SECOND INCOME TAX OFFICER v. MAHARASHTRA STATE FINANCE CORPN. LTD
[Citation -1986-LL-0822-5]

Citation 1986-LL-0822-5
Appellant Name SECOND INCOME TAX OFFICER
Respondent Name MAHARASHTRA STATE FINANCE CORPN. LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 22/08/1986
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags mercantile system of accounting • cash system of accounting • interest on accrual basis • method of accounting • condition precedent • accrual of income • suspense account • accrued interest • interest accrued • mercantile basis • sticky advances • interest income • speaking order • credit balance • written off
Bot Summary: Revenue is in appeal before us and relies on Supreme Court's decision in State Bank of Travancore vs. CIT 50 CTR 290: 158 ITR 102 where it was held that in the case of assessee following mercantile system o f accounting interest income accrued to the assessee was assessable and it was immaterial that the assessee had credited the interest to Interest Suspense Account. Counsel for the assessee explained that in respect of sticky advances up to financial year 1978-79, the assessee was debiting the interest on accrual basis to the debtor's account and was crediting the same to Interest Suspense Account. The credit balance in the interest account was taken to profit loss account at the end of the year, while the credit balance in the Interest Suspense Account was not carried to profit loss account. While the debit regarding accrued interest was made to Accrued Interest Suspense Account' and not to the accounts of the debtors, credit was given to Interest Suspense instead of Interest Suspense Account earlier. The net result of these entries was the same as before financial year 1978-79 that the accrued interest continued to be accounted for in the assessee's account books though such interest was not shown as income in the profit loss account. To complete the assessee's version of accounting, we may note that on the filing of suit against he debtor, the assessee transferred the account from Recalled Account category to Suit filed Account category and thereafter the accrued interest in respect of such debtors was credited to Interest Suspense Account though the debit for accrued interest continued to appear in Accrued Interest Suspense Account. Respectfully following the said decisions, we hold that the interest on Recalled Accounts and Suit filed Account had accrued to the assessee and was assessable.


RAJENDRA, A.M. Assessee is State Financial Corporation set up under Act of Parliament to finance small and medium scale industries. Its relevance account year ended on 31st March, 1980. It filed return declaring income of Rs. 2,34,99,280. major issue before ITO was regarding taxability of amounts creditor to (a) Interest Suspense account (Suit filed Accounts) Rs. 59,57,822 ITO observed that assessee was maintained its accounts on mercantile basis therefore following State Bank of Travancore vs. CIT 1975 CTR (Ker) 72: (1971) 110 ITR 336 (Ker), he held that aforesaid two amounts totalling Rs.1,16,96,604 were taxable. CIT(A), following Tribunal's decision in assessee's case for asst. yr. 1978-79, held that aforesaid amount was not taxable on accrual basis but only on realization basis. He accordingly deleted said addition. Revenue is in appeal before us and relies on Supreme Court's decision in State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290: (1986) 158 ITR 102 (SC) where it was held that in case of assessee following mercantile system o f accounting interest income accrued to assessee was assessable and it was immaterial that assessee had credited interest to "Interest Suspense Account". ld. counsel for assessee explained that in respect of sticky advances up to financial year 1978-79, assessee was debiting interest on accrual basis to debtor's account and was crediting same to "Interest Suspense Account". This was in contra-distinction to accounts of debtors (who were considered good) in whose cases interest accrued was debited to debtors account and correspondingly created to interest account. credit balance in interest account was taken to profit & loss account at end of year, while credit balance in Interest Suspense Account was not carried to profit & loss account. After financial year 1978-79, assessee changed heads of accounts while making entries in respect of accrued interest on sticky advances. While debit regarding accrued interest was made to "Accrued Interest Suspense Account'" and not to accounts of debtors, credit was given to " Interest Suspense (Recalled Accounts)" instead of " Interest Suspense Account" earlier. Subsequently, when interest was received from debtor, credit was afforded to Accrued Interest Suspense Account from where said amount was transferred to "Interest on Loan Account". net result of these entries was same as before financial year 1978-79 that accrued interest continued to be accounted for in assessee's account books though such interest was not shown as income in profit & loss account. Thus, assessee continued to follow mercantile system of accounting by accounting for interest due from debtors on accrual basis. On these facts, it cannot be claimed that assessee had changed its system of accounting for mercantile to cash. Under cash system of accounting, entry is made only on realization and before said point of time, no entries are made in account books. However, under mercantile