Ita Nos.82 & 83 Of 2018.Reserved On : 24[Th] November, 2022.Date Of Decision : 7[Th] December, 2022 v. The Kangra Central Co-Op Bank Ltd. …

1 IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA ITA Nos.82 & 83 of 2018.Reserved on : 24[th] November, 2022.Date of Decision : 7[th] December, 2022. Versus The Kangra Central Co-op Bank Ltd. …...Respondent ITA No.83 of 2018. Pr. Commissioner of Income Tax …...Appellant Versus The Kangra Central Co-op Bank Ltd. …...Respondent Coram: The Hon’ble Ms. Justice Sabina, JudgeThe Hon’ble Mr. Justice Sushil Kukreja, Judge. Whether approved for reporting?[1] Sabina, Judge. (Oral) Vide this order, above mentioned two appeals would bedisposed of as they involved common issue.2. Appellant-revenue has filed the appeals challenging the orderdated 31[st] January, 2018, passed by the Income Tax Appellate Tribunal, 2 Division Bench ‘A’, Chandigarh, whereby the appeals filed by the revenuewere dismissed. 3.At the time of admission of the appeals, following substantialquestions of law were framed in ITA No.82 of 2018:- “(1) Whether on the fact and in the circumstances ofthe case, the Hon’ble ITAT, Chandigarh is justified in deletingthe addition of Rs.27,78,47,640/ made by the AO on accountof interest accrued on non performing assests by ignoringthe decision of the Hon’ble supreme Court in the caseof State Bank of Travancore (158 ITR 102” (2)Whether on the facts and in the circumstances of thecase, the Hon’ble ITAT erred in applying Section 43D to acooperative society even though the same isspecifically excluded under Explanation (ii) to clause (vii a) ofSection 36 (1) (3)Whether on the fact and in the circumstances of thecase, the Hon’ble ITAT has erred in following the decision inthe case of CIT vs. Punjab State Co-op Bank Ltd. Of A.Y.2007-08, 2008-09 reported in 143 ITD 571 (Chd)as the Punjab State Co-op Bank Ltd. is a scheduled Bankwhereas the Kangra Central Co-op Bank Limited is not ascheduled Bank.” 4.Similar substantial questions of law were framed in ITA No.83of 2018, with difference in the amount concerned. 5.The question involved in the present appeals is as to whetherthe assessee was liable to pay tax on interest accrued on loanscategorized as non-performing assets (NPA)/sticky loans on receipt basis 3 as claimed by the assessee or on accrual basis as calculated by therevenue. 6.The assessee is a non-scheduled bank. The assessingofficer noted that the assessee had not credited/recognized interest onNPAs, although, it was following mercantile system of accounting. 7.Notice was issued to the assessee with regard to theassessment years 2012-13 and 2013-14. The assessee was asked toexplain as to why the interest on loans had not been added to its income. The case of the assessee was that the amount of interest had not beenshown as income because the same had become NPA and the bank wasnot certain about the recovery of principal amount/interest. Hence, thebank had not made any entries in its books of account for the years inquestion with regard to interest due on NPA accounts. The assessingofficer held that the assessee was required to show the interest on NPAsas income and consequently the income of the assessee wasrecomputed by the assessing officer by including the interest, which wasliable to accrue on the loans etc. Assessee filed appeals before theCommissioner of Income Tax Appeals and the appeals were allowed bythe appellate authority. 8.Aggrieved against the orders passed by the appellateauthority, the revenue approached the Tribunal by way of appeals.Appeals with regard to assessment years 2012-13 and 2013-14 were 4 clubbed and were dismissed by the Tribunal vide impugned order dated31[st] January, 2018. 8.Aggrieved against the orders passed by the appellateauthority, the revenue approached the Tribunal by way of appeals.Appeals with regard to assessment years 2012-13 and 2013-14 were 4 clubbed and were dismissed by the Tribunal vide impugned order dated31[st] January, 2018. 9.Learned counsel for the appellant-revenue has submittedthat the assessee was a non-scheduled bank and was followingmercantile system of banking. Hence, the assessee was required tocredit the income of NPA or sticky loans and could claim the same as baddebt in the next year. The assessee could not draw any benefit underSection 43D of the Income Tax Act, 1961. Learned counsel has furthersubmitted that para (xii) of CBDT instruction No.17/2008, dated 26[th]November, 2008, instructed that under Section 145 of the Act, Incomeunder the heads ‘profit and gains of business’ or ‘income from othersources’ is required to be computed in accordance with either cash ormercantile system of accounting, regularly employed by the assessee.Under the RBI Guidelines and the Indian Companies At, 1956, Bankshave to follow the mercantile system of accounting and prepare accountson accrual basis. The Assessing Officers should ensure that this systemis strictly followed by the Banks in respect of all sources of income.Learned counsel has further submitted that the said instructions werebinding on the department. Learned counsel has further submitted thatthe assessee had not maintained any suspense account and had to onlyfollow mercantile system of banking. 