Vildirect: IncomeTax-caselaws-1998-VIL-124-ITAT-

1998-VIL-124-ITAT-

Equivalent Citation: ITD 068, 332, TTJ 064, 432,

Income Tax Appellate Tribunal CALCUTTA

Date: 27.03.1998

UNITED BANK OF INDIA.

DEPUTY COMMISSIONER OF INCOME-TAX

BENCH

Member(s) : D. MANMOHAN., S. C. TIWARI.

JUDGMENT

Per S. C Tiwari, A.M. --- As certain common issues and facts are involved in these appeals and the same were argued together by the common counsels engaged by the assessee and the Department, these appeals are being decided together for convenience.

2. First major issue involved in these appeals which pertains to assessment years 1981-82 to 1988-89 and 1990-91 relates to the assess ability of interest income attributable to certain class of loans and advances made by the assessee-bank to some of its debtors. The assessee is a nationalised commercial bank having its head office in Calcutta and various branches in Calcutta and several other places. According to the assessee-bank, it has been following a hybrid system of accounting for a very long time under which certain class of debtors of doubtful recovery were excluded and the assessee stopped debiting interest attributable to the amounts outstanding in the accounts of such debtors. The assessee, however, did not give up its rights and claims of charging interest on the amounts outstanding against such debtors but such interest was not debited to the debtors' accounts on accrual basis but was incorporated in separate memorandum record maintained by the assessee-bank for this purpose. As a consequence, no interest income on such loans and advances was recognised in the consolidated income and expenditure account of the assessee year after year. According to the assessee, on certain debtors' account having become doubtful of recovery under the parameters applied by the bank, the assessee followed thereafter cash system of accounting in respect of interest chargeable on such accounts. Subject to this exception, the assessee followed accrual basis or mercantile system of accounting in respect of its interest income on loans and advances made by the bank to its customers. This method of accounting which was being regularly employed by the assessee was accepted by I.T. Authorities in the assessment orders of earlier years, but from assessment year 1980-81 onwards the assessing authorities disputed this method of accounting as not being correct and insisted upon assessing interest income on such loans of doubtful recovery, commonly known as 'sticky loans' on accrual basis. Reliance in this behalf was placed by the assessing authorities on the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT[1986] 158 ITR 102/24 Taxman 337. Huge additions were made to the income declared by the assessee on this basis in the impugned assessment orders for the assessment years 1981-82 to 1988-89 and 1990-91. Aggrieved by these assessment orders, the assessee made unsuccessful appeals before the CIT(A) having jurisdiction over the assessee from time to time. Still aggrieved, the assessee is in appeal before us.

3. Dr. Debi Pal, the ld. Counsel for the assessee-bank argued before us that the facts of the case of the assessee in all these assessment years are clearly distinguishable from the facts on which the Supreme Court judgment in the case of State Bank of Travancore was given. The assessee in that case was following uniformly mercantile system of accounting in respect of all categories of debtors. At the end of the relevant accounting year, the assessee debited the accounts of all debtors the amount of interest chargeable on accrual basis. However, instead of crediting the interest thus charged to the interest account on a general basis, in the case of State Bank of Travancore corresponding credits in the cases of sticky loans were made to Interest Suspense Account. On those facts the Hon'ble Supreme Court have held that the interest on sticky advances had accrued according to the mercantile system of accounting and merely by carrying such accrued interest to the Interest Suspense Account without treating it as a bad debt or irrecoverable interest was not in accordance with the provisions of the Income-tax Act, 1961. The fact that these amounts were taken to the Interest Suspense Account, therefore, did not affect its taxability as such. As against this, the facts of the assessee in the present appeals, viz, United Bank of India are clearly distinguishable. The United Bank of India did not debit the accounts of the debtors, it was because this bank was following hybrid system of accounting and not mercantile system of accounting simplicitor. Under this hybrid system of accounting this assessee while following the mercantile system of accounting in respect of loans and advances in ordinary course, followed cash system of accounting in respect of sticky loans. The judgment of the Hon'ble Supreme Court in the case of the State Bank of Travancore did not apply on these special facts of the assessee for the reason that unlike the former bank, there was no accrual of interest under the method of accounting which the assessee followed in respect of sticky loans.

4. Dr. Debi Pal argued that hybrid system of accounting is now well established system of accounting and it is not necessary for an assessee to merely choose between mercantile system of accounting or cash system of accounting. Under the provisions of Income-tax Act a method of accounting regularly employed by an assessee has to be accepted unless it could be shown that the method of accounting regularly employed by an assessee was not proper for the purpose of ascertainment of the income, on the facts and in the circumstance, of an assessee. In the case of a commercial bank, adoption of cash system of accounting for interest on sticky loans, was justified and in keeping with well-recognised principles of accounting. Extracts from 'Statements and Standards Accounting' published by the Institute of Chartered Accountants of India filed by the assessee at pages 6 and 7 of supplementary paper book were referred to and the following paragraph was in particular relied upon:

