1. These two appeals by the assessee arise out of the common order of the CIT, Karnataka-III, Bangalore passed under Section 263 of the IT Act, 1961, and relate to asst. yrs. 1993-94 and 1994-95. For the sake of convenience the appeals are heard together and are being disposed of by this common order.
2. For the asst. yr. 1993-94 the assessee has raised a ground as follows : "The learned CIT erred in holding that the revision under Section 263 for the asst. yr. 1993-94 was within time although clearly the action under Section 263 was time-barred." But at the time of hearing the learned counsel for the assessee fairly stated that, the action under Section 263 by the CIT was not time-barred and did not want to press this ground. We accordingly reject this ground of appeal.
3. The only common issue to be decided in these appeals is whether the CIT was right in assuming jurisdiction under Section 263 of the IT Act, 1961. The facts briefly stated are that: The assessee is a nationalised bank wholly owned by Government of India. The assessee bank has inter alia income from interest on securities and for the assessment years under consideration it had taken into account in the books of account broken period interest on these securities calculated up to 31st March.
In the assessment made under Section 143(3), the AO followed the instructions issued by the CBDT to the Chief CITs not to bring to tax the broken period interest as such interest had not been accrued.
However, while completing the assessment for the asst. yr. 1995-96 in the case of the assessee-bank, despite the instruction of the CBDT the AO included the broken period interest in the total income of the assessee for that year and simultaneously proposed the CIT to initiate action under Section 263 for the assessment years under consideration, on the ground that the action of the AO in not including the broken period interest was erroneous and prejudicial to the interest of Revenue. Before the CIT the assessee relied on the judgment of the Hon'ble Karnataka High Court in the assessee's own case holding that the broken period interest was not taxable as the interest on securities did not accrue from day to day but only on certain fixed days. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. v. Addl. CIT (1991) 187 ITR 541 (SC). However, the CIT in his common order dt. 15th March, 1999, held that interest on securities for the broken period is chargeable to tax on accrual basis, and accordingly directed the AO to suitably modify the assessments for the asst. yrs. 1993-94 and 1994-95. It is against this order of the CIT, that the assessee has come up in appeal before the Tribunal.
4. Before us Sri V.R. Gupta, Advocate appeared for the assessee and Dr.
R.B. Krishnan appeared for the Revenue. The learned counsel for the assessee argued that for invoking Section 263 two conditions are required to be satisfied i.e., (1) the order has to be erroneous and (2) the order has to be prejudicial to the interests of Revenue. If either of the conditions is absent, the CIT cannot revise an order invoking the provisions of Section 263. For this proposition he relied upon the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC). It is argued by the learned counsel that the provisions of Section 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneous that the said section will be attracted. An incorrect assumption of facts and/or an incorrect application of law will satisfy the requirement of the order being erroneous. The learned counsel went on to add that when the AO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless and until the view taken by the AO is unsustainable in law. It is therefore, pleaded that the order passed by the CIT under Section 263 be set aside and the assessee's appeals allowed.
5. On the other hand, Dr. R.B. Krishnan argued on behalf of Revenue that the decision of the Supreme Court relied on behalf of the assessee is distinguishable on facts. He stated that the Supreme Court in the said decision has categorically held that the CIT is right in invoking the provisions of Section 263 if the view adopted by the AO is unsustainable in law. He further argued that after the deletion of the Chapter dealing with income from interest on securities the income of the nature in the present situation is taxable under the head 'profits and gains of business or profession'. According to him the income under the head 'profits and gains of business or profession' is to be computed under Section 145 i.e., as per the method of accounting regularly employed by an assessee. Since the assessee bank itself had credited the interest on securities for the broken period to its P&L a/c and since this method is regularly employed by it, the AO was not correct in deleting the same and holding that the income has not accrued to the assessee. Dr. Krishnan submitted that this view was unsustainable in law and hence applying the same decision of the Hon'ble Supreme Court in Malabaz Industrial Co.'s case (supra) the CIT was right in assuming jurisdiction under Section 263.
