1. Since the only issue in the two appeals in the case of M/s. Canara Bank and the most important issue in the other three appeals, relating to the other two assessees also being banks, is the same, these five appeals have been consolidated and a common order is being passed for the sake of convenience.
2. All these appeals are Departmental appeals filed against the order of the Commissioner of Income-tax (Appeals) deleting the additions of the large amounts of the nature of interest on sticky loans. So far as M/s. Vysya Bank Ltd. is concerned, the Assessing Officer discusses in the assessment orders for the two years that the assessee-bank had stated in its letter dated 5-2-1990 that it had stopped charging interest on doubtful debts from the assessment year 1987-88 and instead, as and when the interest was recovered or written off as bad debts, the amount in the suspense account was reduced. The Assessing Officer considered the method adopted by the assessee being not acceptable to the Department in view of the principles laid down by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 regarding taxability of interest accrued on sticky loans or doubtful debts. The Assessing Officer referred to the discussion made in the said judgment by the Supreme Court relating to the concept of real income ultimately holding that it was not permissible by crediting the interest amounts on sticky loans to suspense account, to term interests already accrued as non-accrued. The Assessing Officer also referred to the instructions issued by the CBDT in Instruction No.1586, dated 5-2-1986 holding that the interest on doubtful debts should be brought to tax. The Assessing Officer thereafter stated that in absence of the particulars relating to the details of interest accrued on doubtful debts, which the assessee had been asked by the Assessing Officer to furnish, he worked out the said interest at the bank's average lending rate of 15% on the debit balance in the doubtful debts.
Ultimately, the Assessing Officer added back the amounts of Rs. 28,27,979 and Rs. 42,98,000 in the assessments of M/s. Vysya Bank Ltd., for assessment years 1987-88 and 1988-89 respectively.
2.1 In the case of M/s. Syndicate Bank, the Assessing Officer discussed in the assessment order that the assessee had not offered any interest on amounts where suits had been filed/provision/account/claim lodged account. Representative of the assessee contended before the Assessing Officer that since no interest had accrued or arisen to the bank, the same was not offered to tax. It was furthermore contended that this system of accounting was being followed by the bank for the past 35 years or so. In this case also, the Assessing Officer referred to the abovementioned decision of the Supreme Court in State Bank of Travancore's case (supra) and added back an amount of Rs. 24,21,43,522 as interest corresponding to the suit filed account/provision accounts and claim lodged accounts.
2.2 So far as the case of M/s. Canara Bank is concerned, its assessment for assessment year 1981-82 had earlier been completed under Section 143(3) without taking into consideration the interest on sticky loans.
The assessment was, however, reopened under Section 147(a). In the reassessment order, the Assessing Officer made detailed discussions on this issue. He discussed that this bank was not offering to tax, interest accrued on sticky loans and doubtful advances and that once the loan was identified as sticky, doubtful etc., the same was being transferred to a head called "loan post due account" (1PD A/c) and that the interest accrued on the said account was not being offered to tax at all. The Assessing Officer furthermore stated that instead, interest recovered, if any, was taken on cash basis. The assessee represented before the Assessing Officer that his method of account was being followed by the assessee since 1960. The Assessing Officer, however, did not consider the method to be acceptable inasmuch as in his opinion, income of the assessee could not be properly deduced there from. In this case also, the Assessing Officer referred to the decision of the Supreme Court in the case of State Bank of Travancore [supra).
It was contended by the assessee before the Assessing Officer that as regards the switching of the accounting method, the current practice followed by the assessee was widely recognised and that the CBDT, by its Circular No. 491, dated 30-6-1987 urged the Department to accept the change in the method of accounting from mercantile system to cash system in respect of interest on sticky loans in the case of State Financial Corporations, provided the change was accepted by the IDBI/RBI. The Assessing Officer held that the distinction sought to be established by the assessee from the facts found in the case of State Bank of Trauancore [supra) was not existing. He stated that the assessee was mainly following mercantile system of accounting and it could not be said that the assessee had switched over to the cash system. He also stated that the CBDT circular referred to by the assessee related only to interest accounts of State Financial Corporations and was not applicable to banking companies. Finally, he estimated the interest on sticky loans at the figure of Rs. 5,22,34,000 for the assessment year 1981-82 and added back the amount in the reassessment order. So far as the assessment year 1982-83 is concerned, for the same reasons as in the earlier year, he added back an amount of Rs. 6,82,36,000 by way of estimated interest on sticky loans in the original assessment itself.
