Important Point
The circulars are meant for ensuring proper administration of the statutes.

Headnote:Income Tax Act, 1961-Sections 256(1), 145 and 119-Assessee credited Rs. 49,15,435/- by way of interest to suspense account because recovery doubtful-No recovery effected in previous three years-Excluded said sum while computing total income-Income-Tax Department completed assessment for assessment year 1981-82 on 28th February 1985 excluding from total income of assessee said sum while computing total income of assessee on basis of CBDT Circular-Income Tax Commissioner on examination of assessment record included said amount in total income of assessee -Income Tax Appellate Tribunal allowed appeal - Reference-High Court answered reference in favour of Revenue-Appeal-CBDT circular cannot be ignored-So long as circular is in force binding on departmental authorities in view of provisions of Section 119 of the Act to ensure uniform and proper administration and application of Income Tax Act-Question answered in favour of assessee.
Held : The relevant circulars of C.B.D.T. cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of Section 119 to ensure a uniform and proper administration and application of the Income-tax Act. (Para 18)

Judgment

Mrs. Sujata V. Manohar, J.-Civil Appeal No. 235 of 1996 pertains to the assessment of the income of the appellant, United Commercial bank Ltd., for the assessment year 1981-82. The assessee had credited a total sum of Rs. 49,15,435/- by way of interest to a suspense account since recovery of the said amount was doubtful and no recovery of the said amount or any part of it which was by way of interest on loans advanced by it, had been effected in the three previous years. The assessee excluded the said sum of Rs. 49,15,435/- while computing its total income.

2. The income-tax department completed the assessment for assessment year 1981-82 on 28th of February, 1985, by following the Central Board of Direct Taxes Circular No. F. 201/21/84 TTA-II dated 9th of October, 1984 excluding from the total income of the assessee, the said sum of Rs. 49,15,435/- while computing the total income of the assessee. The Commissioner of Income-tax on examination of the assessment records considered the exclusion of the said sum of Rs. 49,15,435/- to be erroneous and prejudicial to the interest of the revenue. By his order dated 5th of March, 1987 he included the said amount in the total income of the assessee. On appeal, the Income-tax Appellate Tribunal, by its order dated 14.10.1988, allowed the appeal of the assessee. A reference was made to the High Court at the instance of the revenue under Section 256(1) of the Income-tax Act. The following question was referred to the High Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the CIT’s order under Section 263 of the Income-tax Act holding that when the assessment was completed, the only paper available was the Board’s circular dated 9th October, 1984 and, therefore, it cannot be said that the IAC’s order of assessment not taxing the interest in suspense of Rs. 49,15,435/- in view of that circular was erroneous and prejudicial to the interest of revenue.”

3. The High Court has answered the reference in favour of the revenue in view of the decision of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala1.

4. We have to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. It is the case of the assessee that in respect of loans which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realised by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of income-tax.

5. The method of accounting which is followed by the assessee-bank is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. In Spicer and Pegler’s Practical Auditing the relevant passage occurring at page 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (supra). It is as follows :

“Where interest has not been paid, it is sometimes left out of account altog

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1999 Supreme(SC) 651

Important Point The circulars are meant for ensuring proper administration of the statutes.

Cases Referred (6)

Important Point
The circulars are meant for ensuring proper administration of the statutes.