1. As certain common issues and facts are involved in these appeals and the same were argued together by the common counsels engaged by the assessee and the Department, these appeals are being decided together for convenience.
2. First major issue involved in these appeals which pertains to asst.
yr. 1981-82 to 1988-89 and 1990-91 relates to the assessability of interest income attributable to certain class of loans and advances made by the assessee-bank to some of its debtors. The assessee is a nationalised commercial bank having its head office in Calcutta and various branches in Calcutta and several other places. According to the assessee-bank, it has been following a hybrid system of accounting for a very long time under which certain class of debtors of doubtful recovery were excluded and the assessee stopped debiting interest attributable to the amounts outstanding in the accounts of such debtors. The assessee, however, did not give up its rights and claims of charging interest on the amounts outstanding against such debtors but such interest was not debited to the debtors' account on accrual basis but was incorporated in separate memorandum record maintained by the assessee-bank for this purpose. As a consequence, no interest income on such loans and advances was recognised in the consolidated income and expenditure account of the assessee, year after year.
According to the assessee, on certain debtors' account having become doubtful of recovery under the parameters applied by the bank, the assessee followed thereafter cash system of accounting in respect of interest chargeable on such accounts. Subject to this exception, the assessee followed accrual basis or mercantile system of accounting in respect of its interest income on loans and advances made by the bank to its customers. This method of accounting which was being regularly employed by the assessee was accepted by IT authorities in the assessment orders of earlier years, but from asst. yr. 1980-81 onwards the assessing authorities disputed this method of accounting as not being correct and insisted upon assessing interest income on such loans of doubtful recovery, commonly known as "sticky loans" on accrual basis. Reliance in this behalf was placed by the assessing authorities on the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC). Huge additions were made to the income declared by the assessee on this basis in the impugned assessment orders for the asst. yrs. 1981-82 to 1988-89 and 1990-91.
Aggrieved by these assessment orders, the assessee made unsuccessful appeals before the CIT(A) having jurisdiction over the assessee from time to time. Still aggrieved, the assessee is in appeal before us.
3. Dr. Debi Pal, the learned counsel for the assessee-bank argued before us that the facts of the case of the assessee in all these assessment years are clearly distinguishable from the facts on which the Supreme Court judgment in the case of State Bank of Travancore (supra) was given. The assessee in that case was following uniformly mercantile system of accounting in respect of all categories of debtors. At the end of the relevant accounting year, the assessee debited the accounts of all debtors the amount of interest chargeable on accrual basis. However, instead of crediting the interest thus charged to the interest account on a general basis, in the case of State Bank of Travancore (supra) corresponding credits in the cases of sticky loans were made to interest suspense account. On those facts the Hon'ble Supreme Court have held that the interest on sticky advances had accrued according to the mercantile system of accounting and merely by carrying such accrued interest to the Interest suspense account without treating it as a bad debt or irrecoverable interest was not in accordance with the provisions of the IT Act, 1961. The fact that these amounts were taken to the interest suspense account, therefore, did not affect its taxability as such. As against this, the facts of the assessee in the present appeals viz., United Bank of India are clearly distinguishable. The United Bank of India did not debit the accounts of the debtors, it was because this bank was following hybrid system of accounting and not mercantile system of accounting simplicitor. Under this hybrid system of accounting this assessee while following the mercantile system of accounting in respect of loans and advances in ordinary course, followed cash system of accounting in respect of sticky loans. The judgment of the Hon'ble Supreme Court in the case of the State Bank of Travancore (supra) did not apply on these special facts of the assessee for the reason that unlike the former bank, there was no accrual of interest under the method of accounting which the assessee followed in respect of sticky loans.
