Financial Corpn. Vs. CITI  INSC 318 (12 May 1994)
B.L. (J) Hansaria B.L. (J) Kuldip Singh (J)
1994 AIR 2416 1994 SCC (4) 375 JT 1994 (4) 191 1994 SCALE (2)1026
Judgment of the Court was delivered by HANSARIA, J.- In this batch of appeals,
we are concerned with the question as to how interest accruing on 'sticky
advances' has to be taxed. The appellants being various leading financial
institutions of the country, the answer has to be not on 'sticky ground' but on
terra-firma. We would not, however, be required to labour hard to base our
conclusion on firm ground because much of the ground has already been covered
by a three-Judge Bench of this Court which decided the case of State Bank of 'Travancore
advances are called 'sticky' in commercial parlance whose recovery becomes
highly improbable or doubtful. The interest accruing on such advances are
debited to the parties concerned by those institutions which maintain their
accounts on mercantile system, and at the same time instead of carrying such an
interest to the profit and loss account, the same is credited to a separate
account styled as suspense account or interest suspense account.
(1986) 2 SCC 11: 1986 SCC (Tax) 289: (1986) 158 ITR 102 377 3.In State Bank of Travancore
case' this Court was called upon to decide as to how accrual of interest on
such advances has to be taxed under the Income Tax Act, 1961 (hereinafter
referred to as the Act). The Bench differed in its ultimate conclusion and the
majority view was taken by Mukharji, J., as he then was, with whom Misra, J.,
as he then was, agreed. Tulzapurkar, J., was in minority. As leading legal
luminaries of the taxation world had appeared to assist this Court in answering
the aforesaid question, all that could reasonably be said on both the sides was
done by persuasive and forceful arguments advanced, inter alia, by Shri Palkhivala,
Shri Desai and Dr Pal. Fundamentals of law and principles of taxing income were
brought to the notice of the Court along with many decided cases of various
courts of the country and the English law.
crux of the argument on behalf of the assessee was that accrual of interest on
such advances does not produce real income, and so, despite the mercantile
system of accounting such interest should be taxed only when it is really
recovered. The majority too had no reservation in accepting the submission that
the income which really accrues can be taxed. The question examined was when
can such an income be said to have really accrued? Mukharji, J.
in para 67 of the judgment that whether an accrual has taken place or not must
be judged on the principles of real income theory; and in determining whether
the income is hypothetical or real various factors have to be taken into
account. The learned Judge observed that it would be difficult and improper to
extend the concept of real income to all cases depending upon the 'ipse dixit
of the assessee which would then become a value judgment only. It was opined
that the question has to be considered from the point of view of real income
"taking the probability or improbability of realisation in a realistic
manner and dovetalling of these factors to-ether"; but once the accrual
takes place, on the conduct of the parties subsequent to the year of closing,
an income which has accrued, cannot be made 'no income'.
learned Judge thereafter formulated eight propositions which according to him
emerged as a result of the discussion undertaken. These propositions mentioned
in para 69 read as below: (SCC pp. 66-67) "(1) It is the income which has
really accrued or arisen to the assessee that is taxable.
the income has really accrued or arisen to the assessee must be judged in the
light of the reality of the situation.
concept of real income would apply where there has been a surrender of income
which in theory may have accrued but in the reality of the situation no income
had resulted because the income did not really accrue.
a debt has become bad deduction in compliance with the provisions of the Act
should be claimed and allowed.
the Act applies the concept of real income should not be so read as to defeat
the provisions of the Act.
there is any diversion of income at source under any statute or by overriding
title then there is no income to the assessee.
conduct of the parties in treating the income in a particulate manner is
material evidence of the fact whether income has accrued or not.
improbability of recovery, where the conduct of the assessee is unequivocal,
cannot be treated as evidence of the fact that income has not resulted or
accrued to the assessee. After debiting the debtor's account and not reversing
that entry but taking the interest merely in suspense account cannot be such
evidence to show that no real income has accrued to the assessee or treated as
such by the assessee.
concept of real income is certainly applicable in judging whether there has
been income or not but in every case it must be applied with care and within
well recognised limits." 6.Insofar as the method of accounting is
concerned, which has been dealt by Section 145 of the Act, to which our
attention has been invited by Shri Salve also, Mukharji, J. stated in para 46
that the method of accountancy regularly employed by the assessee helps
computation of income, profits and gains under Section 28 of the Act and the
taxability of that income under the Act will then have to be determined. The
question in this context is whether the income which has been computed
according to the method of accounting followed regularly by an assessee can be diminuted
or diminished by any notion of real income, which aspect has to be judged in
the light of the well-settled principles. What these principles are, we have
Salve has, in this connection, brought to our notice the decision of thePrivy
Council in CIT'v. Maharaja adhiraja Ka eshwar Singh 2 of which it hasbeen
stated that what the Income Tax Officer has to compute is the assessee's income
and when the assessee 'so chooses to treat it'. This observation has relevance
only qua the method of accounting adopted by the assessee. If it be mercantile
system, the assessee chooses to treat the income on the basis of accrual of the
same; but if the assessee were to adopt cash system, he chooses to treat the
income actually received as his income. Once the selection relating to the
method of accounting has been made, what has been observed by Mukharji, J. in para
46 (supra) follows.
