Commissioner Of Income Tax, Karnataka-I, Bangalore v. M/S. Canara Bank

1. The revenue seeks the following two questions to be referred by the Appellate Tribunal under the provisions of the Income Tax Act, 1961 (for short the Act):

(1) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing the assessee's claim of bad and doubtful debts relating to advance made by the rural branches to the extent of Rs. 1,45,14,126/-?

(2) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the orders of the CIT (A) who deleted the addition of Rs. 12,16,33,177/- being the interest accrued relatable to the period ended 31-12-1981, but becomes payable after 31-12-1981?

2. The first question was held against the revenue by the Tribunal on the ground that actually the assessee-bank had made provision for the entire sum and the sum did not exceed the ceiling prescribed under Section 36(1)(vii)(a) of the Act. Though Mr. Raghavendra Rao, learned counsel for the revenue, tried to contend that actually no such provision was made by the assessee to the extent of Rs. 29,83,288/- towards bad and doubtful debts and only a claim is now made, we cannot accept this contention in view of the clear and specific finding given by the Tribunal that the assessee had made such a provision. Consequently, first question will not arise at all for consideration. Regarding the second question the learned counsel for the revenue pointed out that a question of law really arises in view of the decision of the Supreme Court in State Bank of Travancore v. Commissioner of Income Tax, Kerala, 158 ITR 102, wherein the Supreme Court pointed out that whenever there is any conflict between the accrued income and real income, the method of accounting adopted by the assessee should prevail and in the instant case the assessee in its accounts as on 31st December has shown the interest as having accrued and therefore the learned counsel contended that the same was liable to be included for taxation purposes. It is to be noted here that it is interest on securities and the interest will be actually claimable by the assessee only by 31st March, or at any rate subsequent to the date stated, as having accrued in the accounts of the assessee for the purpose of its accounting. In the aforesaid decision of the Supreme Court, the Supreme Court has not specifically laid down that as and when the assessee enters in the accounts that certain income has arisen or accrued the same will have to be treated as having accrued to the assessee, by the very force of the system of accounting. In fact the principles enunciated by the Supreme Court are found at page 155, which reads:

“As a result of the aforesaid discussion, the following propositions emerge:

(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 in suspense account cannot be such evidence to show that no real income has accrued to the assessee or 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.”

3. As was argued by Mr. Raghavendra Rao we could have and would have called for the question to be decided by us, if the ultimate conclusion of the Tribunal was against the decision of the Supreme Court. Even at an earlier stage of the above decision of the Supreme Court, at page 154 it was pointed out that:

“Besides, any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value Judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made “no income”.

4. In Point No. 4 quoted above it has been brought out that where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. This statement is of vital importance because according to Mr. Sarangan the question has been already considered by this Court and therefore this question of law does not arise as far as this Court is concerned.

5. Mr. Sarangan has cited the decision rendered in The Commissioner Of Income-Tax v. Vijaya Bank., Mangalore, ILR 1976 KAR 490. The relevant facts in that case were, that the bank purchased certain securities in the middle of the year. The bank not only paid the value of the securities as such, but paid something more towards the proportionate interest that accrued in respect of those securities upto the period of purchase. This sum representing the interest stated as accrued on securities was sought to be deducted by the assessee under Sections 19, 20 and 37 of the Act. The assessee's contention was not accepted by this Court. It was held that question of proportionate interest cannot be taken as having accrued to the assessee at all and the interest on security does not arise day-to-day, but would arise only on the date prescribed or agreed upon while issuing the securities. In such a situation the relevant provision will be Section 18. In para 15 of the Judgment this Court observed thus:

“The above enunciation has been relied on for the Revenue for two purposes, and in our opinion, justifiably; First, to repel a contention urged on behalf of the assessee that dealing in securities being a part of the business of banking, and as such they were trading assets, and that hence it was permissible for it (the assessee) to deduct the amount paid towards the interest alleged to have accrued due during the broken period upto the date of their purchase, as the same had not resulted in the acquisition of any income producing asset; Second, to support an argument that so long as computation of income under the head ‘interest on securities’ has to be separately made under the Act, the manner of such computation, including permissible deductions, must be confined to the provisions of Sections 18 to 21 only.”

6. Again, at para 17 the question was posed as to whether the interest for the broken period prior to the date of purchase of the securities by the assessee, can be construed as ‘interest’ within the meaning of Section 18 of the Act and the answer was that it was not possible to treat it as an interest that has accrued. For this purpose this Court referred to a decision of an English Court in Wigmore v. Thomas Summerson and Sons, IX Tax Cases 577. In this connection this Court also quoted a few passages out of which the following seems to be relevant for our present purpose:

“…….If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in to bringing into existence a debt or a right to receive the payment or in other words a debitum in present, solvendum in futuro it cannot be said that any income has accrued to him”.

7. Applying this test it was pointed out that the interest for the broken period had not accrued or crystallised into a debt and thus has not become due and payable, as if it is characterised as income chargeable to tax in the hands of the transferor and hence could be said as deductible in the hands of the assessee transferee. We are of the view that this decision entirely covers the question raised by the revenue. The relevant provision actually is Section 18 and not Section 5 as was argued by Mr. Raghavendra Rao. Section 5 is subject to other provisions of the Act and here, Section 18 is the specific provision, which governs the subject of interest on securities. Mr. Sarangan also pointed out that this Court's decision has been affirmed by the Supreme Court in Vijaya Bank Ltd. v. Commissioner of Income Tax (Addl.), 1987 ITR 541 and the principle is stated at page 542, thus:—

“In the instant case, the assessee purchased securities. It is contended that the price paid for the securities was determined with reference to their actual value as well as the interest which had accrued on them till the date of purchase. But the fact is, whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. Subsequently, when these securities yielded income by way of interest, such income attracted Section 18.”

8. The last sentence conveys the idea that actually the income fructifies to the assessee only when the securities yield the interest and only in such a situation Section 18 is attracted and that the securities do not yield any income during the broken period of any year.

9. In the circumstances, we do not think we should require the Tribunal to refer any question to this Court.

10. Civil Petitions are rejected accordingly.