M/S. Maharashtra State Financial Corporation Ltd v. The Commissioner Of Income Tax,Bombay City Ii, Bombay

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION INCOME TAX REFERENCE NO. 85 of 1988 M/s. Maharashtra State Financial Corporation Ltd., vs. ... Applicant. The Commissioner of Income Tax,Bombay City II, Bombay ..... Respondent Mr. P. J. Pardiwala i/b. Mulla & Mulla for Applicant. Mr. Ashok Kotangale for Respondent. CORAM: V. C. DAGAAND A. S. AGUIAR JJ. Date: 4[th] July, 2005. ORAL JUDGMENT: (Per V. C. Daga J. ) 1. This reference is at the instance of the assessee -applicantMaharashtra State Financial Corporation Ltd., under section 256(1)of the Income Tax Act (ITR for short), 1961. 2. The question of law referred to this court is as follows: 3. (1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in in holding that interest of Rs.1,16,96,604/- credited to the interestsuspense (suit-filed) account and interest suspense(Recalled) account had accrued to the assessee andwas chargeable to tax for the Assessment Year 1980-81?” Factual Matrix 2. The factual matrix reveal that the issue pertains to the relevantaccounting year ended on 31.3.1980 (Assessment Year 1980-81).The assessee - Maharashtra State Financial Corporation Ltd., is setup under an Act of Parliament to finance small and medium scaleindustries. The assessee – Corporation fled its return for theAssessment Year 1980-81 declaring its income in the sum ofRs.2,34,99,280. 3. The Income Tax Officer amongst others considered the taxability ofthe amount credited (a) “Interest Suspense (suit filed) Account”amounting to Rs.59,57,822/- and, (b) Interest Suspense (Recalled)Account”amounting to Rs.57,38,782/- . The I. T. O. found that thesetwo amounts put together amounting to Rs.1,16,96,604/- weretaxable as the assessee was maintaining its accounts on mercantilebasis. This view was taken relying on the decision of Kerala HighCourt in the case of State Bank of Travancore vs. C. I. T., reported in (1971) 110 ITR 336. 4. Being aggrieved by the aforesaid order the assessee – Corporationpreferred an appeal before the Commissioner of Income Tax(Appeals). The said Appellate Court following the decision of theTribunal for the earlier year i.e., Assessment Year 1978-79 held thatthis amount was not taxable on accrual basis but was taxable onrealization basis, consequently, it deleted the said addition. 5. The matter was carried to the Tribunal at the instance of theRevenue in appeal. Before the Tribunal reliance was placed by theDepartment on the decision of the Supreme Court in the case ofState Bank of Travancore (1986) 158 ITR (102 SC) wherein theSupreme Court held that in the case of assessee followingmercantile system of accounting, interest income accrued to theassessee was assessable irrespective of whether the assessee hadcredited such interest to interest suspense account. It is not indispute that the assessee was debiting the amount of interest onaccrual basis to the debtor's account and was crediting the same tointerest suspense account in respect of advances known as stickyadvances. This was in contrast to the accounts of debtor's who wereconsidered good. In whose cases interest accrued was being debited to the debtor' s account and accordingly credited to theinterest account. The credit balance in the interest – account wastaken to profit and loss account at the end of the y year while creditbalance in the “Interest Suspense Account” was not carried to theprofit and loss account. debited to the debtor' s account and accordingly credited to theinterest account. The credit balance in the interest – account wastaken to profit and loss account at the end of the y year while creditbalance in the “Interest Suspense Account” was not carried to theprofit and loss account. 6. After the Financial Year 1978-79, the assessee made a change inthe system of account. While the debit regarding accrued interestwas made to accrued interest suspense account and not to theaccount of the debtors, credit was given to “Interest Suspense(Recalled) Account” instead of Interest Suspense Accounton a .Subsequently when the interest was received from the debtor, creditwas given to “Accrued Interest Suspense Account”from where thesame amount was transferred to interest on loan account. The netresult of these entries was the same as before financial year 1978-79viz., that the accrued interest continued to be accounted for inassessee's account books though such interest was not shown asincome in the profit and loss account. Thus the assessee, accordingto what was stated on its behalf, continued to follow mercantilesystem of accounting by accounting for the dues from the debtors onaccrual basis. On these facts the Tribunal found that assessee didnot change its system of accounting for mercantile cash. It is further made clear by the assessee that on filing a suit against the debtors,the assessee credited the interest earned thereafter to InterestSuspense (suit filed) account. Thus, even in respect of accountswhere suits were filed, the assessee's system of accountingcontinued to be mercantile. 