1983 (7) TMI 61 - AT - Income Tax

Summary

Issues Involved:
1. Whether the interest above 11.25% could be taxed on an accrual basis.
2. The application of the real income theory.
3. The validity of oral agreements modifying written contracts.
4. The necessity of evidence for waiver or forgoing of interest claims.

Issue-wise Detailed Analysis:

1. Whether the interest above 11.25% could be taxed on an accrual basis:
The Tribunal initially held that the written agreement between the parties stipulated an interest rate of 4.25% above the bank rate, which had increased to 9%, making the effective rate 13.25%. The Tribunal rejected the assessee's contention that an oral agreement had modified this rate to 11.25%, stating that "written agreements between companies cannot be changed later on orally." Consequently, the Tribunal upheld the Commissioner's directive to assess the interest at 13.25%.

2. The application of the real income theory:
The assessee argued that only the real income, which was the interest received at 11.25%, should be taxed, citing precedents like H.M. Kashiparekh & Co. Ltd. v. CIT and CIT v. Shoorji Vallabhdas & Co. The Tribunal, however, noted that there was no evidence of a positive act of waiver or forgoing of the additional interest. It emphasized that "accrual means the right to receive the income," which had not been displaced in this case. Therefore, the Tribunal concluded that the additional interest over 11.25% should also form part of the assessee's income.

3. The validity of oral agreements modifying written contracts:
The Tribunal highlighted that written agreements between companies could not be altered orally, and the conduct of the parties could only help in interpreting an agreement when doubtful but not change it when it was clear. The Tribunal did not accept the existence of any oral agreement modifying the interest rate to 11.25%. The Third Member also emphasized that any agreement by a company must be in writing, supported by resolutions or clear conduct, and mere book entries were insufficient to establish such an agreement.

4. The necessity of evidence for waiver or forgoing of interest claims:
The Tribunal noted that there was no evidence of a waiver or forgoing of the additional interest. It stated that "receipt of a lesser amount cannot take the place of waiver," and there must be some evidence of a positive act of waiver. The Third Member further pointed out that there was no clear evidence of any alteration in the agreement or forgoing of the interest, as the mere fact of entries in the books did not indicate a modification of the agreement.

Separate Judgments Delivered:
Judicial Member's Judgment: Confirmed the Tribunal's earlier order that the interest rate should be 13.25% and not 11.25%.

Accountant Member's Judgment: Disagreed with the Judicial Member, arguing that the additional interest at 2% was impliedly waived by both parties and should not be taxed on an accrual basis.

Third Member's Judgment: Supported the Judicial Member's view, concluding that there was no evidence of an oral agreement or waiver, and thus, the interest rate should be 13.25%.

Conclusion:
The Tribunal, supported by the Third Member, held that the assessee-company was liable to tax on the interest at the rate of 13.25% on an accrual basis, as there was no sufficient evidence to support the claim of an oral agreement or waiver of the additional interest. The matter was referred back to the original Bench for final disposal.