"A bank may decide not to accrue interest on a loan or advance, for example when the borrower is more than a particular period in arrears with respect to the payment of interest or principal. A bank discloses the aggregate amount of loans and advances at the balance sheet date on which interest is not being accrued and the basis used to determine the carrying amount of such loans and advances. It is also desirable that a bank discloses whether it recognises interest income on such loans and advances and the impact which the non-accrual of interest has on its income statement. Reference was also made to CBDT Circular No. 491 dated 30th June, 1987 issued in the context of the Supreme Court judgment in the case of State Bank of Travancore. As per this circular, if RBI and IDBI were satisfied that the change in the system of accounting of interest from mercantile to cash basis by the concerned State Financial Corporation was legal, valid and bona fide, the Assessing Officer may accept the cash system of accounting of interest. On the basis of these authorities the ld counsel for the assessee argued that in the case of a public sector bank having large scale banking operation, adoption of cash system of accounting in respect of interest on sticky loans was rational, justified and in accordance with well-accepted norms of accountancy. The ld. counsel of the assessee argued that the legal principles involved in this behalf in the present appeals are not something arising for consideration by the Tribunal for the first time. These issues had already arisen and considered at length in a number of Tribunal and High Court decisions. The underlying principles came to be considered by the ITAT, Bombay Bench-C in the case of Industrial Credit & Investment Corpn. of India Ltd v. IAC[1990] 32 ITD 315 and as per the order dated March 3,1989 the Tribunal held that the hybrid system of accounting was now well-settled and the assessee, i.e., ICICI which was earlier following mercantile system in regard to the interest on sticky loan accounts was justified and entitled to switch over to the cash system of accounting, while following the mercantile system of accounting in respect of loans other than sticky loans. While deciding the matter, the Tribunal specifically considered the arguments of Revenue based on the judgment of the State Bank of Travancore's case and a host of other High Court judgments including Calcutta High Court judgments in Reform Flour Mills (P.)Ltd v. CIT [1981] 132 ITR 184/[1980] 4 Taxman 531, James Finlay & Co. v. CIT [1982] 137 ITR 698/[1981] 6 Taxman 222 and Snow White Food Products Co. Ltd v. CIT(No.1) [1983] 141 ITR 847. The ITAT, Bombay order in the case of Industrial Credit & Investment Corpn.of India Ltd. was challenged before the Hon'ble Bombay High Court and as per the judgment in CIT v. Industrial Credit & Investment Corpn. of India Ltd. [1991] 189 ITR 126 the Hon'ble Bombay High Court held that the finding of the Tribunal that the Supreme Court decision in the case of State Bank of Travancore was not attracted on the facts of ICICI did not give rise to any referable question of law. Thereafter, Dr. Debi Pal referred to ITAT, Calcutta order dated 30th March, 1992 in the case of Allahabad Bank v. I.A.C [IT Appeal No. 116 (Cal.)of 1988] and pointed out that in that case also the Tribunal found that change-over to cash system of accounting from mercantile system of accounting in respect of interest on sticky loans was found to be in order, after considering the Supreme Court judgment in the case of State Bank of Travancore and Calcutta High Court judgments in Reform Flour Mills (P.) Ltd.'s case and Snow White Food Products Co. Ltd.'s case The ld. counsel argued that the assessee's case in the instant appeals is on a much stronger footing inasmuch as there was no change of accounting in the case of the assessee but the assessee had been following hybrid system of accounting for along time prior to the previous years under consideration in these appeals. The ld. counsel argued that hybrid method of accounting followed by the assessee herein was legally tenable and in order as held by the Hon'ble Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT (No. 2) [1983] 141 ITR 861 / [1982] 10 Taxman 37. The ld. counsel for the assessee also pointed out that the ITAT, Bangalore Bench also took the similar view in the case of Dy. CIT v. Syndicate Bank [1994] 50 ITD 14.

5. Dr. Debi Pal, ld. counsel for the assessee stated that apart from these various decisions of various Benches of I.T.A.T the adoption of cash system of accounting in respect of interest on sticky loans and in that event non-applicability of Supreme Court judgment in the case of State Bank of Travancore has also been upheld by the judgments of Bombay High Court and Rajasthan High Court. In the case of CIT v. Citybank, N.A. [1994] 208 ITR 930/75 Taxman 433 the Hon'ble Bombay High Court upheld the hybrid system carving out separate system on receipt basis in respect of interest on sticky loans in the back ground of the ratio of the Hon'ble Supreme Court judgment in the case of State Bank of Travancore and they answered the question in favour of the assessee. Similarly, the Hon'ble Rajasthan High Court have in the case of CIT v. Rajasthan Financial Corpn. (No.1) [1998] 229 ITR 246/[1996] 88 Taxman 58 upheld the hybrid system of accounting followed by Rajasthan Financial Corpn. whereunder interest on sticky loans was accounted for on realisation only.

6. Relying on these arguments the ld. counsel for the assessee argued that authorities below have not been justified in making/upholding additions on account of accrued interest on sticky loans to the income declared by the assessee-bank in the assessment years 1981-82 to 1988-89 and 199091 and the same were liable to be deleted. However, without prejudice the ld. counsel argued that insofar as the sticky loans where the assessee had already filed suits for recovery were concerned, the Assessing Officer had no basis for making assessment of any income on accrual basis in view of the provisions of section 34 of Code of Civil Procedure. This power vested in the Court only where the suits were pending adjudication.

7. Shri Jaydev Saha, Senior Counsel engaged by the department for these appeals argued that the assessee had not brought complete facts on record in support of his contentions. It was not established that the assessee was consistently following hybrid system of accounting. It was not known as to at what point of time this change of method of accounting had been introduced. It was also not established that the assessee did follow this hybrid system of accounting in all these assessment years. It was also not clear from the facts as to on what basis the distinction between sticky loans and non-sticky loans was drawn. Reading from the assessment orders the ld. counsel for the department argued that these facts were not there before the Assessing Officer and, therefore, in the absence of details the Assessing Officer had to resort to estimate of disallowance. He also pointed out that in these assessment orders the Assessing Officer has clearly specified that the method of accounting of the assessee was 'mercantile'. At this stage, Dr. Debi Pal intervened and pointed out that as per the letter dated 31st January, 1991 the assessee had clearly taken this stand that the decision of the Supreme Court in the case of State Bank of Travancore was not applicable to the assessee-bank. The bank did not debit the concerned party's accounts and Credit Interest Suspense Account as had been done by the State Bank of Travancore. Even before the ld. CIT(A), the main plank of the arguments was that the assessee had been following hybrid system of accounting. At no stage, during the course of proceedings before the authorities below the assessee had been called upon to establish that hybrid system of accounting was followed and that the method of accounting in respect of interest on sticky loans was on cash basis only. The assessee was a large public sector bank and there was no reason to doubt its statements in respect of the method of accounting followed in the books of account and annual accounts in respect of interest on sticky loans.