3. Additions in all the cases were challenged by the respective assessees before the CIT (Appeals). The CIT (Appeals) distinguished the facts of all the three cases from those in the case of State Bank of Travancore [supra) as decided by the Supreme Court and by holding that an assessee is to be taxed only on the income which he has made and not on the income which he possibly could have made. Finally, he deleted the additions in all the cases.
4. During the course of the hearing of the appeals in a combined manner before us, the learned Departmental Representative argued as follow: 4.1 In the case of M/s. Vysya Bank Ltd., he stated that the circumstances in this case were different from those of the other two cases inasmuch as till assessment year 1986-87 this particular assessee had been accounting for all its interest income on mercantile basis and that it changed the said method of accounting from the assessment year 1987-88 onwards. He argued that even the changed method also could not be said to be of the nature of cash system of accounting inasmuch as the assessee went on following the mercantile system of accounting in respect of all its sources of income and even in respect of interest income also. It went on following mercantile system in the case of all loans excepting the sticky loans only. The assessee started following the cash system in case of sticky loans alone. The learned DR thus argued that the change was neither a valid one nor a bona fide one and hence, the so-called change could not be accepted. He also referred to the decision of the Supreme Court in the case of State Bank of Travancore [supra) and argued that the Supreme Court had taken into account the concept of real income therein and in the present case, interest was actually accruing even on the sticky loans and the assessee was, therefore, liable to tax on such interest income also. He furthermore stated that the State Financial Corporations had changed their method of accounting from mercantile to cash system in respect of all types of interests, whether on sticky loans or otherwise, whereas the assessee claimed to have changed over to the cash system only in respect of interest on sticky loans alone. He, by relying on the decision of the Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR 1, strongly argued that change in the method of accounting in such a manner was not at all permissible. He also relied on the decision of the Calcutta High Court in the case of James Finlay & Co. v. CIT [1982] 137 ITR 698 and of the Kerala High Court in the case of CIT v. Kerala Financial Corpn. [1985] 155 ITR 228 in support of his contention that a change to hybrid system as done by Vysya Bank was not permissible at all. He raised the question as to whether the so-called change, as taken recourse to, by the assessee was at all bona fide. He stated that the change had been brought about by the assessee merely for the purpose of reducing its tax liability after delivery of the Supreme Court judgment in the case of State Bank of Travancore (supra).
4.2 The learned DR also brought to our attention discussion made by the Supreme Court in its judgment under consideration relating to the earlier judgment of the Supreme Court in the case of CJT v. K.R.M.T.T.Thiagarqja Chetty & Co. [1953] 24 ITR 525 [at page 140 of State Bank of Travancore's case (supra)] and also relating to another judgment of the Supreme Court in the case of CITv. Chamanlal Mangaldas & Co. [1960] 39 ITR 8 [at page 146 of State Bank of Travancore's case (supra)]. He also placed reliance on two judgments of the Karnataka High Court in the case of Karnataka State Financial Corpn. v. CIT [1988] 174 ITR 206 and Karnataka State Financial Corpn. v. CIT [1988] 174 ITR 212. He furthermore tried to distinguish the unreported judgment of the Karnataka High Court in the case of Syndicate Bank [IT Reference Case Nos. 80 to 82 of 1982, dated 24-1 -1989] by stating that this particular judgment of the Karnataka High Court was based on factual finding as rendered by the ITAT not challenged by the Department and could not, therefore, be considered to be an authority on the point of the system of accounting to be considered as being validly followed or not. The learned DR also brought to our notice the fact that the Karnataka High Court had held in Karnataka State Financial Corpn. v.CIT [1988] 1974 ITR 212 that RBI directives and circulars are guiding factors in deciding taxability. Reference was also made in this connection to the abovementioned decision of the Kerala High Court in Kerala Financial Corpn. 's case (supra).
4.3 So far as the cases of Syndicate Bank and Canara Bank are concerned, the learned DR, although admitting that there was no case of any switchover of the accounting system for these two banks, at the same time however, argued that it cannot be said that the method of accounting being followed by these two banks of considering interest on sticky loans on receipt basis only, could not be considered to be a proper one for giving a fair idea about the actual income of the banks concerned. He thus argued that the method of accounting being followed by these two banks should not be considered as a valid one and it was, therefore, necessary to take into consideration even accrued interest on sticky loans in respect of these two banks also to arrive at their correct pictures of income. He also argued that this was possible in accordance with the judgment of the Supreme Court in the case of State Bank of Trauancore (supra).
