1989 (6) TMI 23 - HC - Income Tax

Summary

Issues involved:
The judgment involves the issue of estimating interest income of the assessee and whether interest income had accrued to the assessee in a specific case.

Estimation of Interest Income:
The assessee derived income from interest and director's remuneration, having advanced a loan to his father. The debit balance in the father's account was not charged interest from 1971 onwards due to financial difficulties. The Income-tax Officer included interest income in the assessment, but the Appellate Assistant Commissioner deleted the addition. However, the Appellate Tribunal restored the Income-tax Officer's order, contending that interest had accrued to the assessee despite not being charged. The Tribunal emphasized the absence of evidence showing the forgone interest.

Accrual of Interest Income:
The Tribunal's decision hinged on whether interest income had accrued to the assessee despite not being charged. The judgment referenced the mercantile system of accounting to determine the point of tax liability attraction. Citing relevant case law, it emphasized that income must materialize for tax liability to arise. The judgment highlighted the commercial and business realities of the situation, emphasizing the need for real income to have materialized for taxation purposes.

Precedents and Legal Interpretations:
The judgment referenced decisions from other High Courts, such as the Madras High Court and the Punjab and Haryana High Court, where forgone interest income was not added to the assessee's taxable income due to the impracticality of expecting such income. These cases underscored that the mere adoption of the mercantile system of accounting does not mandate the taxation of hypothetical income that has not materialized in reality.

Conclusion:
The High Court answered the reference question in favor of the assessee, highlighting that the interest income had not materialized as the debtor was unable to pay any interest. The judgment emphasized the importance of considering the commercial and business realities of a situation in determining the accrual of income for tax purposes. The decision was unanimous, with no order as to costs.