10.In support of his arguments, learned counsel for theappellant has placed reliance on the judgment of Hon’ble Supreme Court 5 in State Bank of Travancore Versus Commissioner of Income Tax, Kerala, (1986) 2 Supreme Court Cases, 11, wherein it has been heldas under:- “64.In CIT v. Motor Credit Co. Pvt. Ltd., the assessee,a private company, was carrying on business as financierfor purchase of motor vehicles on hire purchase. Itadvanced under hire purchase agreements monies to twofirms which were plying buses. The routes of these twofirms having been taken over by a State TransportCorporation following nationalisation, the firms defaultedin making payment of the hire purchase instalments, andconsequently the buses were seized. As the assessee-company was advised that there was no prospect ofrecovering even the principal amount, the assessee-company did not credit the interest on the outstandingsfrom the two companies even though it was adopting themercantile system of accounting. The Income-tax Officer,however, included a sum of Rs. 56,163 by way of accruedinterest on the amounts outstanding against these twofirms. There in fact no interest accrued in view of the factsbecause there was hire purchase and the State transportcorporation had taken over the firms. Therefore, there wasno question of paying any hiring charges or interest. Inthat view it was considered to be unrealistic that incomeaccrued. If the actuality of situation or the reality of aparticular situation makes an income not to accrue, thenvery different considerations would apply. But whereinterest has accrued and the assessee has debited theaccount of the debtor the difficulty of the recovery wouldnot make the accrual non-accrual of interest. 6 6 65.In CIT v. Devi Films (P) Ltd., the Madras HighCourt held that the regular mode of accounting onlydetermined the mode of computing the taxable incomeand the point of time at which the tax liability wasattracted. It would not determine or affect the range oftaxable income or the ambit of taxation. It was further heldthat where no income had resulted, it could not be saidthat income had accrued merely on the ground that theassessee had been following the mercantile system ofaccounting. Even if the assessee made a credit entry tothat effect still no income could be said to have accrued tothe assessee according to the Madras High Court. If noincome had materialised, it was pointed out, there couldbe no liability to tax on any hypothetical accrual of incomebased on the mercantile system of accounting followed bythe asessee that had to be taken into account, but whatshould be considered was whether the income had reallymaterialised or resulted to the assessee. The questionwhether real income had materialised to the assessee hadto be considered with reference to commercial andbusiness realities of the situation. In that case theassessee company had entered into an agreement with Mwho was producing a Kannada film. The film was in theprocess of production and the producer wanted finance tocomplete the picture and approached the assessee andoffered the exclusive distribution rights of the picture incertain areas in Karnataka State. The assessee agreed toadvance a sum of Rs. 2,80,000. Under the agreement theassessee as distributor could deduct the commission andappropriate the balance towards the discharge of theamount advanced to the producer and after the advancewas completely adjusted, the distributor had to remit to theproducer the realisations after deducting the commission. 7 The distribution commission was to be calculated at 35%of the net realisation on the picture. The producerundertook to complete and deliver the prints for therelease of the picture failing which the producer undertook to pay damages together with interest for the amountreceived at 12% per annum from the date of default to thedate of delivery of the prints and also provided certainsum for certain contingency. It is not necessary to set outin detail the further facts. It was held that the assesseewas in a position to realise only Rs. 3,47,000approximately during the three years in question asagainst a total sum or Rs. 4,37,828 incurred as the cost ofproduction. The Tribunal was justified in the High Court'sview that having regard to the terms of the agreemententered into between the parties and in the light of theentries contained in the accounts, the commission couldnot be said to have accrued in favour of the assessee, ascommission could be earned only after the entire advancehad been realised. The decision, as is apparent from itstenor rested upon the peculiar facts. As the advancescould not be realised because of the contingencies thathappened in that case, the commissions did not accrue orcould not be said to have actually accrued. As mentionedbefore, the concept of real income may have to be givenprecedence in computation of income in a particular casebut accrued income cannot be waived as not havingaccrued to the assessee. Sethuraman, J. who deliveredthe judgment of the bench noted the distinction betweenthe James Finlay's case and the case before him in theMadras High Court. Dealing with the Calcutta case,Sethuraman, J. observed at page 395 that the waiver ofinterest would be inconsistent with the entries in thebooks, since the interest had been credited to the 8 8 suspense account. As in the instant case before us inthese appeals the learned judges of the Madras HighCourt also referred to Morvi Industries Ltd. where affirmingthe Calcutta High Court decision, it was found that therelinquishment by the assessee of its remuneration after ithad become due was of no effect and that the amountwas liable to be taxed. The Madras High Court felt thatthis Court had considered only in the light of the system ofaccounting followed by the assessee and further observedthat this Court in the aforesaid decision had not beenreferred to the notion of real income. It is unfortunate thatthe High Court chose to side-track a binding decision ofthis Court on a wholly untenable ground.” 