5. Shri Vishnu Bharath, counsel for Vysya Bank Ltd., Shri V.R. Gupte, counsel for Canara Bank and Shri K.P. Kumar, counsel for Syndicate Bank represented their respective clients and spoke elaborately by citing a plethora of case laws on their parts. We are not going to discuss the arguments put forward by them at this stage. On the other hand, we propose to take into consideration the said arguments at appropriate places while deciding the issue raised.
6. Let us first of all try to analyse the facts of the case. This is rather simple. So far as the Vysya Bank Ltd. is concerned, it was following purely the mercantile system of accounting till assessment year 1986-87. From assessment year 1987-88, however, it made a slight modification in the said system. It discerned sticky loans and started not taking into consideration the interest on such loans. In the case of State Bank of Trauancore (supra) that particular bank had actually taken into consideration interests even on sticky loans. Accounts of the respective parties had duly been debited with the interest amounts.
However, instead of crediting the said interest amounts to Interest Account, the State Bank of Travancore credited the interest amounts to a separate account called "Interest Suspense Account". Vysya Bank Ltd., did not adopt that practice. On the other hand, it did not bring the interest on sticky loans to its accounts at all from assessment year 1987-88 onward. On the other hand, it resorted to the method of cash system of accounting in respect of such interests, viz., these interests would be credited to the profit and loss account only when the interests would actually be received by the bank.
So far as Syndicate Bank and Canara Bank are concerned, they have not been following the mercantile system of accounting in respect of interest on sticky loans for a very long time, having actually been following the cash system of accounting as narrated above in respect of interest on sticky loans or LPD Account (as called by the Canara Bank) - since 1953 in case of Syndicate Bank and 1960 in case of Canara Bank.
In fact, Shri Kumar drew our attention to the remark made by the Assessing Officer at page 12 of the assessment order in the case of this bank for assessment year 1983-84 and at para 4.10-6 to the effect that the assessee had been following cash system of accounting.
7. The question which is common in respect of all the three assessees and which is required to be, thus, answered is whether the system of accounting being followed at present by all the three banks, viz. cash system of accounting only in respect of interest on sticky loans alone, can be considered to be a valid system and whether the true income of the assessees can be arrived at by resorting to this system. An additional question would arise in case of Vysya Bank Ltd. alone as to whether the change-over of the method of accounting by that bank from a purely mercantile system to the present system with effect from 1987-88 can be considered to be a bona fide and acceptable one.
8. Let us first of all try to analyse the arguments put forward by the learned DR at the first place. He has referred to the decision of the Madras High Court in G. Padmanabha Chettiar & Sons' case (supra) in support of his contention that hybrid system of accounting is not permissible. We are, however, afraid that the Madras High Court has not come up with such a proposition. On the other hand, what the Madras High Court merely says in the said judgment is that the same system is to be adopted for receipts and payments and that the assessee cannot adopt mercantile system to claim deduction of amounts payable by it and cash system in respect of amounts due to it. It is needless to say that this is not the case in the present cases and this particular judgment will not be applicable here.
8.1 Reliance has also been placed by the learned DR on the decision of the Calcutta High Court in the case of James Finlay & Co. (supra). In that particular case, interest on advances was being credited in the accounts and subsequently transferred as irrecoverable to suspense account. The Tribunal held that there was no change in the method of accounting and that the assessee had not abandoned its claim of interest and accordingly the amounts were assessable on accrual basis.
In the present cases, interest has not at all been credited in the accounts of any of the assessees. There is also no question of interest income being taxable on accrual basis inasmuch as all the assessees are claiming that they follow cash system of accounting in respect of interests on sticky loan. We will refer to this particular point at a later stage. In any case, it would suffice to say that this particular decision of the Calcutta High Court does not fit into the facts of the present cases. In the case of Kerala Financial Corpn. (supra) as decided by the Kerala High Court, interest amount was transferred to suspense account under advice from the RBI. It was held that no change in the system of accounting had taken place. As discussed in the earlier sub-paragraphs, there is no case of interest amount having been taken into consideration in the present matters. This particular decision also does not seem to be of much help to the Department.
