S. Bandyopadhyay, Accountant Member -
(1.) SINCE the only issue in the two appeals in the case of M/s. Canara Bank and the most important issue in the other three appeals, relating to the other two assessees also being banks, is the same, these five appeals have been consolidated and a common order is being passed for the sake of convenience.
(2.) All these appeals are Departmental appeals filed against the order of the Commissioner of Income-tax (Appeals) deleting the additions of the large amounts of the nature of interest on sticky loans. So far as M/s. Vysya Bank Ltd. is concerned, the Assessing Officer discusses in the assessment orders for the two years that the assessee-bank had stated in its letter dated 5-2-1990 that it had stopped charging interest on doubtful debts from the assessment year 1987-88 and instead, as and when the interest was recovered or written off as bad debts, the amount in the suspense account was reduced. The Assessing Officer considered the method adopted by the assessee being not acceptable to the Department in view of the principles laid down by the Supreme Court in the case of State Bank of Travancore v. CIT  158 ITR 102 regarding taxability of interest accrued on sticky loans or doubtful debts. The Assessing Officer referred to the discussion made in the said judgment by the Supreme Court relating to the concept of real income ultimately holding that it was not permissible by crediting the interest amounts on sticky loans to suspense account, to term interests already accrued as non-accrued. The Assessing Officer also referred to the instructions issued by the CBDT in Instruction No. 1586, dated 5-2-1986 holding that the interest on doubtful debts should be brought to tax. The Assessing Officer thereafter stated that in absence of the particulars relating to the details of interest accrued on doubtful debts, which the assessee had been asked by the Assessing Officer to furnish, he worked out the said interest at the bank's average lending rate of 15% on the debit balance in the doubtful debts. Ultimately, the Assessing Officer added back the amounts of Rs. 28,27,979 and Rs. 42,98,000 in the assessments of M/s. Vysya Bank Ltd., for assessment years 1987-88 and 1988-89 respectively.
2.1 In the case of M/s. Syndicate Bank, the Assessing Officer discussed in the assessment order that the assessee had not offered any interest on amounts where suits had been filed/provision/account/claim lodged account. Representative of the assessee contended before the Assessing Officer that since no interest had accrued or arisen to the bank, the same was not offered to tax. It was furthermore contended that this system of accounting was being followed by the bank for the past 35 years or so. In this case also, the Assessing Officer referred to the abovementioned decision of the Supreme Court in State Bank of Travancore's case (supra) and added back an amount of Rs. 24,21,43,522 as interest corresponding to the suit filed account/provision accounts and claim lodged accounts.
2.2 So far as the case of M/s. Canara Bank is concerned, its assessment for assessment year 1981-82 had earlier been completed under Section 143(3) without taking into consideration the interest on sticky loans. The assessment was, however, reopened under Section 147(a). In the reassessment order, the Assessing Officer made detailed discussions on this issue. He discussed that this bank was not offering to tax, interest accrued on sticky loans and doubtful advances and that once the loan was identified as sticky, doubtful etc., the same was being transferred to a head called "loan post due account" (1PD A/c) and that the interest accrued on the said account was not being offered to tax at all. The Assessing Officer furthermore stated that instead, interest recovered, if any, was taken on cash basis. The assessee represented before the Assessing Officer that his method of account was being followed by the assessee since 1960. The Assessing Officer, however, did not consider the method to be acceptable inasmuch as in his opinion, income of the assessee could not be properly deduced there from. In this case also, the Assessing Officer referred to the decision of the Supreme Court in the case of State Bank of Travancore [supra). It was contended by the assessee before the Assessing Officer that as regards the switching of the accounting method, the current practice followed by the assessee was widely recognised and that the CBDT, by its Circular No. 491, dated 30-6-1987 urged the Department to accept the change in the method of accounting from mercantile system to cash system in respect of interest on sticky loans in the case of State Financial Corporations, provided the change was accepted by the IDBI/RBI. The Assessing Officer held that the distinction sought to be established by the assessee from the facts found in the case of State Bank of Trauancore [supra) was not existing. He stated that the assessee was mainly following mercantile system of accounting and it could not be said that the assessee had switched over to the cash system. He also stated that the CBDT circular referred to by the assessee related only to interest accounts of State Financial Corporations and was not applicable to banking companies. Finally, he estimated the interest on sticky loans at the figure of Rs. 5,22,34,000 for the assessment year 1981-82 and added back the amount in the reassessment order. So far as the assessment year 1982-83 is concerned, for the same reasons as in the earlier year, he added back an amount of Rs. 6,82,36,000 by way of estimated interest on sticky loans in the original assessment itself.
