The Judgment of the Court was delivered by
Kochu Thommen, J.:— The following question has been, at the instance of the revenue, referred to as by the Income-tax Appellate Tribunal, Cochin Bench:
“Whether on the facts and circumstances of the case Rs. 2,39,010.66 credited to the interest suspense account for the year ending 31-3-1974 and Rs. 2,44,737.13 credited to the interest suspense account for the year ending 31-3-1975 should not be brought to tax for the assessment years 1974-1975 and 1975-1976 respectively?”
2. The assessee is the Kerala Financial Corporation constituted by the State Government under S. 3 of the State Financial Corporations Act (Centra, Act 63 of 1951). The assessee has been from its inception keeping its accounts according to the mercantile system. In the course of its business the assessee advances long-term loans extending to 20 years repayable in half yearly instalments. The interest accruing on the loans is generally credited by it to the Interest Account on the due dates, even when the amounts are not actually received. These entries are made after debiting the interest to the respective accounts of the customers. Subsequently corresponding credit entries are made in the Profit and Loss Account. Since large number of loans of various financial corporations including the assessee remained unpaid, the Reserve Bank of India issued a circular No. I.F.D No. OPR: 1076/1(5)-73-74 dated 21st November, 1973 (Annexure-A) advising these corporations not to treat the unrealised interest on sticky loans as income in order that the distributable profits may not be unduly inflated so as to present an untrue picture of their actual income. The Reserve Bank of India stated:
“……It will, therefore, be preferable to credit the amount of unrealised interest to a special account (Interest Suspense Account) instead of the Profit and Loss Account or make a specific provision for unrealised Interest to the debit of the Profit and Loss Account equivalent to the amount of such interest credited to the Profit and Loss Account.”
3. So stating the Reserve Bank of India forwarded to the assessee a copy of letter No. F. No. 207/10/73-II-A II dated 16th April, 1973 (Annexure-B) which was addressed by the Under Secretary, Central Board of Direct Taxes (the “Board”) to the Income-tax Adviser and Ex-Officio, Deputy Secretary, Finance Department, Haryana Civil Secretariat, Chandigarh. That letter reads:
“Sub:— Levy of Income-tax on the amount placed in the Suspense Account,
I am directed to refer to your D.D No. 30-IIA (HR) 11864 dated 15th March, 1975 on the above subject.
The Board is of the view that the amounts kept in suspense account under the heads interest, commission, etc., will not be assessable to tax. However, the assessee must maintain a systematic method of accounting in respect of doubtful debtors subject to checks and counter checks.”
4. On receipt of the circular of the Reserve Bank of India (Annexure-A) and the letter addressed by the Board to the Government of Haryana (Annexure-B), the assessee opened in its books a new account called the Interest Suspense Account. Any interest accruing on a loan which had not been realised for 3 years was debited to the account of the debtor and credited to the Interest Suspense Account. Subsequently if any portion of that interest was realised, the same was transferred to the Interest Account and from there to the Profit and Loss Account. For the accounting years in question ending on 31-3-1974 and 31-3-1975, the assessee respectively credited Rs. 2,39,010.66 and Rs. 2,44,737.13 to the Interest Suspense Account after debiting the same to the accounts of the concerned parties. In the returns filed by the assessee for the assessment years 1974-1975 and 1975-1976 relevant to the previous years ending on 31-3-1974, and 31-3-1975, it did not include in its total income the above mentioned amounts credited to the Interest Suspense Account. The Income-tax Officer completed the assessments on the basis of the income disclosed by the assessee (Annexure-C). However the Commissioner of Income-tax by his order under S. 263 of the Income-tax Act, 1961 (the “Act”) directed the Income-tax Officer to modify the assessment orders so as to include in the total income the two sums credited to the Interest Suspense Account (Annexures D & E). Against these orders, the assessee appealed to the Tribunal. In the Memorandum of Appeal (Annexure-F) the assessee pointed out that, in respect of the doubtful debts, the accrued interest was credited to the Interest Suspense Account on the basis of the letter dated 16-4-1973 addressed by the Board to the Government of Haryana (Annexure-B). Apart from this, the only other ground taken was that the decision of this Court in State Bank of Travancore v. CIT., (1977) 110 ITR. 336 (Ker.) was not applicable to the assessee's case. The arguments urged on behalf of the assessee before the Tribunal are summarised in paragraphs 6 and 7 of the Tribunal's order. They are: It was open to the assessee to change its regular method of accounting and follow the new method regularly, provided the change was bona fide and not with a view to avoiding payment of the correct tax. The change made by the assessee was of such a nature. No income escaped assessment as a result of the change. The decision of this Court in State Bank of Travancore v. C.I.T (1977) 110 ITR. 336 (Ker.) was not applicable to the case of the assessee as that decision was rendered on the basis that the State Bank of Travancore did not adopt a regular method of accounting in respect of sticky advances. No other argument appears to have been urged before the Tribunal.
