 ITR 996 (SC), but in this case the authorities have not referred to such judgments in their recorded reasons. Besides a circular should not be thrown overboard when the High Court itself has not done so. Accordingly, he sought reversal of the decision of the Commissioner (Appeals) on this point.

4. In reply Shri Sathe relied on the order of the Commissioner (Appeals) and pointed out that when the various facts are put together, a clear position emerges. The IAC was prepared to test the point in an open assessment as soon as he read the Kerala High Court judgment. The IAC, however, did not immediately proceed to assume jurisdiction under Section 147. The matter was pending under correspondence. The IAC was awaiting information resolving the apparent conflict between executive circular and the High Court decision. The matter got resolved on 31-3-1978 when possibly oral communication was received. This is the reason why for 1973-74 neither the IAC nor the ITO is referring either to the High Court judgment or the telegram or the circular. The source of information was the Ministry's opinion as communicated to him. The information threw overboard the previous circular and enabled the IAC to issue the notice. For 1974-75 the telegram and the CBDT circular constituted additional information. Thus, there are both High Court judgment and information to support Section 148 action. As to information from the Law Ministry, the authority is found in Vashist Bhargava v. ITO [1975] 99 ITR 148 (Delhi). Under article 77(3) of the Constitution opinion of the Ministry of Law becomes the opinion of the Government. Besides, the impugned notices were issued at a time when the Supreme Cout judgment in Kalyanji Mavji and Co. v. C/r[1976] 102 ITR 287 and the Bombay High Court judgment in CIT v. Hoick Larsen [1972] 85 ITR 467 held the field. The judgment of Indian & Eastern Newspaper Society (supra) does not come in the way for two reasons : (i) there is the Kerala High Court judgment in State Bank of Travancore's case (supra) to support the view, and (ii) the judgment in B.M. Edward, India Sea Foods' case (supra) was delivered later in August 1979. As explained in Export Enterprises (P.) Ltd. v. ITO [1983] 142 ITR 641 (Cal.), assessments reopened prior to August 1979 are valid as they are to be seen from the point of view of law then laid down by the Supreme Court. Lastly, Vimal Chandra Golecha's case (supra) and Ved Prakash Prabhudayal Agarwal's case (supra) deal with cases where material was not given even after the issue of notice. There is no such thing in this case. Reasons recorded need not be communicated as held by the Supreme Court in S. Narayanappa v. CIT [1967] 63 ITR 219.

5. Elaborating the point, Shri Sathe contended that all reasons need not be recorded and that all surrounding circumstances should be seen as explained in H.A. Nanji and Co. v. ITO 1973 Tax LR 567 (Cal.).

Quoting from H.A. Nanji and Co. v. ITO [1979] 120 ITR 593 (Cal.) (page 606), Shri Sathe pointed out that, all that is necessary is that the facts recorded in the reopening should not be inconsistent with the facts on record. The reasons for reopening do not indicate such a position. The IAC/ITO did examine the records and held that irrespective of the accounting method interest is chargeable as income on accrual basis and that in fact there were cases of interest chargeable but not charged. Shri Sathe explained the above position in the light of the following case laws : Kalyanji Mavji and Co.'s case (supra), R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 (SC), Anandji Haridas and Co. (P.) Ltd. v.S.P. Kastur AIR 1968 SC 566, United Mercantile Co. Ltd. v. CIT [1967] 64 ITR 218 (Ker.) (information on awareness). Glen Leven Estates Ltd. v. ITO [1973] 88 ITR 39 (Ker.) (knowledge from records). ACED v. Nawab Sir Mir Osmart Ali Khan Bahadur, H.E.H. the Nizam of Hyderabad [1969] 72 ITR 376 (SC) (opinion of the CBDT).

Shri Sathe wound up his arguments by pointing out the ratio of New Bank of India Ltd. v. ITO [1982] 136 ITR 679 (Delhi) where the facts were exactly similar to the present case. The law laid down is correct though the judgment was delivered before Indian & Eastern Newspaper Society's case (supra).

6. Regarding the argument of there being a change in the method of accounting in 1956-57, Shri Sathe contended that there is nothing to show that there was proper application of mind. Further, the assessee there was a banking company which was different from, the present assessee who is a nationalised bank. As there is no opinion formed at the time of original assessments, there is no question of change of opinion. S. Narayanappa's case (supra) is a clear authority for the preposition that the assessee is not entitled to know the reasons recorded under Section 148 but at the time of assessment, the assessee is only entitled to know the material against him. This has been done.

