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Issues Involved:
1. Allowability of interest forgone as business expenditure. 2. Assessment of interest on outstanding money advanced to a subsidiary as real income. Summary: Issue 1: Allowability of Interest Forgone as Business Expenditure The Tribunal allowed the interest forgone as business expenditure in the computation of the income of the assessee for the assessment year 1971-72. The assessee-company, following the mercantile method of accounting, decided not to charge interest on the outstanding amount due from its subsidiary due to the latter's financial difficulties. The Income-tax Officer added the estimated interest income, arguing that interest accrues day to day and the decision to forgo interest was taken after the accounting year ended. The Appellate Assistant Commissioner deleted this addition, stating that interest not charged for proper reasons could not be treated as accrued income. The Tribunal upheld this decision, considering the waiver of interest as expenditure incurred for business purposes u/s 37(1) of the Income-tax Act, 1961. However, the High Court disagreed, noting that there was no agreement to waive interest within the relevant accounting year, and thus, the interest had already accrued and could not be waived post-accrual. Issue 2: Assessment of Interest on Outstanding Money Advanced to Subsidiary as Real Income The Tribunal held that the interest on the balance outstanding was not part of the real income of the assessee, as the original liability was substituted by a subsequent agreement. The High Court, however, found no evidence of such an agreement within the relevant accounting year. It emphasized that interest accrues on a day-to-day basis and becomes payable at the end of the accounting year. The doctrine of real income was deemed inapplicable as the subsidiary's financial condition did not prevent the accrual of real income. The High Court referenced the Supreme Court's decision in State Bank of Travancore v. CIT, which clarified that income accrues in reality and cannot be waived after accrual. Consequently, the High Court ruled that the interest income had already accrued by March 31, 1971, and the subsequent resolutions to forgo interest were ineffective. Conclusion: The High Court answered the first question in the negative and the second question in the affirmative, both in favor of the Revenue, stating that the interest forgone could not be allowed as business expenditure and the interest on the outstanding amount was part of the real income of the assessee. There was no order as to costs.
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