Privy Council case' has not said anything to the contrary.
against the above, Tulzapurkar, J. stated that even under the mercantile system
accounting, it is only the accrual of real income which is chargeable to tax,
which aspect has to be decided on commercial principles having regard to the
business character of the transactions and the realities and specialties of the
situation; and cannot be determined by adopting purely theoretical or
doctrinaire or legalistic approach. The learned Judge then observed in para
19-that he failed to understand why interest on sticky loans, 2 (1933) 1 ITR
94, 102: AIR 1933 PC 108: 60 IA 146 379 which has theoretically accrued but has
not factually resulted or materialised at all should not be regarded as
hypothetical income and not real income? He further opined that there was no
reason why the factum of stickiness of loans operating throughout the
accounting period should not have, on being objectively established to the
satisfaction of taxing authorities as distinguished from mere ipse dixit of the
assessee, the effect of preventing the accrual of interest as real income of
the assessee? The objections taken by the counsel for Revenue, one of which was
that the only provision under the Act was to exclude such accrual of interest
on debts which have become irrecoverable was met in para 20 by stating, inter alia,
that though there is a distinction between an irrecoverable loan and a sticky
loan the same bei ng that in former the chance of a recovery are almost nil
whereas in latter there is high degree of improbability of recovery, interest
on the latter is hypothetical and not real; and so, the distinction is not
have duly applied our mind to the rival views expressed in the aforesaid case
and with respect we are in agreement with the stand taken by the majority. The
reason is that, according to us, the majority's assessment is more logical and
sound, because in every case accrual of such income cannot be presumed to be
hypothetical, as would be the result if minority view were to be accepted.
the stand taken by the majority takes care of probable injustice (which may be
caused) because of what has been stated in its proposition no. (3) above, which
is that where a debt has become bad, deduction would be allowed. We would
therefore, observe that though Misra, J., while agreeing with Mukharji, J.,
stated, inter alia, ill para 74 that in a taxing statute, where the law is
clear, considerations of even injustice do not afford Justification for
exempting income from taxation, as opined in Mapp v. Oram3 no injustice would
really be caused in the cases at hand,inasmuch as if the advance in question
can ultimately be established to have become bad debt, the assessee would be
entitled to refund of the tax already paid by him in this regard. This has not
been disputed by Shri Ramamurti appearing for the Revenue.
May it be stated that another two-Judge Bench of this Court of which one of us
(Kuldip Singh, J.) was a member, had also accepted that majority view as
correct in State Bank of Travancore v. C1T4 because of which the appeal and
application for intervention were dismissed.
Salve has made heroic efforts to satisfy us that the majority view may be taken
as per incuriam inasmuch as it had not applied its mind to the effect of some
circulars issued by the authorities concerned as empowered by Section 1 19 of
the Act. This is sought to be brought home to us by referring to the
observations of Mukharji, J. at the end of para 42 that in the appeals the
Court was "not concerned with the actual effect of these circulars and
these need not be set out and examined". This observation had 3 (1969) 3
All ER 215: (1969) 3 WLR 557 4 (1990) 186 ITR 187 (SC) 380 been made after
noting the circulars to which attention of the Court had been drawn.
it is correct that among the circulars brought to the notice of the Court the
one which Shri Salve mentions, namely one issued in October 1984, was not
brought to the notice of the Bench deciding the aforesaid case that is not
material, because we are in agreement with Mukharji, J. when he stated at the
end of para 43 that the circulars "cannot detract from the Act".
Salve would however, urge that a little different view of the matter had been
taken by two-Judge Bench of this Court in K.P. Varghese v. IT05 in which it was
observed (at ITR p. 613: SCC p. 188) that circulars issued under the aforesaid
provisions are binding on all officers "even if they deviate from the provisions
of the Act". As to what was sought to be conveyed by the word 'deviate' is
not clear to us. This much, however, is apparent that this Court did not mean,
while saying as above, that circulars can override any provision of the Act or
to put in the language of Mukharji, J. detract from the Act. Though Shri Salve
has urged that the decision in Varghese has been affirmed by a Constitution
Bench in C.B. Gautami v. Union of India6, reference to that case shows that
Varghese case5 was mentioned in para 22 while stating that the conclusion
arrived at, namely, that the provisions of Chapter XX-C of the Act are to be
resorted to only where there is significant undervaluation of the immovable
property with a view to evading tax, finds support from the decision in Varghese.
This shows that what was stated about permissibility of circulars to 'deviate'
from the provisions of the Act was not one which was affirmed by the
fact that the circular to which Shri Salve has referred is one which had been
issued in exercise of powers conferred by Section 1 19 of the Act has no
significance insofar as the point under consideration, namely, whether the
circular can override or detract from the provisions of the Act, is concerned,
inasmuch as what Section 1 19 has empowered is to issue orders, instructions or
directions for the "proper administration" of the Act or for such
other purposes specified in sub-section (2) of the section. Such an order,
instruction or direction cannot override the provisions of the Act; that would
be destructive of all the known principles of law as the same would really
amount to giving power to a delegated authority to even amend the provision of
law enacted by Parliament. Such a contention cannot seriously be even raised.
result is that we follow and affirm the view taken by the majority by this
Court in State Bank of Travancore case' and hold that the interest which had
accrued on the sticky advance has to be treated as income of the assessee and
as such taxable. We would add that 'If ultimately it would be established by
the assessee that the advance has taken the shape of bad 6 (1993) 1 SCC 78 381
debt refund of the tax paid on the interest would become due and the same can
be claimed by the assessee in accordance with law.
The appeals have no force as the view taken in the impugned judgments is in
accord with the majority ,s stand in State Bank of Travancore case1. They are,
therefore dismissed. No order as to costs.