8. The ld. Senior Counsel of the Department argued that in any case the assessee has argued for assessment of same kind of income on two different methods. The nature and source of income remained the same, ie., interest on amounts advanced by the bank to its customers, When there was no material distinction in the nature and source of income, the assessee could not follow cash system of accounting as well as mercantile system of accounting. Such an accounting practice could not be held to be a proper method of accounting from which correct income of the assessee could be deduced. Secondly, it was undisputed fact that the bank had not waived its right to receive interest even in regard to sticky loans. Suits for recovery filed by the bank were pending. Certain suits had also been decreed in favour of the assessee-bank. There was no renunciation of claim of interest. The assessee never gave up its right to interest and on these fact accrual of interest to the assessee could not be denied.

9. The ld. senior counsel for the Department argued that there was no material distinction between the facts of the assessee's case and that of State Bank of Travancore. The substantive facts remained the same. The assessee cannot therefore escape from the ratio of the Supreme Court judgment in the case of State Bank of Travancore. Merely not debiting the account of the party was not the substance of the matter. The ld. senior counsel brought our attention to the judgment of the Hon'ble Calcutta High Court in the case of James Finlay & Co. and argued that in that case the Hon'ble Calcutta High Court have clearly held that unless specifically given up, the assessee could not prevent the accrual of interest income. The assessee in the instant appeals had merely brought a change in the modalities under the same head of income without bringing any substantive change in relation to its rights and claims in respect of income arising on sticky loans.

10. the ld. counsel for the Department thereafter brought our attention to another judgment of the Hon'ble Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. It was argued that in that case the Hon'ble High Court have held that when the assessee simultaneously in respect of certain transactions followed mercantile system of accounting and in respect of others followed the cash system of accounting, then the proper expression should be that he maintained a dual system of accounting and not hybrid system of accounting. All that the assessee did was treatment of particular transactions differently or separately from the method followed by the assessee. In the judgment of the Hon'ble Calcutta High Court this state of affairs was not permissible.

11. Thereafter, the ld. counsel for the Department referred to the decision of the Hon'ble Calcutta High Court in the case of Snow White Food Products Ltd. 141 ITR 847 and relied upon, in particular, the observations of the Hon'ble High Court at page 859. The Ld. Counsel argued that in that case it was held that it was not open to the assessee to keep alive the contract and his rights thereunder, but for the purposes of income-tax to say that he would not debit the interest which may have accrued.

12. Finally, the ld. counsel for the Department argued that the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore has put the matter beyond controversy. This judgment has been followed in a host of other cases, for example State Bank of Travancore v. CIT [1990] 186 ITR 187 (SC), Grindlays Bank P.L.C v. CIT [1998] 201 ITR 148 (Cal.), CIT v. Kerala Financial Corpn. Ltd [1985] 155 ITR 246 (Ker.), CIT V. Kerala Financial Corpn. [1985] 155 ITR 228/[1987] 30 Taxman 153 (Ker).and CIT v. Mercantile Bank Ltd [1996] 222 ITR 572/85 Taxman 151 (Bom). Further it was a settled legal position that method of accounting followed by the assessee was not decisive of his tax liability. Reference in this behalf was made to the Hon'ble Madras High Court judgment in CIT v. P. Mariappa Gounder [1984] 147 ITR 676/17 Taxman 292 and Kerala High Court judgment in Aspinwall & Co. (Travancore) Ltd v. CIT [1990] 184 ITR 56. In the instant case the various aspects of the transactions and the merit of the assessee's arguments have been carefully and elaborately discussed in the order of the Ld. CIT(A) for the assessment year 1986-87. The ld. counsel for the Department argued that when on merit the method of accounting followed cannot be said to be reflective of correct income earned by the assessee, such method has to be discarded.

12.1 The ld. counsel for the assessee, in his rejoinder argued that all the contentions of the ld. counsel for the Department were based on mercantile system of accounting whereas the assessee's case is based on hybrid system of account. He further argued that various Calcutta High Court judgments relied upon by the Revenue were not applicable on the facts and circumstances of the assessee-bank's case because it was not a case of a particular transaction. The assessee followed cash method of accounting in respect of a distinct class of transactions after careful and rational classification. It was not as if the assessee declared some isolated transactions to be sticky loans for the purpose of avoidance of tax liability. As against this in the cases relied upon by the Revenue the assessees had chosen to follow cash system of accounting in respect of certain isolated transactions only.

