HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 602 / 2008 Aravali Kshetriya Gramin Bank (Merged with and now known as Baroda Rajasthan Gramin Bank), Sawaimadhopur. Appellant Versus Assistant Commissioner Of Income Tax, Circle Sawaimadhopur Respondent Connected With D.B. Income Tax Appeal No. 202 / 2009 Aravali Kshetriya Gramin Bank (Merged with and now known as Baroda Rajasthan Gramin Bank), Sawaimadhopur. Appellant Versus Assistant Commissioner Of Income Tax, Circle Sawaimadhopur Respondent For Appellant(s) : Mr. Gunjan Pathak, Mr. Dinesh KUmar For Respondent(s) : Mrs. Parinitoo Jain with Ms. Shiva Goyal HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment / Order 05/09/2017 1. By way of these appeals, appellant has challenged judgment and order passed by Tribunal whereby Tribunal has dismissed appeal confirming order passed by CIT(A) and AO. 2. This court while admitting appeals has framed following questions of law:- D.B. Income Tax Appeal No.602/2008 admitted on 19.08.2010:- 1. Whether under facts and circumstances, initiation of proceedings under Section 147 of Income Tax Act in respect of Assessment Year 1998-99 are legal and proper? 2. Whether Tribunal was justified in holding additions made by AO towards non-recoverable interest on NPA debts is inconformity with requirement of Section 43D of Act? D.B. Income Tax Appeal No.202/2009 admitted on 19.09.2011: Whether Tribunal was justified in holding additions made by AO towards non-recoverable interest on NPA debts is inconformity with requirement of Section 43D of Act? 3. Counsel for appellant contended that AO has issued notice under Section 148 and proceedings under Section 147 of I.T. Act were initiated against appellant relying on decision of Supreme Court in case of Madhya Pradesh Cooperative Bank Ltd. Vs. Addl. CIT reported in 218 ITR 483 (SC) and has re-opened assessment which was done under Section 143(1). notice was issued on 11.3.2003 and not only that, issue of Section 80P(2) which was covered by judgment in case of Madhya Pradesh Co-operative Bank Ltd. Vs. Addl. CIT 218 ITR 438(SC) but it has also covered under Section 43D, expenses which are deducted and account which was write off on back date which was accepted, was also re-opened. 4. He contended that these issues were raised before ITO that judgment of M.P. High Court has now been overruled by Supreme Court in case of CIT Vs. Karnataka State Cooperative Bank reported in 251 ITR 194 (SC) dated 22.8.2001 on date on which notice was issued, and therefore, notice was issued on overruled judgment. In spite of that, Assessing Officer has added income and reassessed against which appeal was carried out and tribunal has confirmed order. 5. Counsel for appellant has relied on judgment of this Court in case of C.I.T. Bikaner Vs. Shri Ram Singh :: 2009(1) WLC 136 wherein it has been observed as under:- 27. If considered on that principle, leaving apart for moment, aspect of interpretation of word and as or, existence of word also is of great significance, being of conjunctive nature, and leaves no manner of doubt in our opinion, that it is only when, in proceedings under Section 147 Assessing Officer, assesses or reassesses any income chargeable to tax, which has escaped assessment 16 for any assessment year, with respect to which he had reason to believe to be so, then only, in addition, he can also put to tax, other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in course of proceedings under Section 147. 28. To clarify it further, or to put it in other words, in our opinion, if in course of proceedings under Section 147, Assessing Officer were to come to conclusion, that any income chargeable to tax, which, according to his reason to believe, had escaped
assessment for any assessment year, did not escape assessment, then, mere fact, that Assessing Officer entertained reason to believe, albeit even genuine reason to believe, would not continue to vest him with jurisdiction, to subject to tax, any other income, chargeable to tax, which Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in course of proceedings under Section 147. 29. It is different story that for such other income, Assessing Officer may have recourse to such other remedies, as may be available to him under law, but then, once it is found, that income, regarding which he had reason to believe to have escaped assessment, is not found to have escaped assessment, Assessing Officer is required to
withhold his hands, at that only. 30. To this extent, we agree with view expressed by Punjab and Haryana High Court, in Atlas Cycle Industries' case. 31. result of aforesaid discussion is, that question framed, in order dated 23.5.2006, is required to be, and is, answered in manner, that Tribunal was not justified in holding, that proceedings for reassessment under Section 148/147 were initiated by Assessing Officer, on nonexisting facts, because ultimately assessee has been able to explain income, which was believed to have been escaped assessment, was explainable. It is further held, that Assessing Officer was justified in initiating proceedings under Section 147/148, but then, once he came to conclusion, that income, with respect to which he had entertained reason to believe to have escaped assessment, was found to have been explained, his jurisdiction came to stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in course of proceedings, which were found by him, to have escaped assessment. 6. He contended that AO has seriously committed error in issuing notice under Section 147 of Act. 7. He has relied on decision of Supreme Court in case of UCO Bank Vs. Commissioner of Income Tax reported in