6. We have given our careful consideration to the rival submissions, facts and circumstances of the case and also the decision of the Hon'ble Supreme Court referred to above. The prerequisite for the exercise of jurisdiction by the CIT under Section 263 is that the order of the AO has not only to be erroneous but has also to be prejudicial to the interests of Revenue. Thus the twin conditions are required to be satisfied. Moreover, the CBDT had opined for asst. yr. 1992-93 that the income being interest on security for the broken period is not required to be included in the assessee's total income. The letter of the CBDT dt. 2nd Jan., 1995, addressed to the Chief CIT, Bangalore to this effect is reproduced below for the sake of understanding the matter correctly : "Subject : Representation of Canara Bank, Bangalore, reg. assessment of broken period interest on Government securities.
I am directed to enclose a copy of letter No. PDGAW : BSCA : IT : 92-93/1668 NVG dt. 14th Nov., 1994, received from Canara Bank, Bangalore, on the above subject. Taking in consideration the fact that the Committee of Secretaries had refused to give approval to the Department to file Special Leave Petition against the High Court's decision on the above issue in favour of the assessee for asst. yr. 1984-85 and for the purpose of minimising litigation in the case of "Public Sector Undertakings", you are requested to take necessary action so that broken period interest is not assessed as income of the bank during asst. yr. 1992-93 and also for withdrawing pending appeals in the case of Canara Bank, Bangalore before the Tribunal/ High Court on the above issue, It is seen that based on the decision of the Hon'ble Karnataka High Court in the assessee's own case for asst. yr. 1984-85 the CBDT thought it fit even for asst. yr. 1992-93 not to assess The interest income of the broken period as income accrued during the year. It is seen that the provisions of Sections 18 to 21 of the Act dealing with 'Interest on Securities' were deleted w.e.f. 1st April, 1989, i.e., asst. yr.
1989-90. But the aforesaid letter of the Board pertains to asst. yr.
1992-93. There is no amendment in the law after asst. yr. 1992-93 in respect of charging the same income. It can, therefore, be held that the view which is correct for the asst. yr. 1992-93 can still prevail for asst. yrs. 1993-94 and 1994-95 also. This is one of the possible view which the AO has followed. The CIT acting under Section 263 might not agree with the view of the AO. However, so long as the view' adopted by the AO is not proved to be unsustainable in law, the CIT cannot assume jurisdiction under Section 263. Respectfully following the decision of the Hon'ble Supreme Court in Malabai Industrial Co.'s case (supra) we hold that the CIT was not correct in invoking the provisions of Section 263 and hence the order passed by him thereunder is set aside.
7. We could also examine the provisions of Section 263 from another angle i.e., whether the order is prejudicial to the interests of the Revenue or not. In the asst. yrs. 1993-94 and 1994-95 the loss returned by the assessee was Rs. 262,41,52,430 and Rs. 210,41,59,100 while the assessments completed were on net loss of Rs. 220,93,00,570 and Rs. 161,45,74,759 respectively. As per the method of accounting followed, the assessee first credits the broken period interest to its P&L a/c.
However, while filing returns of income the interest income for the broken period is excluded from the total income/loss, as the same is not treated as accrued to the assessee. However, while doing so the interest income of the broken period of earlier previous year which has accrued during the year is offered for taxation, thereby the income credited in the books of account in an earlier previous year is offered for taxation in the immediately subsequent assessment year, as having accrued to the assessee. Ultimately there is no loss to the Revenue except that the year of chargeability is different. If for the purpose of determining the prejudice to the Revenue the interest income for the broken period is assumed to be even Rs. 100 crores, then even for the assessment years under consideration the assessed income will still be loss. The loss to be carried forward for asst. yr. 1993-94 will be less. However, the income offered for taxation in asst. yr. 1994-95 will be reduced since it has suffered tax in asst. yr. 1993-94 and for the purpose of calculating income-tax the resultant figure will not affect the Revenue in any manner. In the circumstances of the case it is not proved that there is any prejudice to the Revenue by way of less tax payable by the assessee. When the question was put to the learned Departmental Representative by the Bench with regard to the prejudice caused to the interests of Revenue the learned Departmental Representative simply stated that it will affect the amount of carried forward loss only. In our opinion even if the carried forward loss to certain extent will be reduced, similar amount will be reduced from the income offered in the subsequent year and hence the ultimate effect is not going to cause any prejudice to the Revenue. On this count also the action of the CIT in invoking the provisions of Section 263 is not warranted. We, therefore, hold that in the absence of any prejudice caused to the Revenue action under Section 263 could not have been invoked by the CIT and hence such an order is liable to be set aside.