4. Dr. Debi Pal argued that hybrid system of accounting is now well-established system of accounting and it is not necessary for an assessee to merely choose between mercantile system of accounting or cash system of accounting. Under the provisions of IT Act a method of accounting regularly employed by an assessee has to be accepted unless it could be shown that the method of accounting regularly employed by an assessee was not proper for the purpose of ascertainment of the income, on the facts and in the circumstance, of an assessee. In the case of a commercial bank, adoption of cash system of accounting for interest on sticky loans, was justified and in keeping with well-recognised principles of accounting. Extracts from "Statement and Standards Accounting" published by the Institute of Chartered Accountants of India filed by the assessee at pp. 6 and 7 of supplementary paper-book were referred to and the following para was in particular relied upon : "A bank may decide not to accrue interest on a loan or advance, for example when the borrower is more than a particular period in arrears with respect to the payment of interest or principal. A bank discloses the aggregate amount of loans and advances at the balance sheet date on which interest is not being accrued and the basis used to determine the carrying amount of such loans and advances. It is also desirable that a bank discloses whether it recognises interest income on such loans and advances and the impact which the non-accrual of interest has on its income statement." Reference was also made to CBDT Circular No. 491, dt. 30th June, 1987, issued in the context of the Supreme Court judgment in the case of State Bank of Travancore vs. CIT (supra). As per this circular, if RBI and IDBI were satisfied that the change in the system of accounting of interest from mercantile to cash basis by the concerned State Financial Corporation was legal, valid and bona fide, the AO may accept the cash system of accounting of interest. On the basis of these authorities the learned counsel for the assessee argued that in the case of a public sector bank having large scale banking operation, adoption of cash system of accounting in respect of interest on sticky loans was rational, justified and in accordance with well-accepted norms of accountancy. The learned counsel of the assessee argued that the legal principles involved in this behalf in the present appeals are not something arising for consideration by the Tribunal for the first time.
These issues had already arisen and considered at length in a number of Tribunal and High Court decisions. The underlying principles came to be considered by the Tribunal, Bombay, Bench-C, in the case of Industrial Credit and Investment Corpn. of India Ltd. vs. IAC (1990) 32 ITD 315 (Bom) and as per the order dt. 3rd March, 1989, the Tribunal held that the hybrid system of accounting was now well-settled and the assessee, i.e., ICICI which was earlier following mercantile system in regard to the interest on sticky loan accounts was justified and entitled to switch over to the cash system of accounting, while following the mercantile system of accounting in respect of loans other than sticky loans. While deciding the matter, the Tribunal specifically considered the arguments of Revenue based on the judgment of the State Bank of Travancore (supra) and a host of other High Court judgments including Calcutta High Court judgments Reform Flour Mills (P) Ltd. vs. CIT (1980) 132 ITR 184 (Cal), James Finlay & Co. vs. CIT (1982) 137 ITR 698 (Cal) and Snow White Food Products Co. Ltd. vs. CIT (1983) 141 ITR 847 (Cal). The Tribunal, Bombay, order in the case of ICICI Ltd. was challenged before the Hon'ble Bombay High Court and as per the judgment in CIT vs. Industrial Credits Investment Corpn. of India Ltd. (1991) 189 ITR 126 (Bom) Hon'ble Bombay High Court held that the finding of the Tribunal that the Supreme Court decision in the case of State Bank of Travancore (supra) was not attracted on the facts of ICICI did not give rise to any referable question of law. Therefore, Dr. Debi Pal referred to Tribunal, Calcutta, order dt. 30th March, 1992, in the case of Allahabad Bank vs. IAC [ITA No. 116/Cal/1988] and pointed out that in that case also the Tribunal found that change-over to cash system of accounting from mercantile system of accounting in respect of interest on sticky loans was found to be in order, after considering the Supreme Court judgment in the case of State Bank of Travancore (supra) and Calcutta High Court judgments in Reform Flour Mills (P) Ltd. vs. CIT (supra) and Snow White Food Products Co. Ltd. vs. CIT (supra). The learned counsel argued that the assessee's case in the instant appeals is on a much stronger footing inasmuch as there was no change of accounting in the case of the assessee but the assessee has been following hybrid system of accounting for a long time prior to the previous years under consideration in these appeals. The learned counsel argued that hybrid method of accounting followed by the assessee herein was legally tenable and in order as held by the Hon'ble Calcutta High Court in the case of Snow White Food Products Co. Ltd. vs. CIT (supra). The learned counsel for the assessee also pointed out that the Tribunal, Bangalore Bench also took the similar view in the case of Dy. CIT vs. Syndicate Bank & Ors. (1995) 51 TTJ (Bang) 365 : (1994) 50 ITD 14 (Bang).
