Rajasthan H.C : Whether under the facts and circumstances, initiation of proceedings under Section 147 of the Income Tax Act in respect of Assessment Year 1998-99 are legal and proper?

High Court Of Rajasthan

Aravali Kshetriya Gramin Bank (Merged With And Now Known As Baroda Rajasthan Gramin Bank) And Anr. Vs. Assistant Commissioner Of Income Tax And Anr.

Section 147, 148

Asst. Year 1998-99

K.S. Jhaveri & Inderjeet Singh, JJ.

D.B. Income Tax Appeal No. 602/2008 Connected with D.B. Income Tax Appeal No. 202/2009

5th September, 2017

Counsel Appeared:

Gunjan Pathak, Dinesh Kumar for the Petitioner.: Parinitoo Jain, Shiva Goyal for the Respondent.

JUDGMENT/ORDER

1. By way of these appeals, the appellant has challenged the judgment and order passed by the Tribunal whereby the Tribunal has dismissed the appeal confirming the order passed by the CIT

(A) and AO.

2. This court while admitting the appeals has framed following questions of law:D.B. Income Tax Appeal No.602/2008 admitted on 19.08.2010:

Whether under the facts and circumstances, initiation of proceedings under Section 147 of the Income Tax Act in respect of Assessment Year 1998-99 are legal and proper?

Whether Tribunal was justified n holding the additions made by the AO towards nonrecoverable interest on NPA debts is in conformity with the requirement of Section 43D of the Act?”

D.B. Income Tax Appeal No.202/2009 admitted on 19.09.2011:

“Whether Tribunal was justified in holding the additions made by the AO towards nonrecoverable interest on NPA debts is in conformity with the requirement of Section 43D of the Act?

3. Counsel for the appellant contended that the AO has issued notice under Section 148 and proceedings under Section 147 of the I.T. Act were initiated against the appellant relying on the decision of the Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. Vs. Addl. CIT reported in 218 ITR 483 (SC) and has re-opened the assessment which was done under Section 143(1). The notice was issued on 11.3.2003 and not only that, the issue of Section 80P (2) which was covered by the judgment in the case of Madhya Pradesh Co-operative Bank Ltd. Vs. Addl. CIT 218 ITR 438(SC) but it has also covered under Section 43D, the expenses which are deducted and the account which was write off on a back date which was accepted, was also re-opened.

4. He contended that these issues were raised before the ITO that the judgment of M.P. High Court has now been overruled by the Supreme Court in the case of CIT Vs. Karnataka State Cooperative Bank reported in 251 ITR 194 (SC) dated 22.8.2001 on the date on which the notice was issued, and therefore, the notice was issued on an overruled judgment. In spite of that, the Assessing Officer has added income and re-assessed against which the appeal was carried out and tribunal firmed the order.

Counsel for the appellant has relied on the judgment of this Court in the case of C.I.T. Bikaner Vs. Shri Ram Singh 2009(1) WLC 136 wherein it has been observed as under:

“27. If considered on that principle, leaving apart for the moment, the aspect of interpretation of the word “and” as “or”, the existence of the word “also” is of a great significance, being of conjunctive nature, and leaves no manner of doubt in our opinion, that it is only when, in proceedings under Section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax, which has escaped assessment 16 for any assessment year, with respect to which he had “reason to believe” to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under Section 147.

28. To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under Section 147, the Assessing Officer were to come to conclusion, that any income chargeable to tax, which, according to his “reason to believe”, had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the Assessing Officer entertained a reason to believe, albei even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the Assessing Officer may find to have escaped assessment and which may come to his notice subsequently, in the course of proceedings under Section 147

29. It is a different story that for such other income, the Assessing Officer may have recourse to such other remedies, as may be available to him under law, but th n, once it is found, that the income, regarding which he had “reason to believe” to have escaped assessment, is not found to have escaped assessment, the Assessing Officer is required to withhold his hands, at that only

30. To this extent, we agree with the view expressed by the Punjab and Haryana High Court, in Atlas Cycle Industries’ case.

31. The result of the aforesaid discussion is, that the question framed, in the order dated 23.5.2006, is required to be, and is, answered in the manner, that the Tribunal was not justified in holding, that the proceedings for reassessment under Section 148/147 were initiated by the Assessing Officer, on non-existing facts, because ultimately the assessee has been able to explain the income, which was believed to have been escaped assessment, was explainable. It is further held, that the Assessing Officer was justified in initiating the proceedings under Section 147/148, but then, once he came to the conclusion, that the income, with respect to which he had entertained “reason to believe” to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of the proceedings, which were found by him, to have escaped assessment.”

He contended that the AO has seriously committed an error in issuing the notice under Section 147 of the Act.

He has relied on the decision of the Supreme Court in the case of UCO Bank Vs. Commissioner of Income Tax reported in (1999) 237 ITR 0889 wherein it has been held as under:

“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 [(1986) 158 ITR 102 at p.120]. It is as follows:

“4. Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverable interest being credited to revenue, and distributed as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received.”

Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth Edition at page 1089 state as follows:

“Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the Loan account. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised.”

(Vide State Bank of Tranvacore v. CIT [supra]) The assessee’s method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice.

6. For this same reason, and to aid proper determination of income, the Central Board of Direct Taxes had issued Circular No.41(V-6)D of 1952 dated 6th October, 1952. The circular, inter alia, stated that “interest accruing to a money lender on loans entered in the suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee’s taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It is considered desirable to extend this principle to banks which, instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the Income-tax Officer is satisfied that recovery is practically improbable.” This circular was in force till 20th of June, 1978 when the Central Board of Direct Taxes issued a circular dated 20th of June, 1978 withdrawing with immediate eff ct the earlier circular of 6th of October, 1952. The reason for the withdrawal of the circular of 1952 is set out in the circular of 20th of June, 1978. The reason is stated thus: “the Board has been advised that where accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether the interest is credited to suspense account or to interest account. The Kerala High Court has also expressed the same view in the case of State Bank of Travancore v. Commissioner of Income-tax, Kerala [110 ITR 336]. The amount of such interest is, therefore, includible in the taxable income.” The withdrawal of the circular of 6th of October, 1952 which had been in force for thirty six years was on account of the decision of the Kerala High Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (Supra). The Central Board of Direct Taxes, however, issued another circular of 9th of October, 1984 under which the Central Board of Direct Taxes decided 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 assessment year 1979-80 and onwards. The Board’s Instruction No.1186 dated 20.6.78 is modified to this extent.” The same circular has also further clarified that upto assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board’s earlier circular dated 6.10.1952 as the said circular was withdrawn only in June, 1978. The new procedure under the circular of 9th of October, 1984 will be applicable for and from the assessment year 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, upto the assessment year 1978-79, the Central Board of Direct Taxes’ circular of 6th October, 1952 would be applicable; while from the assessment year 1979-80, the Central Board of Direct Taxes’ circular of 9th of October, 1984 is made applicable. In the present case, the assessment was made on the basis of the Central Board of Direct Taxes circular of 9th of October, 1984, since the assessment pertains to assessment year 1981-82 to which the circular of 6th October, 1984 is applicable.

7. What is the status of these circulars? Section 119(1) of the Income-tax Act, 1961 provides that, “The Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions”. Under sub-section (2) of Section 119, without prejudice to the generality of the Board’s power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to assessees, as the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under Section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in Section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.

8. The question whether interest earned, on what have come to be known as “sticky” loans, can be considered as income or not until actual realization, is a question which may arise before several income tax officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such “accrual” of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all income tax officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under Section 119 of the Income Tax Act. Such a circular is binding under Section 119. The circular of 9th of October, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered.”

8. He has also relied on the following judgments:

Commissioner of Income-tax Vs. Bangalore Distt. Cooperative Central Bank Ltd. :: (1998) 233 ITR 282 (SC) Commissioner of Income Tax Vs. Karnataka State Cooperative Apex Bank: (2001) 251 ITR 194 (SC).

Mehsana District Central Co-operative Bank Ltd. Vs. Income-tax Officer, Gujarat State co-operative Bank Ltd. Vs. Commissioner of Income tax (2001) 251 ITR 0522 (SC).

Commissioner of Income Tax Vs. Punjab State Cooperative Bank Ltd. :: 304 ITR 0113 (P & H). Commissioner of Income Tax Vs. Baroda Peoples Cooperative Bank Ltd. 280 ITR 0282. Commissioner of Income tax Vs. Grain Merchants Cooperative Bank Ltd. :: 267 ITR 742 (Kar). Bihar State cooperative Bank Ltd. Vs. CIT :: (1960) 39 ITR 114 (SC). CIT V. Shri Ram Sahakari Bank Limited:: (2004) 266 ITR 632 (Kar.).

Income-tax Officer Vs. Karnataka Central Cooperative Bank Ltd. :: 266 ITR 635 (Kar.).

Bihar State Housing Cooperative Federation Ltd. Vs. Commissioner of Income tax :: (2009) 315 0286 (Pat.) Commissioner of Income-tax Vs. Ramanathapuram Distt. Co-op. Central Bank Ltd. (2002) 255 ITR 423 (SC). Commissioner of Income-tax Vs. Ahmednagar District Central Co-operative:: 264 ITR 0038 (Bom.) Commissioner of Income-tax Vs. Punjab State Cooperative Bank Ltd. :: (2008) 300 ITR 0024.

Commissioner of Income-tax Vs. Ponni Sugars and Chemicals Ltd. ::(2008) 306 ITR 0392.

Commissioner of Income-tax Vs. Haryana State Cooperative Land Development Bank Ltd. :: (2002) 254 ITR 0107. Taking into account, he contended that the issue of Section 147 in respect of assessment year 1998-99 is

required to be answered in favour of the assessee.

