1990 (12) TMI 127 - AT - Income Tax

Tribunal Upholds Order on Sticky Loans: Interest Not Taxable under Real Income Theory

INCOME TAX OFFICER. Versus ORISSA STATE FINANCIAL CORPORATION.

The Tribunal concluded that there was no apparent mistake in its order that warranted rectification. It emphasized that the change in the method of ... - Issues Involved:1. Applicability of Supreme Court's decision in State Bank of Travancore to the assessee's case.2. Change in the method of accounting from mercantile to cash basis.3. Taxability of interest on sticky loans.4. Real income theory vs. accrual concept.5. Rectification of Tribunal's order based on alleged mistakes apparent from the record.Issue-wise Detailed Analysis:1. Applicability of Supreme Court's decision in State Bank of Travancore to the assessee's case:The applicant contended that the Tribunal's order should be modified due to a mistake apparent from the record. They argued that the facts of the assessee's case were identical to those in the case of James Finlay & Co., which was approved by the Supreme Court in State Bank of Travancore. The applicant claimed that the Tribunal should have applied the ratio of the Supreme Court decision to the assessee's case.2. Change in the method of accounting from mercantile to cash basis:The Department's counsel argued that the assessee had switched from the mercantile method to the cash method of accounting for interest on sticky loans starting from the assessment year 1974-75. The Tribunal had previously recognized this change in accounting method and excluded such interest from taxable income. The Tribunal's order for the assessment year 1980-81 was based on this finding. The Department contended that this change was not in consonance with the Supreme Court's judgment in State Bank of Travancore, which held that interest on sticky loans should be taxable even if transferred to a suspense account.3. Taxability of interest on sticky loans:The Department argued that the interest on sticky loans should be taxable as per the mercantile method of accounting, as the assessee had not waived the interest but kept it in a suspense account. They cited the Supreme Court's decision in State Bank of Travancore, which affirmed that interest on sticky loans is taxable. The assessee's counsel countered that the assessee was a development body and not a bank or public limited company. They argued that interest on sticky loans was only returned after actual receipt following litigation, and such interest was governed by the Interest Act.4. Real income theory vs. accrual concept:The Department referred to the Madras High Court's judgment in CIT vs. Devi Films (P) Ltd., which propagated the real income theory in preference to the accrual concept. They argued that the Tribunal's decision to exclude interest on sticky loans was contrary to the Supreme Court's judgment in State Bank of Travancore, which emphasized the accrual of real income. The assessee's counsel argued that the Tribunal had already considered the Supreme Court's judgment and distinguished the assessee's case based on the change in the method of accounting.5. Rectification of Tribunal's order based on alleged mistakes apparent from the record:The Tribunal noted that its previous order had recorded a clear finding that the assessee had properly changed its method of accounting from 1st April 1973. This finding was based on material on record and had been consistently followed in subsequent orders. The Tribunal concluded that the issue raised in the miscellaneous applications was already under consideration before the High Court. The Tribunal emphasized that the realities and specialities of the assessee's situation should be considered in preference to a theoretical or legalistic approach. The Tribunal rejected the Department's argument that the facts of the assessee's case were similar to those in James Finlay & Co. and held that the ratio of the Supreme Court's decision did not apply to the assessee's case without further investigation and reasoning.Conclusion:The Tribunal concluded that there was no apparent mistake in its order that warranted rectification. The Tribunal emphasized that the assessee's change in the method of accounting and the special features of its case had been duly considered in previous orders. The Tribunal rejected both miscellaneous applications, affirming its earlier decisions and maintaining that the interest on sticky loans was not to be taxed based on the principles of real income theory and the actual situation of the assessee.