8.2 The learned DR has raised the issue whether, the change in the method of accounting by the Vysya Bank Ltd., from assessment year 1987-88 onward was bonajide or not? He has also referred to the principles of accrual as discussed by the Supreme Court at page 140 of its judgment in State Bank of Travancore's case (supra). The Supreme Court discussed therein its earlier decision in K.R.M.T.T. Thiagarqja Chetty & Co.'s case (supra). It had been held in the said earlier judgment as early as in 1953 that once the sum of Rs. 2,26,850 had been arrived at as income that had accrued to the assessee, it did not cease to be income by reason of the fact that it was carried to the suspense account by a resolution of the Directors and that it was, therefore, assessable to tax. The facts here also seem to be the same as in the case decided by the Calcutta High Court and the Kerala High Court as mentioned above. This particular decision of the Supreme Court is also, therefore, of not much use for our present purpose.
8.3 Reference has also been made to the discussions made by the Supreme Court in the case of State Bank of Travancore (supra) at pages 146 and 147 of the said report discussing the earlier decision of the Supreme Court in the case of Chamanlal Mangaldas & Co. (supra). In that case, there was a provision for reduction of commission where profits were insufficient in the case of the managing agent. There was modification of the commission before the end of the year and the amount was given up by the managing agent. It was held by the Supreme Court that the managing agent's commission was only determinable and accrued when the year was over and that the amounts of commission were credited in the books of the managed company every six months which meant that, as an interim arrangement, the accounts of all sales were made up at the end of six months also. The Supreme Court finally held that the amount which arose or accrued and which the managing agent had the right to receive was not affected by the manner in which the entry was made. The facts here are completely different from those in the present case and, in any case, the amounts in that particular case had already been brought to the books and later on tried to be denied as income of the managing agent. Needless to say, the facts of the present case are completely different from the same.
8.4 The two judgments of the Karnataka High Court in the case of Karnataka State Financial Corpn. v. CIT [1988] 174 ITR 206 and Karnataka State Financial Corpn. v. CIT [1988] 174 ITR 212 have also been referred to by the learned DR. The first judgment as above does not seem to be much relevant to the present cases. In case of the second judgment again, the Karnataka High Court had actually held that the earlier circular and instructions regarding interest on sticky advances had been withdrawn and the CBDT issued an instruction on 20-6-1978, that where accounts were kept on mercantile basis, interest was taxable irrespective of whether the same was credited to suspense account or to interest account. The High Court furthermore stated that the instruction issued by the CBDT was binding on the income-tax authorities. The High Court furthermore stated that since the Tribunal had made its order on 25-10-1978, it had to follow the instruction issued in June 1978 and hence, interest on sticky loans was includible in the total income of the assessee for the assessment year 1976-77.
With due respect to the above decision of the High Court, we have to state that the Tribunal, while discharging its judicial duties, is not bound by any of the circulars of the CBDT inasmuch as the Tribunal is not an authority subordinate to CBDT. Furthermore, this case is also distinguishable on the basis that the Karnataka State Financial Corporation was actually maintaining its accounts on mercantile basis whereas the claim in the present cases is that all the assessees have been maintaining their accounts in respect of at least, interest on sticky loans on cash basis.
8.5 So far as the bindingness of the RBI directives and circulars are concerned, we can draw our conclusions from the judgment of the Supreme Court in the case of State Bank of Travancore (supra) itself which states that the circulars which are executive in character cannot alter the provisions of the Act and that circulars which are in nature of concessions can always be prospectively withdrawn.
9. Let us now come to the actual points to be decided. We discuss in this connection, the arguments of the counsels for the different assessees and also the decisions cited by them.
9.1 Shri Vishnu Bharath has drawn our attention to the circular of the RBI No. BP.BC. 133/C. 469-89, dated 26-5-1989 in which it was stated the Reserve Bank had considered the matter relating to the accounting practice followed by the banks in classifying the loans as non-performing and stopping interest applications on such loans and had decided that the banks should adopt certain minimum standards in the classification of non-performing loans, on which interest was not to be applied and taken to profit and loss account. In this connection, the RBI specified certain health code classifications relating to interest on loans and directed the banks not to charge interest on such loans in their accounts from the accounting year commencing from 1-4-1989. Shri Vishnu Bharath, on behalf of the Vysya Bank Ltd., stated that the change in the system of accounting by his client bank from 1987-88 was in consequence of the abovementioned directives given by the RBI in 1989 with the only modification that the bank had realised the issue about two years earlier and had changed its practice of not charging interest on sticky loans from assessment year 1987-88 onwards. He stated that there was no case for the change effected being non-bona fide. We agree with the arguments of Shri Vishnu Bharath. We are also of the opinion that the concerned bank along with other banks must have felt anguished over showing their profits at. inflated figures by including interest on sticky loans, which was not an income of the assessee in a realistic sense inasmuch as there was very limited chance of receiving that interest. The change in the method of accounting, therefore, should be considered as bona fide by all accounts. In this connection, we take into account the decision of the Allahabad High Court, as relied upon by Shri Vishnu Bharath in the case of New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 wherein it is stated that though it is open to an assessee to change his method of accounting, the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years. We duly take into consideration the submission of the learned Counsel that the change in this particular case was effected after taking into account the pros and cons of the matter relating to determination of profits in a realistic manner and in a more or less permanent way inasmuch as the change was not reversed back at a later year. We also find that the Allahabad High Court observed in the said judgment that it is not incumbent upon an assessee to follow a purely cash method of accounting or purely mercantile system of accounting and that it could be a mixture of both.