11. Learned counsel for the appellant has also placed reliance on the decision of the Hon’ble Supreme Court in Kerala FinancialCorporationversus Commissioner of Income Tax, (1994) 4Supreme Court Cases, 375, wherein it has been held as under:- “15.The result is that we follow and affirm the viewtaken by the majority by this Court in State Bank ofTravancore case and hold that the interest which hadaccrued on the sticky advance has to be treated asincome of the assessee and as such taxable. We wouldadd that if ultimately it would be established by theassessee that the advance has taken the shape of baddebt refund of the tax paid on the interest would becomedue and the same can be claimed by the assessee inaccordance with law” 12. Learned counsel for the appellant has also placed reliance on the decision of the Hon’ble Supreme Court in Gem Granites versus 9 Commissioner of Income Tax,T.N.(2005) 1 Supreme Court Cases, 289, wherein it has been held as under:- “18.The 1994 and 1995 notifications both relate to theinterpretation of Item (x) in the Twelfth Schedule read withSection 80-HHC as amended in 1991. They are confinedto an exposition of the phrase of "cut and polished" usedin Item (x) and do not seek to interpret the word ’minerals’in general. The 1994 circular clarified that the phrase ’cutand polished’ minerals meant exactly that and could notbe extended to any other process. The 1995 circularmodified the rigour of the 1994 circular to the extent that itrecognized some other processes as falling within thephrase ’cut and polished’. Both circulars clearly state thatbenefit of Section 80 HHC was available to cut andpolished granite only with effect from 1.4.91 by virtue ofinsertion of Item (x) in the Twelfth Schedule to the Act. 19.Doubtless, the Customs Tariff Act and the CentralExcise Tariff Act both draw a distinction between mineralsand processed minerals. For example in Chapter 27 of theCustoms Tariff, a distinction has been drawn betweenmineral fuels, mineral oils and mineral products. Howevera classification which is relevant for the purpose ofdetermination of rate of duty cannot be imported into theIncome tax Act which makes no such distinction. 20.Consequently, even if the concession of theappellant before the High Court is ignored, the benefit ofSection 80-HHC cannot be granted to the appellant for theAssessment Year in question. The appeal is accordinglydismissed without any order as to costs.” 10 19.Doubtless, the Customs Tariff Act and the CentralExcise Tariff Act both draw a distinction between mineralsand processed minerals. For example in Chapter 27 of theCustoms Tariff, a distinction has been drawn betweenmineral fuels, mineral oils and mineral products. Howevera classification which is relevant for the purpose ofdetermination of rate of duty cannot be imported into theIncome tax Act which makes no such distinction. 20.Consequently, even if the concession of theappellant before the High Court is ignored, the benefit ofSection 80-HHC cannot be granted to the appellant for theAssessment Year in question. The appeal is accordinglydismissed without any order as to costs.” 10 13.Learned counsel for the respondent, on the other hand, hasopposed the appeals and has submitted that the Tribunal has rightlydismissed the appeals filed by the revenue. Admittedly, respondentAssessee is a non-scheduled bank. Suspense account is required to becreated by each bank as per Reserve Bank of India Instructions. Therewas no justification in the assessee paying tax with regard to the stickyloans and then claim it as a bad debt in the next year. Section 43D of theIncome Tax Act was substituted by Finance Act 1999 (27 of 1999) w.e.f.1[st] April, 2000, whereas, it had been earlier inserted by Finance Act 1991w.e.f. 1[st] April, 1991. Initially the said Section was applicable to scheduledbank, but thereafter, it was amended and was also made applicable to co-operative bank w.e.f. 1[st] April, 2018. A perusal of the objects at the time ofaddition of co-operative banks in Section 43D reveals that the same wasdone with an intention to cure the defect. 14.In support of his arguments, learned counsel for therespondent has placed reliance on the judgment of Hon’ble SupremeCourt in Allied Motors (P.) Ltd. versus Commissioner of Income-Tax, In support of his arguments, learned counsel for the (1997) 224 ITR 677, wherein it has been held as under:- Section 43B was inserted in the Income-tax Act, 1961 witheffect from April 1, 1984. The section, as it originallystood, did not contain the two provisos. The first provisohas been set out above. The proviso was inserted by theFinance Actof 1987 which came into effect from April 1,1988. Explanation 2 has been added subsequently bythe Finance Act of 1989 but with retrospective effect from 11 April 1, 1984. In these References and appeals we areconcerned with the application of Section 43B as it stoodbefore the provisos were added. xxxxxxxxxIn the case of Goodyear India Ltd. v. State ofHaryana and Anr. (1991) 188 ITR 402, this court said thathe rule of reasonable construction must be applied whileconstruing a statute. Literal construction should beavoided if it defeats the manifest object and purpose ofthe Act. Therefore, in the well known words of Judgelearned Hand, one cannot make a fortress out of thedictionary; and should remember that statutes have