system of accounting, entries are made in account books at time of accrual of income and it is immaterial when income is realised. Applying said test, it is clear tha assessee continued to treat interest income on accrual basis under mercantile system of accounting. To complete assessee's version of accounting, we may note that on filing of suit against he debtor, assessee transferred account from "Recalled Account" category to "Suit filed Account" category and thereafter accrued interest in respect of such debtors was credited to " Interest Suspense (suit filed) Account" though debit for accrued interest continued to appear in "Accrued Interest Suspense Account". Thus, even in respect of Suit Filed Account, assessee's system of accounting continued to be mercantile. In this background, Supreme Court decision in State Bank of Travancore (supra) squarely applies to assessee's case. Both majority and minority judgments of Supreme Court at pages 115 and 142 have approved description of mercantile system of accounting in CIT vs. Smt. Singaribai (1945) 13 ITR 224 at 227 (All) to effect that distinguishing feature of this method of accounting (mercantile) is that "It brings into credit what is due, immediately it become legally due and before it is actually received, and it bring into debit, expenditure amount for which has been legally incurred bring into debit, expenditure amount for which has been legally incurred before it is actually disbursed." Applying said test, it is clear from above narration of accountancy practice of assessee that assessee had brought into credit interest which was due immediately it became legally due and before it was actually received. It was immaterial to what account debit or credit was afforded. Thus, aforesaid Supreme Court decision clearly applies to assessee's case. Supreme Court in said decision had approved (at page 150) Bombay High Court decision in CIT vs. Confinance Ltd. (1973) 89 ITR 292 (Bom) where it w s held that receipt of income either actual or deemed is not condition precedent to taxability and it was assessable if it had arisen or accrued. Bombay High Court held that facts that there was hardly any receipts in respect of items of interest or bona fides of assessee in not charging interest was not disputed, were circumstances which were by themselves insufficient to support conclusion that there was no real interest income as none of debts was written off by assessee nor assessee gave up interest of said debts. Supreme Court had also approved CIT vs. Motor Credit Co. Ltd. (1981) 127 ITR 572 (Mad) and had observed (at page 152) that where interest has accrued and assessee has debited account of debtor, difficulty of recovery would not make accrual non-accrual of interest. Supreme Court also approved (at page 150-1) James Finlay and Co. vs. CIT (1981) 22 CTR (Cal) 289: (1982) 137 ITR 698 (Cal) where assessee, following mercantile system of accounting, treated interest on two doubtful debts separately by crediting to "Suspense A/c". and High Court held that alteration of practice in book-keeping and transfer of amounts to Suspense Accounts could not be termed as change in method of accounting. Supreme Court (at page 136) cited with approval Kanga and Palkhivala's observations in their Commentary "Law and Practice of income-tax" that assessee cannot escape liability to tax by omitting to make entry or making wrong entry in accounts. Respectfully following said decisions, we hold that interest on "Recalled Accounts" and "Suit filed Account" had accrued to assessee and was assessable. ld. counsel for assessee, however, relied on para 3 of CBDT Circular F. No. 201/21-84-ITA. II dated Sept., 1984 which reads as follows: "3. It has now been decided that interest in respect of doubtful debts credited to suspense account by Banking Companies will be subjected to tax but interest changed in account where there has been no recovery for three consecutive accounting years will not be subjected to tax in fourth year and onwards. However, if there is any recovery in fourth year or later, actual amount recovered only will be subjected to tax in respective years. This procedure will apply to asst. yr. 1979-80 and onwards. Board's Instruction No. 1186 dt. 20th June, 1978 is modified to this extent." said circular vide para 4 further directed that all pending disputes should be settled in light of above instructions. In view of said CBDT circular, we restore this matter to file of ITO to decide matter afresh. Revenue's next ground is against CIT(A)'s directions to ITO to calculate deduction under s. 36(1)(viii) at 40per cent of income before deducting special reserve under said sub-section. This was in accordance with CIT vs. Bihar State Finance Corpn. (1983) 142 ITR 518 (Pat). We uphold CIT (A)'s order on this point. Revenue's last grievance is regarding charging interest under ss. 215 and 216. ITO did not pass any speaking order of charging said interest CIT (A) observed that ground raised by assessee did not survive as after giving effect to relief granted by him, no interest would be chargeable. In view of our restoring main ground regarding interest to ITO, we restore this matter also to ITO to pass speaking order if he is of opinion that interest under ss. 215-216 is chargeable. In result, Revenue's appeal is partly allowed. *** SECOND INCOME TAX OFFICER v. MAHARASHTRA STATE FINANCE CORPN. LTD.
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