(1999) 237 ITR 0889 wherein it has been held as under:- method of accounting which is followed by assessee-bank is mercantile system of accounting. However, assessee considers income by way of interest pertaining to doubtful loans as not real income in year in which it accrues, but only when it is realised. mixed method of accounting is thus
followed by assessee-bank. This method of accounting adopted by assessee is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing relevant passage occurring at page 186-187 has been reproduced in minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala [(1986) 158 ITR 102 at p.120]. It is as follows: "4. Where interest has not been paid, it is sometimes left out of account altogether. This prevents possibility of irrecoverable interest being credited to revenue, and distributed as profit. On other hand, this treatment does not record actual state of loan account, and in case of banks and other concerns whose business it is to advance money, it is usual to find interest is regularly charged up, but when its recovery is doubtful, amount thereof is either fully provided against or taken to credit of Interest Suspense Account and carried forward and not treated as profit until actually received." Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth Edition at page 1089 state as follows: "Interest on doubtful debts should be debited to loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To extent interest is received in cash, Interest Suspense Account should be transferred to Interest account; remaining amount should be closed by transfer to Loan account. This treatment accords with principle that no item should be treated as income unless it has been received or there is reasonable certainty that it will be realised." (Vide State Bank of Tranvacore v. CIT [supra]) assessee's method of accounting, therefore, transferring doubtful debt to interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. 6. For this same reason, and to aid proper determination of income, Central Board of Direct Taxes had issued Circular No.41(V-6)D of 1952 dated 6th October, 1952. circular, inter alia, stated that "interest accruing to money lender on loans entered in suspense account because of extreme unlikelihood of their being recovered need not be included in assessee's taxable income if Income-tax Officer is satisfied that there is really little probability of loans being repaid. It is considered desirable to extend this principle to banks which, instead of transferring doubtful debts to a
suspense account, credit interest on such debts to that account provided Income-tax Officer is satisfied that recovery is practically improbable." This circular was in force till 20th of June, 1978 when Central Board of Direct Taxes issued circular dated 20th of June, 1978 withdrawing with immediate effect earlier circular of 6th of October, 1952. reason for withdrawal of circular of 1952 is set out in circular of 20th of June, 1978. reason is stated thus: "the Board has been advised that where accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether interest is credited to suspense account or to interest account. Kerala High Court has also expressed same view in case of State Bank of Travancore v. Commissioner of Income-tax, Kerala [110 ITR 336]. amount of such interest is, therefore, includible in taxable income." withdrawal of circular of 6th of October, 1952 which had been in force for thirty six years was on account of decision of Kerala High Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (Supra). Central Board of Direct Taxes, however, issued another circular of 9th of October, 1984 under which Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by banking companies will be subjected to tax but interest charged 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 assessment year 1979- 80 and onwards. Board's Instruction No.1186 dated 20.6.78 is modified to this extent." same circular has also further clarified that upto assessment year 1978- 79 taxability of interest on doubtful debts credited to suspense account will be decided in light of Board's earlier circular dated 6.10.1952 asthe said circular was withdrawn only in June, 1978. new procedure under circular of 9th of October, 1984 will be applicable for and from assessment year 1979-80. All pending disputes on issue should be settled in light of these instructions. Therefore, upto assessment year 1978-79, Central Board of Direct Taxes' circular of 6th October, 1952 would be applicable; while from assessment year 1979-80, Central Board of Direct Taxes' circular of 9th of October, 1984 is made applicable. In present case, assessment was made on basis of Central Board of Direct Taxes circular of 9th of October, 1984, since assessment pertains to assessment year 1981-82 to which circular of 6th October, 1984 is applicable. 7. What is status of these circulars? Section 119(1) of Income-tax Act, 1961 provides that, "The Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for proper administration of this Act and such authorities and all other persons employed in execution of this Act shall observe and follow such orders, instructions and directions of Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make particular assessment or to dispose of particular case in particular manner; or (b) so as to interfere with discretion of Appellate Assistant Commissioner in exercise of his appellate functions". Under sub-section (2) of Section 119, without prejudice to generality of Board's power set out in sub-section (1), specific power is given to Board for purpose of proper and efficient management of work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to assessees, as guidelines, principles or procedures to be followed in work relating to assessment. Such instructions may be by way of relaxation of any of provisions of sections specified there or
