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  • B.P Saraf
  • S.H Kapadia, JJ.
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Smart Summary

Structured Summary of the Opinion (S.H. Kapadia, J.)

Factual and Procedural Background

The Income Tax Appellate Tribunal (ITAT) referred three questions of law to this Court under section 256(1) of the Income Tax Act, 1961. The questions were framed both at the instance of the assessee and at the instance of the revenue and relate to: (1) the characterisation of discount on Treasury Bills as business income or as 'interest on securities' and whether expenses (salaries and perquisites) must be apportioned under section 40A(5); (2) whether expenses on repairs and maintenance of flats owned by or leased to the company should be considered perquisites for the purpose of disallowance under section 40A(5); and (3) whether interest (Rs. 3,76,449 / Rs. 3,76,443 — as stated at different points in the opinion) accrued on "sticky advances" for the assessment year 1975–1976 was liable to be included in the assessee's total income.

The procedural history relevant to question No. 3: the Inspecting Assistant Commissioner included the interest in the assessee's income; on appeal the Commissioner of Income Tax (Appeals) deleted the inclusion following an earlier order for assessment year 1973–1974 which the Tribunal had upheld; that Tribunal order became final because the department did not seek a reference for that year. For the assessment year 1975–1976 the Tribunal followed its earlier decision and excluded the interest, but because different High Courts had taken differing views on the issue the department sought a reference to this Court; the assessee opposed that reference. The Court disposed of the reference after considering applicable precedents and submissions.

Legal Issues Presented

  1. Whether on the facts and in the circumstances of the case, discount on Treasury Bills is assessable as income from business and not as 'interest on securities' and consequently it is necessary to apportion the expenses by way of salaries and perquisites for purposes of Sec. 40A(5) of the Act?
  2. Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the expenses incurred on the repairs and maintenance of the flats owned by and/or taken on lease by the Company ought to be considered as perquisites for the purposes of computing the disallowance u/s 40A(5) of the Act?
  3. Whether on the facts and in the circumstances of the case, having regard to the admitted fact that the assessee's method of accounting was mercantile, the Tribunal was right in holding that the interest of Rs. 3,76,449 for the assessment year 1975–1976 was not liable to inclusion in the total income of the assessee?

Arguments of the Parties

Assessee's Arguments

  • With respect to Question No. 1: both counsel agreed that the controversy was covered by the Supreme Court's decision in British Bank of the Middle East v. C.I.T.; this led to an acceptance in favour of the assessee on Q1.
  • With respect to Question No. 2: the assessee accepted that the issue was covered by Lubrizol India Ltd. v. C.I.T., resulting in an adverse answer for the assessee (i.e., in favour of the revenue).
  • With respect to Question No. 3: the assessee relied on a circular (No. 201/21/84-ITA-II dated 9 October 1984) to argue that interest on doubtful debts cannot be charged to tax. The assessee also relied on earlier case law (Navnitlal C. Zaveri v. K.K. Sen, Ellerman Lines Ltd. v. C.I.T., and K.P. Verghese v. I.T.O.) to argue that circulars may be binding on the Assessing Officer, even if they deviate from the Act, and contended that the Supreme Court decision in State Bank of Travancore v. C.I.T. failed to consider the view in Navnitlal C. Zaveri (a Constitution Bench), so that the Constitution Bench view should prevail. The assessee further relied on a Bombay High Court decision (C.I.T. v. Central Bank of India), and on Patna High Court (C.I.T. v. Sriram Agarwal) and Punjab & Haryana High Court (B.S. Bajaj v. C.I.T.) decisions in support of its position.