5. Dr. Debi Pal, learned counsel for the assessee, stated that apart from these various decisions of various Benches of Tribunal the adoption of cash system of accounting in respect of interest on sticky loans and in that event non-applicability of Supreme Court judgment in the case of State Bank of Travancore (supra) has also been upheld by the judgment of Bombay High Court and Rajasthan High Court. In the case of CIT vs. Citi Bank, N.A. (1994) 208 ITR 930 (Bom) the Hon'ble Bombay High Court upheld the hybrid system carving out separate system on receipt basis in respect of interest on sticky loans in the background of the ratio of the Hon'ble Supreme Court judgment in the case of State Bank of Travancore (supra) and they answered the question in favour of the assessee. Similarly, the Hon'ble Rajasthan High Court have in the case of CIT vs. Rajasthan Financial Corpn. (1998) 229 ITR 246 (Raj) upheld the hybrid system of accounting followed by Rajasthan Financial Corpn. whereunder interest on sticky loans was accounted for on realisation only.
6. Relying on these arguments the learned counsel for the assessee argued that authorities below have not been justified in making/upholding additions on account of accrued interest on sticky loans to the income declared by the assessee-bank in the asst. yrs.
1981-82 to 1988-89 and 1990-91 and the same were liable to be deleted.
However, without prejudice the learned counsel argued that insofar as the sticky loans where the assessee had already filed suits for recovery were concerned, the AO has no basis for making assessment of any income on accrual basis in view of the provisions of s. 34 of CPC.This power vested in the Court only where the suits were pending adjudication.
7. Shri Jaydev Saha, senior counsel engaged by the Department for these appeals, argued that the assessee had not brought complete facts on record in support of his contentions. It was not established that the assessee was consistently following hybrid system of accounting. It was not known as to at what point of time this change of method of accounting had been introduced. It was also not established that the assessee did follow this hybrid system of accounting in all these assessment years. It was also not clear from the facts as to on what basis the distinction between sticky loans and non-sticky loans was drawn. Reading from the assessment orders the learned counsel for the Department argued that these facts were not there before the AO and, therefore, in the absence of details the AO had to resort to estimate of disallowance. He also pointed out that in these assessment orders the AO has clearly specified that the method of accounting of the assessee was "mercantile". At this stage, Dr. Debi Pal intervened and pointed out that as per the letter dt. 31st January, 1991, the assessee had clearly taken this stand that the decision of the Supreme Court in the case of State Bank of Travancore (supra) was not applicable to the assessee-bank. The bank did not debit the concerned party's accounts and credit interest suspense account as had been done by the State Bank of Travancore. Even before the learned CIT(A), the main plank of the arguments was that the assessee had been following hybrid system of accounting. At no stage, during the course of proceedings before the authorities below the assessee had been called upon to establish that hybrid system of accounting was followed and that the method of accounting in respect of interest on sticky loans was on cash basis only. The assessee was a large public sector bank and there was no reason to doubt its statements in respect of the method of accounting followed in the books of accounts and annual accounts in respect of interest on sticky loans.
8. The learned senior counsel of the Department argued that in any case the assessee has argued for assessment of same kind of income on two different methods. The nature and source of income remained the same, i.e., interest on amounts advanced by the bank to its customers. When there was no material distinction in the nature and source of income, the assessee could not follow cash system of accounting as well as mercantile system of accounting. Such an accounting practice could not be held to be a proper method of accounting from which correct income of the assessee could be deduced. Secondly, it was undisputed fact that the bank had not waived its right to receive interest even in regard to sticky loans. Suits for recovery filed by the bank were pending.
Certain suits had also been decreed in favour of the assessee-bank.
There was no renunciation of claim of interest. The assessee never gave up its right to interest and on these facts accrual of interest to the assessee could not be denied.
9. The learned senior counsel for the Department argued that there was no material distinction between the facts of the assessee's case and that of State Bank of Travancore (supra). The substantive facts remained the same. The assessee cannot, therefore, escape from the ratio of the Supreme Court judgment in the case of State Bank of Travancore (supra). Merely not debiting the account of the party was not the substance of the matter. The learned senior counsel brought our attention to the judgment of the Hon'ble Calcutta High Court in the case of James Finlay & Co. vs. CIT (supra) and argued that in that case the Hon'ble Calcutta High Court has clearly held that unless specifically given up, the assessee could not prevent the accrual of interest income. The assessee in the instant appeals had merely brought a change in the modalities under the same head of income without bringing any substantive change in relation to its rights and claims in respect of income arising on sticky loans.
