1987 (8) TMI 127 - AT - Income Tax

Summary

Issues Involved:
1. Whether the commission of Rs. 1 lakh, related to the assessment year 1979-80 but received in the accounting period relevant to the assessment year 1981-82, should be assessed as income for the assessment year 1979-80 or 1981-82.
2. Whether the interest @ 12% on Rs. 4 lakhs, kept as a deposit with the principals and not received due to the principals' financial crisis, should be assessed as income for the assessment year 1979-80.

Detailed Analysis:

Issue 1: Commission Income Assessment Year

The primary issue is whether the commission of Rs. 1 lakh, related to the assessment year 1979-80 but received in the accounting period relevant to the assessment year 1981-82, should be assessed as income for the assessment year 1979-80 or 1981-82. The assessee argued that due to the financial crisis of the principals, the commission was not received in the assessment year 1979-80. Consequently, the assessee changed its accounting method from mercantile to cash basis, which was communicated to the ITO through letters dated 8th December 1978, 19th November 1981, and 26th December 1981. The assessee contended that the commission should be treated as income in the year it was actually received, i.e., 1981-82.

The revenue, however, argued that the assessee's system of accounting was mercantile, and since the services were rendered, the commission accrued in the assessment year 1979-80. Therefore, it should be included as income for that year, despite the actual receipt occurring later.

Upon review, it was concluded that the agreement between the parties specified that the commission would be paid monthly, and the principals' financial crisis did not constitute a dispute that would defer the accrual of income. The income of Rs. 1 lakh on account of commission accrued to the assessee in the assessment year 1979-80, and thus, including it as income for that year was upheld. Consequently, taxing the same income in the assessment year 1981-82 was deemed improper, and the AAC's deletion of the income in that year was justified.

Issue 2: Interest on Deposit

The second issue concerns whether the interest @ 12% on Rs. 4 lakhs, kept as a deposit with the principals and not received due to the principals' financial crisis, should be assessed as income for the assessment year 1979-80. The assessee argued that due to the financial crisis of the principals, the recovery of the principal amount itself was doubtful, and thus, it would be wrong to include notional interest as income. The assessee relied on cases such as CIT v. Motor Credit Co. (P.) Ltd. and CIT v. Ferozepur Finance (P.) Ltd., where it was held that interest could be accounted for on an actual receipt basis if the principal amount's recovery was in doubt.

The revenue countered that the assessee was entitled to interest @ 12%, which had accrued in the year, and there was no evidence to support the claim that the principal amount's recovery was doubtful.

The Tribunal concluded that there was no evidence of any dispute or doubt regarding the recovery of the principal amount. The financial crisis of the principals did not justify the non-accrual of interest. Therefore, the interest of Rs. 48,000 accrued to the assessee in the assessment year 1979-80 and was rightly treated as income for that year.

Conclusion:

The Tribunal upheld the inclusion of the commission of Rs. 1 lakh as income for the assessment year 1979-80 and justified the deletion of the same income in the assessment year 1981-82. Additionally, the interest of Rs. 48,000 on the deposit accrued to the assessee in the assessment year 1979-80 and was rightly treated as income for that year. Both the appeals by the assessee and the revenue failed.