somepurpose and object to accomplish whose sympathetic andimaginative discovery is the surest guide to their meaning.In the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82ITR 570, this Court said that one should apply the rule ofreasonable interpretation. A proviso which is inserted toremedy unintended consequences and to made theprovision workable, a proviso which supplies an obviousomission in the section and is required to be read into thesection to give the section a reasonable interpretation,requires to be treated as retrospective in operation so thata reasonable interpretation can be given to the section asa whole. Therefore, in the well known words of Judgelearned Hand, one cannot make a fortress out of thedictionary; and should remember that statutes have somepurpose and object to accomplish whose sympathetic andimaginative discovery is the surest guide to their meaning.In the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82ITR 570, this Court said that one should apply the rule ofreasonable interpretation. A proviso which is inserted toremedy unintended consequences and to made theprovision workable, a proviso which supplies an obviousomission in the section and is required to be read into thesection to give the section a reasonable interpretation,requires to be treated as retrospective in operation so thata reasonable interpretation can be given to the section asa whole. This view has been accepted by a number of HighCourts. In the case of CIT v. Chandulal Venichand [1994]209 ITR 7, the Gujarat High Court has held that he firstproviso to section 43B is retrospective and sales-tax forthe last quarter paid before the filing of the return for theassessment year is deductable. This decision deals withassessment year 1984-85. The Calcutta High Court in thecase of CIT v. Sri Jagannath Steel Corporation [1991] 191 12 ITR 676, has taken a similar view holding that thestatutory liability for sales-tax actually discharge after theexpiry of accounting year in compliance with the relevantstature is entitled to deduction under Section 43B. TheHigh Court has held the amendment to be clarificatoryand, therefore, retrospective. The Gujarat High Court inthe above case held the amendment to be curative andexplanatory and hence retrospective. The Patna HighCourt has also held the amendment inserting the firstproviso to be explanatory in the case of JamshedpurMotor Accessories Stores v. Union of India and Ors.[1991] 189 ITR 70., It was held that amendment insertingfirst proviso to be retrospective. The special leave petitionfrom this decision of the Patna High Court was dismissed.The view of the Delhi High Court, therefore, that the firstproviso to section 43B will be available only prospectivelydoes not appear to be correct. As observed by G.P. Singhin his Principles of statutory Interpretation, 4[th] Edn. Page291, "It is well settled that if a statute is curative or merelydeclaratory of the previous law retrospective operation isgenerally intended." In fact the amendment would notserve its object in such a situation unless it is construedas retrospective. The view, therefore, taken by the DelhiHigh Court cannot be sustained.” 15.Learned counsel for the respondent has also placed relianceon the judgment of Hon’ble Supreme Court in UCo Bank versusCommissioner of Income-Tax (1999) 237 ITR 889, wherein it has beenheld as under:- “We have to consider whether interest on a loanwhose recovery is doubtful and which has not been 13 recovered by the assessee-bank for the last three yearsbut has been kept in a suspense account and has notbeen brought to the profit and loss account of theassessee, can be included in the income of the assesseefor the assessment year 1981-82. It is the case of theassessee that in respect of loans which are advanced by itto various customers, recovery of some loans is verydoubtful. It is doubtful whether even the interest on theloans advanced will be recovered from the customer. Insuch cases, the interest calculated on the loan amount iscredited in a suspense account. This amount is notbrought to the profit and loss account of the assessee-bank because these are amounts which are not likely tobe realised by the bank. Hence they do not form a part ofthe real income of the bank. If and when any such amountor a part of it is recovered, it is included in thatassessment year in the total income of the assessee forthe purpose of payment of income-tax. The method of accounting which is followed by theassessee-bank is mercantile system of accounting.However, the assessee considers income by way ofinterest pertaining to doubtful loans as not real income inthe year in which it accrues, but only when it is realised. Amixed method of accounting is thus followed by theassessee-bank. This method of accounting adopted bythe assessee is in accordance with accounting practice. InSpicer and Pegler's Practical Auditing the relevantpassage occurring at page 186-187 has been reproducedin the minority judgment of this Court in State Bank ofTravancore v. Commissioner of Income-tax, Kerala [(1986)158 ITR 102 at p.120]. It is as follows: 14 "Where interest has not been paid, it is sometimesleft out of account altogether. This prevents thepossibility of irrecoverable interest being credited torevenue, and distributed as profit. On the otherhand, this treatment does not record the actualstate of the loan account, and in the case of banksand other concerns whose business it is toadvance money, it is usual to find the interest isregularly charged up, but