otherwise. Board thus has power, inter alia, to tone down rigour of law and ensure fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of Income-tax Act which are binding on authorities in administration of Act. UnderSection 119(2)(a), however, circulars as contemplated therein cannot be adverse to assessee. Thus, authority which wields power for its own advantage under Act is given right to forego advantage when required to wield it in manner it considers just by relaxing rigour of law or in other permissible manners as laid down in Section 119. power is given for purpose of just, proper and efficient management of work of assessment and in public interest. It is beneficial power given to Board for proper administration of fiscal law so that undue hardship may not be caused to assessee and fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to class, can thus be given benefit of relaxation of law by issuing circulars binding on taxing authorities. 8. question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realization, is
a question which may arise before several income tax officers exercising jurisdiction in different parts of country. Under accounting practice, interest which is transferred to suspense account and not brought to profit and loss account of company is not treated as income. question whether in given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, Board has considered it necessary to lay down general test for deciding what is doubtful debt, and directed that all income tax officers should treat such amounts as not forming part of income of assessee until realized, this direction by way of circular cannot be considered as travelling beyond powers of Board under Section 119 of Income Tax Act. Such circular is binding under Section 119. circular of 9th of October, 1984, therefore, provides test for recognising whether claim for interest can be treated as doubtful claim unlikely to be recovered or not. test provided by said circular is to see whether, at end of three years, amount of interest has, in fact, been recovered by bank or not. If it is not recovered for period of three years, then in fourth year and onwards claim for interest has to be treated as doubtful claim which need not be included in income of assessee until it is actually recovered. 8. He has also relied on following judgments: 1. Commissioner of Income-tax Vs. Bangalore Distt. Cooperative Central Bank Ltd. :: (1998) 233 ITR 282 (SC)
2. Commissioner of Income Tax Vs. Karnataka State Cooperative Apex Bank: (2001) 251 ITR 194 (SC). 3. Mehsana District Central Co-operative Bank Ltd. Vs. Income-tax Officer, Gujarat State co-operative Bank Ltd. Vs. Commissioner of Income tax (2001) 251 ITR 0522 (SC). 4. Commissioner of Income Tax Vs. Punjab State Cooperative Bank Ltd. :: 304 ITR 0113 ( P & H).
5. Commissioner of Income Tax Vs. Baroda Peoples Cooperative Bank Ltd. 280 ITR 0282. 6. Commissioner of Income tax Vs. Grain Merchants Cooperative Bank Ltd. :: 267 ITR 742 (Kar). 7. Bihar State cooperative Bank Ltd. Vs. CIT :: (1960) 39 ITR 114 (SC). 8. CIT V. Shri Ram Sahakari Bank Limited:: (2004) 266 ITR 632 (Kar.). 9. Income-tax Officer Vs. Karnataka Central Cooperative Bank Ltd. :: 266 ITR 635 (Kar.). 10. Bihar State Housing Cooperative Federation Ltd. Vs. Commissioner of Income tax :: (2009) 315 0286 (Pat.) 11. Commissioner of Income-tax Vs. Ramanathapuram Distt. Co-op. Central Bank Ltd. (2002) 255 ITR 423 (SC). 12. Commissioner of Income-tax Vs. Ahmednagar District Central Co-operative:: 264 ITR 0038 (Bom.) 13. Commissioner of Income-tax Vs. Punjab State Cooperative Bank Ltd. :: (2008) 300 ITR 0024. 14. Commissioner of Income-tax Vs. Ponni Sugars and
Chemicals Ltd. ::(2008) 306 ITR 0392. 15. Commissioner of Income-tax Vs. Haryana State Cooperative Land Development Bank Ltd. :: (2002) 254 ITR 0107. 9. Taking into account, he contended that issue of Section 147 in respect of assessment year 1998-99 is required to be answered in favour of assessee. 10. Counsel for respondent contended that notice was issued under Section 147/148 of Act and assessment was done under Section 143(1) and 143(3) of Act. She has taken us to Para 8 of order of tribunal which reads as under:-- 8. ld. A/R submitted further that in recent case of CIT Vs. India Equipment Leasing Ltd. 293 ITR 350 (Mad.) involving identical issue, decision was rendered in favour of assessee in view of judgment reported in UCO Bank Vs. CIT, 237 ITR 889
(SC). In subsequent assessment order passed under Section 143(3) relating to assessment year 2003-04, 2004-05 and 2005-06, no interference on this ground has been made. Copies of these orders have been placed at pages 26 to 33 of paper book. ld. A/R submitted further that provisions of 43D of Act have been wrongly relied upon by assessee before ld. CIT(A). These provisions are not applicable under facts and circumstances of present case. ld. A/R also referred CBDT Circular No.621 dated 19.12.2001, as amended by Circular 642 dated 11.12.92 and Circular No.698 dated 28.12.1994, relevant extract whereof have been reproduced at page 7 of first appellate order. 