New Fields Advertising (P.) Ltd. vs O.D. Sharma, Assistant Commissioner of Income Tax, Investigation Circle 2(2) , New Delhi

A.K. Sikri, J.—The income tax Department has filed complaint u/s 276 of the income tax Act, 1961 for the assessment year 1987-88, against the petitioners herein. Allegations made in the complaint are that in the income tax return for the aforesaid assessment year the petitioners have declared a total income of Rs. 6,41,440. The return showed debit of Rs. 7,06,227 on account of conversor''s commission of advertisement and publicity account. The names of the persons to whom the aforesaid amount was paid to each person was disclosed in the return. The income tax Officer in his assessment order found this expenditure to be unjustified and the same was debited to the income of the petitioners. The petitioners filed appeal against the order of assessment and ultimately the income tax Appellate Tribunal allowed the expenses under the aforesaid head to the extent of Rs. 6,62,317. Fifty per cent of the balance, i.e., Rs. 21,956 was allowed under ''business expenditure'' and thus concealment of income of Rs. 21,956 only was treated which became final. It is the submission of the learned counsel for the petitioner that the amount is admittedly less than Rs. 25,000 and there is a Circular of CBDT that if the evasion is less than Rs. 25,000 no prosecution would be launched. The Circular in question is dated 7-9-1991 which is annexed with the petition and the relevant portion of the said Circular reads as under :-

(iii) Section 276(1) - Wilful attempt to evade tax etc.-

Prosecution u/s 276(1) of the income tax Act, 1961 or the corresponding provision of the Wealth-tax Act, 1957 need not be initiated if :

(a) the income sought to be evaded is less than Rs. 25,000 or;

(b) the net wealth sought to be evaded is less than Rs. 50,000.

The same will apply to an offence u/s 277 for false statement in verification, etc.

The petitioner had sought discharge on the aforesaid ground which application of the petitioner was dismissed by the learned M.M. The petitioner filed revision which has also been dismissed by the impugned order and this is how present petition u/s 482 of Cr. P.C. is filed.

Order of the revisionary Court would reveal that the Court took note of the said C.B.D.T. Circular and also found that Patna and Rajasthan High Courts had taken the view that such proceedings be quashed in view of C.B.D.T. Circular. However, Kerala High Court had taken contrary view following which the revision was dismissed. Learned counsel for the petitioner submits that this controversy stand concluded by the Apex Court in the case of UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, . The Supreme Court has held that such circulars having the effect of relaxing rigour of law are binding of authorities as they are issued u/s 119 of the income tax Act. After detailed discussion on the law on point the Supreme Court made the following observation:-

In the premises the majority decision in the State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, , cannot be looked upon as laying down that a circular which is properly issued u/s 119 of the income tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five Judges in Navnitlal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, ''D'' Range, Bombay, . In fact State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, , has already been distinguished in the case of Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 (SC) , by a Bench of three Judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a ''sticky'' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or ''sticky'' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. (p. 900)

Since the evasion of income was less than Rs. 25,000 having regard to the Circular issued by C.B.D.T. itself prosecution was not to be launched. I am, therefore, of the opinion that since the said Circular would be binding on the income tax authorities u/s 119 of the income tax Act and that if the evasion of the income to the aforesaid extent petitioner has already paid tax thereon no useful purpose would be served in continuing with the complaint filed by the income tax Department and these proceedings are hereby quashed.