10. The learned counsel for the Department thereafter brought our attention to another judgment of the Hon'ble Calcutta High Court in the case of Reform Flour Mills (P) Ltd. vs. CIT (supra). It was argued that in that case the Hon'ble High Court have held that when the assessee simultaneously in respect of certain transactions followed mercantile system of accounting and in respect of others followed the cash system of accounting, then the proper expression should be that he maintained a dual system of accounting and not hybrid system of accounting. All that the assessee did was treatment of particular transactions differently or separately from the method followed by the assessee. In the judgment of the Hon'ble Calcutta High Court this state of affairs was not permissible.
11. Thereafter, the learned counsel for the Department referred to the decision of the Hon'ble Calcutta High Court in the case of Show White Food Products Ltd. vs. CIT (supra) and relied upon, in particular, the observations of the Hon'ble High Court at p. 859. The learned counsel argued that in that case it was held that it was not open to the assessee to keep alive the contract and his rights thereunder, but, for the purposes of income-tax to say that he would not debit the interest which may have accrued.
12. Finally, the learned counsel for the Department argued that the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra) has put the matter beyond controversy. This judgment has been followed in a host of other cases, for example, State Bank of Travancore vs. CIT (1990) 186 ITR 187 (SC), Grindlay's Bank Plc. vs.
CIT (1993) 201 ITR 148 (Cal), CIT vs. Kerala Financial Corpn. Ltd. (1985) 155 ITR 246 (Ker), CIT vs. Kerala Financial Corpn. Ltd. (1995) 155 ITR 228 (Ker) and CIT vs. Mercantile Bank Ltd. (1996) 222 ITR 572 (Bom). Further, it was a settled legal position that method of accounting followed by the assessee was not decisive of his tax liability. Reference in this behalf was made to the Hon'ble Madras High Court judgment in CIT vs. P. Mariappa Gounder (1984) 147 ITR 676 (Mad) and Kerala High Court judgment in Aspinwall & Co. (Travancore) Ltd. vs.
CIT (1990) 184 ITR 56 (Ker). In the instant case the various aspects of the transactions and the merit of the assessee's arguments have been carefully and elaborately discussed in the order of the learned CIT(A) for the asst. yr. 1986-87. The learned counsel for the Department argued that when on merit the method of accounting followed cannot be said to be reflective of correct income earned by the assessee, such method has to be discarded.
12.1. The learned counsel for the assessee, in his rejoinder argued that all the contentions of the learned counsel for the Department were based on mercantile system of accounting whereas the assessee's case is based on hybrid system of account. He further argued that various Calcutta High Court judgments relied upon by the Revenue were not applicable on the facts and circumstances of the assessee-bank's case because it was not a case of a particular transaction. The assessee followed cash method of accounting in respect of a distinct class of transactions after careful and rational classification. It was not as if the assessee declared some isolated transactions to be sticky loans for the purpose of avoidance of tax liability. As against this in the cases relied upon by the Revenue the assessee had chosen to follow cash system of accounting in respect of certain isolated transactions only.