when its recovery isdoubtful, the amount thereof is either fully providedagainst or taken to the credit of an InterestSuspense Account and carried forward and nottreated as profit until actually received." Under Section 145 of the Income-Tax Act, 1961,income chargeable under the head "profits and gains ofbusiness or profession or income from other sources"shall be computed in accordance with the method ofaccounting regularly employed by the assessee; providedthat in a case where the accounts are correct andcomplete but the method employed is such that in theopinion of the Income- tax Officer, the income cannotproperly be deduced therefrom, the computation shall bemade in such manner and on such basis as the Income-tax Officer may determine. In the present case themethod employed is entirely for a proper determination ofincome. The question whether interest earned, on whathave come to be known as "sticky" loans, can beconsidered as income or not until actual realization, is a 15 question which may arise before several income taxofficers exercising jurisdiction in different parts of thecountry. Under the accounting practice, interest which istransferred to the suspense account and not brought tothe profit and loss account of the company is not treatedas income. The question whether in a given case such"accrual" of interest is doubtful or not, may also beproblematic. If, therefore, the Board has considered itnecessary to lay down a general test for deciding what isa doubtful debt, and directed that all income tax officersshould treat such amounts as not forming part of theincome of the assessee until realized, this direction byway of a circular cannot be considered as travellingbeyond the powers of the Board under Section 119 of theIncome Tax Act. Such a circular is binding under Section119. The circular of 9th of October, 1984, therefore,provides a test for recognising whether a claim for interestcan be treated as a doubtful claim unlikely to berecovered or not. The test provided by the said circular isto see whether, at the end of three years, the amount ofinterest has, in fact, been recovered by the bank or not. Ifit is not recovered for a period of three years, then in thefourth year and onwards the claim for interest has to betreated as a doubtful claim which need not be included inthe income of the assessee until it is actually recovered. xxxxxxxxx In the premises the majority decision in the StateBank of Travancore v. CIT (1986) 158 ITR 102 (SC)cannot be looked upon as laying down that a circularwhich is properly issued under Section 119 of the Income-tax Act for proper administration of the Act and forrelieving the rigour of too literal a construction of the lawfor the benefit of the assessee in certain situations would 16 xxxxxxxxx In the premises the majority decision in the StateBank of Travancore v. CIT (1986) 158 ITR 102 (SC)cannot be looked upon as laying down that a circularwhich is properly issued under Section 119 of the Income-tax Act for proper administration of the Act and forrelieving the rigour of too literal a construction of the lawfor the benefit of the assessee in certain situations would 16 not be binding on the departmental authorities. Thiswould be contrary to the ratio laid down by the Bench offive judges in Navnitlal C. Javeri v. K.K. Sen (1965) 56ITR 198 (SC). In fact, State Bank of Travancore v. CIT(1986) 158 ITR 102 (SC) has already been distinguishedin the case ofKeshavji Ravji and Co. v. CIT (1990) 182ITR 1 (SC) by a Bench of three judges in a similarfashion. It is held only as laying down that a circularcannot alter the provisions of the Act. It being in thenature of a concession, could always be prospectivelywithdrawn. In the present case, the circulars which havebeen in force are meant to ensure that while assessingthe income accrued by way of interest on a "sticky" loan,the notional interest which is transferred to a suspenseaccount pertaining to doubtful loans would not beincluded in the income of the assessee, if for three yearssuch interest is not actually received. The very fact thatthe assessee, although generally using a mercantilesystem of accounting, keeps such interest amounts in asuspense account and does not bring these amounts tothe profit and loss account, goes to show that theassessee is following a mixed system of accounting bywhich such interest is included in its income only when itis actually received. Looking to the method of accountingso adopted by the assessee in such cases, the circularswhich have been issued are consistent with theprovisions of Section 145 and are meant to ensure thatassessees of the kind specified who have to account forall such amounts of interest on doubtful loans areuniformly given the benefit under the circular and suchinterest amounts are not included in the income of theassessee until actually received if the conditions of thecircular are satisfied. The circular of October 9, 1984, also 17 serves another practical purpose of laying down a uniformtest for the assessing authority to decide whether theinterest income which is transferred to the suspenseaccount is, in fact, arising in respect of a doubtful or"sticky" loan. This is done by providing that non-receipt ofinterest for the first three years will not be treated asinterest on a doubtful loan. But if after three years thepayment of interest is not received, from the fourth yearonwards it will be treated as interest on a doubtful loanand will be added to the income only when it is actuallyreceived. The other judgment on