The concept of real income has been the subject-matter of litigation which is extremely disturbing considering the fact that courts have in the past given their ruling on the subject. Under the mercantile system of accounting it is the real income which has accrued in a practical sense that is to be brought into account for tax purposes.This well-settled concept in the commercial world has been accepted at different times by the three administrative authorities concerned with the topic, viz, the Reserve Bank of India, the Department of Banking and the Central Board of Direct Taxes, and it has received judicial recognition in various cases.
In a recent decision in the case of United Commercial Bank vs CIT ((1999) 106 Taxman 601), the Supreme Court reiterated and emphasised the principle that what is taxable under the Act is the really accrued or arisen income.
On the basis of the method of accountancy regularly employed by the assessee, the real income was shown in the income-tax return submitted by theassessee. This could not be ignored by holding that in a balance sheet which was required to be statutorily maintained in a particular form, market value of the shares and securities was not mentioned or was mentioned in brackets. The decision in the case of State Bank of Travancore vs CIT (158 ITR 102) did not lay down any rule that whatever was not mentioned in the prescribed statutory balance sheet was not to be taken into account for deciding real taxable income.
The decision of the Supreme Court in the case of State Bank of Travancore was explained in a subsequent decision of the Supreme Court in UCO Bank vs CIT (237 ITR 889) by observing that the relevant circular of the board was not pointed out to the court and that the majority decision in the said case could not be looked upon as laying down that a circular which was properly issued under Section 119 of the Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assesseein certain situations would not be binding on the departmental authorities.
The court held that this would be contrary to the ratio laid down by the bench of five Judges in Navnit Lal C Jhaveri vs KK Sen, AAC (56 ITR 198).The court further held that in fact State Bank of Travancore's case had already been distinguished in Keshavji Ravji & Co vs CIT (183 ITR 1) by a Bench of three Judges in a similar fashion and it is held only as laying down that a circular cannot alter the provisions of the Act.
In United Commercial Bank's case, the Supreme Court held that whichever method is adopted by the assessee, a true picture of the profits and gains, that is to say, the real income, is to be disclosed. For determining the real income, the entries in a balance sheet required to be maintained in the statutory form may not be decisive or conclusive. In such cases, it is open to the assessing officer as well as the assessee to point out the true and proper income while submitting the income-tax return.
In KedarnathJute Mfg Co Ltd vs CIT (82 ITR 363), the court negatived the contention that "if an assessee under misapprehension or mistake fails to make an entry into the books of account and although, under the law, a deduction must be allowed by the assessing officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction". The court held that whether the assessee is entitled to the particular deduction or not, will depend upon the provision of law relating thereto and not on the view which the assessee might take of his right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.
In the present case, the question was slightly different. The Union government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as perthe statutory form.
However, since the assessee was maintaining its accounts on mercantile system, it was entitled to show its real income by taking into account the market value of such investments in arriving at the real taxable income. Therefore, the assessing officer taxed the assessee on that basis.
From the decisions discussed above, it can be held:
that for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower.
that, in the balance sheet, if the securities and shares are valued at cost, yet from that no firm conclusion can 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 the stock-in-trade either at cost or market price.
that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts orof valuation.
that the concept of real income is certainly applicable in judging whether there has been income or not, but in every case, it must be applied with care and within their recognised limits.
that whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
that under Section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that, in the opinion of the assessing officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the assessing officer may determine.The Supreme Court also held in the above decision that where a particular method of accounting or valuation is followed by the tax department, there would be no justifiable reason for departing therefrom. According to the court, preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee fromsubmitting the income-tax return on the real taxable income in accordance with a method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance sheet in the statutory form on the basis of the cost of investments.
In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare its balance sheet in the prescribed form and it had no option to change it. As stated earlier, for the purpose of income-tax, what is to be taxed is the real income which needs to be deduced on the basis of the assessee's regular accounting system and that was done by the assessee in the present case.
It is also relevant to point out that Section 43-D of the Income-tax Act, 1961 has been substituted with effect from the financial year 1999-2000 relevant to the assessment year 2000-2001. Under this provision, income byway of interest on bad or doubtful debts would be taxable in the previous year in which it is credited to the profit and loss account or in the year in which it is actually received, whichever is earlier. This provision applies to a scheduled bank, public financial institution or a state financial or industrial investment corporation as defined in this section.
However, the interest taxable under this provision must relate categorically to bad or doubtful debts as may be prescribed having regard to the guidelines issued by the RBI or by the national housing bank, as the case may be.
The aforesaid provision only applies in the case of the institutions referred to in that section. As far as other tax payers are concerned, the Supreme Court's decision in the case of UCO Bank on the concept of taxability of real income, would apply.
-- The author is a Supreme Court advocate
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