LexMERCANTILE BANK LTD., BOMBAY versus THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY-III
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
A
MERCANTILE BANK LTD., BOMBAY
v.
1HE COMMISSIONER OF INCOME-TAX, BOMBAY CITY-Ill
MAY I, 2006
B
[RUMA PAL AND DAL VEER BHANDARI, JJ.]
Income Tax Act, 1961:
Section 36(/)(vii) read with Section 36(2)-AY 1978-79-/nterest on
C doubtful advances-Liability to tax-Held: Interest on doubtfal loans entered
in suspense account could not be brought to tax-Central Board of Direct
Taxes Circular, 1952.
Section 40-A(5)-AY 1978-79-Expenses or payments-Payment of
D salary to serving and retired employees-limits of deduction---Held: Section
40-A(5){cJ(ii) of the Act speaks of ··an amount"'.-This would indicate that
the employer is only entitled to deduction of one amount-Therefore, only
one limit is prescribed for deduction on account of salary whether paid to
an employee in service or a retired employee in any one previous year.
E
Words & Phrases:
F
'"Aggregate "-Meaning of-In the context of first proviso to Section
40-A{6) of the Income Tax Act, 1961.
In this appea~ the following question arose:-
(i) Whether the appellant-assessee was liable to be taxed under the
Income Tax Act, 1961 in respect of the interest on doubtful advance credited
to the interest suspense account?
(ii) Whether two separate limits applied for the purposes of computing
G disallowance under Section 40-A(S) of the Income Tax Act, 1961 where an
employee retired and ceased to be in employment during the previous year, so
that one limit applied in respect of the amounts and benefits received by him
as an employee and another for the amounts and benefits received by him as
a former employee?
H
628
MERCANTILE BANK LTD. BOMBAY 1·. COMMR. OF INCOME TAX BOMBAY
629
The High Court answered both the questions in favour of the Revenue A
and against the appellant-assessee for the Assessment year 1978-79. Hence
the appeal.
Allowing the appeal in part, the Court
HELD: 1.1. The Central Board of Direct Taxes had issued a Circular in B
1952 stating that the interest on sticky loans which were entered in the
suspense account need not be included in the assessee's assessable income
provided the Income Tax Officer was satisfied that there was no real probability
of the loans being repaid. [631-G; 632-AI
1.2. Assessment for the year 1978-79 should have been dealt with by C
the Department in accordance with the 1952 Circular under which the interest
on doubtful could not be brought to tax. [632-G)
UCO Bank v. Commissioner of Income Tax, (1999) 237 ITR 859, relied
on.
State Bank of Travancore v. Commissioner of Income Tax, (1986) 156 D
ITR 102, held inapplicable.
State Bank of Travancore v. Commissioner of Income Tax, (1977) 110
ITR 336 (Ker), overruled.
2. The intention of the Legislature was to fix the limits of deduction E
under the various clauses of Section 40-A(5) of the Income Tax Act, 1961,
Section 40-A(5)(c)(ii) of the Act speaks of"an amount". This would indicate
that the employer is only entitled to deduction of one amount. Clause (c)(ii)
also speaks of an employee as being not only one who has ceased to be in
employment, but one who ceases to be in employment. In respect of the later F
it is assumed that the employee served for a period but ceases to be so employed
during the previous year in question. In such a case, the Section expressly
provides for a limit on the deduction of Rs. 60,000/-. (635-G, H; 636-AI
Hindustan Motors Ltd. v. Commissioner of Income Tax, (1985) 156 ITR
(Cal) 223, overruled.
G
3.1. In terms of Explanation 2(a) in Section 40-A(5) of the Act there is
only one limit for all salary whatever it may be comprised whether wages or
terminal benefits. [636-G)
3.2. Reliance on the use of the word "aggregate" in the first proviso to H
630
SUPREME COURT REPORTS [2006] SUPP. I S.C.R.
A Section 40-A(S)(a) was inapt Both the proviso and Section 40-A(6) deal with
different kinds of payment or expenditure which, therefore, necessitated the
use of the word "aggregate". (636-G-HI
3.3. Section 40-A(S) on the other hand speaks of an "amount" and
"salary" indicating a single deduction where the use of the word "aggregate"
B was uncalled for. (637-C-DI
4. Only one limit is prescribed for deduction on account of salary
whether paid to an employee in service or a retired employee in any one
previous year. (637-D)
C
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 310 of2001.
D
E
F
G
From the Judgment/Order dated 9.3.1999 of the High Court of Judicature
at Bombay in Income Tax Reference NoExcerpt shown. Read the full judgment & AI analysis in Lexace.