Additions in all the cases were challenged by the respective assessees before the CIT (Appeals). The CIT (Appeals) distinguished the facts of all the three cases from those in the case of State Bank of Travancore [supra) as decided by the Supreme Court and by holding that an assessee is to be taxed only on the income which he has made and not on the income which he possibly could have made. Finally, he deleted the additions in all the cases.
(3.) DURING the course of the hearing of the appeals in a combined manner before us, the learned Departmental Representative argued as follow:
4.1 In the case of M/s. Vysya Bank Ltd., he stated that the circumstances in this case were different from those of the other two cases inasmuch as till assessment year 1986-87 this particular assessee had been accounting for all its interest income on mercantile basis and that it changed the said method of accounting from the assessment year 1987-88 onwards. He argued that even the changed method also could not be said to be of the nature of cash system of accounting inasmuch as the assessee went on following the mercantile system of accounting in respect of all its sources of income and even in respect of interest income also. It went on following mercantile system in the case of all loans excepting the sticky loans only. The assessee started following the cash system in case of sticky loans alone. The learned DR thus argued that the change was neither a valid one nor a bona fide one and hence, the so-called change could not be accepted. He also referred to the decision of the Supreme Court in the case of State Bank of Travancore [supra) and argued that the Supreme Court had taken into account the concept of real income therein and in the present case, interest was actually accruing even on the sticky loans and the assessee was, therefore, liable to tax on such interest income also. He furthermore stated that the State Financial Corporations had changed their method of accounting from mercantile to cash system in respect of all types of interests, whether on sticky loans or otherwise, whereas the assessee claimed to have changed over to the cash system only in respect of interest on sticky loans alone. He, by relying on the decision of the Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT  182 ITR 1, strongly argued that change in the method of accounting in such a manner was not at all permissible. He also relied on the decision of the Calcutta High Court in the case of James Finlay & Co. v. CIT  137 ITR 698 and of the Kerala High Court in the case of CIT v. Kerala Financial Corpn.  155 ITR 228 in support of his contention that a change to hybrid system as done by Vysya Bank was not permissible at all. He raised the question as to whether the so-called change, as taken recourse to, by the assessee was at all bona fide. He stated that the change had been brought about by the assessee merely for the purpose of reducing its tax liability after delivery of the Supreme Court judgment in the case of State Bank of Travancore (supra).
4.2 The learned DR also brought to our attention discussion made by the Supreme Court in its judgment under consideration relating to the earlier judgment of the Supreme Court in the case of CJT v. K.R.M.T.T. Thiagarqja Chetty & Co.  24 ITR 525 [at page 140 of State Bank of Travancore's case (supra)] and also relating to another judgment of the Supreme Court in the case of CITv. Chamanlal Mangaldas & Co.  39 ITR 8 [at page 146 of State Bank of Travancore's case (supra)]. He also placed reliance on two judgments of the Karnataka High Court in the case of Karnataka State Financial Corpn. v. CIT  174 ITR 206 and Karnataka State Financial Corpn. v. CIT  174 ITR 212. He furthermore tried to distinguish the unreported judgment of the Karnataka High Court in the case of Syndicate Bank [IT Reference Case Nos. 80 to 82 of 1982, dated 24-1 -1989] by stating that this particular judgment of the Karnataka High Court was based on factual finding as rendered by the ITAT not challenged by the Department and could not, therefore, be considered to be an authority on the point of the system of accounting to be considered as being validly followed or not. The learned DR also brought to our notice the fact that the Karnataka High Court had held in Karnataka State Financial Corpn. v. CIT  1974 ITR 212 that RBI directives and circulars are guiding factors in deciding taxability. Reference was also made in this connection to the abovementioned decision of the Kerala High Court in Kerala Financial Corpn. 's case (supra).
4.3 So far as the cases of Syndicate Bank and Canara Bank are concerned, the learned DR, although admitting that there was no case of any switchover of the accounting system for these two banks, at the same time however, argued that it cannot be said that the method of accounting being followed by these two banks of considering interest on sticky loans on receipt basis only, could not be considered to be a proper one for giving a fair idea about the actual income of the banks concerned. He thus argued that the method of accounting being followed by these two banks should not be considered as a valid one and it was, therefore, necessary to take into consideration even accrued interest on sticky loans in respect of these two banks also to arrive at their correct pictures of income. He also argued that this was possible in accordance with the judgment of the Supreme Court in the case of State Bank of Trauancore (supra).;