7. On an examination of the facts and the arguments, we upheld the decision of the Commissioner (Appeals). What we have to see is the state of mind of the authority issuing the notice. The IAC and the ITO were for , some time faced with an apparent conflict between a High Court judgment and executive instructions. When the conflict was resolved as above, the authorities examined the facts of this case and found a prima facie case. It is to be remembered that conditions for assuming jurisdiction to issue notice under Section 148 are different from those required for sustaining the proposed addition. Taking into consideration arguments and the case law relied upon by the departmental representative which effectively meet the arguments of Shri Parulekar, we dismiss the appeals on this point.

8. IT Appeal Nos. 268 and 269 (Pune) of 1981 filed by the revenue are misconceived. We see nothing wrong in the Commissioner (Appeals) coming to the conclusion that some of the points have not received adequate attention and that in the interest of justice, the matter should be given proper attention. The Commissioner (Appeals) has provided the requisite guidelines. These appeals are dismissed accordingly.

9. Coming to the IT Appeal Nos. 956 and 957 (Pune) of 1983 filed by the revenue, Shri Sathe's contention is that the assessee's method of accounting is mercantile. Such a method makes no distinction between recoverable and irrecoverable items at the time of charging. The issue is decided by test of chargeability in terms of the contract for the advance and not by the prospects of recovery. The assessee is not even keeping a suspense account and cannot get the benefit of the CBDT circular of 1952 which deals with suspense account credit of interest on sticky loans. The assessee does keep a register for advances where no interest is charged but the register has not been produced for scrutiny. The CBDT circular says that the suspense account credits are not immune from scrutiny of the ITO. If as contended there is any departure from the pure mercantile method, the ITO would be at liberty to apply Section 145 of the Act. The Commissioner (Appeals), thus, erred in deciding in favour of the assessee. Shri Sathe took us through the order of the IAC and the Commissioner (Appeals) and found fault with the finding of the Commissioner (Appeals) in para 10 that the ITO has not given any finding to the effect whether certain loans have become sticky or not. According to the departmental representative, there is a distinction between sticky advances and irrecoverable advances, the former being an advance not ripe for write-off there being only no actual recovery for the preceding few years. The Commissioner (Appeals) also erred in referring to actual write-off (para 11) to support his conclusion regarding a different item, viz., sticky dues. It is true that the case of Federal Bank [IT Appeal No.450 (Coch.) of 1981] is very similar to the present case as mentioned by the Commissioner (Appeals) in para 11 of his order but there are other cases like Ratnakar Bank case decided by this Bench holding a contrary view. The Commissioner (Appeals) has again mixed up the concept of true or real income with the concept of income in accordance with the regular system of accouting as provided in Section 145.

10. Shri Sathe then contended that the absence of objection to the method of accounting by auditors or the RBI inspection unit on which the Commissioner (Appeals) has heavily relied is no ground for holding that the method of accounting is scientific and answers all the tests for getting out of the clutches of Section 145 proviso. There is nothing like a regular mixed or hybrid method which rests upon subjective decision about actual charging of interest in accounts independent of the terms of the interest-bearing advances. What is the criterion marking an account as sticky How does one keep track of such accounts. Even the auditor's report refers to some misclassification. Is there any standard accountancy profession approved method of identifying and classifying the loans? The test of no recovery for 3 years is not satisfactory. Mere non-recovery does not ipso facto render the account sticky. Unless it is shown that there is a proper application of mind to each individual advance, the ITO would be compelled to frame proper estimates of such accrued and not accounted interest. Relying on the case of CIT v. A. Krishnaswami Mydaliar [1964] 53 ITR 122 (SC), the departmental representative contended that estimate by the IAC is justified as the so called mixed method of accounting is neither time honoured nor custom approved. If at the end of the 3 years the assessee received accumulated interest, it cannot be assessed in one year and has to be related back as held in Addl. CIT v. Ganesh Das [1981] 129 ITR 467 (AIL). The assessee does not waive the interest at any time. When he goes to a court of law, interest due is claimed whether charged in accounts or not. Expenses, however, are debited at actuals. Shri Sathe then distinguished the case of CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226 (Mad.) on which reliance is placed by the Commissioner (Appeals) in that it pertained to cash method of accounting for sales tax which is a statutory liability on the assessee irrespective of collection from the buyers.