Revenue's Arguments

  • With respect to Question No. 1: the revenue accepted that British Bank of the Middle East governed the issue (and, following that decision, Q1 was answered in favour of the assessee).
  • With respect to Question No. 2: the revenue accepted Lubrizol India Ltd. v. C.I.T. as determinative (Q2 answered in favour of the revenue).
  • With respect to Question No. 3: the revenue relied on the decision in State Bank of Travancore v. C.I.T., including its subsequent affirmation by the Supreme Court (1986 158 ITR 102), to support the proposition that interest on sticky advances is taxable and therefore should be included in the assessee's income.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
British Bank of the Middle East v. C.I.T. (1998 233 ITR 251) Characterisation of discount on Treasury Bills as business income rather than 'interest on securities'. The parties accepted this decision as determinative of Question No. 1; the Court answered Q1 in the negative (in favour of the assessee).
Lubrizol India Ltd. v. C.I.T. Whether expenses on repairs and maintenance of flats should be considered perquisites for computation under section 40A(5). Both parties treated this decision as controlling for Question No. 2; the Court answered Q2 in the affirmative (in favour of the revenue).
State Bank of Travancore v. C.I.T. (Kerala High Court 1977 110 ITR 336; upheld by Supreme Court 1986 158 ITR 102) That interest which has accrued on sticky advances has to be treated as income of the assessee and is taxable. The revenue relied on this line of authority for Question No. 3; the Court held Question No. 3 was covered by State Bank of Travancore and answered it in the negative (in favour of the department).
Navnitlal C. Zaveri v. K.K. Sen (Constitution Bench) Authority relied upon by the assessee to contend that circulars might be binding on Assessing Officers and could be followed even if they deviate from the Act. The Court considered this decision but noted that subsequent Supreme Court authority (K.P. Verghese and Kerala Financial Corporation) had addressed the interaction between circulars and the Act; the Court did not accept the assessee's attempt to treat State Bank of Travancore and Kerala Financial Corporation as per incuriam.
Ellerman Lines Ltd. v. C.I.T. (1971 82 ITR 913) Subsequent authority cited by the assessee in support of the view that circulars could be binding or influential. Referenced by the assessee; the Court treated subsequent consolidated Supreme Court authority as controlling.
K.P. Verghese v. I.T.O. (1981 131 ITR 597) Interpreted in the course of discussing whether circulars could "deviate" from the provisions of the Act; addressed by later Supreme Court authority. The Court noted that K.P. Verghese followed Navnitlal and was considered in Kerala Financial Corporation; the Court relied on the later decision (Kerala Financial Corporation) which clarified that circulars cannot detract from the Act.
Kerala Financial Corporation v. C.I.T. (1994 210 ITR 129) Held that circulars issued by the Board under section 119 cannot detract from or override the provisions of the Income Tax Act; affirmed State Bank of Travancore's position on taxable interest on sticky advances. The Court held this decision to be final and binding; it rejected the assessee's contention that the decision was per incuriam and applied Kerala Financial Corporation to answer Question No. 3 against the assessee.
C.I.T. v. Central Bank of India (Bombay High Court — citation indicated "150 ITR Statutes 77" in the opinion) A Bombay High Court decision relied upon by the assessee on the inclusion of interest on sticky advances. The assessee relied on this decision, but the Court noted the conflict of views between High Courts and referred to the binding Supreme Court authority (Kerala Financial Corporation / State Bank of Travancore) instead.
C.I.T. v. Sriram Agarwal (Patna High Court, judgment delivered 21 April 1986) Patna High Court decision relied upon by the assessee on the treatment of interest on doubtful or sticky advances. The Court observed that this decision was delivered prior to Kerala Financial Corporation and therefore had no application to the facts of the present case in light of the later binding Supreme Court ruling.
B.S. Bajaj v. C.I.T. (Punjab & Haryana High Court) A High Court decision that, according to the opinion, treated a relevant circular as clarificatory and declined to enter the broader controversy. The Court noted that it disagreed with any view that suggested a conflict of opinion between Supreme Court decisions and said the Punjab & Haryana High Court did not need to decide the larger issue; it did not adopt the view that there was a conflict in the Supreme Court's decisions.
C.B. Gautam v. Union of India Referenced in the opinion in relation to how Varghese was treated in later Supreme Court jurisprudence (contextual reference). The opinion cites this appeal as part of the contextual discussion of Varghese and related authorities; it did not change the Court's conclusion to follow Kerala Financial Corporation.

Court's Reasoning and Analysis

The Court proceeded question by question, relying on precedent and the positions taken by counsel.

  1. Question No. 1 (Treasury Bills discount):

    The learned counsel for both parties agreed that British Bank of the Middle East v. C.I.T. governed this issue. Applying that authority, the Court concluded that the controversy was squarely covered by British Bank and therefore answered Question No. 1 in the negative — i.e., in favour of the assessee and against the revenue.

  2. Question No. 2 (Repairs/maintenance as perquisites under s.40A(5)):

    Both parties accepted that Lubrizol India Ltd. v. C.I.T. controlled the issue. Following that decision, the Court answered Question No. 2 in the affirmative — in favour of the revenue and against the assessee.