13. We have carefully considered the rival submissions and perused the orders of the authorities below. The case of the Revenue before us mainly is that as far as the facts of the case were concerned, there was not any material distinction between those in the case of State Bank of Travancore and the case of the assessee. The only distinction drawn was on the basis of entries made in the books of account. For this reason alone, the assessee could not claim that what was found to be taxable in the case of State Bank of Travancore should be found to be not taxable in the case of the assessee. Secondly, the Ld. Counsel for the Revenue has attempted to dispute the validity of the method of accounting followed by the assessee on the ground that it was not open to the assessee to adopt altogether different methods of accounting in respect of the same source of income and he has tried to find support from some judgments of the Hon'ble Calcutta High Court as enumerated by us in the foregoing paragraphs. In our considered opinion, the method of accounting followed by an assessee cannot be disregarded for the reason only that had the assessee applied a different method of accounting, his taxable income would have been higher. The question as to what income has been earned or loss incurred by a business cannot be decided completely at any particular point of time while the business is still being carried on. There may be huge profit at one point of time and there may be heavy loss at the next. As income-tax is a levy on annual income, it becomes necessary to have a specific measurement of periodical income. The method of accounting followed by an assessee assumes a great significance in this context. The Legislature in India have, in so far as the assessment years under consideration by us are concerned, refrained from laying down, with a few exception, the specific method of accounting to be followed for computation of annual income from a business carried out by an assessee. Under the provisions of section 145(1), the choice of method of accounting has been conferred upon the assessee. This provision, therefore, presupposes that there can be more than one method of accounting from which income can properly be deduced. Under the provisions of section 145(1) a method of accounting followed by an assessee can be disputed on the ground that from the particular method of accounting followed by the assessee, income cannot be properly deduced. There are a large number of Supreme Court and High Court judgments to the effect that otherwise the method of accounting followed by an assessee is binding on the Revenue. The authority for this well-known legal position, if any required, may be found in the judgments in CIT V. Sarangpur Cotton Mfg. Co. Ltd [1938] 6 ITR 36 (PC), Keshav Mills Ltd v. CIT [1953] 23 ITR 230 (SC), CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) and so on. The Courts have also clearly recognised the fact that there may be different amounts of income resulting in a particular year on the same facts of the case depending upon which method of accounting has been employed. The only legal requirement is that the method of accounting once employed should be regularly followed by the assessee. As held by the Hon'ble Supreme Court in the case of A.Krishnaswami Mudaliar an assessee ought to get the advantage and suffer the disadvantage of the method of accounting employed by him and on such accounting system being regularly maintained, it may happen that in a particular year the Revenue may gain but in another year the assessee may gain. We are, therefore, clearly of the view that the method of accounting followed by the assessee cannot be assailed on the ground that in another case on a different method of accounting having been employed, the assessment of income at a higher amount was made. The only ground on which method of accounting followed by an assessee can be assailed is that it is not a proper method. Thus, in our opinion, the significance of method of accounting and entries made in the books of account of an assessee cannot be minimised. In the instant case, the Revenue has insisted upon a method of accounting different from that maintained in the books of account. More often it is the assessees who seek to claim advantages or reduction in income on the basis of a method of accounting other than employed by them in the books of account. Even in the present appeals, as we would shortly see, on another issue the assessee is in argument before us that his income should be determined on a method of accounting other than one employed in the books of account. At any rate, the answer in both situations to be the same that if the method of accounting as employed in the books of account is proper and in accordance with well-recognised principles of accounting, the same must prevail whether at the expense of the Revenue or the assessee in a particular year.

14. This brings us to the second limb-of the argument of the ld. counsel for the Department that cash system of accounting employed by the assessee in respect of the sticky loans while following the mercantile system of accounting in respect of all other loans cannot be said to be a proper method from which income of the assessee may be properly and correctly computed. Certain judgments of the Hon'ble Calcutta High Court as referred to by us in the earlier paragraphs were relied upon before us. We see considerable justification in the contention of the Ld. Counsel for the assessee that the facts of the assessee's case are altogether different. We have quoted in para 4 above from the accounting standard approved by the Institute of Chartered Accountants in India in respect of an assessee engaged in the business of banking operations. Having regard to the particular nature of facts and circumstances prevalent in the banking business, the Institute have in their wisdom carved a niche in respect of the banking business that the banks may legitimately shift to cash system of accounting in respect of sticky loans while at the same time continuing to follow accrued method of accounting in respect of all other kinds of loans and advances. On consideration we do not see any reason to question the appropriateness or correctness of the accounting standard granted in respect of banks as distinguished from other businesses. Furthermore, it is seen by us that the dispute in this behalf is not a new dispute which has come up for consideration before us for the first time. The ld. counsel for the assessee have cited three widely reported decisions of Income-tax Appellate Tribunal Benches of Bombay, Calcutta and Bangalore. He has relied upon the judgments of the Hon'ble Bombay High Court and Rajasthan High Court which have been delivered on these very specific issues. The judgments of the Calcutta High Court relied upon by the Revenue and various other arguments have all been considered in detail in the Tribunal orders which were subsequently upheld by the High Courts. We do not find any Tribunal order or High Court judgment in which any contrary view is taken.

15. In view of the discussions in the foregoing paragraphs, we hold that the assessee's grounds of appeal for various years in this behalf must succeed. We direct deletion of all additions made/confirmed by the authorities below in respect of assessment years 1981-82 to 1988-89 and 1990-91 on the basis of accrual of interest on the loans categorised by the assessee as sticky loans.

