K.C. Agarwal, C.J.
1. This is a reference made at the instance of the Commissioner of Income-tax, West Bengal, Calcutta, referring the following two questions of the Income-tax Appellate Tribunal, dated May 25, 1988, for decision of the High Court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that interest credited to the suspense account cannot be added to the income of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the decision of the Supreme Court in the case of State Bank of Travancore v. CIT : [1986]158ITR102(SC) cannot be applied to the facts of this case ?'
2. The brief facts of the case are that the assessee is an insurance company, carrying on general insurance business. For the assessment year 1983-84, interest on loans was kept in suspense account and according to the assessee credit for the same would be taken in the year of realisation. The question that arises in this reference for determination is whether the decision of the Supreme Court in the case of State Bank of Travancore v. CIT : [1986]158ITR102(SC) could be applicable to the case of an insurance company.
3. The assessee is the insurance company. In the proceeding for assessment of tax for the accounting year relating to the assessment year 1983-84, the Assessing Officer noticed that an amount of interest of Rs. 37.35 lakhs on certain mortgage loans where the mortgagors were defaulters or where the rate of interest is disputed had been kept in suspense account. The Assessing Officer relying on the decision of the Supreme Court in the case of State Bank of Travancore v. CIT : [1986]158ITR102(SC) added the aforesaid amount to the total income of the assessee. The assessee relied upon the provision of Section 44 of the Income-tax Act read with the First Schedule thereto and it was argued that inclusion of Rs. 37.35 lakhs was arbitrary and illegal. Before the appellate authority, the following copy of interest suspense account was furnished ;
Rs. P.'Opening balance as on 1-1-1982 41,80,124.89Add :Interest accrued and interest outstanding for the year 1982 :
Interest accruedInterest o/s Rs. P.Rs. P. Dansingh Bawa18,551.863,65,260.20 Empire Investment1,541.1088,762.84 Kiran Theatres4,515.073,67,497.96 Ravi Industries1,590.41
66,107.79
25,998.448,87,648.799,13,647.23
50,93,772.12Less :Interest received during the year 1982 : Onkarmal Ishardas (p.) Ltd. 4,39,800.32 Dady Tej (P.) Ltd. 2,50,000.00 K. R. Kothandaraman 37,179.16
7,26,979.48
43,66,792.64Less :Due to compromise approved by HD amount removed from interest suspense account : Onkarmal Ishardas (P.) Ltd. 20,325.32 Dady Tej (P.) Ltd. 6,11,723.86
6,32,049.18
Balance as on 31-12-1982 37,34,743.46'
4. The Commissioner sent back the case and directed the Inspecting Assistant Commissioner to compute afresh the amount assessable in the year under consideration after examining the accounts of interest on mortgage loans kept in suspense account.
5. Being aggrieved, the assessee came up on appeal before the Tribunal and the Tribunal considered the provisions of Section 44 of the Income-tax Act read with the First Schedule and held that the decision of the Supreme Court in State Bank of Travancore v. CIT : [1986]158ITR102(SC) is not applicable.
6. Now, the question that was raised was about the applicability of Section 44 of the Income-tax Act, 1961, read with the provisions of the First Schedule along with the charging Section 5 of the Income-tax Act. Reliance was placed by learned counsel for the Department that having regard to the charging Section 5 the mortgage loans and sticky loans could be added and interest thereon could also be added to the total income of the assessee. The majority decision of the Supreme Court referred to above had supported his submission. In the majority decision of the Supreme Court law laid down was (headnote) :
' (i) For the content of taxable income, one has to refer to the substantive provisions of the Income-tax Act, 1961, mainly Section 5 read with the other relevant sections.
(ii) In some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of real income, i.e., making the income accrue in the real sense of the term, can be brought into play but the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication by the assessee treating the amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entry in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about.
(iii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under Section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act.
(iv) Where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non-accrual.
(v) The following propositions emerge in relation to the theory of real income : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits.
(vi) Circulars which are executive in character cannot alter the provisions of the Act. Circulars which are in the nature of concessions can always be prospectively withdrawn.'
7. Learned counsel for the assessee tried to distinguish the Supreme Court judgment of State Bank of Travancore v. CIT : [1986]158ITR102(SC) by submitting that the law laid down in that case was to be read on its own facts. It is submitted that the charging section is Section 4 and not Section 5 and further that such charge is determined 'subject to the provisions (including provisions for the levy of additional income-tax) of this Act.' The charging section having itself stipulated that its applicability would be subject to the provisions of the Act, counsel's submission that Section 44 should not be relied upon is not correct.
