1991 (1) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Assessability of accrued interest on mortgage loans for the assessment years 1973-74 to 1975-76.
2. Deduction of Rs. 1,03,842 as a bad debt u/s 36(1)(vii) of the Income-tax Act, 1961, for the assessment year 1974-75.

Summary:

1. Assessability of Accrued Interest on Mortgage Loans:

The assessee, a money-lender following the mercantile system of accounting, had advanced loans on mortgages and consistently debited interest on an accrual basis up to the assessment year 1969-70. However, from the assessment year 1970-71 onwards, the assessee did not credit the accrued interest, citing doubtful realization. The Tribunal upheld the addition of accrued interest for the assessment year 1970-71, and the assessee accepted the additions for 1971-72 and 1972-73. For the assessment years 1973-74 to 1975-76, the Tribunal deleted the addition of accrued interest, stating there was no foreseeable prospect of recovery. The Revenue contended that under section 5(1)(b) of the Act, income that accrues or is deemed to accrue must be included in the total income, irrespective of recovery difficulties. The court held that under the mercantile system, interest income accrues when it becomes legally payable, and the difficulty of recovery does not negate accrual. The court referenced decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT, Morvi Industries Ltd. v. CIT, and State Bank of Travancore v. CIT, emphasizing that accrued income must be included in the total income. The court concluded that the Tribunal erred in deleting the accrued interest and answered the questions in favor of the Revenue.

2. Deduction of Rs. 1,03,842 as a Bad Debt:

The assessee wrote off Rs. 1,03,842 as a bad debt u/s 36(1)(vii) of the Act for the assessment year 1974-75, which was disallowed by the Income-tax Officer and affirmed on appeal. The Tribunal directed the exclusion of this amount. The court found that the Tribunal misdirected itself by assuming the mortgage and personal remedies were barred without sufficient basis. The Tribunal also failed to consider the value of the security and the payments made by the mortgagor. The court emphasized that the mere entry of write-off in the books is not conclusive and the onus is on the assessee to establish that the debt had become bad in the relevant year. The court referenced Chettinad Co. P. Ltd. v. CIT, highlighting that the satisfaction of the Income-tax Officer on evidence is necessary. The court concluded that the Tribunal did not consider all relevant materials and answered the questions in favor of the Revenue.

Conclusion:

The court ruled in favor of the Revenue on both issues, holding that the accrued interest on mortgage loans should be included in the total income for the assessment years in question and that the write-off of Rs. 1,03,842 as a bad debt was not justified based on the evidence presented.