13. We have carefully considered the rival submissions and perused the orders of the authorities below. The case of the Revenue before us mainly is that as far as the facts of the case were concerned, there was no any material distinction between those in the case of State Bank of Travancore (supra) and the case of the assessee. The only distinction drawn was on the basis of entries made in the books of account. For this reason alone, the assessee could not claim that what was found to be taxable in the case of State Bank of Travancore should be found to be not taxable in the case of the assessee. Secondly, the learned, counsel for the Revenue has attempted to dispute the validity of the method of accounting followed by the assessee on the ground that it was not open to the assessee to adopt altogether different methods of accounting in respect of the same source of income and he has tried to find support from some judgments of the Hon'ble Calcutta High Court as enumerated by us in the foregoing paras. In our considered opinion, the method of accounting followed by an assessee cannot be disregarded for the reason only that had the assessee applied a different method of accounting, his taxable income would have been higher. The question as to what income has been earned or loss incurred by a business cannot be decided completely at any particular point of time while the business is still being carried on. There may be huge profit at one point of time and there may be heavy loss at the next. As income-tax is a levy on annual income, it becomes necessary to have a specific measurement of periodical income. The method of accounting followed by an assessee assumes a great significance in this context. The legislature in India have, insofar as the assessment years under consideration by us are concerned, refrained from laying down, with a few exceptions, the specific method of accounting to be followed for computation of annual income from a business carried out by an assessee. Under the provisions of s. 145(1), the choice of method of accounting has been conferred upon the assessee. This provision, therefore, presupposes that there can be more than one method of accounting from which income can properly be deduced. Under the provisions of s. 145(1) a method of accounting followed by an assessee can be disputed on the ground that from the particular method of accounting followed by the assessee, income cannot be properly deduced. There are a large number of Supreme Court and High Court judgments to the effect that otherwise the method of accounting followed by an assessee is binding on the Revenue. The authority for this well-known legal position, if any required, may be found in the judgments in CIT vs. Sarangpur Cotton Mfg. Co. Ltd. (1938) 6 ITR 36 (PC), Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 (SC), CIT vs. A. Ramaswamy Mudaliar & Ors. (1964) 53 ITR 122 (SC) and so on. The Courts have also clearly recognised the fact that there may be different amounts of income resulting in a particular year on the same facts of the case depending upon which method of accounting has been employed .The only legal requirement is that the method of accounting once employed should be regularly followed by the assessee. As held by the Hon'ble Supreme Court in the case of CIT vs. A. Ramaswamy Mudaliar & Ors. (supra) and assessee ought to get the advantage and suffered the disadvantage of the method of accounting employed by him and on such accounting system being regularly maintained, it may happen that in a particular year the Revenue may gain but in another year the assessee may gain. We are, therefore, clearly of the view that the method of accounting followed by the assessee cannot be assailed on the ground that in another case on a different method of accounting having been employed, the assessment of income at a higher amount was made. The only ground on which method of accounting followed by an assessee can be assailed is that it is not a proper method. Thus, in our opinion, the significance of method of accounting and entries made in the books of account of an assessee cannot be minimised. In the instant case, the Revenue has insisted upon a method of accounting different from that maintained in the books of account. More often it is the assessee who seek to claim advantages or reduction in income on the basis of a method of accounting other than employed by them in the books of account. Even in the present appeals, as we would shortly see, on another issue the assessee is in argument before us that his income should be determined on a method of accounting other than one employed in the books of account. At any rate, the answer in both situations to be the same that if the method of accounting as employed in the books of account is proper and in accordance with well-recognised principles of accounting, the same must prevail whether at the expense of the Revenue or the assessee in a particular year.
14. This brings us to the second limb of the argument of the learned counsel for the Department that cash system of accounting employed by the assessee in respect of the sticky loans while following the mercantile system of accounting in respect of all other loans cannot be said to be a proper method from which income of the assessee may be properly and correctly computed. Certain judgments of the Hon'ble Calcutta High Court as referred to by us in the earlier paras were relied upon before us. We see considerable justification in the contention of the learned counsel for the assessee that the facts of the assessee's case are altogether different. We have quoted in para 4 above from the accounting standard approved by the Institute of Chartered Accountants in India in respect of an assessee engaged in the business of banking operations. Having regard to the particular nature of facts and circumstances prevalent in the banking business, the Institute have in their wisdom carved a niche in respect of the banking business that the banks may legitimately shift to cash system of accounting in respect of sticky loans while at the same time continuing to follow accrued method of accounting in respect of all other kinds of loans and advances. On consideration we do not see any reason to question the appropriateness or correctness of the accounting standard granted in respect of banks as distinguished from other businesses.
Furthermore, it is seen by us that the dispute in this behalf is not a new dispute which has come up for consideration before us for the first time. The learned counsel for the assessee have cited three widely reported decisions of Tribunal Benches of Bombay, Calcutta and Bangalore. He has relied upon the judgments of the Hon'ble Bombay High Court and Rajasthan High Court which have been delivered on these very specific issues. The judgments of the Calcutta High Court relied upon by the Revenue and various other arguments have all been considered in detail in the Tribunal orders which were subsequently upheld by the High Courts. We do not find any Tribunal order or High Court judgment in which any contrary view is taken.
15. In view of the discussions in the foregoing paras, we hold that the assessee's grounds of appeal for various years in this behalf must succeed. We direct deletion of all additions made/confirmed by the authorities below in respect of asst. yrs. 1981-82 to 1988-89 and 1990-91 on the basis of accrual of interest on the loans categorised by the assessee as sticky loans.