8. Section 44 is a non obstante provision and it clearly provides that the income charged to tax for an insurance company has to be computed in accordance with the rules contained in the First Schedule. According to him, the provisions relied upon by the Department did not apply in the present case. He submitted that Section 44 expressly makes the First Schedule to the Income-tax Act applicable to the case of an insurance company. Rule 5 of the said Schedule is the particular rule which is applicable in the present case. It states clearly that 'the profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance, subject to certain adjustments. These adjustments at the material time were only in respect of amounts of expenditure inadmissible under the provisions of Sections 30 to 43B, amounts written off or reserved to meet depreciation of or loss on the realisation of investments, and amounts carried over to a reserve for unexpired risks as may be prescribed in this behalf.
9. There cannot be any question that the adjustments referred to in Rule 5 have no application in regard to any amount of interest due to the insurance company as no question of expenditure arises in the present case. Interest is an item of income in the present context.
10. It is a fact that copies of annual accounts, as required under the Insurance Act, had been furnished to the Controller of Insurance. Under Rule 5, therefore, the profits as disclosed in such accounts are the only profits which are chargeable to tax. In the present case, the question of any adjustment under Rule 5 cannot at all arise.
11. In L.I.C. of India v. CIT : [1978]115ITR45(Bom) , the Bombay High Court had held in relation exactly to the same rules as provided for non-life insurance that Section 44 of the Income-tax Act having started with a non obstante clause directs that the provisions of Section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in the section. The only other overriding effect of the Act is that its provisions operate notwithstanding the provisions of Section 191 or Sections 28 to 43A. According to the court, the effect of Section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carries on insurance business and in whose case the provisions of Rule 2 (the case was that of a life insurance business and Rule 2 was similar to Rule 5) of the First Schedule are attracted.
12. In CIT v. Calcutta Hospital and Nursing Home Benefits Association Ltd. : [1965]57ITR313(SC) , the Supreme Court had occasion to consider the case of a mutual insurance where also similar provisions relating to computation of income from insurance business had to be computed. The referable rule under the Indian Income-tax Act, 1922, was Rule 6 the terms of which were as follows (page 317) :
'The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Superintendent of Insurance after adjusting such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing, the profits and gains of a business. .. . .'
13. At page 320, the Supreme Court observed that :'.... the Income-tax Officer is bound to accept the balance of profits disclosed by the annual accounts, copies of which have been submitted to the Superintendent of Insurance. He can only adjust this balance so as to exclude from it any expenditure other than expenditure which may under the provisions of Section 10 be allowed for in computing the profits and gains of a business. We are not concerned here with the latter part of Rule 6 dealing with profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments. This court examined the provisions of the Insurance Act in connection with the Schedule in Pandyan Insurance Co. Ltd. v. CIT : [1965]55ITR716(SC) and arrived at the conclusion that the Insurance Act 'makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business' and that Rule 6 should be construed in the light of this background... it seems to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income-tax Officer, except that the Income-tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of Section 10 of the Act.'
14. Section 44 of the Act of 1961, corresponds to Section 10(7) of the Indian Income-tax Act, 1922. In interpreting the provisions thereof, the Supreme Court had decided in L. I. C. of India v. CIT : [1964]51ITR773(SC) that the assessment of the profits of an insurance business is completely governed by the rules in the Schedule to the Income-tax Act and the Income-tax Officer had no power to do anything not contained in the rules to be found in the Schedule. It was held that there is no general right to correct the errors in the accounts of an insurance business. These observations were applied and the principle reiterated and carried forward to its logical extension by the Supreme Court in the case of Pandyan Insurance Co. Ltd. v. CIT : [1965]55ITR716(SC) referred to earlier.
15. The Bombay High Court had an occasion to consider these aspects in South India Insurance Co. Ltd. v. CIT : [1977]106ITR969(Bom) and the court's observations at page 973 onwards reflect the views expressed by the Supreme Court and some High Courts and the observations made by the courts in the different decisions make it clear that the Assessing Officer has no jurisdiction to make any adjustment to the profit and loss disclosed in the accounts forwarded to the Superintendent of Insurance. The case of State Bank of Travancore and Cochin v. CIT : [1986]158ITR102(SC) referred to earlier has, therefore, no application in the present case.
16. We have considered the rival submissions and find no merit in the argument of the Department. In our view, the case reported in State Bank of Travancore v. CIT : [1986]158ITR102(SC) is not applicable to the present case. The Tribunal was justified in deciding the controversy against the Commissioner of Income-tax, we are in agreement with the same.
17. For the reasons stated above, the first question referred for decision is answered in the affirmative by holding that interest credited to the suspense account cannot be added to the income of the assessee and the controversy involved in this reference which is question No. 2 is not covered by the decision of the Supreme Court in the case of State Bank of Travancore v. CIT : [1986]158ITR102(SC) . Both the questions, therefore, are answered in favour of the assessee and against the Department.
18. The reference is, therefore, dismissed with costs.
Mukul Gopal Mukherji, J.
I agree.