16. The second major issue arising in these appeals relates to valuation of closing stock of securities and shares by the assessee in the assessment years 1985-86, 1986-87, 1987-88 and 1992-93. In the first three assessment years the assessee is in appeal before us whereas in assessment year 1992-93, the Ld. CIT(Appeals) having accepted the assessee's contention, it is the department which has come in appeal before us. The facts of the case, in brief, are that under the guidelines issued by Reserve Bank of India the assessee-bank was obliged to invest certain portion of deposits accepted by it in Government securities. The assessee also purchased certain shares of Public Limited Companies. In the books of account the assessee valued closing stock of such shares and securities uniformly on the cost basis. The income or loss arising to the assessee on sale of securities and shares was offered for assessment up to the assessment year 1984-85 on the same basis. However, in the return of income filed in the assessment year 1985-86 the assessee claimed that a sum of Rs. 52.33 crores be allowed as deduction as representing depreciation in the value of these shares and securities on account of fall in the market value. The assessee claimed that the loss arising as a result of change in the method of valuation was 'a trading loss. Thereafter, in the returns of income filed subsequent to the assessment year 1985-86 the assessee declared loss or, as the case may be, income on the new basis of the valuation of the closing stock, i e., cost or market price whichever is lower. In the books of account and published audited annual accounts, however, the assessee continued to value the closing stock on the basis of the cost alone. The Assessing Officer did not accept these contentions of the assessee and the matter came up for consideration of the Ld. CIT(Appeals) - II, Calcutta in the case of the assessee for the assessment year 1986-87. After consideration of the matter, the Ld. CIT(Appeals) held that the assessee was hitherto holding these shares and securities as investment as distinguished from stock-in-trade. He, therefore, directed that the value of all shares and securities acquired by the assessee and included in the opening balance as at 1-1-1985 should be treated as investment and valued at cost. The profits or loss arising to the assessee on sale of such shares and securities should be worked out on cost basis and assessed as capital gains or capital loss. With regard to the purchase of shares and securities on and after 1-1-1985 the assessee may be held to be a trader and the assessee may be permitted to value closing stock of such shares and securities on the basis of the changed method of accounting. Thus, the closing stock of shares and securities held by the assessee on 31-12-1985 and onwards should be valued on twin basis of cost in respect of past acquisition and market rate in respect of subsequent acquisition on the basis of the cut-off date of 1-1-1985.

17. During the course of hearing before us the ld. counsel for the assessee argued that these securities and shares have been acquired by the assessee-bank in compliance to the directions of R.B.I. These could not be considered investments made by the assessee-bank as it had no choice in the matter and has necessarily been required to purchase them. The market price of these shares and securities steadily declined but the assessee was obliged to show them in the books of account at cost only. As a result, the assessee over course of years incurred huge loss which were not reflected in the books of account and income-tax returns. Somewhere in 1984 it came to the notice of the assessee-bank that in the case of a sister bank, viz, Corporation Bank the returns of income had been filed claiming loss arising on account of difference between the market price and the cost of purchase of such securities and shares. Though the CIT(Appeals) negatived the claim of the bank, the I.T.A.T. allowed the deduction claimed by that assessee. The General Manager of the assessee-bank therefore, submitted a detailed note and the Board of Directors of the assessee-bank in its meeting held on 29th December, 1984 approved that closing stock of securities as on 31st December, 1984 may be valued on the basis of cost or market value whichever is lower and the loss thus arising may be treated to be a business loss for the sole purpose of the assessee-bank's tax assessment for the assessment year 1985-86.

18. On these facts the ld. counsel for the assessee relied upon the Board's Circular No. 599 dated 24th April, 1991 reported in 189 ITR (Statutes) 126. Para 2 of this circular reads as under :

"2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given to the stock in-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/ receipts, and only the net interest on securities shall be brought to tax as business income."

19. Dr. Debi Pal, ld. counsel for the assessee argued that in the case of a bank holding of Government securities is always incidental to carrying on of business and the Ld. CIT(Appeals) was not justified in drawing the distinction between investments and stock-in-trade as done by him. Reliance was placed on the judgment of the Calcutta High Court in United Bank of India Ltd. v. CIT[1963] 50 ITR 258. Wherein holding of securities was held incidental to carrying of business. The Ld. counsel further informed that there was no basis for the distinction drawn by the Ld. CIT(Appeals) inasmuch as in the past assessments of the assessee-bank which were completed on the valuation of the closing stock on cost basis, the income or loss arising to the assessee on sale of securities was always treated to be on trading account of the assessee.

20. The ld. counsel for the assessee further argued that it was true that the assessee had changed its method of accounting. But this change of method of accounting became necessary because otherwise the books of account of the assessee reflected distorted results without taking into account that the market price of these shares was substantially lower. After this change of method of accounting was effected, the assessee has followed the changed method of accounting regularly and consistently in all subsequent assessment years. The assessee was entitled to make this change in the method of accounting. The ld. counsel cited a number of case laws and placed particular emphasis on the judgment of the Hon'ble Calcutta High Court in 114 C.T.R. 271 (Cal.) and Snow White Food Products Co. Ltd's case 141 ITR 847.

21. The ld. counsel for the assessee argued that the claim made by the assessee in this behalf are perfectly in order. An identical issue came to be considered by the Hon'ble Karnataka High Court in the case of CIT v. Corporation Bank Ltd. [1988] 174 ITR 616/41 Taxman 161. In that case also the assessee valued the closing stock of shares and securities on cost basis but in the return of income claimed loss on the basis that market price on the relevant date was much lower than the cost price recorded in the books of account. After consideration of the matter the Hon'ble Karnataka High Court held that the Tribunal was justified in approving the method of valuation adopted by the assessee for the relevant assessment year. Their Lordships, therefore, answered the question against the Revenue.