5. Significantly, as seen from the Tribunal's order, the assessee did not contend that it changed its method of accounting from the mercantile to the cash system. All that it said was that it changed its method of accounting by crediting an Interest Suspense Account to which unrealised interest on sticky loans was credited. No contention was raised to the effect that as a result of the change in the method in regard to such interest no income is accounted to have accrued or arisen or resulted until actual receipt. Significantly again the assessee did not contend that, in respect of the sticky loans, it had made any effort to recover the principal amounts due for repayment under the contract or the interest payable thereon, and that it was satisfied that they had become irrecoverable. No evidence to such effect was adduced before the Tribunal, apart from saying that the amounts had not been paid for 3 years.
6. The Tribunal placed much reliance on the circular dated 21-11-1973 issued by the Reserve Bank of India and held that, in so far as the doubtful loans were concerned, the assessee changed its method of accounting by crediting the accrued, but unrealised, interest to the Interest Suspense Account after debiting the same to the accounts of the respective debtors, and that the change was bona fide. This is what the Tribunal found in paragraph 9 of its order:
“As already stated, the assessee has been keeping its accounts on mercantile basis and upto the accounting year 31-3-1972 it had been crediting the interest accrued on the various loans advanced by it to various parties in the ‘interest account’. A change was made only from the accounting year ending 31-3-1973. From that year onwards interest from such loans which had not been realised for three years, was not credited in the interest account but credited in a different account styled as ‘interest suspense account’ though debit entries were made in the account of the respective debtors for the amount of interest accrued. This change came to be made because of the circular issued by the Reserve Bank of India dated 21-11-1983……whenever any such interest or part thereof was realised the same was transferred to the interest account and then to the profit and loss account. In these circumstances, it cannot at all be doubted the change in the method of accounting regarding the unrealised interest is not bona fide and it cannot be suggested that it has been brought about with a view to avoid payment of tax or reduce the tax liability………
(emphasis supplied)
7. The Tribunal has not found that the change in the method of accounting as from the year ending 31-3-1973 resulted in a cash system of accounting, in so far as the interest in question was concerned. Nor has the Tribunal found that either the principal or the interest had become irrecoverable. The Tribunal has also not stated that the circular of the Reserve Bank of India suggested a change which was in substance and effect a cash system of accounting where under no income was brought into the books until and unless it was actually received. The Tribunal has, however, found that interest did accrue on the due dates, but it was credited to the Interest Suspense Account. The Tribunal has not considered the letter of the Board to the Government of Haryana, and no argument regarding it appears to have been urged before it.
8. It must be noticed that the Tribunal refers to the “interest in respect of loans which have remained unrealised for three years”. It is not clear from the order whether the long-term loans which were repayable in half yearly instalments were themselves in default of repayment on the due dates or only the accrued interest on such loans remained unpaid on the due dates. The arguments at the bar proceeded on the basis that the Tribunal has referred only to the unpaid interest and that there was no evidence as to whether the loans themselves were in default. What is however clear is that the interest credited to the Interest Suspense Account was interest which remained unpaid for 3 years.
9. Sri P.K.R Menon, counsel for the revenue, submits that, on the facts found, the interest credited to the Interest Suspense Account constituted the income of the assessee during the relevant years. The Commissioner rightly ordered the addition of the interest. There was no evidence for the Tribunal to come to the conclusion that by crediting the interest to the Interest Suspense Account the assessee made a change in the method of accounting. No principle or authority justified such conclusion. Neither the circular of the Reserve Bank of India relied on by the Tribunal nor the letter of the Board to the Government of Haryana (referred to in the assessee's Memorandum of Appeal) supports the contention that the Interest Suspense Account implied a cash system of accounting. He further submits that the letter of the Board which is only an answer to a communication, and not addressed or endorsed to any authority under the Income-tax Act, is not an order or instruction or direction within the meaning of S. 119 and is therefore not binding on any Income-tax Authority. He submits that, on the basis of the mercantile system of accounting which the assessee has all along regularly followed, the amounts in question representing accrued income were liable to be charged under the Act.