8. We shall now discuss whether the interest for the broken period can still be included in the assessee's total income on the merits of its case or not. The learned authorised representative stated that interest on Government securities accrues to the assessee only on specified dates and not day-to-day basis. The assessee has no right to claim interest at the close of the financial year. The income which can be said to have been accrued is only that portion which the assessee is entitled to receive or on which the assessee has a right to receive. In the absence of any right of the assessee to claim the interest for the broken period interest at the end of the relevant previous year cannot be said to have been accrued to the assessee and hence even applying the provisions of Section 145 no interest can be charged. In the absence of any accrual of income to the assessee the position will not change, whether it was taxed as per the earlier provision of interest on securities or by subsequent amendment whereby such income is taxed under the head 'profits and gains of business1. He also relied upon the Karnataka High Court's decision in the assessee's own case in CIT v.Canara Bank (1992) 195 ITR 66 (Kar) and the decision of the Tribunal, Jaipur Bench in State Bank of Bikaner & Jaipur v. Dy. CIT (1999) 65 TTJ (Jp) 480 : (2000) 74 ITD 203 (Jp). It was further argued that the case before the Jaipur Bench of the Tribunal related to the asst. yrs.
1991-92 and 1992-93 i.e., subsequent to the removal of Chapter on taxation of 'Interest on Securities' and simultaneous amendments in Section 145 w.e.f. asst. yr. 1989-90. On the other hand, the learned Departmental Representative argued that after the deletion of the Chapter relating to taxation of interest on securities w.e.f. 1st April, 1989, the interest on securities is to be taxed under the head "profits and gains of business" in assessee's case. It was, therefore, prayed that for computing the profits and gains of business Section 145 is to be applied. The learned Departmental Representative further argued that as per Section 145 the income under the head "profits and gains of business" is to be computed in accordance with the method of accounting regularly employed by the assessee. The assessee credits the interest on securities for the broken period in its books of account.
The assessee maintains the books of account on mercantile system. It, therefore, cannot be said that as per the method of accounting employed, the interest had not accrued to the assessee. It was further argued that if the method of accounting is not regularly employed it is only the AO who has the power to reject the books of account and compute the income to the best of his satisfaction. What was emphasised was that it is only the AO who could reject the book-results. However, the assessee has no right to say that even though the income is accounted in the books of account as accrued to it for the purpose of taxation, it is not open to the assessee to argue that the income had not accrued to it. The learned Departmental Representative further relied upon the decision of the Kerala High Court in CJT v. Catholic Syrian Bank Ltd. (1997) 228 ITR 363 (Ker). It was argued that the decision of the jurisdictional High Court in assessee's own case (supra) was in respect of the year when Sections 18 to 21 of the IT Act were on the statute book. It was therefore, argued that the decision of the Karnataka High Court does not apply after the amendment in the Act w.e.f. asst. yr. 1989-90. Dr. Krishnan further argued that the interest for the broken period can be said at the most not due to the assessee but cannot be said that it has not accrued to it. The income of the nature of interest accrues day to day and not on specific date when the same is payable. The concept of income accruing and income due is different and whatever income that has accrued till the end of the previous year has to be taxed only in the relevant previous year and not in the subsequent year when the same is due.