9.2 We also take due note of the reliance placed on the decision of the Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 in which the High Court has accepted the possibility of the assessee employing cash system of accounting with regard to its income from other sources alone and stated that the income of the assessee from other sources could properly be deduced there from by the taxing authorities even by applying the cash system of accounting.
9.3 It is found that the Bombay Tribunal had held, in the case of ICICI where the assessee had admitted the cash system of accounting for interest on sticky loans and advances, that the deletion of interest accrued on loans treated as doubtful was right. The Bombay High Court approved of this decision of the Tribunal in CIT v. Industrial Credit & Investment Corpn. of India Ltd. [1991] 189 ITR 126 by observing that since interest had not been credited to interest suspense account, the Supreme Court's decision in the case of State Bank of Travancore [supra) was not attracted and hence, the interest was not chargeable to tax.
9.4 Shri Vishnu Bharath also referred to a circular of the CBDT bearing No. 41(V-6) D of 1952, dated 6-10-1952 and referred to the decision of the Karnataka High Court in the case of CITv. Corpn. Bank Ltd. [1986] 157 ITR 509 in which the Karnataka High Court had observed that by virtue of the circular as mentioned above, interest on loans that had accrued to the assessee-bank, the recoveiy of which was considered doubtful was not liable to assessment under the Income-tax Act. We, however, do not exactly accept this particular contention of Shri Vishnu Bharath about applicability of this particular judgment of the Karnataka High Court inasmuch as the abovementioned circular of the CBDT, dated 6-10-1952 was withdrawn prospectively by the CBDT by its letter dated 20-6-1978 addressed to the Commissioner of Income-tax soon after the Kerala High Court's decision in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336.
9.5 We also take due note of the reliance placed by Shri Vishnu Bharath on the decision of the Madras High Court in the case of CITv. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 in which it had been held that the question whether real income materialised to the assessee was required to be considered with reference to commercial and business realities of the situation and not with reference to his system of accounting.
9.6 Shri Vishnu Bharath has also placed reliance on the following decisions in support of his contention relating to non-taxability of interest on sticky loans: We do not consider that so many decisions as relied upon by Shri Vishnu Bharath are necessary for deciding the issue, which could actually be taken care of by relying on the other decisions already taken into consideration by us. In this connection, however, we want to take due note of the observation made by the Supreme Court in the case of Investment Ltd. v. CIT 1 1970) 77 ITR 533 at page 537: ...A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts.... A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities....
9.7 It has been stated before us by Shri Vishnu Bharath that the categories of loans treated by the Vysya Bank Ltd., as doubtful are : The Vysya Bank Ltd. resorts to accounting of interest on cash system in respect of these three types of loans only. We consider that the classification of the loans into doubtful ones by consideration of the loans of the above three debts separately as adopted by Vysya Bank Ltd., is on a rational basis and hence, the bank can be considered to be following a valid method of accounting in respect of accounting of interests on these types of loans. The change over from the complete mercantile system of accounting as in past to the present system with effect from assessment year 1987-88 also, in our view and in the circumstances of the cases and on the basis of the judgments of the different courts as considered above, has got to be treated as a bona fide change, especially when the bank has not made any back-track from this method at any time after the changeover. In this connection, we also take due note of the reliance placed by Shri Vishnu Bharath on the decision of the Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847 in which it has been held that for a change in the method of accounting, the approval of the income-tax authorities is not needed.
10. Both Shri Gupte for Canara Bank and Shri Kumar for Syndicate Bank argued that the Supreme Court's judgment in the case of State Bank of Travancore (supra) is not applicable to the cases of their clients.