10. Appearing for the assessee, Sri Dasthur submits that the unpaid interest credited to the Interest Suspense Account did not form part of the real income of the assessee and was therefore not assessable to tax. Referring to the decision in H.M Kashiparakh and Co. Ltd. v. Commr. of Income-tax, (1960) 39 ITR. 706 (Bom.), which was approved by the Supreme Court in CIT v. Birla Gwalior (P.) Ltd., (1973) 89 ITR. 266 (SC.), counsel submits that, notwithstanding the entries in the books, the unpaid interest formed only hypothetical income and not real income. He then submits that during the accounting years ending on 31-3-1973, 31-3-1974, 31-3-1975 and 31-3-1976 the assessee changed over, in so far as the interest in question was concerned, from the mercantile system to the cash system of accounting under which no income was chargeable until it was actually received. His third contention is that even assuming that the books were kept not on the cash system of accounting, but on the mercantile system in the true sense of the term or any system based on accrual of income, the amounts credited to the Interest Suspense Account, in the light of the letter of the Board (Annexure-B), were not assessable to income-tax.
11. It is significant that the amounts due as interest were credited to the Interest Suspense Account after they were duly debited to the accounts of the parties on the respective due dates, thereby indicating in clear terms that the interest had accrued and became payable, though not actually received, and therefore not credited to the Interest Account or transferred to the Profit and Loss Account. If the change in the method of accounting had resulted in a cash system of accounting where no entries are made until the amounts in question are actually received, the interest which remained unpaid would not have found any entry in the books of account. Had the assessee which had all along followed the mercantile system of accounting, at any rate until the accounting year ending on 31-3-1973, in fact changed over on a regular basis to a cash system of accounting, in so far as the doubtful interest was concerned, it could not have debited it on the due dates to the accounts of the parties concerned and credited the same in its books, albeit in the Suspense Account. The debit and the credit show that the interest had become due and to that extent income had in law accrued. The fact that the credit is made not to the Interest Account, but to a different head, namely, the Interest Suspense Account, does not change the legal character of the accrued income or its chargeability, or the basic method of accounting, although it is open to the assessee to claim an allowance under S. 36(1)(vii) in respect of the same amount as a bad debt. May be the change found by the Tribunal has resulted in a new method of book-keeping—a change in the head of the account to which interest has been credited, as distinguished from a change in the method of accounting, or at best a hybrid system—whereunder the interest still continued to be treated in the books as accruing or arising on the due dates, although not paid. This is far from the cash system.
12. In so far as the Tribunal has not found that the change has resulted in a cash system of accounting, its finding that interest which accrued on the due dates was duly credited to the Interest Suspense Account after debiting the same to the accounts of the parties concerned assumes particular significance. This is a clear finding of fact indicating in no uncertain terms that at no material time had the method of book-keeping adopted by the assessee resulted in a cash system of accounting or in a system where charge, is postponed to the actual receipt of income.
13. Income arises in terms of the contract governing the particular transaction, and not by reason of the entries in the books of account which merely evidence the accrual or receipt of income: Sutlej Cotton Mills Ltd. v. C.I.T, (1979) 116 ITR. 1, 5 (SC.). Income is charged under the Act either when it has accrued or when it has been received. The assessee's choice of accounting determines the point of time at which the income is charged.
14. Under the mercantile system of accounting income is charged when it accrues or arises, whether or not it has been received. “Under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed”: per Iqbal Ahmad C.J in CIT. v. Shrimati Singari Bai, (1945) 13 ITR. 224, 227 (All.). On the other hand, under the cash accountancy system, income is not charged until it is received in the accounting year. According to this system, “a record is…….kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed and if the profits of the business are accounted for in this way the tax is payable on the difference between the receipts and the disbursements for the period in question” per Courtney Terrell, C.J in Dhakeshwar Prasad v. Commr. of Inc.-tax, (1936) 4 ITR. 71, 74.