  3. Question No. 3 (Interest on sticky advances for AY 1975–1976):

    The Court set out the factual and procedural background: interest had been included by the Inspecting Assistant Commissioner; on appeal it was deleted following an earlier order (AY 1973–1974) which the Tribunal had upheld and which became final. The department invoked the State Bank of Travancore line of authority (including its affirmation by the Supreme Court) and sought a reference. The assessee relied on a Bombay High Court decision, on various High Court judgments, and on a circular (No. 201/21/84-ITA-II dated 9 October 1984) arguing that interest on doubtful debts should not be taxed and that circulars could be binding even if they deviated from the Act.

    The Court analyzed the legal effect of circulars and the competing authorities. It referred to the Supreme Court's decision in Kerala Financial Corporation v. C.I.T., which addressed the same contention and explicitly held that circulars cannot detract from or override the provisions of the Income Tax Act, as Section 119 empowers the Board to issue orders, instructions or directions for the proper administration of the Act but not to amend or override statutory provisions. The opinion quotes and relies on the Kerala Financial Corporation reasoning which considered Navnitlal C. Zaveri, K.P. Verghese and related authorities.

    The Court rejected the assessee's contention that Kerala Financial Corporation was per incuriam (including the argument that Navnitlal was not considered), noting that Navnitlal had been considered and followed in K.P. Verghese and then discussed in Kerala Financial Corporation. The Court therefore held that Kerala Financial Corporation is final and binding; it followed State Bank of Travancore (as affirmed by the Supreme Court) and concluded that interest accrued on sticky advances has to be treated as income and is taxable. Accordingly Question No. 3 was answered in the negative (in favour of the department and against the assessee).

Holding and Implications

Holding:

  • Question No. 1: Answered in the negative — in favour of the assessee and against the revenue (the Court followed British Bank of the Middle East v. C.I.T.).
  • Question No. 2: Answered in the affirmative — in favour of the revenue and against the assessee (the Court followed Lubrizol India Ltd. v. C.I.T.).
  • Question No. 3: Answered in the negative — in favour of the department and against the assessee (the Court held State Bank of Travancore and Kerala Financial Corporation to be binding and applicable).

Implications:

  • The Court held that the Supreme Court decision in Kerala Financial Corporation v. C.I.T. is final and binding and that circulars issued by the Board under section 119 cannot override or detract from the provisions of the Income Tax Act; consequently, the assessee's argument based on the circular of October 9, 1984 was rejected.
  • On the specific factual disputes before the Tribunal: Q1 is decided for the assessee; Q2 is decided for the revenue; Q3 is decided for the department (interest on sticky advances is taxable). The reference was disposed of accordingly.
  • The Court recorded that the reference is disposed "with no order as to costs." The opinion treats the questions as resolved by application of existing Supreme Court authority rather than by announcing new principles.

This summary is drawn exclusively from the provided opinion and does not add facts or inferences not contained in the original text.

Show full summary ...

    Banque Nationals De Paris v. Commissioner Of Income Tax

    S.H Kapadia, J.:— By this reference under section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred following questions of law for the opinion of this Court at the instance of the assessee as well as at the instance of the revenue:

    “At the instance of assessee:

    1. Whether on the facts and in the circumstances of the case, discount on Treasury Bills is assessable as income from business and not as ‘interest on securities’ consequently it is necessary to apportion the expenses by way of salaries and perquisites for purposes of Sec. 40A(5) of the Act?

    2. Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the expenses incurred on the repairs and maintenance of the flats owned by and/or taken on lease by the Company ought to be considered as perquisites for the purposes of computing the disallowance u/s 40A(5) of the Act?”

    At the instance of revenue:

    3. Whether on the facts and in the circumstances of the case, having regard to the admitted fact that the assessee's method of accounting was mercantile, the Tribunal was right in holding that the interest of Rs. 3,76,449 for the assessment year 1975–1976 was not liable to inclusion in the total income of the assessee?”

    2. Both the learned counsel for the parties state that as far as question No. 1 is concerned, the controversy therein is squarely covered by the decision of this Court in British Bank of the Middle East v. C.I.T . 1998 233 ITR 251.. In view of this following the above decision, question No. 1 is answered in negative i.e in favour of assessee and against the revenue.