22. The Ld. Senior Counsel of the Department argued that in the resolution passed by the Board of Directors of the assessee-bank in these appeals a decision to claim deduction in the return of income on different basis was for assessment year 1985-86 only and, therefore, the assessee could not derive any support from this resolution in any other assessment year. He also argued that the reliance placed by the assessee on the CBDT Circular was totally misplaced. The Board circular required that necessary adjustment should be made in the books of account of the assessee by way of corresponding debit entries which had not been done by the assessee herein. The assessee, therefore, could not derive any benefit from the said circular of CBDT Finally, the ld. counsel of the assessee argued that the assessee's case was totally untenable in view of the judgments of the Hon'ble Calcutta High Court in the case of CIT v. UCO Bank [1993] 200 ITR 68. In that case in the assessment completed at a loss of more than Rs. 7 crores had been allowed on the ground that the market value of shares and securities was much less than book value. The CIT revised the assessment holding that the assessee-bank could not claim loss which was not taken into account while preparing the final account, particularly when this loss related to notional revaluation of shares and securities. On appeal, the Tribunal cancelled the order of the CIT On reference, the Hon'ble Calcutta High Court held that the assessee had not valued its stock of shares and securities in its books of account in accordance with the method, cost or market price, whichever is lower. The claim for loss based on notional valuation of stock-in-trade only for tax purpose could not be permitted. The assessee could have claimed the benefit of stock valuation at cost or market value, whichever is lower only if such method was actually followed and adopted by him in preparing the final accounts.

23. In his rejoinder the ld. counsel for the assessee argued that in the books of account of the assessee the shares and securities were valued at cost only because in the case of an assessee engaged in the banking operations it was not appropriate to show the assets in poor light. Hence, exemption from the Finance Ministry was obtained to value the shares and securities in the final accounts of the assessee-bank on cost basis only. The attention of the Hon'ble Calcutta High Court was not drawn to these special facts when the reference in the case of UCO Bank was argued. The ld. counsel argued that in the case of UCO Bank the attention of the Hon'ble Calcutta High Court was also not drawn to the Supreme Court judgment in the case of investment Ltd v. CIT [1970] 77 ITR 533. The Ld. counsel for the assessee placed reliance on the paragraph appearing at pages 537-38 in 77 ITR. He, therefore, urged that having regard to the special facts of the case and judgment of the Hon'ble Supreme Court in the case of Investment Ltd. which have not been noticed in the judgment of the Hon'ble Calcutta High Court in the case of UCO Bank the Tribunal may allow the present assessee's appeals in this behalf.

24. We have carefully considered the rival submissions. It is seen that the judgment of the jurisdictional High Court of Calcutta in the case of UCO Bank has been given of facts identical to those in the present appeals. The ld. counsel of the assessee has argued that the special reasons for valuing the closing stock of shares and securities on the basis of cost alone have not been argued before the Hon'ble Calcutta High Court in that case. We do not think that for these reasons there would be any difference in the legal position enunciated by the Calcutta High Court in the case of UCO Bank. As already discussed in this order while discussing the earlier issue, method of accounting regularly followed by the assessee is binding on assessee as well as the Assessing Officer and only departure permissible therefrom under the provision of section 145(1) could be only when the method of accounting followed by the assessee was such that the correct income could not be deduced therefrom. It is not the case of the assessee before us that the treatment given by the assessee in its books of account is erroneous or not in accordance with well-established principles of accountancy. The value of closing stock on cost basis alone is one of the permissible modes of valuation of closing stock under the well-recognised principles of accountancy. Provisions of section 145(1) do not take into consideration the reasons behind a particular method being followed by the assessee in his books of account. The assessee is not even under an obligation to disclose his reasons or motive behind selecting a particular method of accounting from out of various choices available. The taxing authorities can only concern themselves with as to whether or not the method of accounting employed is such that the income could be said to be properly deducible therefrom. In the instant case the assessee has followed a well-recognised method of valuation of closing stock in the books of account. We, therefore, do not see much force in these arguments.

25. The ld. counsel for the assessee has argued that the Supreme Court judgment in the case of Investment Ltd. has not been sighted in the judgment of the Hon'ble Calcutta High Court in the case of UCO Bank. We have carefully perused the judgment of the Hon'ble Supreme Court in the case of Investment Ltd. and we do not find any authority therein at variance with the decision given by the Hon'ble Calcutta High Court in the case of UCO Bank. In the case of Investment Ltd. the question was as to whether loss arising on sale of securities was a capital loss or business loss and Their Lordships were concerned as to whether the securities were held by the assessee as an investment or as a stock-in-trade. One of the grounds taken on behalf of the Revenue was that the securities had been valued by the assessee year after year on cost basis, which was indicative that the same had been held by the assessee as investment. If the assessee had held the same as stock-in-trade, he would have valued the same at market price which was lower than the cost. The Hon'ble Supreme Court held the view that from the fact that securities and shares had been valued at cost, no firm conclusion could be drawn. A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deduced therefrom. Valuation of stock at cost being one of the recognised methods, no inference could be drawn that securities and shares were not stock-in-trade. Thus, there is no authority in this judgment that an assessee can file his returns of income on a basis different from in the books of account, even if the books of account have been maintained correctly in accordance with well-recognised principles of accountancy. If at all, this judgment of the Hon'ble Supreme Court in the case of Investment Ltd. goes against the assessee, inasmuch as, Their Lordships have held that a method of accounting adopted by a trader consistently and regularly may be discarded only if income of the trade cannot be properly deduced therefrom.

26. From the discussion in the foregoing paragraph it is seen that the judgment of the Hon'ble jurisdictional Calcutta High Court in the case of UCO Bank is squarely against the assessee and, therefore, grounds taken by the assessee in this behalf for assessment years 1985-86, 1986-87 and 1987-88 are liable to be rejected while the grounds of appeal Nos. 1 and 2 taken by the Revenue for the assessment year 1992-93 are liable to be allowed. However, as the assessee has cited the judgment of the Karnataka High Court in the case of Corporation Bank Ltd. constituting authority for a contrary proposition we wish to make a few observations of our own on the subject-matter.