15. As stated by the Supreme Court in Morvi Industries Ltd. v. CIT., (1971) 82 ITR. 835 (SC.):
“……It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made…….”
16. In Keshav Mills Ltd. v. Commr. of Inc.-tax., (1953) 23 ITR. 230, 239, the Supreme Court had already noticed and emphasised this fundamental distinction between the two systems of accountancy. Again in Commr. of Inc.-tax v. A. Krishnaswami Mudaliar (1964) 53 ITR. 122, 129, 130, the Supreme Court stated:
“…Whereas under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year…….Again where the cash system is adopted, there is no question of bad debts or outstandings at all, in the case of mercantile system against the book profits some of the bad debts may have to be set off when they are found to be irrecoverable. Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous in which certain elements and incidents of the cash and mercantile systems are combined.”
17. But whichever be the method regularly followed, and dependent on that method, income is assessed under the Act, as stated earlier, on the basis of either accrual or receipt, which are the two alternative points relevant to the charge.
18. What the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it: C.I.T v. Kameshwar Singh, (1933) I ITR. 94, 101 (P.C) Where the assessee has all along maintained a mercantile system of accounting and income has accrued under the contract, such income does not cease to be chargeable income by reason only of the fact that it has been credited to a Suspense Account and has not been transferred to the Profit and Loss Account. Suspense Account does not suspend the accrual or chargeability of the income or change its nature (See Commr. of Income-tax v. K.R.M.T.T Thiagaraja Chetty, (1953) 24 ITR. 525 (SC.) and Debaprasanna Mukherji v. C.I.T, (1951) 20 ITR. 293 (Cal.). To credit the interest to the Suspense Account is to prasuppose the accrual of a right to that interest: James Finlay & Co. v. CIT., (1982) 137 ITR. 698, 705 (Cal.). Income does not cease to be income for the purpose of assessment even it is unilaterally relinquished after it has accrued. Income which has once accrued retains the character of income, and unless allowed as a proper deduction as a business expenditure, it remains chargeable to tax (See Mervi Industries Ltd. v. C.I.T, (1971) 82 ITR. 835 (SC.)). On the other hand, if on a true construction of the transaction income is found not to have arisen or accrued, any entry in the books of account showing accrual of income would not attract lax merely by reason of such entry (Sutlej Cotton Mills Ltd. v. C.I.T (1979) 116 ITR. 1 (SC.)).
19. The unilateral relinquishment of income will not change the character of what is otherwise income. But where the terms of the agreement between the parties are varied by mutual consent preventing accrual of the whole or part of the income, no income to such extent will result and no tax thereon will be payable even when the books of account contain entries showing a hypothetical income which does not materialise. As stated by Hidayatullab, J., as he then was, in Commr. of Income-tax v. Shoorji Vallabhadas and Co., (1962) 46 ITR. 144, 148 (SC.):
“……No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account……A mere bookkeeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm….The reduction was a part of the agreement………”
20. Accrual of income can be prevented either by contract or by statute. In Poona Electric Supply Co. Ltd. v. Commr. of Inc.-tax, (1965) 57 ITR. 521 (SC.), the latter was the position. The Supreme Court stated that the real profits of a businessman could not obviously include the amounts returned by him by way of rebate under statutory compulsion. It is as if he received only the original amount minus the amount to be returned. The amount returned is not a part of the profits at all. So stating the Supreme Court approvingly referred to the decision of the Bombay High Court in H.M Kashiparakh & Co. Ltd. v. Commr. of Inc.-tax, (1960) 39 ITR. 706 (Bom.) where the concept of real income was expounded. This concept was again approved by the Supreme Court in CIT. v. Birla Gwalior (P.) Ltd., (1973) 89 ITR. 266 (SC.) where income did not accrue because of contract. The court held:
“.The commission receivable could have been ascertained only after the managed company made up its accounts. The assessee had given up the commission even before the managed company made up its accounts. Hence, the mere fact that the assessee-company was maintaining its accounts on the basis of the mercantile system cannot lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year….”
21. In that case a part of the commission due to the assessee was relinquished before the accrual of the income, and there was no dispute as to the bona fides of the relinquishment or the alteration in the terms of the contract resulting in the relinquishment. See also C.I.T v. Chamanlal Mangaldas and Co. (1960) 39 ITR. 8 (SC.).
