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Issues Involved:
1. Accrual of income from service charges for delayed/non-payment of instalments. 2. Method of accounting (mercantile vs. cash basis). 3. Financial position of debtor (Nirlon) and its impact on income recognition. 4. Legal precedents and their applicability. Issue-wise Detailed Analysis: 1. Accrual of Income from Service Charges for Delayed/Non-Payment of Instalments: The core issue was whether the service charges for delayed/non-payment of instalments amounting to Rs. 5,86,365 should be considered as accrued income for the assessment year 1988-89. The assessee argued that due to Nirlon's adverse financial position, these charges were not accounted for as income during the year but would be recognized upon receipt. However, the Tribunal held that income accrues when it is due, irrespective of actual receipt, as per the mercantile system of accounting. The Tribunal referenced several judicial decisions, including the Supreme Court's ruling in CIT v. K.R.M.T.T. Thiagraja Chetty & Co. (24 ITR 525), which stated that the computation of profits cannot suspend their accrual. Therefore, the service charges accrued at the end of the accounting year and were taxable. 2. Method of Accounting (Mercantile vs. Cash Basis): The assessee maintained its accounts under the mercantile system, where income is recognized when it is earned, regardless of when it is received. The Tribunal noted that there was no resolution to change the accounting method from mercantile to cash basis for the service charges. The assessee's argument that the income would be accounted for upon receipt was not acceptable, as it constituted a selective change in the accounting method, which is impermissible. The Tribunal cited the decision in State Bank of Travancore v. CIT (158 ITR 102), emphasizing that income must be recognized on an accrual basis even if its recovery is doubtful. 3. Financial Position of Debtor (Nirlon) and Its Impact on Income Recognition: Nirlon was declared a Relief Undertaking by the Government of Maharashtra and referred to the BIFR due to its adverse financial position. Despite this, the Tribunal found that the assessee was hopeful of recovering the dues, as indicated in the board resolutions and the notes in the audited accounts. The Tribunal observed that the assessee had not waived its right to claim service charges during the accounting year. The subsequent agreement to settle the outstanding amount for a reduced sum and waive the service charges occurred after the close of the accounting year, which did not affect the accrual of income for the year under consideration. 4. Legal Precedents and Their Applicability: The Tribunal reviewed several judicial decisions cited by the assessee, including: - Citibank N.A.'s case: Not applicable as it involved a change in the accounting system from mercantile to cash basis, which was not the case here. - Mahavir Co. (P.) Ltd.'s case: Inapplicable as it involved a resolution to waive interest, which was not present in this case. - Motor Credit Co. (P.) Ltd.'s case: Distinguished as it involved no prospect of recovering the principal amount, unlike the present case where the assessee was hopeful of recovery. - Shiv Parkash Janakraj & Co. (P.) Ltd.'s case: Distinguished as there was no fixed date for interest payment in that case. - Sir Sarupchand Hukamchand (P.) Ltd.'s case: Distinguished as it involved a debtor company taken over by an authorized controller and a suit barred by limitation. - Jitpan Holdings (P.) Ltd.'s case: Distinguished as it involved a provision for bad debt accepted by the revenue. The Tribunal concluded that the income from service charges accrued on the closing date of the accounting year and was taxable. The appeal was dismissed, upholding the orders of the first appellate authority and the Assessing Officer.
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