O F Uco Bank v. Commissioner Of Income-Tax[[1]]. The

HON’BLESRIJUSTICE G. CHANDRAIAH&HON’BLESRIJUSTICE CHALLA KODANDA RAM R.C. No.80 of 2000 JUDGMENT:- ( per Hon’ble Sri Justice Challa Kodanda Ram) At instance of the Revenue, the following question of law,which arises from the Common Order dated 04.12.1997 of theTribunal in I.T.A.Nos. 1956 & 1959/Hyd/90 and 1943/Hyd/92 forthe assessment years 1979-80 to 1982-83, has been referredfor the opinion of this Court. 1.“Whether the I.T.A.T. is correct in law in holding that nointerest accrues on advances not written off as bad debts, afterthe institution of suits for recovery even in the case of anassessee which follows mercantile system of accounting?interest accrues on advances not written off as bad debts, afterthe institution of suits for recovery even in the case of anassessee which follows mercantile system of accounting? For the assessment year 1989-90, there is another question of law referred which reads as follows: 2.Whether on the facts and in the circumstances of the case, theI.T.A.T. was justified in allowing the expenditure incurred onguest house in spite of the prohibition against allowing theexpenditure under Section 37(4) of the I.T. Act?”I.T.A.T. was justified in allowing the expenditure incurred onguest house in spite of the prohibition against allowing theexpenditure under Section 37(4) of the I.T. Act?” So far as question No.1 is concerned, the issue relates tocharging of interest on the sticky and bad debts. The assessee– Andhra Bank was following mercantile system of accountingand in the process, the loans which have become sticky andnot yielding any revenue after three years were not beingdebited with interest and the said component was not beingoffered as income for the purpose of assessment. TheAssessing Officer had added back on estimate basis theinterest on such bad and sticky accounts though the assessee by itself had not offered the same for the purpose ofassessment. The first Appellate Authority, having consideredthe facts on record and following the Tribunal’s earlier order forthe assessment year 1983-84 had granted relief and deletedthe addition made by the Assessing officer. The Tribunalconfirmed the same by following its own earlier order inI.T.A.Nos.28/Hyd/89 and 1072/Hyd/89 and also other orders. Against the orders of the Tribunal, the above questions of lawsaid to be arising from the orders of the Tribunal have beenreferred to this Court. The issue raised is no more res integra and the same isnow settled by the judgment of the Supreme Court in the case o f UCO Bank vs. Commissioner of Income-Tax[[1]]. The Supreme Court had distinguished its earlier judgment in State Bank of Travancore vs. Commissioner of Income Tax[[2]]wherein it is held that from time to time, the Central Board ofDirect Taxes (C.B.D.T.) had issued Circulars in exercise of itspowers under Section 119 of the Income Tax Act with respectto the method of accounting and treatment of the interestaccruing to a money lender on loans entered in the suspenseaccount arising on account of their likelihood of not beingrecovered. The Apex Court had referred to the Circulars issuedfrom time to time and finally by referring to the Board Circulardated 09.10.1984 held in favour of the assessee by noticing theBoard Circular to the following effect: “Interest in respect of doubtful debts credited to suspense account bythe banking companies will be subject to take to interest charged in an Bank of Travancore vs. Commissioner of Income Tax[[2]]wherein it is held that from time to time, the Central Board ofDirect Taxes (C.B.D.T.) had issued Circulars in exercise of itspowers under Section 119 of the Income Tax Act with respectto the method of accounting and treatment of the interestaccruing to a money lender on loans entered in the suspenseaccount arising on account of their likelihood of not beingrecovered. The Apex Court had referred to the Circulars issuedfrom time to time and finally by referring to the Board Circulardated 09.10.1984 held in favour of the assessee by noticing theBoard Circular to the following effect: “Interest in respect of doubtful debts credited to suspense account bythe banking companies will be subject to take to interest charged in an account where there has been no recovery for three consecutiveaccounting years will not be subject to tax in the 4[th] year andonwards. However, if there is any recovery in the 4[th] year or later, theactual amount recovered only will be subject to tax in the respectiveyears. This procedure will apply to the assessment year 1979-80 andonwards. The Board’s Instruction No.1186, dated June, 20, 1978,ismodified to this extent”. The same circular has also further clarifiedthat up to the assessment year 1978-79 the taxability of interest ondoubtful debts credited to suspense account will be decided in thelight of the Board’s earlier circular dated October 6, 1952, as the saidCircular was withdrawn only in June, 1978. The new procedure underthe Circular of October 9, 1984, will be applicable for and from theassessment year 1979-80. All pending disputes on the issue shouldbe settled in the light of these Instructions. Therefore, up to theassessment year 1978-79, the Central Board of Direct Taxes’ Circularof October 6, 1952, would be applicable; while from the assessmentyear 1979-80, the Central Board of Direct Taxes’ circular of October 9,1984, is made applicable. In the present case, the assessment wasmade on the basis of the Central Board of Direct Taxes circular ofOctober 9, 1984, since the assessment pertains to the assessmentyear 1981-82 to which the circular of October 6, 1984 is applicable. In the light of the judgment of the Supreme Court,clarifying the legal position so far as Question No.1 isconcerned, the same is required to be answered in favour ofthe assessee and against the Revenue. So far as Question No.2 is concerned, the same is covered by the judgment of the Supreme Court reported in BritanniaIndustries Limited vs. Commissioner of Income-tax and Another[[3]]in favour of the Revenue and against the assessee. Accordingly, Reference is answered. No order as tocosts. Miscellaneous Petitions, if any pending, shall standdisposed of as infructuous. _______________ G. CHANDRAIAH, J 04-02-2014 ____________________ CHALLA KODANDA RAM, J bcj [1][1999] 237 ITR 889[2][1986] 158 ITR 102 (SC)[3][2005] 278 ITR 546 (SC)