7. The Tribunal thus held that the Supreme Court decision in StateBank of Travancore (supra), squarely applied to the facts of thecase of the assessee. According to the said judgment of the ApexCourt, the distinguishing feature of the mercantile system ofaccounting was that “it brings into credit what is due, immediately itbecome legally due and before it is actually received; and it bringsinto debit, expenditure, the amount for which has been legallyincurred before it is actually disbursed”. 8. The Tribunal applying the above test has also observed that theSupreme Court had approved the decision of Bombay High Court inCIT v. Confidence Ltd., (1973) ITR 292 wherein it was held thatreceipt of income either actual or deemed is not a conditionprecedent to taxability and it is assessable if it had arisen or accrued.Following this decision the Tribunal held that the amount shown in“Interest Suspense (suit filed) Account” amounting to Rs.59,57,822/- andSupreme Court had approved the decision of Bombay High Court inCIT v. Confidence Ltd., (1973) ITR 292 wherein it was held thatreceipt of income either actual or deemed is not a conditionprecedent to taxability and it is assessable if it had arisen or accrued.Following this decision the Tribunal held that the amount shown in“Interest Suspense (suit filed) Account” amounting to Rs.59,57,822/- and “”Interest Suspense (Recalled) Account, amounting to Rs.57,38,782/- wasassessable. It is out of this finding of theTribunalthat the assessee hassought to raise the above mentioned question. “”Interest Suspense (Recalled) Account, amounting to Rs.57,38,782/- wasassessable. It is out of this finding of theTribunalthat the assessee hassought to raise the above mentioned question. 9. As already stated herein above, the amount of RS.57,38,782 represents“”“the Interest Suspense (Recalled) Account. So far as the InterestSuspense (suit filed) Account” is concerned it represents Rs.59,57,822.How this amount should be dealt with is now covered by the Circularissued by the Central Board of Direct Taxes, under section 119 of theIncome Tax Act , by which the Board has decided that interest in respectof the doubtful debt deducted by the banking company would be subjectto tax but the interest charged in the account where there has been norecovery for consecutive three accounting years will not be subject to taxin the fourth year and onwards. The circular also states that if there isany recovery, the actual amount recovered only would be subjected to taxin the respective years. This procedure would apply to the AssessmentYear 1979-80 and onwards. The Tribunal while deciding appealbefore it relied on the said judgment of the Apex Court in the case ofState Bank of Travancore (supra), decided by the Apex Court.However, this judgment of the State Bank of Travancore (supra)wasexplained by the Apex Court in its subsequent judgment in thecase of UCO Bank vs. Commissioner of Income Tax, reported in [1999] 237 ITR 889, wherein the Apex Court held that in view of thecircular dated 9[th] October 1984 the interest in the suspense accountshould not be taxed. The Apex Court itself ruled that the circularissued by the CBDT was not brought to the notice of the Court whenthe case of State Bank of Travancore (supra), was decided by itand as such it was not followed in the UCO Bank case. Since thecircular was binding on the assessing authority the interest on thearrears could not have been taxed. In this view of the matter theTribunal was not justified in taxing the amount of Rs.57,38,782. 10.Now what remains to be considered is the amount of interestshown in the “Interest Suspense (Recalled) Account”amounting toRs.59,57,822. The learned counsel appearing for the assesseesubmitted that the award of interest for the period subsequent to thefling of the suit till the date of decree, lies within the discretion of thecourt and as such the interest from the date of filing of the suit is notliable to tax each year, on the premise that the interest had continuedto accrue from year to year. In support of this submission, heplaced reliance on the decision of the Calcutta High Court, in thecase of Commissioner of Income Tax, West Bengal -IX vs.Naskarpara Jute Mills Co., Ltd., reported in [1983] 141 ITR 384 and in the case of Commissioner of Income Tax vs. Orissa StateFinancial Corporation, reported in 201 ITR 595 (Orissa). A readingof section 34 CPC, it is clear that the interest from the date of suit tillthe date of decree is a matter within the discretion of the courtpassing the decree. At the time of filing of the suit for recovery of thedebt, the assessee had merely right to claim for interest, that right togrant further interest is in the discretion of the Court. Consequentlyright to receive future interest comes in picture when the courtpasses the decree, from the date of the suit, as was determined byit, with, interest, could not be assessed to tax. We agree with theview taken by the Calcutta and Orissa High Court in this regard. 11.In view of the above in our view the amount of Rs.59,57,822/- could not have been added to the total income, as interest income.Consequently, the Tribunal was not justified in reversing the order ofthe Commissioner of Income Tax (Appeals). In the result we answerthe question in the negative, that is, in favour of the assessee andagainst the revenue. Reference disposed of accordingly, with noorder as to costs. (V. C. DAGA J. ) (A. S. AGUIAR J.)