which reliance was placedby the Department was a judgment of a Bench of twojudges of this Court in Kerala Financial Corporation V.CIT (1994) 210 ITR 129, where this Court, following themajority view in State Bank of Travancore v. CIT(1986)158 ITR 102 (SC) held that interest which hadaccrued on a "sticky" advance has to be treated asincome of the assessee and taxable as such. It is saidthat ultimately, if the advance takes the shape of a baddebt, refund of the tax paid on the interest would becomedue and the same can be claimed by the assessee inaccordance with law. For reasons set out above, we arenot in agreement with the said judgment. The relevantcirculars of Central Board of Direct Tax cannot beignored. The question is not whether a circular canoverride or detract from the provisions of the Act; thequestion is whether the circular seeks to mitigate therigour of a particular section for the benefit of theassessee in certain specified circumstances. So long assuch a circular is in force it would be binding on thedepartmental authorities in view of the provisions of 18 18 Section 119 to ensure a uniform and properadministration and application of the Income-tax Act.” 16.Learned counsel for the respondent has also placed relianceon the judgment of Hon’ble Supreme Court in Mercantile Bank Ltd.versus Commissioner of Income-Tax, (2006) 283 ITR 84 (SC), whereinit has been held as under:- “7.Although the 1952 circular was withdrawn in June1978 in view of the decision of the Kerala High Court tothe contrary in State Bank of Travancore vs. CIT (1977)110 ITR 336, the principle was reintroduced by the CentralBoard of Direct Taxes by another Circular dated October9, 1984. The 1984 Circular clarified that up to theAssessment years 1978-79 the taxability of interest ondoubtful debts credited to suspense account would bedecided in the light of the Board’s earlier Circular dated6th October, 1952 as the said Circular was withdrawn onlyin June, 1978. With effect from 1979-80 the newprocedure prescribed under the 1984 circular would apply.The procedure prescribed is not relevant for our purposes.But it is clear that the circular issued in 1978 waseffectively set aside and rendered ineffective. 9.Therefore, the assessment year in question in thisappeal should have been dealt with by the Department inaccordance with the 1952 Circular under which theinterest on doubtful loans could not be brought to tax. 10.The decision of the High Court on the first question,having been based on the decision in State Bank ofTravancore [1986] 158 ITR 102 (SC) must be held to be 19 incorrect in view of the subsequent judgment of this Courtin the case of UCO Bank Vs. CIT [1999] 237 ITR 889.” 17.Learned counsel for the respondent has also placed relianceon the judgment of Hon’ble Supreme Court in Commissioner ofIncome-Tax versusAlom Extrusions Ltd. [2009] 319 ITR 306 (SC),wherein it has been held as under:- “16.We find no merit in these civil appeals filed by theDepartment for the following reasons: firstly, as statedabove, Section 43-B [main section], which stood insertedby Finance Act, 1983, with effect from April 1, 1984,expressly commences with a non-obstante clause, theunderlying object being to disallow deductions claimedmerely by making a Book entry based on MerchantileSystem of Accounting. At the same time, Section 43-B[main section] made it mandatory for the Department togrant deduction in computing the income under Section 28in the year in which tax, duty, cess, etc., is actually paid.However, Parliament took cognizance of the fact thataccounting year of a company did not always tally with thedue dates under the Provident Fund Act, MunicipalCorporation Act [octroi] and other Tax laws. Therefore, byway of first proviso, an incentive/relaxation was sought tobe given in respect of tax, duty, cess or fee by explicitlystating that if such tax, duty, cess or fee is paid before thedate of filing of the Return under the Income Tax Act [duedate], the assessee(s) then would be entitled to deduction.However, this relaxation/incentive was restricted only totax, duty, cess and fee. It did not apply to contributions tolabour welfare funds. The reason appears to be that theemployer(s) should not sit on the collected contributions 20 20 and deprive the workmen of the rightful benefits underSocial Welfare legislations by delaying payment ofcontributions to the welfare funds. However, as statedabove, the second proviso resulted in implementationproblems, which have been mentioned hereinabove, andwhich resulted in the enactment of Finance Act, 2003,deleting the second proviso and bringing about uniformityin the first proviso by equating tax, duty, cess and fee withcontributions to welfare funds. Once this uniformity isbrought about in the first proviso, then, in our view, theFinance Act, 2003, which is made applicable by theParliament only with effect from April 1, 2004, wouldbecome curative in nature, hence, it would applyretrospectively with effect from April 1, 1988. Secondly, itmay be noted that, in the case of Allied Motors (P) Limitedvs. Commissioner of Income Tax, reported in [1997] 224I.T.R.677 (SC), the Scheme of Section 43-B of the Actcame to be examined. In that case, the question whicharose for determination was, whether sales tax collectedby the assessee and paid after the end of the relevantprevious year but within the time allowed under therelevant Sales Tax law should be disallowed underSection 43-B of the Act while computing the businessincome of the previous year? That was a case