1989 (10) TMI 17 - HC - Income Tax

Summary

Issues:
Assessment of notional interest on a loan advanced to a sister concern for the assessment year 1979-80.

Analysis:
The petitioner, a public limited company engaged in the coir business, had advanced a loan of Rs. 1,50,000 to a sister concern, with the interest on the loan being included in the accounts until the end of the prior year. However, for the assessment year 1979-80, the interest on the loan was not entered in the account books as it was not received. The Income-tax Officer included Rs. 30,000 as interest on the loan in the assessment. The Commissioner of Income-tax (Appeals) reversed this decision, but the Income-tax Appellate Tribunal upheld the addition, stating that the interest on the loan is includible in the assessment even without an entry in the accounts. The petitioner then sought to refer a question of law to the court, which was declined by the Appellate Tribunal. The court held that since the petitioner was maintaining accounts on a mercantile basis and there was no evidence of a modification in the contract or the loan becoming irrecoverable, the interest accrued to the petitioner each year. The court relied on precedents to support its decision.

The court emphasized that the petitioner's failure to credit the interest amount in the profit and loss account did not absolve it from the liability arising from the accrued interest on the loan. Without any variation in the original contract or evidence of the loan becoming irrecoverable, the interest was deemed to have accrued to the petitioner annually. The court found that the addition of Rs. 30,000 as interest on the loan by the Income-tax Officer was correctly upheld by the Appellate Tribunal. Citing relevant case law, the court concluded that the question of law raised by the petitioner was not referable, and the original petition was dismissed as without merit.

In summary, the court ruled that the notional interest on the loan advanced to the sister concern was rightfully included in the petitioner's income for the assessment year 1979-80, based on the accrual of interest and the absence of evidence to support a modification in the contract or the loan becoming irrecoverable. The court's decision was supported by the petitioner's maintenance of accounts on a mercantile basis and established legal precedents.