11. Counsel for respondent has taken us to para 10 of order of tribunal which reads as under:- 10. Considering above submissions, we are not inclined to interfere with first appellate order as ld. CIT (A) has rightly observed that assessee has not fulfilled requirement shown in CBDT Circular No.621 dated 19.12.91 as amended by Circular No.642 dated 11.12.92 and Circular No.698 dated 28.12.94. new section 43D provide that interest on sticky loans shall be charged to tax only in year in which interest is actually received or is credited to Profit & Loss account which ever is earlier. In present case. However, accrued interest of past two years, on advances which were not classified as NPA in those years, but has been classified as NPA during year under consideration. It is that interest which accrued on advances in those past two years and was credited to Profit & Loss account in those years and this entryof accrued interest of earlier years has now been reversed during year under consideration on basis that those advances have become NPA during year. Since debts which have become bad and doubtful during year on interest so accrued during year has not been matter of controversy, in fact same has not been credited to Profit & Loss account by assessee and, therefore, same will be charged to tax in year in which it is actually received. controversy, as rightly observed by ld. CIT(A) is that on these debts, which have now become doubtful during year, appellant in past two years had already credited interest in Profit & Loss account of
those respective two years and it is during year under consideration that appellant has reversed that entry and thus seeking deduction of this interest. As per provisions of Act, nowhere, it has been provided that such reversal of interest is allowable deduction. It is only Section 43D, where interest on bad and doubtful debt has been considered to be taken as income in year in which it is actually received, if same is not credited in Profit & Loss account. Thus postponement of treating interest as income is available, through section 43D on bad and
doubtful debt. However, in present case this interest income has already been credited in Profit & Loss account of earlier year, then by virtue of phrase used in Section 43D whichever is earlier, interest so credited in earlier year has been rightly considered as taxable in earlier year and there can not be any deduction during this year by reversing entries of earlier years, even by taken help/recourse of Section 43D. 12. In that view of matter, she contended that view taken by tribunal is just and proper and no interference is called for. 13. We have heard counsel for parties. 14. Before proceeding with matter, it is really shocking that date on which notice was issued on judgment which is sought to be relied on was overruled by decision of Supreme Court on 22.8.2001, therefore notice issued under Section 147/148 was based on judgment which was overruled. In that view of matter, there is no basis for issuing notice. However, in view of decision of this Court in case of CIT Bikaner Vs. Shri Ram Singh (supra), it is very clear that authority could not have travelled notice under Section 147. 15. Further, counsel for respondent contended that judgment of this Court is required to be considered in view of Explanation 3 of Section 147 which came into force w.e.f. 2009, amendment which has been added w.e.f. 1.4.1889. However, it will not be out of place to mention here that notice was issued on 11.3.2003. This explanation was not there at that time. In that view of matter, we are not giving any comment whether impugned jurisdictional judgment will apply or not and when notice was issued, this explanation was not there. 16. In that view of matter, in our considered opinion, Assessing Officer has not only committed very serious error in issuing notice on overruled judgment but has also committed serious misconduct. Inasmuch as, in spite of pointing out judgment rendered by Karnataka High Court came subsequently and has overruled M.P. High Court judgment, proceedings ought to have been closed. However, not only Assessing Officer but CIT(A) and Tribunal have not taken into consideration this note. 17. In our considered opinion, issue under Section 147 based on overruled judgment is required to be answered in favour of assessee. 18. On other issue, counsel for appellant has relied on decision of Supreme Court in case of T.R.F. Ltd. Vs. Commissioner of Income Tax:: reported in (2010) 323 ITR 397 wherein it has been held as under:- This position in law is well-settled. After 1st April, 1989, it is not necessary for assessee to establish that debt, in fact, has become irrecoverable. It is enough if bad debt is written off as irrecoverable in accounts of assessee.However, in present case, Assessing Officer has not examined whether debt has, in fact, been written off in accounts of assessee. When bad debt occurs, bad debt account is debited and customer's account is credited, thus, closing account of customer. In case of Companies, provision is deducted from Sundry Debtors. As stated above, Assessing Officer has not examined whether, in fact, bad debt or part thereof is written off in accounts of assessee. This exercise has not been undertaken by Assessing Officer. Hence, the
matter is remitted to Assessing Officer for de novo consideration of above-mentioned aspect only and that too only to extent of write off. 19. In that view of matter, second issue is required to be answered in favour of assessee against department. appeals stand allowed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Pdaiya/28-29 Powered by TCPDF (www.tcpdf.org) Aravali Kshetriya Gramin Bank (Merged with and now known as Baroda Rajasthan Gramin Bank), Sawaimadhopur v. Assistant Commissioner of Income-tax, Circle Sawaimadhopur