State Bank of Indore vs Commissioner of Income Tax

N.K. Jain, J.—Both these Income Tax references have been heard as connected matters, as not only the parties in both the cases are the same but common questions of law are involved in both these cases. This order shall dispose of both these references (I. T. R. Nos. 58 of 1997 and 60 of 1997).

These references are made at the instance of the assessee, the State Bank of Indore, and arise from two similar orders passed in I. T. A. Nos. 470/Ind of 1988 and 471/Ind of 1988, dated December 6, 1994, for the assessment years 1983-84 and 1984-85, whereby the following questions, said to be questions of law, have been referred to this court for answer :

"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in upholding the rejection of method of accounting of interest on sticky loans credited to ''Interest Suspense Account'' consistently followed by the assessee in the assessment years 1961-62 onwards and accepted by the Department ?

(ii) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in upholding the taxation of interest on sticky loans credited to ''Interest Suspense Account'' contrary to the decision consistently taken in the preceding years not to tax ?"

In I. T. R. No. 58 of 1997 an additional question of law has been referred as follows :

"(iii) Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the expenditure on salary and uniform allowance paid to drivers was hit by the provisions of Section 37(3A)?"

Questions Nos. (i) and (ii) which are common in both the references are inter-related and what is to be seen is whether the interest on sticky loans credited to interest suspense account by the assessee-bank though accrued but difficult to recover and not in fact recovered, is liable to assessment for Income Tax. It is a common ground that in the relevant assessment years the amount of interest in question has accrued in respect of doubtful loans and is not likely to be recovered. The amount has so far been not recovered by the assessee-bank and has been credited to "Interest Suspense Account". According to the Revenue, where any such interest has accrued and the assessee has debited the account of the holder, the difficulty of recovery would not make its accrual, non-accrual and Section 5 of the Income Tax Act would make such an amount liable for assessment.

As against it, learned counsel for the assessee-bank has pointed out that the Central Board of Direct Taxes in exercise of its powers conferred by Section 119, has on October 9, 1984, issued a circular directing that "Interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to the assessment year 1979-80 and onwards. By this circular an earlier circular dated June 20, 1978, was modified. It was, thus, contended that the circular which is binding on the assessing authority as also on the Tribunal makes the said interest not liable to assessment unless the amount is actually recovered by the assessee-bank. Reliance has been placed on a Supreme Court decision in UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, .

We have considered the rival contentions. In our judgment, the controversy projected stands resolved finally by the Supreme Court judgment in the case of UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, . In this case the apex court explained, rather overruled, its own earlier decision in the case of State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, and held that the circular dated October 9, 1984, was binding u/s 119 and that the interest suspense account was not liable to be taxed from the assessment year 1979-80 and onwards.

In view of the law as laid down by the apex court, questions Nos. (i) and (ii) referred to us, are, therefore, liable to be and are accordingly answered in the negative, i.e., against the Revenue.

Coming to question No. (iii) in I. T. R. No. 58 of 1997, our answer to this question turns on the interpretation of Section 37, particularly that of Sub-sections (3A) and (3B) as they stood before their deletion. The dispute pertains to the dress allowance paid to the drivers by the assessee-bank. Sub-section (3A) provided that the expenditure incurred by an assessee on any one or more of the items specified in Sub-section (3B) exceeding one hundred thousand rupees, twenty per cent, of such excess shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession." Sub-section (3B) enumerates the said items and one such item is the running and maintenance of aircraft and motor cars. Any payment to the driver is for the purpose of running of motor-cars. The expenditure claimed on dress allowance by the assessee-bank clearly fell within the purview of Sub-section (3A) and the said expenditure was not allowable under the head "Profits and gains of business or profession".

This question (iii) is, therefore, liable to be answered in the affirmative, i.e., against the assessee.

Accordingly, we answer questions Nos. (i) and (ii), which are the common questions in both the references, in the negative, i.e., in favour of the assessee. Question No. (iii), in I. T. R. No. 58 of 1997, is answered in the affirmative, i.e., against the assessee.

Both these Income Tax references, thus, stand disposed of as aforesaid but without any order as to costs.

This order be retained in I. T. R. No. 58 of 1997 and a copy thereof be placed in I. T. R. No. 60 of 1997.