Shri Gupte drew our attention to the fact that from page 134 of the reported judgment onward, it may be found that the Supreme Court all along emphasised on the presumption of the system of accounting being mercantile for holding that even interest on sticky loans was also taxable. He has referred to pages 135 and 136 of the said reported judgment in support of his argument. We agree with the same. Shri Gupte has also argued that there are umpteen number of judgments recognising a mixed or hybrid system of accounting. In support of his contention, he has especially referred to the judgment of the Allahabad High Court in the case of J.K. Bankers v. CIT [1974] 94 ITR 107 in which it has been observed as follows : It was open to the assessee to follow one system of accounting in respect of one source and another system in respect of other sources.
Due note may be taken in this connection of the decision of the Madras High Court in the case of CIT v. E.A.E.T. Sundararqj [1975] 99 ITR 226.
At page 231 of the said reported judgment, the Madras High Court observed as follows : An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis.
Shri Gupte also argued by referring to the discussion made by the Supreme Court at pages 152 and 154 of the reported judgment in the case of State Bank of Travancore (supra) relating to the cases decided by the Madras High Court in Motor Credit Co. (P.) Ltd. 's case (supra) and Punjab &Haryana High Court in CITv. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 that the conditions in these two cases are exactly like those in the assessee's own case and, hence, the dictum of the respective courts in those cases holding in favour of non-accrual of interest income should be considered to apply to the present case. Shri Gupte also made a reference to the decision of the Madras High Court in the case of CITv. Devi Films (P.) Ltd. [1983] 143 ITR 386. We, however, refuse to take notice of this particular decision inasmuch as the Supreme Court has expressly disapproved the said decision in its judgment in the case of State Bank of Travancore (supra).
11. Shri Kumar also argued in almost the same line and took our attention to the discussions made at page 1162, 8th edition of the Treatise on Income-tax by Kanga & Palkhiwala, Part I in which it has been stated that there may be different systems of accounting for different sources or even different customers. In support of the argument that hybrid system of accounting is permissible, he has relied upon the decision of the Madras High Court in the case of CITv. North Arcot District Co-operative Spg. Mills Ltd. 11984] 148 ITR 406 in which it has been held that there is a possibility of an assessee adopting a hybrid system of accounting if it be possible to ascertain the true profits on the basis of such accounting, and on a decision of the ITAT, Bombay Bench in the case of Industrial Credit & Investment Corpn. of India Ltd. v. IAC [1990] 32 ITD 315. Shri Kumar stated that this particular judgment was delivered by the ITAT even after and by taking into consideration the earlier judgment of the Supreme Court in the case of State Bank of Travancore (supra). He referred to the fact that reference petitions under Sections 256(1) and 256(2) against the abovementioned judgment of the Tribunal have been dismissed in CITv.Industrial Credit & Investment Corpn. of India Ltd. [1991] 189 ITR 126 (Bom.). He strongly contended that it was very much possible to deduce the profits of his client bank even under the method of accounting presently being followed by it. He also relied on another judgment of the ITAT, Hyderabad Bench in the case of Andhra Bank [IT Appeal No. 99 (Hyd.) of 1987, dated 31 -8-1989] in which also interest on sticky loans has been held not to be includible in the income of the assessee.
Further reliance was also placed on an unreported judgment of the Karnataka High Court in Syndicate Bank's case (supra) for assessment year 1974-75 in which also a similar view is stated to have been taken.
12. After taking into consideration the decisions on all the abovementioned cases, we must finally come to the conclusion that firstly, maintenance of accounts on a hybrid system is not at all irregular provided the profits of the concern can be deduced correctly there from. In the instant cases, all the three assessees have started maintaining accounts in respect of interest on sticky loans on cash basis, whereas all the other accounts are being maintained on mercantile basis. There is nothing to conclude that the principles of accountancy have been ravished thereby. In fact, because of the very nature of the sticky loans, recovery of the principal amounts in respect of which itself is extremely doubtful, consideration of further interest thereon and inclusion of the same in the profits of a bank cannot be considered to be a realistic method of arriving at the true profits of the bank. The directives issued by the Reserve Bank of India in 1989 also support the cases of the assessees. We do not find any reason to hold that treatment of interest on sticky loans on cash basis would not lead to a proper determination of the income of the assessees. Finally, therefore, we hold that the hybrid system of accounting as being followed by the three assessees is perfectly valid and in view of the cash system of accounting in respect of interest on sticky loans being followed, the decision of the Supreme Court in the case of State Bank of Travancore (supra) cannot also be considered to be at all applicable to any of the present cases. It goes without saying that in accordance with the cash system of accounting, interest merely accrued but not received would not constitute income of the assessees. Again, so far as the Vysya Bank Ltd. is concerned, we have already held that the switch-over from purely mercantile system of accounting to the hybrid system of accounting with effect from assessment year 1987-88 was perfectly valid and also a bona fide transition on the part of the said bank. The case of that bank has also, therefore, got to be treated at par with the other two banks from assessment year 1987-88 onwards. Hence, in all the cases under present consideration, inclusion of interest income on the sticky loans on accrual basis has got to be considered as unwarranted. We, therefore, uphold the action of the CIT(A) in deleting such interest amounts.