whichrelated to Assessment Year 1984-1985. The relevantaccounting period ended on June 30, 1983. The IncomeTax Officer disallowed the deduction claimed by theassessee which was on account of sales tax collected bythe assessee for the last quarter of the relevantaccounting year. The deduction was disallowedunder Section 43-B which, as stated above, was insertedwith effect from April 1, 1984. It is also relevant to notethat the first proviso which came into force with effect from 21 April 1, 1988 was not on the statute book when theassessments were made in the case of Allied Motors (P)Limited (supra). However, the assessee contended thateven though the first proviso came to be inserted witheffect from April 1, 1988, it was entitled to the benefit ofthat proviso because it operated retrospectively from April1, 1984, when Section 43-B stood inserted. This is howthe question of retrospectively arose in Allied Motors (P)Ltd. [1997] 224 I.T.R. 677. This Court, in Allied Motors (P)Limited [1997] 224 I.T.R. 677 held that when a proviso isinserted to remedy unintended consequences and tomake the section workable, a proviso which supplies anobvious omission in the section and which proviso isrequired to be read into the section to give the section areasonable interpretation, it could be read retrospective inoperation, particularly to give effect to the section as awhole. Accordingly, this Court, in Allied Motors (P) Ltd.[1997] 224 I.T.R. 677, held that the first proviso wascurative in nature, hence, retrospective in operation witheffect from April 1, 1988. It is important to note once againthat, by the Finance Act, 2003, not only the secondproviso is deleted but even the first proviso is sought to beamended by bringing about an uniformity in tax, duty, cessand fee on the one hand vis-a-vis contributions to welfarefunds of employee(s) on the other. This is one morereason why we hold that the Finance Act, 2003, isretrospective in operation. Moreover, the judgment inAllied Motors (P) Limited (supra) is delivered by a Benchof three learned Judges, which is binding on us.Accordingly, we hold that Finance Act, 2003, will operateretrospectively with effect from April 1, 1988 [when the firstproviso stood inserted]. Lastly, we may point out thehardship and the invidious discrimination which would be 22 22 caused to the assessee(s) if the contention of theDepartment is to be accepted that Finance Act, 2003, tothe above extent, operated prospectively. Take anexample - in the present case, the respondents havedeposited the contributions with the R.P.F.C. after March31 [end of accounting year] but before filing of the Returnsunder the Income Tax Act and the date of payment fallsafter the due date under the Employees' Provident FundAct, they will be denied deduction for all times. In view ofthe second proviso, which stood on the statute book at therelevant time, each of such assessee(s) would not beentitled to deduction under Section 43-B of the Act for alltimes. They would lose the benefit of deduction even inthe year of account in which they pay the contributions tothe welfare funds, whereas a defaulter, who fails to paythe contribution to the welfare fund right upto April 1,2004, and who pays the contribution after April 1, 2004,would get the benefit of deduction under Section 43-B ofthe Act. In our view, therefore, the Finance Act, 2003, tothe extent indicated above, should be read asretrospective. It would, therefore, operate from April 1,1988, when the first proviso was introduced. It is true thatthe Parliament has explicitly stated that the Finance Act,2003, will operate with effect from April 1, 2004. However,the matter before us involves the principle of constructionto be placed on the provisions of the Finance Act, 2003. 17.Before concluding, we extract hereinbelow therelevant observations of this Court in the case ofCommissioner of Income Tax, Bangalore vs. J.H. Gotla,reported in [1985] 156 I.T.R. 323, which reads as under: 23 "We should find out the intention from thelanguage used by the Legislature and if strictliteral construction leads to an absurd result,i.e., a result not intended to be subserved bythe object of the legislation found in the mannerindicated before, then if another construction ispossible apart from strict literal construction,then that construction should be preferred tothe strict literal construction. Though equity andtaxation are often strangers, attempts shouldbe made that these do not remain always soand if a construction results in equity ratherthan in injustice, then such construction shouldbe preferred to the literal construction." 18.For the afore-stated reasons, we hold that FinanceAct, 2003, to the extent indicated above, is curative innature, hence, it is retrospective and it would operate witheffect from 1st April, 1988 (when the first proviso came tobe inserted). For the above reasons, we find no merit inthis batch of civil appeals filed by the Department whichare hereby dismissed with no order as to costs.” 