27. We have already mentioned elsewhere in this order that the Hon'ble Supreme Court in the case of A. Krishnaswami Mudaliar recongnised the fact that the quantum of profits and gains of a business would differ according to the system of accounting adopted. In the case of CIT v. Tata Iron & Steel Co. Ltd [1977] 106 ITR 363 (Bom) it has been held that if the method followed in the books of account cannot be said to be unreasonable, it has to be followed even if better method can be visualised. As early as in 1937 in the case of Sarangpura Cotton Mfg. Co. Ltd. at page 40 the following has been recorded:

'Their Lordship are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purpose - in this case for the purposes of the Company's business-and does not relate to a method of making up the statutory return for assessment to income-tax."

Thus, the Hon'ble Judicial Committee held as early as in 1937 that an assessee cannot ask for two different methods, one for writing books of account for the purposes of his business and another for having his tax liability determined under the Income-tax Act. Along the same lines, the decision was given by the Allahabad High Court in the case of CIT v. Smt. Singari Bai [1945] 13 ITR 224 and Madras High Court in the case of Bangalore Woollen, Cotton & Silk Mills Co. Ltd. v. CIT [1950] 18 ITR 423 in which case the question was as to whether an assessee writing books of account under mercantile system of accounting can ask for cash system for the purpose of his income-tax assessment.

28. While dwelling in this order upon the contentions of the parties in relation to the assessability of interest on sticky loans we have seen that the present assessee vehemently argued that the treatment given by him to the interest on sticky loans in the books of account takes his case outside the ratio of the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore. The same assessee now in these grounds of appeal wants us to take a view at variance from treatment given in the books of account. The Revenue has also taken different stands in relation to these two issues. It would be seen that at different points of time both assessee as well as the Revenue would like a position different from that emerging from method of accounting followed in the books of account to be taken. The provisions of section 145(1) lay down the uniform standard to be followed in every situation, ie., the method of accounting regularly employed by the assessee must form the basis of computation of income under the head 'Profits and gains from business or profession' and "Income from other sources". A computation of income on any other basis under these heads can be made only if the method of accounting employed in the books of account is such that income cannot be properly deduced therefrom. We find that the valuation of stock and securities in the books of account is as much in accordance with the well-recognised principles of accountancy as the treatment given to interest on sticky loans in the books of account of the assessee.

29. It was pointed out by the ld. counsel for the assessee during the course of hearing that the treatment given by the Ld. CIT(Appeals) is quite confused inasmuch as he has held shares and securities purchased by the assessee up to 1-1-1984 as constituting investment in the hands of the assessee as distinguished from stock-in-trade. For securities and shares purchased by the assessee on 1- 1-984 and thereafter the ld. CIT(Appeals) has accepted the argument that the assessee could value the same for the purpose of income-tax returns on the basis of cost or market price, whichever is lower. It is seen that both these findings of the Ld. CIT(Appeals) are contrary to legal position. We, therefore, direct the A.O. to modify the assessments for the assessment years 1985-86 to 1987-88 and 1992-93 on the basis that all shares and securities held by the assessee during the relevant accounting period constituted stock in hand, assessable under the head 'Profits and gains from business or profession". For the purpose of computing the profit or loss, the Assessing Officer may follow the finding of the Hon'ble jurisdictional High Court in the case of UCO Bank that the assessee cannot after having valued the same on the basis of cost alone claim in the income-Lax return valuation on the basis of cost or market price, whichever is lower. If for the purpose of giving full effect to the legal position, thus, enunciated by the Hon'ble Calcutta High Court in the case of UCO Bank, it is necessary to rectify the assessments for any other assessment years, he may either on his own or on an application filed by the assessee consider application of the provisions of section 154 of the Act.

30. The third issue which relates to the assessment years 1990-91 and 1991-92 only pertains to the assessee's claim of deduction under the provisions of section 36(1)(viia). The facts of the case, in brief, are that the assessee claimed deduction of Rs. 6.7 crores for assessment year 1990-91 and of Rs. 783.08 lakhs for the assessment year 1991-92. In both the assessment years the Assessing Officer noticed that as per the order of the Ld. CIT(Appeals) in the case of the assessee for the assessment year 1989-90 the deduction under these provisions was required to be restricted to the extent of the exact amount of bad debts written off by the rural branches of the assessee-bank. Since no such bad debts had been written off in these two assessment years, the Assessing Officer completely denied the assessee's claim of deduction under this provision. On appeal, the Ld. CIT(Appeals) following the order for the assessment year 1989-90 rejected the assessee's grounds of appeal.

31. During the course of hearing before us, the ld. counsel of the assessee pointed out that Ld. CIT(Appeals) erred in bringing out the concept of write off under the provisions of section 36(1)(viia) whereas no such condition has been stipulated in the Act in this behalf. The Ld. Counsel argued that provisions of section 36(1)(viia) as they apply to these assessment years provided for an independent deduction to the assessee in respect of provision for bad and doubtful debts irrespective of the provisions of sections 36(1)(vii) and 36(2). The only connection between the provisions of section 36(1)(viia) with 36(1)(vii) or 36(2) laid down in the Act was to exclude the possibility of an assessee obtaining double deduction and for that purpose certain stipulations had been made by way of proviso to section 36(1)(vii) and the provisions of section 36(2)(v). In his reply, the Ld. senior counsel of the department did not dispute this contention of the assessee but argued that as the assessee had been following cash system of accounting in respect of interest on sticky loans, in the event of the assessee's argument in that behalf being accepted, the assessee should not be allowed any deduction in respect of interest on sticky loans under the provisions of section 36(1)(viia) to which the ld. counsel of the assessee had no objection. We, therefore, direct the Assessing Officer to allow the assessee such deduction as may otherwise be admissible to the assessee under the provisions of section 36(1)(viia) without requiring the assessee to write off the accounts of the debtors by corresponding amounts. The Assessing Officer may, however, exclude for the purpose of computation any interest on sticky loans not adjusted by the assessee to the debtors' accounts, following cash method of accounting.

