Decided on August 10,1964

CIT. Respondents


- (1.) THIS is a reference by the Income tax Appellate tribunal, Madras Bench, under S. 66 (1) of the Indian Income-tax Act, 1922. The assessee is the Catholic Bank of India Limited, Changanacherry. The assessment year is 1958-59; and the accounting period, the twelve months ended on 3112 1957. The question referred is: "whether on the facts and in the circumstances of the case, the addition of Rs. 38, 500/- to the assessee's income for the assessment year 1958-59 was justified?"
(2.) THE quantum of the addition is not challenged. THE controversy is as to the right to make an addition on the facts and in the circumstances of of the case. The addition represents interest not included in the profit and loss account of the assessee in pursuance of a direction from the reserve Bank of India . The interest concerned represented the interest due, but not received, on what are termed the "sticky" advances of the assessee. The Reserve Bank of India conducted an inspection into the affairs of the assessee under S. 35 of the banking Companies Act, 1949, and as a result of that inspection imposed certain conditions on it. One of those conditions, as can be seen from Annexure A to the Statement of the Case, was that the assessee should not credit to its profit and loss account unrealised interest on advances which are considered by it as bad or doubtful of recovery. Annexure A also said that if the assessee violated any of the conditions embodied therein, of which the Reserve Bank of india will be the sole judge, the Reserve Bank of India may proceed to pass, without any further notice, the necessary orders refusing the grant of a licence to the assessee in terms of the first proviso to sub-section (2) of s. 22 of the Banking Companies Act, 1949.
(3.) THE real question for determination is whether the non-inclusion of the interest on the "sticky" advances in pursuance of the direction of the Reserve Bank of India will exonerate the assessee from liability to pay income-tax in respect of that amount. THE assessee was all along following the mercantile system of accounting and the Department held that it should have credited the interest due on all its advances, whether actually received or not, on the accrual basis; and that no direction of the reserve Bank of India could possibly take out of the net of taxation any interest which had actually accrued to the assessee during the accounting period relevant to the assessment year concerned. THE Tribunal in dealing with the matter said: "the assessee's representative produced before us the correspondence that passed between the assessee and the Reserve Bank. THE reserve Bank had directed the assessee bank not to credit the amount of interest to the Profit and Loss Account. This direction cannot over-ride the requirements of the Income-tax Act. It has not that statutory binding force". We are in agreement with the conclusion reached by the tribunal. The charge of income-tax under the Indian Income-tax act, 1922, is in respect of the total income of an assessee. S. 4 defines the gamut of total income. S. 2 (15) which purports to define total income merely says that total income means total amount of income, profits and gains referred to in sub-section (1) of S. 4 computed in the manner laid down in the Act.;

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