IMPORTANT POINT
Only one limit is prescribed for deduction on account of salary whether paid to an employee in service or a retired employee in any one previous year.

Headnote:(i) Income Tax Act, 1961 — Sections 36(1)(vii) rw/s 36(2) — Taxability of interest on doubtful debts credited to suspense account — Assessment Year 1978-79 — Central Board of Direct Taxes had issued a circular on 6-10-1952 stating that the interest on sticky loans which were entered in the suspense account need not be included in the assessee’s assessable income provided the Income Tax Officer was satisfied that there was no real probability of the loans being repaid — By another Circular dated 9-10-1984, it was clarified that although 1952 circular was withdrawn, upto the Assessment years 1978-79, taxability of interest on doubtful debts credited to suspense account would be decided in the light of Board’s earlier Circular dated 6-10-1952 as the said Circular was withdrawn only in June, 1978 — Whether interest on doubtful loans could be brought to tax — (No) — Appellant was held not liable to be taxed in respect of the interest on doubtful advances credited to the interest suspense account.(Paras 7 & 9)
       (ii) Income Tax Act, 1961 — Section 40A(5) — Expenses or payments not deductible in certain circumstances — Whether two separate limits apply for the purposes of computing disallowance u/s 40A(5) of the Act where an employee retires and ceases to be in employment during the previous year — (No) — Employer is only entitled to deduction of one amount.
       Held : The intention of the Legislature was to fix limits of deduction under the various clauses of sub section (5) of Section 40A. If the view accepted by the Calcutta High Court were to be accepted the fixation would be meaningless as the limits would vary depending on the date on which an employee may retire. According to the Calcutta High Courts view if an employee serves for 12 months, and retires on the last day of the previous year, the employer would be entitled to claim a deduction of Rs.60,000/- on account of salary paid to an employee while in service and another limit of Rs.60,000/- on account of salary paid to the employee on retirement. In other words, the employer would be entitled to a deduction of two different amounts. Yet Clause (c) (ii) of sub section (5) of Section 40A speaks of "an amount". This would indicate that the employer is only entitled to deduction of one amount. Clause (c)(i) also speaks of an employee as being not only one who has ceased to be in employment, but one who ceases to be in employment. In respect of the latter it is assumed that the employee served for a period but ceases to be so employed during the previous year in question. In such a case, the section expressly provides for a limit on the deduction of Rs.60,000/-.(Paras 16 & 17)
       Sub section (5)(c) on the other hand as we have seen speaks of an "amount" and "salary" indicating a single deduction where the use of the word "aggregate" was uncalled for. We would therefore affirm the answer given in the impugned judgment to the second question in favour of the revenue and hold that only one limit is prescribed for deduction on account of salary whether paid to an employee in service or a retired employee in any one previous year.(Paras 22 & 23)

JUDGMENT

Ruma Pal, J. — The assessment year in question is 1978-79. The two questions which are to be answered in this appeal are:

i)Whether the appellant is liable to be taxed under the Income Tax Act, 1961 (referred to hereinafter as the "Act") in respect of the interest on doubtful advances credited to the interest suspense account?

ii)Whether two separate limits apply for the purposes of computing disallowance under Section 40A (5) of the Act where an employee retires and ceases to be in employment during the previous year, so that one limit will apply in respect of the amounts and benefits received by him as an employee and another for the amounts and benefits received by him as a former employee.

2. The High Court answered both the questions in favour of the Revenue and against the Assessee.

3. Being aggrieved the appellant has approached this Court.

4. As far as the first question is concerned, the High Court answered it in the affirmative relying on the decision of this Court in State Bank of Travancore vs. Commissioner of Income Tax1. In the decision of State Bank of Travancore Vs. Commissioner of Income Tax the minority opinion expressed by Tulzapurkar, J, was that the stickiness of advances or loans objectively established to the satisfaction of the Taxing Authorities by furnishing a proper material, is sufficient to prevent the accrual of interest thereon as real income and would have the affect of rendering such income hypothetical. Therefore the interest cannot be brought to tax irrespective of the method of accounting followed, provided the assessee was able to establish to the satisfaction of the Taxing Authority that the loans had in fact becomes sticky during the concerned year or years by producing proper material and that the assessee had invariably followed the practice of carrying the interest of such loans to interest suspense account instead of crediting the same to interest account or profit and loss account with the additional safeguard of offering the same for taxation if and when it was subsequently realized.

5. The majority view, however was that carrying certain amounts which had accrued as interest without treating it as a bad debt or irrecoverable interest but keeping it in suspense account would be repugnant to Section 36(1)(vii) read with Section 36 (2) of the Act. Where the mercantile system of accounting was followed and loans had not been written off the amounts accrued on the loans were income assessable to tax.

6. The question again arose for consideration before a bench of three Judges in the case of UCO Bank Vs. Commissioner of Income Tax (1999) 237 ITR 889, where the Court affirmed the minority view of Tulzapurkar J, in State Bank of Travancores case. The assessment year in question in that case was 1981-82. The interest on loans the recovery of which was doubtful had not in fact been recovered by the assessee bank for the last three years and had been kept in a suspense account and had not been brought to the profit and loss account of the assessee because the amounts were not likely to be realized. The Court found that this method of accounting was in accordance with established accounting practice. Additionally it was held that the Central Board of Direct Taxes had issued a circular on 6th October 1952 stating that the interest on sticky loans which were entered in the suspense account need not be included in the assessees assessable income provided the Income Tax Officer was satisfied that there was no real probability of the loans being repaid.

7. Although the 1952 circular was withdrawn in June 1978 in view of the decision of the Kerala High Court to the contrary in State Bank of Travancore vs. Commissioner of Income Tax (1977) 110 ITR 336, the principle was reintroduced by the Central Board of Direct Taxes by another Circular dated 9th October, 1984. The 1984 Circular clarified that up to the Assessment years 1978-79 the taxability of interest on doubtful debts credited to sus

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Judicial Analysis

SupremeToday

2006 Supreme(SC) 426

IMPORTANT POINTOnly one limit is prescribed for deduction on account of salary whether paid to an employee in service or a retired employee in any one previous year.

Cases Referred (3)

Judicial Analysis

IMPORTANT POINT
Only one limit is prescribed for deduction on account of salary whether paid to an employee in service or a retired employee in any one previous year.