9. In reply, the learned counsel for the assessee also argued that though there is amendment in the provision relating to taxation of interest on securities, yet Section 5 of the Act is not amended. What is not an income as per Section 5 cannot be said to have accrued to the assessee and by invoking Section 145 the same cannot be taxed. He further relied on the decision of the Supreme Court in United Commercial Bank v. CIT (1999) 240 ITR 355 (SC) for the proposition that the assessee though have made an entry in the books of account, however for the purpose of taxation the assessee is free to follow the method as permissible under law and he cannot be precluded by saying that once the income has been shown to have accrued in the books of account the assessee is not allowed to withdraw the same from the computation of his total income.
10. We have considered the arguments of both the parties and gone through the decisions relied upon by them. It appears that the decision of the Jaipur Bench of the Tribunal (supra) is directly on the point now under consideration. The only point we are required to decide is whether income has accrued to the assessee or not. Government securities are offering interest on the specified dates, which may be subsequent to the end of the accounting year. As per the terms of issue of Government securities, the interest is not payable at any time. The assessee does not get a right to claim the interest on the closing date of the financial year. For e.g., if the interest is payable, say in the month of May and November proportionate interest for four months from 1st December to 31st March does not become right of the assessee to claim. In the absence of any right to claim the income such income cannot be said to have accrued to the assessee. Thus the income from interest on securities becomes the income of the bank only when it becomes due. The assessee becomes entitled for the interest only during those days which are specified at the time of issue of those securities and it cannot claim that it had become entitled to the interest earlier than those specified dates. If the assessee sells the security prior to the due date, the holder of the security i.e., transferee would be entitled to the interest for the entire period and the issuing authority of the securities will make the payment of interest to the holder only. In such a situation the assessee would not have any right or claim whatsoever for the interest of the broken period. The amount is accounted for only because of the requirements of the Banking Regulation Act. But in fact, the amount cannot be said to have accrued to the assessee. Even though the Chapter relating to charging of income from interest on securities i.e., Sections 18 to 21 are deleted, yet Section 5 is unamended. So long as the income cannot be said to have accrued within the meaning of Section 5 of the IT Act, which is the charging section, Sections 28 to 44D computing the income under the head "profits and gains of business" cannot be brought into operation.
Drawing the conclusion further, since the amount does not become income under Sections 28 to 44D, Section 145 cannot be brought into operation.
The provisions of Section 145 cannot override Section 5. If an income has neither accrued nor received within the meaning of Section 5 whatever Section 145 may say, such income cannot be charged to tax even though the accounting entry has been made in the books of account. The computation provision of Section 145 cannot enlarge or even restrict the content of taxable income.
11. We are not convinced by the argument that Section 145(1) confers a discretionary power upon the AO to compute the income correctly. Along with power there is a statutory duty upon the AO to examine in every case whether the income chargeable to tax in the relevant year has been correctly calculated by the assessee or not. If on proper appreciation of facts if the accounting entry includes any income which has not been accrued to the assessee, the AO is supposed to tax only those income which in fact had accrued to the assessee within the meaning of Section 5. The Hon'ble Supreme Court has time and again held that the income is not calculated based on accounting entry but only on the accrual principle. Unless and until the assessee has a right to receive the income, such income cannot be said to have accrued to him. For this proposition we are fortified in our view as per the decisions of the Hon'ble Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC), CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). The decision relied upon by the learned Departmental Representative in Catholic Syrian Bank Ltd.'s case (supra) is found to be on a different issue. The ratio of the said decision is not applicable to the facts of the case inasmuch as in that case the assessee tried to reduce the interest for the broken period from the cost of the securities.
However, their Lordships has held that the amount being interest for the broken period was income of the assessee and could not be deducted in computing the income from securities. We are unable to agree that the decision of the Kerala High Court in Catholic Syrian Bank Ltd.'s case (supra) is applicable to the facts or even the issue on hand.
12. In the result, we hold that though the assessee has accounted interest for the broken period in its books of account, yet the same has not accrued to the assessee and the same cannot be included in the total income of the assessee for the assessment years under appeal.