22. In H.M Kashiparskh and Co. Ltd. v. Commr. of Income-tax (1960) 39 ITR. 706 (Bom.), the assessee which was the managing agent of a paper mill company and which maintained its accounts on the mercantile system gave up a part of the commission in excess of what it was bound to give up in certain circumstances, in terms of the agreement. The High Court held that it was only the real income of the assessee for that accounting year which was liable to tax and such real income could not be arrived at without taking into account the actual amount forgone by it. In ascertaining the real income, the fact that the assessee maintained its accounts on the mercantile system was not conclusive. The court said:
“…The accrual of the commission, the making of the accounts, the legal obligation to give up part of the commission, and the forgoing of the commission at the time of the making of the accounts were not disjointed facts: there was a dovetailing about them which could not be ignored,…………………”
23. This was a decision which turned on the peculiar facts of the case, particularly the prior agreement between the parties and the significant fact that what was given up was part of the commission, the right to receive which arose only on completion of the accounts which were then not yet ready. The court found that although what was given up was in excess of what was required to be given up strictly in terms of the agreement, considering the facts and circumstances and the relevant provisions of the agreement, there was such a dovetailing about them that what was given up in excess could not be seen in isolation so as to disqualify it for exclusion in determining the real income. But this line of authority does not support the proposition that where income has been, under the mercantile system of accounting, relinquished or otherwise dealt with after it has accrued is no longer income for the purpose of tax. Interest accrues on the due dates, as provided under the contract, and unlike in the case of commission, its accrual does not depend, on or await the completion or settlement of accounts. Where income has in law accrued, although not received, such income does not cease to be real income for the purpose of assessment even though it has been subsequently given up or kept in a Suspense Account (See Pondicherry Railway Co. Ltd. v. C.I.T AIR. 1931 PC. 165).
24. In State Bank of Travancore v. C.I.T (1977) 110 ITR. 336 (Ker.), this Court had occasion to consider whether a banking company which followed the mercantile system of accounting was liable to be taxed in respect of the interest that had accrued on sticky advances and credited to an Interest Suspense Account. It was held that income had accrued on the due dates and it was therefore liable to be taxed. In Catholic Bank of India v. Commr. of I.T, 1964 KLT. 654, this Court held that, the assessee having all along followed the mercantile system of accounting, the non-inclusion of the interest on the sticky advances in pursuance of the direction of the Reserve Bank of India did not exonerate the assessee from liability to pay income-tax in respect of such income. These two decisions, counsel for the revenue contends with much force, squarely apply to the facts of this case.
25. The decision of the Madras High Court in C.I.T v. Motor Credit Co. P. Ltd., (1981) 127 I.T.R 572 (Mad.) relied on by the assessee's counsel has no application to the facts of this case, for, in the first place, the assessee there had not accounted for any interest either on accrual or on receipt basis and the Tribunal had on the peculiar facts of that case found that the assessee could not reasonably expect to get any interest on the outstandings under the Hire Purchase Agreement when the routes in question had been taken over by the State Transport Corporation and the buses themselves had been seized by the assessee for non-payment of the hire purchase instalments. Similarly in CIT. v. Devi Films (P.) Ltd., (1983) 143 ITR. 386 (Mad.), relied on by the assessee's counsel, there was clear finding that in all probability the amounts advanced and the commission or interest agreed to be paid had become irrecoverable, and the mere fact that entries had been made in the books did not evidence accrual of real income. There is no such finding in the instant case. On the other hand, an earlier decision of the Madras High Court in CIT. v. Express Newspapers Ltd., (1980) 124 ITR. 117 (Mad), is quite in point. In that case the court held that the assessee having followed the mercantile system of accounting and on that basis interest having been debited to the parties' account, the assessee could not get over the liability to tax by merely keeping the interest in a Suspense Account, and the assessment of the interest was therefore justified.
26. The decisions of the Calcutta High Court in CIT. v. Rajasthan Investment Co. (P.) Ltd., (1978) 113 ITR. 294 (Cal) and Reform Flour Mills Private Ltd. v. CIT., (1978) 114 ITR. 227 (Cal.) cited on behalf of the assessee both before the Tribunal and before us have no application to the facts of this case as in each of these cases there was a clear finding that the assessee had altered its method of accounting by changing over to the cash system on the basis of a previous decision of its Board of Directors and consequently the assessee brought into account only the interest which had been received and not merely receivable. There is no such finding in the present case.