Counsel for the respondent contended that notice was issued under Section 147/148 of the Act and assessment was done under Section 143(1) and 143(3) of the Act. She has taken us to Para 8 of the order of tribunal which reads as under:-

“8. The ld. A/R submitted further that in a recent case of CIT Vs. India Equipment Leasing Ltd. 293 ITR 350 (Mad.) involving identical issue, the decision was rendered in favour of the assessee in view of the judgment reported in UCO Bank Vs. CIT, 237 ITR 889 (SC). In the subsequent assessment order passed under Section 143(3) relating to the assessment year 2003-04, 2004-05 and 2005-06, no interference on this ground has been made. Copies of these orders have been placed at pages 26 to 33 of the paper book. The ld. A/R submitted further that provisions of 43D of the Act have been wrongly relied upon by the assessee before the ld. CIT(A). These provisions are not applicable under the facts and circumstances of the present case. The ld. A/R also referred CBDT Circular No.621 dated 19.12.2001, as amended by Circular 642 dated 11.12.92 and Circular No.698 dated

28.12.1994, relevant extract whereof have been reproduced at page 7 of the first appellate order.”

11. Counsel for the respondent has taken us to para 10 of the order of the tribunal which reads as under:”10. Considering the above submissions, we are not inclined to interfere with the first appellate order as the ld. CIT (A) has rightly observed that the assessee has not fulfilled the requirement shown in the CBDT Circular No.621 dated 19.12.91 as amended by Circular No.642 dated 11.12.92 and Circular No.698 dated 28.12.94. The new section 43D provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or is credited to the Profit & Loss account which ever is earlier. In the present case. However, the accrued interest of the past two years, on the advances which were not classified as NPA in those years, but has been classified as NPA during the year under consideration. It is that interest which accrued on advances in those past two years and was credited to the Profit & Loss account in those years and this entry of accrued interest of earlier years has now been reversed during the year under consideration on the basis that those advances have become NPA during the year. Since the debts which have become bad and doubtful during the year on the interest so accrued during the year has not been a matter of controversy, in fact same has not been credited to Profit & Loss account by the assessee and, therefore, same will be charged to tax in the year in which it is actually received. The controversy, as rightly observed by the ld. CIT(A) is that on these debts, which have now become doubtful during the year, the appellant in the past two years had already credited the interest in the Profit & Loss account of those respective two years and it is during the year under consideration that the appellant has reversed that entry and thus seeking deduction of this interest. As per the provisions of the Act, nowhere, it has been provided that such reversal of interest is an allowable deduction. It is only Section 43D, where interest on bad and doubtful debt has been considered to be taken as income in the year in which it is actually received, if the same is not credited in the Profit & Loss account. Thus the postponement of treating the interest as income is available, through section 43D on bad and doubtful debt However, in the present case this interest income has already been credited in the Profit & Loss account of the earlier year, then by virtue of phrase used in Section 43D “whichever is earlier”, the interest so credited in the earlier year has been rightly considered as taxable in the earlier year and there can not be any deduct on during this year by reversing the entries of the earlier years, even by taken help/recourse of Section 43D.

12. In that view of the matter, she contended that view taken by the tribunal is just and proper and no interference is called for.

13. We have heard counsel for the parties.

14. Before proceeding with the matter, it is really shocking that the date on which the notice was issued on a judgment which is sought to be relied on was overruled by the decision of Supreme Court on 22.8.2001, therefore notice issued under Section 147/148 was based on the judgment which was overruled. In that view of the matter, there is no basis for issuing the notice. However, in view of the decision of this Court in the case of CIT Bikaner Vs. Shri Ram Singh (supra), it is very clear that the authority could not have travelled the notice under Section 147. 15. Furthe counsel for the respondent contended that the judgment of this Court is required to be considered in view of the Explanation 3 of Section 147 which came into force w.e.f. 2009, the amendment which has been added w.e.f. 1.4.1889. However, it will not be out of place to mention here that the notice was issued on 11.3.2003. This explanation was not there at that time. In that view of the matter, we are not giving any comment whether the impugned jurisdictional judgment will apply or not and when the notice was issued, this explanation was not there.

16. In that view of the matter, in our considered opinion, the Assessing Officer has not only committed very serious error in issuing the notice on an overruled judgment but has also committed serious misconduct. Inasmuch as, in spite of the pointing out the judgment rendered by the Karnataka High Court came subsequently and has overruled the M.P. High Court judgment, the proceedings ought to have been closed. However, not only the Assessing Officer but the CIT(A) and the Tribunal have not taken into consideration this note.

17. In our considered opinion, the issue under Section 147 based on an overruled judgment is required to be answered in favour of the assessee.

18. On the other issue, counsel for the appellant has relied on the decision of the Supreme Court in the case of T.R.F. Ltd. Vs. Commissioner of Income Tax:: reported in (2010) 323 ITR 397 wherein it has been held as under:- “This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.

19. In that view of the matter, the second issue is required to be answered in favour of the assessee against the department. The appeals stand allowed.

[Citation : 409 ITR 242]

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