18.At the time of extension of scope of 43D to co-operativebanks, following factors were taken in consideration while passingFinance Bill 2017:- “Extension of scope of section 43D to Co-operative BanksThe existing provisions of section 43D of the Act, inter-alia, provides that interest income in relation to certaincategories of bad or doubtful debts received by certaininstitutions or banks or corporations or companies, shallbe chargeable to tax in the previous year in which it is 24 18.At the time of extension of scope of 43D to co-operativebanks, following factors were taken in consideration while passingFinance Bill 2017:- “Extension of scope of section 43D to Co-operative BanksThe existing provisions of section 43D of the Act, inter-alia, provides that interest income in relation to certaincategories of bad or doubtful debts received by certaininstitutions or banks or corporations or companies, shallbe chargeable to tax in the previous year in which it is 24 credited to its profit and loss account for that year oractually received, whichever is earlier. This provision is anexception to the accrual system of accounting which isregularly followed by such assessees for computation oftotal income. The benefit of this provision is presentlyavailable to scheduled banks, public financial institutions,State financial corporations, State industrial investmentcorporations and certain public companies like HousingFinance companies. With a view to provide a level playingfield to co-operative banks vis-à-vis scheduled banks andto rationalise the scope of the section 43D, it is proposedto amend section 43D of the Act so as to include co-operative banks other than a primary agricultural creditsociety or a primary co-operative agricultural and ruraldevelopment bank. Consequentially, as per matchingprinciple in taxation, if the interest income on bad ordoubtful debts is chargeable to tax on receipt basis, theinterest payable on such bad or doubtful debts need to beallowed on actual payment. In view of this, it is proposedto amend section 43B of the Act to provide that any sumpayable by the assessee as interest on any loan oradvances from a co-operative bank other than a primaryagricultural credit society or a primary co-operativeagricultural and rural development bank shall be allowedas deduction if it is actually paid on or before the due dateof furnishing the return of income of the relevant previousyear. These amendments will take effect from 1[st] April,2018 and will, accordingly, apply in relation to theassessment year 2018-19 and subsequent years.” 19.In the present case, at the time of assessment years inquestion, Section 43D of the Act did not refer to non-scheduled banks and 25 only referred to scheduled banks. However, by Finance Act 2017, Co-operative banks were also included in the definition of Section 43D w.e.f.1[st] April, 2018. At the time of passing of the Bill, it was specificallymentioned that the amendment will take place w.e.f. 1[st] April, 2018 andwill accordingly apply in relation to assessment year 2018-19 andsubsequent years. Hence, the learned counsel for the revenue hasvehemently argued that Section 43D was not retrospective in nature, butit was to take effect w.e.f. 1[st] April, 2018. 20.On the other hand, learned counsel for the assessee hassubmitted that the amendment was to be interpreted, in terms of theobjects, it sought to achieve and as the amendment was curative innature to provide level playing field to the co-operative banks vis-à-visscheduled bank and to rationalize the scope of Section 43D, theamendment was liable to be read with effect from the date when Section43D was introduced in the Act i.e. with effect from 1[st] April, 2000. In thisregard, the observations made by the Hon’ble Supreme Court in AlliedMotors (P.) Limited’s case supra are relevant. It has been observed bythe Hon’ble Supreme Court that when any addition is made in a provisionto remedy unintended consequence and to make it workable and itsupplies an obvious omission, then reasonable interpretation would bethat the said amendment is made retrospective in operation. 21.A perusal of the objects of amending the existing provisionsof Section 43D of the Act vide Finance Bill 2017, reveals that the benefit 26 21.A perusal of the objects of amending the existing provisionsof Section 43D of the Act vide Finance Bill 2017, reveals that the benefit 26 of the existing provision was available to scheduled bank or a publicfinancial institution etc. With a view to provide level playing field to co-operative banks vis-à-vis scheduled banks and to rationalize the scope ofSection 43D, it was proposed to introduce the amendment to Section 43Dof the Act so as to include co-operative banks other then a primaryagricultural credit society or a primary co-operative agricultural and ruraldevelopment bank. The omission was sought to be corrected by bringingat par the scheduled banks and non-scheduled banks. Thus, it is evidentthat the amendment was brought in force with a view to cure the omissionin Section 43D. Although, the amendment was sought to be madeeffective w.e.f. 1[st] April, 2018, but it was liable to be treated asretrospective in nature. In order to arrive at this view, reliance is made onthe decision of Hon’ble Supreme Court in Allied Motors’ case supra.Moreover, it serves no purpose that the assessee, which is a non-scheduled bank, should include the NPAs/sticky loans in the relevantassessment year and then claim it as a bad debt in the next assessmentyear. There is no quarrel with the preposition of law settled by thejudgments relied upon by the learned counsel for the appellant, but inview of the decision given by the Hon’ble Supreme Court in AlliedMotors’ case supra, we are of the opinion that the view taken by theTribunal that the assessee was required to tax the interest on the stickyloans/NPAs on receipt basis, is liable to be upheld. 27 22.Accordingly the appeals are dismissed. The substantialquestions of law stand answered accordingly. (Sabina) Judge December 07, 2022 (ps) (Sushil Kukreja) Judge