    3. As regards question No. 2 is concerned, both the learned counsel for the parties state that the controversy there in is covered by the decision of this Court in Lubrizol India Ltd. v. C.I.T… Question No. 2 is, therefore answered in the affirmative i.e in favour of revenue and against the assessee. As regards question No. 3 is concerned, the interest of Rs. 3,76,443/- accrued to the assessee on sticky advances in the previous year relevant to the assessment year 1975–1976 which the Inspecting Assistant Commissioner included in the assessee's income. In appeal, the Commissioner of Income Tax (Appeals) deleted the same following his earlier order for assessment year 1973–1974 which came to be upheld by the Tribunal. That order of the Tribunal became final as the department did not seek reference. Hence, following its earlier decision, the Tribunal in the present assessment year 1975–1976 came to the conclusion that interest on sticky advances cannot be included in the assessee's income. However, relying upon the judgment of the Kerala High Court in State Bank of Travancore v. C.I.T . 1977 110 ITR 336. since upheld by the Supreme Courtin State Bank of Travancore v. C.I.T . 1986 158 ITR 102., the department sought reference which was opposed by the assessee. The assessee relied upon the judgment of the Bombay High Court in C.I.T v. Central Bank of India . 150 ITR Statutes 77.. In the light of different view held by different High Courts the Tribunal referred the above question No. 3 to this Court for opinion.

    4. Learned counsel for the assessee, however, contended that in view of the circular bearing No. 201/21/84-ITA-II dated 9th October, 1984 interest on doubtful debts cannot be charged to tax. He contended that the view expressed by the Supreme Court in State Bank of Travancore v. C.I.T (supra) that the circular issued by the Board cannot detract from the Act is a view which is in direct conflict with the earlier view of the Apex Court in Navnitlal C. Zaveri v. K.K Sen, A.A.C…5 According to the learned counsel for the assessee even the circular which deviated from the provisions of the Act would still be binding on the Assessing Officer. According to the learned counsel this was the view expressed by the Supreme Court in Navnitlal C. Zaveri's case (supra) which was also followed subsequently by the Supreme Court in Ellerman Lines Ltd. v. C.I.T . 1971 82 ITR 913. and in K.P Verghese v. I.T.O . 1981 131 ITR 597. Learned counsel for the assessee accordingly submitted that the view expressed by the Constitution Bench of the Supreme Court in Navnitlal C. Zaveri's case (supra) was not brought to the notice of the Supreme Court in the subsequent decision in State Bank of Travancore (supra) and since the judgment of the Supreme Court in Navnitlal C. Zaveri's case was delivered by the Constitution Bench of five Judges, the opinion of the larger Bench must prevail. At this stage, we may mention that we invited attention of the learned counsel for the assessee to the subsequent decision of the Supreme Court in Kerala Financial Corporation v. C.I.T . 1994 210 ITR 129. in which an identical contention was raised on behalf of the assessee. After considering the judgment of the Supreme Court in K.P Verghese v. I.T.O (supra) which has followed the judgment of the Constitution Bench of the Supreme Court in Navnitlal C. Zaveri's case (supra), the Apex Court came to the conclusion that the circulars issued by the Board cannot detract from the provisions of the Income Tax Act. In this connection, the Supreme Court observed at page 134 as follows:

    “Shri Salve has made heroic efforts to satisfy us that the majority view may be taken as per incuriam inasmuch as it had not applied its mind to the effect of some circulars issued by the concerned authorities as empowered by Section 119 of the Act. This is sought to be brought home to us by referring to the observations of Mukhaiji, J., at the end of paragraph 42 (at page 139 of 158 ITR) that in the appeals the Court was “not concerned with the actual effect of these circulars and, these need not be set out and examined”. This observation had been made after noting the circulars to which the attention of the Court had been drawn.

    Though it is correct that among the circulars brought to the notice of the Court the one which Shri Salve mentions, namely, that issued in October, 1984, was not brought to the notice of the Bench deciding the aforesaid case, that is not material, because we are in agreement with Mukhaiji, J., when he stated at the end of paragraph 43 (at page 139 of 158 ITR) that the circulars “cannot detract from the Act”.”

