1996 (9) TMI 5 - SC - Income Tax

Accrual of Income - Whether Tribunal was right in holding that the interest for the assessment year 1971-72, had already accrued to the assessee on October 31, 1970, under the mercantile system of accountancy - Whether Tribunal was right in holding that the subsequent relinquishment of interest by a resolution dated November 24, 1970, did not affect the tax liability of the assessee on accrual basis - Held, yes

Summary

Issues Involved:
1. Accrual of interest under the mercantile system of accountancy.
2. Impact of subsequent relinquishment of interest on tax liability.

Issue-wise Detailed Analysis:

1. Accrual of interest under the mercantile system of accountancy:

The primary issue in these appeals is whether the interest for the assessment years 1969-70, 1970-71, and 1971-72 had accrued to the assessee on October 31 of the respective preceding years under the mercantile system of accountancy. The assessee-company had advanced a loan to a firm and initially charged interest for the assessment years 1966-67 and 1967-68. However, for the subsequent four assessment years, the assessee-company passed resolutions deciding not to charge interest due to the firm's financial difficulties.

For the assessment year 1968-69, the resolution was passed before the end of the accounting year, whereas for the years 1969-70, 1970-71, and 1971-72, the resolutions were passed after the expiry of the relevant accounting years. The Income-tax Officer added an amount towards interest, calculating it at fifteen percent per annum, stating that the relinquishment was without commercial considerations and seemed to be a collusion to evade tax liability. The Appellate Assistant Commissioner and the Tribunal upheld this view, emphasizing that the interest had accrued before the waiver and that the assessee was following the mercantile system of accounting.

The Supreme Court held that in the case of the three subsequent assessment years, the interest had accrued to the assessee despite no entries being made in the accounts. The waiver after the expiry of the accounting year meant that the assessee was giving up the money that had already accrued. Therefore, the Tribunal was right in its view for the assessment years 1969-70, 1970-71, and 1971-72. For the assessment year 1968-69, since the resolution was passed before the end of the accounting year, the Revenue did not press the case.

2. Impact of subsequent relinquishment of interest on tax liability:

The second issue is whether the subsequent relinquishment of interest by a resolution affects the tax liability of the assessee on an accrual basis. The High Court had followed the decision in CIT v. Birla Gwalior (P.) Ltd., which held that the principle of the earlier decision in Morvi Industries Ltd. v. CIT did not apply. However, the Supreme Court disagreed, stating that the facts of the present case squarely fell within the principle of Morvi Industries Ltd.'s case, where the relinquishment of income after it had accrued did not affect the tax liability.

The Supreme Court also referred to the decision in State Bank of Travancore v. CIT, which emphasized that the concept of real income cannot be employed to defeat the provisions of the Act and the Rules. The court reiterated that the provisions of the Act and the Rules must be applied and followed, and the concept of real income should not be used to whittle down or defeat these provisions.

Conclusion:

The appeals relating to the assessment years 1969-70, 1970-71, and 1971-72 were allowed, and the judgment of the High Court was set aside. The questions were answered in favor of the Revenue and against the assessee. The appeal relating to the assessment year 1968-69 was dismissed as not pressed. There was no order as to costs.