13. There are some covered issues relating to Vysya Bank Ltd., and also Syndicate Bank, which are also being taken up as below: 13.1 The Vysya Bank Ltd. One of the issues common to both the years relates to the direction given by the CIT(A) to treat share-issue expenses as revenue expense. In the assessments, the Assessing Officer had treated these expenses as capital expenses for both the years by relying on the principles laid down by the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52. The CIT(A), however, referred to various decisions like Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 20 (Kar.), CITv. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130ITR 385 (Mad.) and Federal Bank Ltd. v. CAT [1989] 180 ITR 241 (Ker.) in which share issue expenses have been considered as revenue expenses and allowed reliefs to the assessee.
13.2 The learned Counsel for the assessee has also relied on the abovementioned decisions quoted by the CIT(A). The learned DR, on the other hand, besides relying on the judgment of the Supreme Court in India Cements Ltd. case (supra) in principle, also came up with his argument that the Punjab & Haryana High Court and the Calcutta High Court have held in their respective judgments in Groz-Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743 and Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 that expenses of this type are of capital nature. He also contended that the decision of the Karnataka High Court in Hindustan Machine Tools Ltd. (No. 3)'s case (supra) should not be considered as an authority on this matter inasmuch as the Karnataka High Court held that only filing fees in connection with the issue of shares to be of revenue nature and did not take into consideration the ambit of various types of expenses required to be incurred in connection with the issue of new shares.
14. We do not find much relevance to the decision of the Supreme Court in the case of India Cements Ltd. (supra) to the present case. The matter decided by the Supreme Court was relating to the expenses incurred in connection with raising of loans for business purpose and it had nothing to do with issue of new share capital. At the same time again, we find that the Madras High Court has held in the case of Kisenchand Chellaram (India) (P.) Ltd. (supra) that fees paid to the Registrar of Companies for increasing capital should be treated to be of the nature of revenue expense. In arriving at that decision, the Madras High Court merely took into consideration whether the expense was incurred in connection with the business activities of the company or not and relied on the above-mentioned decision of the Supreme Court in India Cements Ltd.'s case (supra). The Kerala High Court, also held in the case of Federal Bank Ltd. (supra) that filing fees paid to Registrar of Companies on enhancement of authorised capital constitute a revenue expense. Furthermore, the Karnataka High Court has also held in the case of Hindustan Machine Tools Ltd. (No. 3) (supra), by following the decision of the Madras High Court in the case of Kisenchand Chellaram (India) (P.) Ltd. (supra) that the expenditure incurred by way of filing fees paid to the Registrar of Companies in respect of enhancement of the authorised share capital of the company was deductible as revenue expenditure.
14.1 On the other hand, the Punjab & Haryana High Court has held in the case of Groz Beckert Saboo Ltd. (supra) that fees paid under the Companies Act for increasing share capital is of capital nature. In doing so, the Punjab & Haryana High Court followed the earlier- decision of the Calcutta High Court in the case of Brooke Bond India Ltd. (supra).
14.2 We thus find that the decisions of the different High Courts are divided on this particular issue. However, the Karnataka High Court has already held that filing fees even for the purpose of increasing the capital of the company would constitute revenue expenses. The said decision should apply to other expenditure also incurred in connection with increasing the capital. Respectfully following the said decision, therefore, we hold in this particular case that the CIT(A) acted correctly in allowing the claims of the assessee as revenue expenses.
His order in this regard is, therefore, being upheld and the departmental ground is being dismissed.
15. Another issue common to both the years for Vysya Bank Ltd., is whether the CIT(A) acted correctly in allowing 50% of the entertainment expenditure as being attributable to the members of staff of the assessee-bank. The Tribunal has already held in a number of cases that 50% of the expenditure incurred towards providing hospitality to outsiders should be considered as attributable to the company's own employees and should not, therefore, be disallowed as entertainment expense. The CIT(A) has followed the same line. We do not find any thing wrong with his order and uphold the same.