11. Shri Sathe then referred to the case law relied upon by the assessee regarding suspense account and submitted that the same does not apply to the assessee for the simple reason that the assessee has no suspense account. He further pointed out that if the assessee is permitted to choose his own year of offering income for assessment, it would create chaos and defeat the very purpose of Section 145 which pins the assessee to a regular method of accounting. Such a system which would be conditioned by the whims and caprices of the persons in charge, if allowed as a regular and acceptable method, would open the doors for large scale unchecked manipulation and evasion. The fact that the assessee is a nationalised bank subject to the Government supervision, should not be allowed to colour the issue regarding regular and scientific method of accounting. Further, relying on Reform Flour Mills (P.) Ltd. v. CIT [1981] 132 ITR 184 (Cal.), James Finlay and Co. v. CIT [1982] 137 ITR 698 (Cal.) and CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.), the departmental representative submitted that the reliance on State Bank of India v. IAC [1983] 6 ITD 225 (Cal.) would not be appropriate particularly when the Tribunal has not examined the impact of the Bombay High Court judgment in Confinance Ltd.'s case (supra).

12. Regarding the specimen items of non-charging Annexures XII given to the Commissioner (Appeals), Shri Sathe submitted the same has not been examined properly. Putting his accusing finger on one item of Shri B.V.Kulkarni, Shri Sathe wondered why no interest is charged even when there is recovery. As the ITO had no occasion to examine this aspect, the least that the Commissioner (Appeals) could have done is to give a chance to the ITO to obtain the explanation. Accordingly, the departmental representative sought restoration of the order of the ITO.13. In reply, Shri Parulekar submitted that the first assessing authority has not appreciated the impact of the peculiarities of banking business. Non-recovery or recovery by fits and starts is an ordinary incidence of banking business and this is the reason why all banks have a system of providing guidelines as approved by the RBI for not crediting to interest account even though strict principles of accrual and pure mercantile method may warrant such debit and credit.

As this is basically a case of regular method of accounting from 1956-57, the nationalisation in 1969 having maintained the continuity of the business, does not change the position regarding regular method of accounting. The other case law relied upon by the departmental representative is, thus, not relevant. As to the objection of the departmental representative regarding scrutiny of the registers, Shri Parulekar submitted that these have been scrutinised by the auditors and were checked by the ITO as may be seen from the report dated 26-2-1981. Sending the matter back for scrutiny would, thus, be a futile exercise. Shri Parulekar wound up his arguments pointing out that in the case of Central Bank, where similar issue was involved, special leave petition has been rejected by the Supreme Court.

14. In the first order of the Commissioner (Appeals), clear directions were given for resolving the doubts, if any, regarding the registers.

The report of the IAC dated 26-2-1981 indicates that the revenue did not doubt the bona fides at any time and did not hold that there is any unwarranted or subjective transfer of a good debt to the sticky register. The assessee gave a detailed reply dated 24-2-1981, explaining the concept of sticky advance, uniformity in the method adopted all along and the extent of scrutiny made by auditors and the RBI. The method of accounting is, thus, time honoured from 1956-57. It is also approved by the accounting profession as seen from the Cochin Bench judgment in Federal Bank's case {supra) in which the impact of the various judgments has been explained. The judgments in American Express International Banking Corpn. v. IAC [1983] ITD 373 (Bom.) (SB) and State Bank of India v. IAC [1985] 13 ITD 550 (Cal.) leave no doubt either about the method of accounting or about the acceptability thereof. Case law referred to therein CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. and Har.) and CITv. Motor Credit Co.

(P.) Ltd. [1981] 127 ITR 572 (Mad.), though not specifically referring to Confinance Ltd.'s case {supra) shows that illusory interest has to be ignored. The cases of Confinance Ltd. {supra) and James Finlay and Co. (supra) are clearly distinguishable in that in these cases the assesses did not claim any change in the method of accounting adopted in the past and did not also give any proper convincing reason for picking up individual debts for the special or favoured treatment. Shri Parulekar wound his arguments by pointing out that 1981-82 order on the point in favour of the assessce has become final and wondered what prompts the revenue to pursue these matters.

15. In his rejoinder, Shri Sathe submitted that the IAC's report dated 26-2-1981 did not refer to physical verification of the registers.

