1983 (5) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of interest and commission for assessment years 1959-60 and 1960-61.
2. Deduction of expenditure on litigation and establishment for assessment years 1961-62 to 1965-66.
3. Claim of bad debt for assessment year 1966-67.

Summary:

Issue 1: Allowability of Interest and Commission (1959-60 and 1960-61)
The Tribunal found that the agreement dated October 26, 1954, between the assessee and its principals ended in November 1958. Despite no credit note being issued by B. R. Sons for interest and commission, the Tribunal rejected the assessee's claim, stating that the "award given by the arbitrators did not abrogate or abridge the rights of the assessee to the interest or commission to which it was entitled under the agreement." The Tribunal included interest and commission as income based on entitlement, not actual receipt. The court held that taxability arises only when income accrues, and mere entitlement does not result in income. The Tribunal's assumption of income from account book entries was erroneous as "hypothetical income" should have materialized. Therefore, the court answered both questions for 1959-60 and 1960-61 in the negative, in favor of the assessee, stating that the amount of interest and commission not actually realized could not be assessed as income on an accrual basis.

Issue 2: Deduction of Expenditure on Litigation and Establishment (1961-62 to 1965-66)
The Tribunal found that the principal source of income was interest on money lying with the erstwhile principals, and the income was held to be from other sources. The Tribunal rejected the assessee's claim for deduction of expenses incurred on establishment and litigation, stating that the business of distribution had ceased. However, the court found that the expenditure was incurred as commercial expediency and business necessity. The court held that the investment under the agreement was stock-in-trade, and the assessee was entitled to claim expenditure incurred for its recovery as business expenditure. Therefore, both questions were answered in the negative, in favor of the assessee, allowing the deduction of litigation expenses.

Issue 3: Claim of Bad Debt (1966-67)
The assessee claimed deduction of interest and commission as bad debt in view of the award dated August 27, 1964. Since it was found that these amounts did not accrue at all, the question of claiming them as bad debt became academic. Therefore, the question was rendered academic and needed no answer.

Conclusion:
The court ruled in favor of the assessee on all issues, stating that the amounts of interest and commission not actually realized could not be assessed as income on an accrual basis, and the assessee was entitled to claim litigation expenses as business expenditure. The assessee was awarded costs assessed at Rs. 200 in each reference.