16. The Departmental appeal has also been taken for assessment year 1987-88 against the decision of the CIT(A) deleting the addition of Rs. 50,725 under Rule 6D. The Assessing Officer mentioned in the assessment order that the total travelling expenses as per the Tax Audit Report was Rs. 24,99,815 and that, however, the details as required under Rule 6D were not furnished in respect of this particular expenditure. The Assessing Officer added back an amount of Rs. 50,000 on estimate as probable amount of disallowance under Rule 6D. He also added back an amount of Rs. 9,525 out of the director's travelling expenses.
The CIT(A), however, stated that he found that the details had been furnished and that the disallowance had been worked out in accordance with the Tax Audit Report. He also stated that the figure of disallowance of Rs. 24,99,815 as per the Tax Audit Report had got to be accepted. In that view, he deleted the addition of Rs. 59,925.
We are, however, unable to find that the amount of Rs. 24,99,815 was actually added back in the computation of income originally as per the Tax Audit Report. We feel, therefore, that the disallowance is justified in absence of the actual details as required by the Assessing Officer. Hence, we reverse the order of the CIT(A) and restore the disallowance of Rs. 59,925 as made by the Assessing Officer in the original assessment.
17. For assessment year 1S'88-89 again, total disallowance of Rs. 36,414 was made by the Assessing Officer under Rule 6D. This included a sum of Rs. 15,000 which represented a provision made. The CIT(A) gave relief in respect of this amount of disallowance of Rs. 15,000 on the basis of the plea of the assessee that no such provision had been made.
It has been contended in the departmental ground of appeal that an appeal dated 5-2-1990 was filed before the Assessing Officer showing the break-up with a narration "Add: provision Rs. 15,000". This particular issue was not very seriously contested by either of the sides during the course of the appeal before us. Hence, we sustain the order of the CIT(A) in this regard.
18. For assessment year 1988-89, the Department has raised another ground that the CIT(A) erred in directing the Assessing Officer to verify the receipts in respect of donations and allow relief admissible under Section 80G. It has been stated that deduction under Section 80G is not admissible without exemption certificates.
When the Assessing Officer has been directed to verify the matter relating to allowance of deduction under Section 80G, it has got to be presumed that he would take into consideration the matter relating to existence of exemption certificates also. We, therefore, do not find any thing wrong with the direction given by the CIT(A) in this regard and uphold his action.
19. Syndicate Bank : Amongst other grounds taken by the Department in this appeal, one relates to the finding of the CIT(A) that underwriting commission and brokerage received by the assessee during the course of purchase of securities by it does not form its income chargeable to tax.
We find that this particular issue is covered in favour of the assessee by the decision of the Karnataka High Court in the assessee's own case for earlier year in Syndicate Bank v. CIT [1988] 172 ITR 561.
Respectfully following the said judgment, therefore, we refuse to interfere with the finding of the CIT(A) in this regard.
20. The Department has also raised another ground against the direction given by the CIT(A) to the Assessing Officer not to consider the cash payments made by the company to its employees as perquisites for the purpose of computation of disallowance under Section 40A(5). This issue is also found to be covered in favour of the assessee by the judgment of the Karnataka High Court in the case of CITv. Mysore Commercial Union Ltd. [1980] 126 ITR 340. In this regard also, therefore, we refuse to interfere with the direction of the CIT(A).
21. The Department has also raised a ground that the CIT(A) erred in deleting the disallowance in respect of penal interest paid by the assessee to the Reserve Bank of India. This particular issue is also found to have been decided in favour of the assessee by the ITAT, Bangalore Bench, in two of its earlier judgments in the assessee's own case viz., (i) ITA No. 750 (Bang.)/1985, order dated 5-3-1988 for assessment year 1981-82, and (ii) ITA No. 1228/Bang/1986, order dated 24-10-1990 for assessment year 1984-85. Following the said line, therefore, we hold that for this year also, the decision of the CIT(A) is correct and refuse to interfere with his finding.
22. In the result, Appeals No\ ITA 1912/Bang/1989 in the case of M/s.
Syndicate Bank, for assessment year 1987-88, ITA Nos. 1282 & 1283 (Bang.)/1990 in the case of M/s. Canara Bank for assessment years 1981-82 and 1982-83 and ITA No. 2440 (Bang.)/1990 in the case of M/s.
Vysya Bank Ltd., for assessment year 1988-89 are dismissed. However, the departmental appeal in the case of Vysya Bank for assessment year 1987-88 in ITA No. 2439 (Bang.)/1990 is partially allowed to the extent of restoration of the disallowance out of travelling expenses under Rule 6D.