27. 1 he facts found disclose that real income, in terms of the entries made, did arise in the present case. There was no variation in the contract between the assessee and its debtors in respect of the interest receivable. By debiting the interest to the accounts of the customers and crediting the same to the Suspense Account, the assessee acknowledged the accrual of income. No entry has been made to show that what is stated to have accrued has been written off as irrecoverable interest. There is total lack of material on record to show that, notwithstanding the delay, the debtors were unable or unwilling to pay the interest or the prospect of its realisation was doubtful or improbable.
28. We find do substance in Sri Dasthur's contention that in the present case the assessee had, in respect of unrealised interest, changed over to a cash system of accounting and that the decisions of this Court in State Bank of Travancore v. C.I.T, (1977) 110 ITR. 336 (Ker.) and Catholic Bank of India v. Commr. of I.T, 1964 KLT. 654 are not applicable to this case as in those two cases there was no finding that the assessee bad changed its regular system of accounting. In the present case too there is, in our view, no finding that the change, if any, in the method of accounting had resulted in a cash system of accounting or an accounting whereunder income was not brought into the books until received. The very finding of the Tribunal that interest was debited to the accounts of the customers on the due dates and then credited to the Suspense Account militates against such contention. An assessee is at liberty to alter the regular method of accounting which he employed in the past by abandoning the same and starting a new regular method. He “must abandon what, upto that time, has been his regular method, and start a new regular method and not merely a new method for a casual period”: per Beaumont, C.J, Sarupchand v. Commr. of Income-tax, Bombay (1936) 4 ITR. 420 (Bom.). The question whether the regular method of accounting has been changed to a new system is a question of fact which must be found on evidence. There is no finding here that the change has resulted in a system not based on the concept of accrual. Seethe principle stated in Reform Flour Mills Private Ltd. v. C.I.T (1981) 132 ITR. 184 (Cal.) As stated earlier, the only change adopted by the assessee was a change in the method of keeping or writing its books a change in the head of account and not a change in the method of accounting. Assuming that the finding of the Tribunal as regards the change implied a change over from the mercantile to the cash system an assumption which in our view would not be justified even so, such finding would be totally opposed to the facts found by the Tribunal and would therefore be a perverse finding and a misdirection in law. Any such finding would have no sanctity in law: Liquidators of Pursa Ltd. v. Commr. of Inc.-tax, (1954) 25 ITR. 265, 273-276 (SC.); Mahesh Anantrai Pattani v. Commr. of Inc.-tax, (1961) 41 ITR. 481 (SC.); and, Laxmandas Sejram v. Commr. of Inc.-tax, (1964) 54 ITR. 763, 776 (Guj.).
29. The finding of the Tribunal as regards the effect of the circular of the Reserve Bank of India is, in our view, wrong. This circular clearly indicates its object. It was not purported to give any assurance to the assessee as to exemption from income-tax for amounts credited to the Interest Suspense Account. That is not the function of the Reserve Bank of India. In fact no such contention has been urged before us on behalf of the assessee. All that the circular intended to achieve was to advise the State Financial Corporations, such as the assessee, to avoid crediting the unrealised interest on sticky loans to the Profit and Loss Account so as to prevent undue inflation of the distributable profits. That was the only intended effect of the circular. The finding of the Tribunal that the circular saved such accrued income from tax liability is, in our opinion, clearly wrong.
30. We shall now deal with the contention regarding the effect of the letter addressed by the Board to the Government of Haryana. As stated earlier, this letter was not considered by the Tribunal, and its attention was not invited to it on behalf of the assessee at the time of the hearing.