32. There are certain other grounds of appeal which were argued by Shri D.B. Sen on behalf of the assessee. It was pointed out that the assessee has in his appeals for the assessment years 1982-83 to 1985-86, 1987-88 and 1988-89 objected to the authorities below deducting estimated expenditure incurred for earning of dividend incomes while allowing deduction under section 80M to the assessee. Sri D.B. Sen argued that the authorities below were not entitled to deduct any amount on this basis and placed reliance on the judgment of the Hon'ble Calcutta High Court in CIT v. National & Grindlays Bank Ltd. [1993] 202 ITR 559. The ld. senior counsel of the department argued that the assessee in this case was a public sector bank and had wide spread business operation. The business of the assessee was carried out mainly on deposits received from public at large arid, therefore, it could not be that the assessee invested in acquisition of shares without employing the interest bearing deposits received from the customers. Thus, the dividend income earned by the assessee there was bound to be certain interest expenditure. Similarly, having regard to the magnitude of the assessee's operations there was bound to be some administrative expenditure, etc., which should be attributed to earning of dividend income. The Assessing Officer was, therefore, justified to reduce from the gross dividend amount an estimated amount representing such expenditure and allowed deduction under section 80M in respect of net amount only. He placed reliance oh the Calcutta High Court judgment reported in CIT v. United Collieries Ltd. [1993] 203 ITR 857.

33. We have carefully considered the rival submissions in the case of National & Grindlays Bank Ltd., there was no dispute that the asses I see was doing investment business and the entire dividend income was attributable to the business activity of the assessee. In the case of United Collieries Ltd the Hon'ble Calcutta High Court held that relief under section 80M is allowable only on the net dividend and only actual expenditure incurred by the assessee in earning the dividend income should be deducted from the gross dividend income. The Hon'ble Calcutta High Court further held that there was no scope of any estimate of expenditure being made. In the instant appeals before us the facts of the case have not been fully brought out. It is not known as to how much of the dividend income could be attributed to the shares, etc., held by the assessee as business assets or circulating capital. It is also seen that the Assessing Officer has made an estimate of expenditure for want of details from the assessee. For paucity of details, it is not possible to determine as to what extent these two judgments of the Hon'ble Calcutta High Court are applicable on the facts and in the circumstances of the assessee's case. We, therefore, restore the question of computation of deduction under section 80M for all these years to the file of the Assessing Officer with the directions that he may recompute the deduction under section 80M after allowing the assessee reasonable opportunity of placing facts of the case before him and making submissions thereupon. The Assessing Officer may thereafter decide the question in the light of the pronouncements of the Hon'ble Calcutta High Court and other relevant law/legal pronouncements in this behalf.

34. The next issue has been taken by the assessee in relation to the assessment years 1990-91 and 1991-92 and the same is directed against the disallowance of earlier- years' expenses. It is seen that in the assessment orders the disallowance has been made simply on the ground that the expenses related to the earlier years. During the course of appeal before the Ld. CIT(Appeals) the assessee represented that these expenses could not be provided for as the intimation of such expenses was not received before the close of the relevant previous years. The assessee was, therefore, left with no alternative but to claim deduction of the same in the year in which the expenditure came to the assessee's knowledge. The Ld. CIT(Appeals) turned down these contentions on the ground that as the assessee was maintaining mercantile system of accounting, earlier years' expenses could not be claimed as deduction. On consideration, we are unable to agree with this bald proposition. It is true that under the mercantile system of accounting all expenses relating to the business of a particular year have to be accounted f or in that year itself. However, this general rule admits of certain exception, e.g., disputed claims and liabilities. There are also instances where bills and claims were raised by the parties long after the transactions in question. If any electricity bill, telephone bill is not received in time, the assessee would be justified to claim the same in the year in which such demands are received. In other words, any liability which may be considered to have arisen only in a subsequent year has to be allowed as deduction even if the same may be attributable to the business conducted by the assessee in an earlier year. However, it is also seen by us that the assessee has also in this case not furnished full particulars before the assessing authorities and explanations for not having claimed these expenses in the years to which they relate. In the interests of justice, we consider it necessary that the assessee is allowed further opportunity to substantiate his claims of deduction and thereafter the assessing authority may review the matter and modify the assessed income to the extent called for. We direct accordingly.

35. In relation to appeals in I.T.A. No. 2364 (Cal.)/95 which is directed against the levy of penalty under section 273 the assessee submitted that the assessee has become a defaulter only in view of uncalled for additions made to the declared income by the Assessing Officer. At any rate, the assessee prayed that consequential effect to our order in the assessee's appeal for the assessment year 1982-83 may be given in respect of the amount of penalty levied. This contention of the assessee is justified. We, therefore, direct the Assessing Officer to examine after having given effect to our order in relation to the assessment order for the assessment year 1982-83 as to whether the provisions of section 273 would still be attracted and if so, he may recompute the amount of penalty in accordance with the final tax liability determined after having given effect to our order in relation to the assessment for the assessment year 1982-83.

36. All other grounds in these appeals were not pressed by the parties during the course of hearing before us and are accordingly hereby rejected.

37. In the result, all these appeals filed by the assessee as well as the Revenue shall be treated as partly allowed.

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