Further rejection of special leave petition does not mean approval as explained in Amrut Talkies v. Second ITO [1984] 150 ITR 386 (Kar.). In Federal Bank's case (supra) all aspects in proper perspective were not placed before the Tribunal. The decision of the Tribunal should, therefore, be taken as confined to the facts of that case.

16. We have examined the facts and the arguments. The assessee is a nationalised bank where accounts are examined not merely by internal auditors but also by statutory auditors and the RBI inspection unit.

Although these facts do not give the assessee any immunity from scrutiny by the revenue, there should be really strong grounds for holding that the method of accounting calls for application of Section 145(1) proviso. The treatment given to a transaction by an assessee in his books of account is admittedly not decisive of the true nature of the transaction as explained in CIT v. Chunilal V. Mehta and Sons (P.) Ltd. [1971] 82 ITR 54 (SC). Although the legal position regarding chargeability of interest does not change, the law does permit a taxpayer to choose a regular method of accounting and even to change the same, if necessary. Even if by any change the method of accounting leads to a reduction or minor distortion of tax liability, this cannot be a ground for rejecting the method of accounting if such accounting is bona fide consistently followed and is not inconsistent with the various methods of accounting as recognised by the profession-Indo Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.). As rightly pointed out by Shri Parulekar, the peculiar factors of banking business and the methods adopted by various banks have to be taken note. There is no bank which adopts what may be called pure mercantile method. Some banks adopt suspense account method as explained in the Central Bank case.

Some others, like the Federal Bank and the assessee-bank do not keep a separate suspense account, but maintain a register of advances on which interest accrued being illusory is not charged. The assessee was up to 1956-57 adopting the suspense account method. Even in such a method as per executive instructions (1952 circular), credits (subject to scrutiny if necessary) were not to be taken as income. The assessee discontinued this manner of keeping track of the advances interest on which is illusory, and adopted a method in which such entries are not made at all, because even otherwise such entries would not represent real income. For all practical purposes there is no difference between the State Bank method and the Federal Bank method and this is the reason why in these cases the attempt of revenue to rope in illusory interests did not meet with success. The case laws relied upon by the revenue particularly Confinance Ltd.'s case {supra) and James Finaly and Co.'s case (supra) are, thus, clearly inapplicable to the facts of the case. Although strictly speaking the CBDT circular applies to entries in suspense account only, as mentioned above, as there is no material distinction between this method and the assessee's method, the principles should apply with equal force to the assessee's method. The Commissioner (Appeals) was, thus, right in holding in favour of the assessee. It may be that the registers were not fully scrutinised but from the I AC report, taking into consideration the fact that the assessee is a nationalised bank, it would be a futile exercise now to insist on fresh examination of all the entries in the sticky advances very minutely as to look for some incautious entry here or a minor lapse there. The CBDT circular regarding non-assessability of interest taken to suspense account would apply to the assessee also.

17. Mercantile method which goes largely by the principles of accrual, however, does approve of many variations in accounting depending on the requirements of each business. In banking, as mentioned above, there is nothing like a pure mercantile method where the interest entries would conform exactly to accrual. The fact that such variations are permissible is writ large in Section 145 itself. All that is now necessary is to see whether income could be properly deducted therefrom. The guidelines of non-recovery of 3 years as the primary basis for not charging interest has been approved even by the CBDT circular dated 9-10-1984 and by the RBI. 'Sticky' is a term which has a definite connotation in banking circles and is not likely to be mis understood. Sticky items are there where there is no recovery or where chances of recovery are not bright and the advance itself is not considered ripe for final write-off (including interest whether charged or not). As a nationalised bank, proper registers of sticky account are kept and these are examined by the auditors, the RBI, etc. Each branch has an official who has been provided with guidelines from time to time for entering any item in this register. The case of B.V. Kulkarni on which the departmental representative has laid his accusing finger was actually a case not of a recovery but of a set off against other claim.

This register, thus, serves as an aide memoire and dispenses with the need for a separate suspense account. As suspense account by its very name refers to cases of transitory items till decision is taken, the separate maintenance or otherwise of suspense account does not change the method of accounting. Consequently, viewed in this light, we hold that the method of accounting adopted by the assessee deserves to be accepted as a regular method acceptable without calling for resort to Section 145 proviso. We, accordingly, uphold the decision of the Commissioner (Appeals) and dismiss these appeals.

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