    5. The subsequent judgment of the Apex Court in Kerala Financial Corporation v. C.I.T, (supra) has affirmed the view in State Bank of Travancore v. C.I.T (supra) that circulars cannot deviate from the Act. We do not find any merit in the contention of the assessee that the judgment of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra) was per incuriam as it did not consider the decision of the Supreme Court in Navnitlal C. Zaveri (supra). As stated hereinabove, judgment of the Supreme Courtin Navnitlal C. Zaveri's case (supra) was followed by the judgment of the Supreme Court in K.P Verghese (supra) which, in turn, has been discussed by the Supreme Court in Kerala Financial Corporation (supra) in which it has been laid down following the judgment of the Supreme Court in State Bank of Travancore (supra) that the circulars cannot override or detract from the provisions of the Act inasmuch as Section 119 has empowered the Central Board of Direct Taxes to issue orders, instructions or directions for the proper administration of the Act. In Kerala Financial Corporation (supra), on the above point, the Supreme Court has observed at page 135 as follows:—

    “Shri Salve would, however, urge that a little different view of the matter had been taken by two Judge Bench of this Court in K.P Varghese v. I.T.O in which it was observed at page 613 that circulars issued under the aforesaid provisions are binding on all officers “even if they deviate from the provisions of the Act”. As to what was sought to be conveyed by the word “deviate” is not clear to us. This much, however, is apparent that this Court did not mean, while saying as above, that circulars can override any provision of the Act or, to put it in the language of Mukhaiji, J., detract from the Act. Though Shri Salve has urged that the decision in. Varghese's case (1981) 131 ITR 597 (SC) has been affirmed by a Constitution Bench in C.B Gautam v. Union of India reference to that case shows that Varghese's case (1981) 131 ITR 597 (SC) was mentioned in paragraph 22 (at page 548 of 199 ITR) while stating that the conclusion arrived at, namely, that the provisions of Chapter XX-C of the Act are to be resorted to only where there is significant undervaluation of the immovable property with a view to evading tax, finds support from the decision in Varghese's case (1981) 131 ITR 597 (SC). This shows that what was stated about permissibility of circulars to “deviate” from the provisions of the Act was not one which was affirmed by the Constitution Bench.

    The fact that the circular to which Shri Salve has referred is one which had been issued in exercise of the powers conferred by Section 119 of the Act has no significance in so far as the point under consideration, namely, whether the circular can override or detract from the provisions of the Act is concerned, inasmuch as what Section 119 has empowered is to issue orders, instructions or directions for the “proper administration” of the Act or for such other purposes specified in sub-section (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament. Such a contention cannot seriously be even raised.

    The result is that we follow and affirm the view taken by the majority by this Court in State Bank of Travancore's case (1986) 158 ITR 102 and hold that the interest which had accrued on the sticky advance has to be treated as income of the assessee and as such taxable. We would add that if ultimately it is established by the assessee that the advance had taken the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law.”

    6. In the circumstances, we do not find any merit in the contentions advanced on behalf of the assessee that the decision of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra) was per incuriam. The said decision is binding on this Court.

    7. The learned counsel for the assessee, however, relied upon decision of the Patna High Court in C.I.T v. Sriram Agarwal. The said judgment is delivered on 21st April, 1986 i.e prior to the decision of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra). Hence the decision of the Patna High Court has no application to the facts of the present case.

    8. The learned counsel for the assessee also relied upon decision of the Punjab and Haryana High Court in B.S Bajaj v. C.I.T… As far as the said decision is concerned, it may be mentioned that although reliance was placed in the said case on the decision of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra), the Court has made it very clear that it need not go into the controversy as the circular bearing No. 329 dated 22nd February, 1982 was only clarificatory and in the circumstances, the High Court refused to go into the decision of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra). In any event, we do not agree with the view taken by the Punjab and Haryana High Court that there is conflict of opinion between the decisions of the Supreme Court.

    9. As stated hereinabove, the decision in Navnitlal C. Zaueri v. K.K Sen. A.A.C (supra) was specifically considered by the Supreme Court in K.P Verghese v. I.T.O (supra) which in turn was specifically considered by the Supreme Court in Kerala Financial Corporation v. C.I.T (supra). In the circumstances, the doctrine of per incuriam is not applicable in this case.

    10. In the circumstances, we are clearly of the opinion that the decision of the Supreme Court in Kerala Financial Corporation v. C.I.T (supra) is final and binding and the said decision is clearly applicable to the controversy now sought to be raised on behalf of the assessee Bank. We, therefore, hold that the said question is no more res integra. We further hold that question No. 3 is squarely covered by the decisions of the Supreme Court in State Bank of Travancore v. C.I.T (supra) and in Kerala Financial Corporation v. C.I.T (supra). Accordingly, question No. 3 is answered in negative i.e in favour of the department and against the assessee.

    11. Reference stands disposed of accordingly with no order as to costs.

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    Comments

    Banque Nationals De Paris v. Commissioner Of Income Tax
    (Feb 18, 1999)