31. Sri Dasthur contends that this is not an ordinary letter but a circular containing “orders, instructions and directions to other Income-tax authorities” within the meaning of S. 119 of the Act. We do not agree. The letter which we have extracted above indicates that it was sent to the Government of Haryana in reply to a demi official letter. What exactly were the contents of that Government letter are not in evidence, A mere letter or clarification of the Board in reply to a communication from the assessee or any other person, who is not an authority within the meaning of S. 116, cannot be regarded as a circular coming within the ambit of S. 119 and will not therefore be binding on the authorities (see J.K Synthetics Ltd. v. Central Board of Direct Taxes, (1972) 83 ITR. 335 (SC.)). May be the Government letter does refer to a circular of the Board which was probably the subject matter of the enquiry, but, if so, there is no evidence to show to which circular that letter referred. Sri Dasthur placed before us three circulars of the Board: circular No. 3754 dated 25-8-1924; circular No. 41(V)6D of 1952 No. 27 (44)-11/52 dated 6-10-1952; and, circular No. P. No. 201/7/78-11A. 11 dated 20-6-1978. The last of the circulars withdrew the circular dated 6-10-1952 and the clarifications issued in cases of financial institutions. It is true that if a right came to be vested in the assessee by the virtue of the circular dated 6-10-1952 which was in operation at the time of the assessment, the subsequent withdrawal of the same will not affect the right so acquired (see Commr. Of Income Tax v. India Sea Foods, (1979) 119 ITR. 334 (Ker.) (FB). It is also true that if the first two circulars were applicable to the facts of this case, the income-tax authorities would be bound to act in terms of those circulars even when those terms implied a deviation from the provisions of the Act provided they were of a benevolent or beneficial nature from the point of view of the assessee (see Navnit Lal C. Jaweri v. K.K Sen A.A.C of Inc.-tax, (1965) 56 ITR. 198, 203 (SC.); Ellerman Lines Ltd. v. CIT., (1971) 82 ITR. 913 (SC); K.P Varghese v. ITO, (1981) 131 ITR. 597 (SC); and, Commr. Of Income Tax v. India Sea Foods, (1979) 119 ITR. 334 (Ker.) (FB.))1 However none of the circulars is part of the records and no reference to anyone of them had been made either in the Memorandum of Appeal or in arguments before the Commissioner or the Tribunal. The circular of 1924 was intended to apply to a money-lender who kept his books on the commercial system and maintained a Suspense Account in which he entered loans which in his opinion were extremely unlikely to be recovered and the Income-tax Officer was satisfied that there was little probability of such loans being repaid. The interest accruing on such loans was excluded by the circular from the assessee's taxable income. In the present case no loan is stated to have been credited to a Suspense Account and there is no evidence to show that any loan was not likely to be recovered. In the circumstances the circular of 25-8-1924 has no application to the facts of this case. The circular of 6-10-1952 extended the principle of the 1924 circular to banks which, “instead of transferring the doubtful debts to a Suspense Account, credit the interest on such debts to that account provided the Income-tax Officer is satisfied that recovery is practically improbable”. It would appear from the wording of this circular that it applied only to a case where the recovery of the principal amount itself was “practically improbable”. There is no evidence in this case that was the position with regard to the recovery of either the principal or the interest. The assessee had no such case before the authorities, and no evidence was placed by it to such effect. All that the assessee said was that the interest was not paid for 3 years on loans which were accrued by mortgagee. The state of affairs of the debtors, their ability and willingness to repay the amounts, their general reputation and standing in society, the chances of recovery by recourse to courts are all matters on which the assessee could have placed evidence, but did not do so. Moreover the Tribunal had no opportunity to consider whether the 1952 circular which applied only to banks had any application to a financial institution such as the assessee. In the circumstances the facts on record do not enable the assessee to seek the aid of this circular as well.
32. The assessee having failed to draw the attention of the Tribunal to any circular of the Board, and these circulars not being part of the records, we will not be justified in the present proceeding, which arises from a reference at the instance of the revenue, to refer the case back to the Tribunal to find new facts or embark upon a new line of enquiry (see New Jehangir Vakil Mills Ltd. v. CIT., (1959) 37 ITR. 11 (SC.); Commr. of Inc.-tax. v. Paluram Dhanania, (1966) 60 ITR. 250 (SC.); and, Commissioner Of Income-Tax, Kerala v. V. Damodaran, (1980) 121 ITR. 572, 578, 579 (SC.)).
33. To sum up, real income did arise on the dates on which the interest became due and, according to the system of accounting regularly maintained by the assessee during the relevant years, such income became assessable to tax. Neither the circular of the Reserve Bank of India nor the letter of the Board to the Government of Haryana saved such income from being taxed. In the circumstances, we answer the question referred to us in favour of the revenue and against the assessee. We direct the parties to bear their respective costs.
34. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
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