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Issues involved:
Interpretation of interest accrued on loans advanced to a sister concern, application of mercantile system of accounting, determination of bad debt recovery, relevance of court discretion in awarding interest post-suit filing. Interpretation of interest accrued on loans: The case involved a reference under s. 256(2) of the I.T. Act, 1961 regarding the accrual of Rs. 3,37,725 as interest on a loan advanced to a sister concern. The ITO added this amount as interest at 4% on the outstanding loan of Rs. 71,10,000 for the assessment year 1969-70. The AAC, however, deleted this amount based on the fact that no interest had been shown in the books since April 1966, when recovery of the principal became doubtful due to pending litigation and denial of liability by the debtor. Application of mercantile system of accounting: The Tribunal considered whether the assessee had maintained its accounts on a mercantile basis or cash basis, concluding that it was irrelevant in this case. Despite the outstanding balance and past interest charges, the Tribunal found that the debt had become doubtful as to recovery, leading the assessee to stop charging interest after April 1966. The Tribunal emphasized that no interest was actually received by the assessee, and the debtor's financial position cast doubt on the likelihood of repayment. Determination of bad debt recovery: The Tribunal's decision was challenged on the grounds that the debt should be considered a bad debt only if the debtor could establish it as such. However, the court noted that in cases where a suit had been filed for recovery, the right to interest post-suit depended on court discretion as per s. 34 of the CPC. Citing relevant case law, the court upheld the Tribunal's finding that there was no chance of interest recovery, justifying the assessee's decision not to charge interest. Relevance of court discretion in awarding interest post-suit: The court emphasized the realistic perspective in judging the accrual of interest and reiterated the principle that if a Tribunal finds the principal to be a bad debt, it should be accepted unless challenged as perverse. Considering the circumstances and findings, the court affirmed the Tribunal's decision, ruling in favor of the assessee. In conclusion, the High Court of Calcutta upheld the Tribunal's decision, emphasizing the realistic assessment of interest accrual and the discretion of the court in cases of pending litigation and doubtful debt recovery.
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