2002 (12) TMI 201 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of Interest Income
2. Method of Accounting
3. Bona Fide Belief of Non-Receivability
4. Legal Precedents and Case Laws
5. Liquidation and Winding Up of the Savings Trust

Detailed Analysis:

1. Accrual of Interest Income:
The primary issue revolves around whether the interest income of Rs. 17,962 accrued to the assessee during the assessment year 1980-81. The Income-tax Officer (ITO) included this amount in the assessee's income, asserting that the interest accrued based on the terms of the deposit with the Savings Trust. The assessee contended that there was no likelihood of receiving the interest or the principal amount due to the financial instability of the Savings Trust, which was under liquidation.

2. Method of Accounting:
The ITO noted that the assessee followed the mercantile system of accounting, which necessitates recognizing income on an accrual basis. The assessee argued that it did not maintain any books of account and had previously declared interest income based on certificates issued by the Savings Trust. However, for the relevant assessment year, no such certificates were issued due to the ongoing liquidation proceedings.

3. Bona Fide Belief of Non-Receivability:
The assessee claimed a bona fide belief that the interest and principal amounts were irrecoverable, supported by the fact that the Savings Trust was under liquidation and its accounts were not finalized or audited. The ITO and CIT(A) rejected this contention, stating that the mere absence of certificates did not alter the accrual of income as per the agreed terms of the deposit.

4. Legal Precedents and Case Laws:
The Tribunal referred to several case laws to determine the validity of the assessee's claim:
- Punjab & Haryana High Court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619: Held that interest cannot be said to have accrued if entries were not made on the bona fide belief that the debt had become doubtful.
- Madras High Court in CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572: Stated that interest income should not be taxed when the principal amount was not realizable, even under the mercantile system of accounting.
- Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102: Emphasized that income is assessable if it has arisen or accrued, irrespective of actual receipt.

5. Liquidation and Winding Up of the Savings Trust:
The Savings Trust was under liquidation, and the Calcutta High Court had appointed an ad hoc Board of Trustees to manage its affairs. The Trustees informed the assessee that the accounts would be finalized and audited only after the completion of the winding-up process. This situation created uncertainty regarding the accrual of interest income.

Tribunal's Decision:
The Tribunal, considering the facts and legal precedents, concluded that the interest income of Rs. 17,962 should not be included in the assessee's income for the assessment year 1980-81. The Tribunal held that the ITO was not justified in including this amount, given the bona fide belief of the assessee regarding the irrecoverability of the interest and principal amounts. The Tribunal relied on the decisions of the Punjab & Haryana High Court and the Madras High Court, which supported the assessee's position.

Separate Judgment by Judicial Member:
The Judicial Member disagreed with the majority view, citing the Supreme Court decision in State Bank of Travancore v. CIT and the Calcutta High Court decision in James Finlay & Co. v. CIT. The Judicial Member argued that difficulties in realizing interest or the bona fides of the assessee in not charging interest were insufficient to conclude that interest income did not accrue. The Judicial Member emphasized that the Savings Trust was traceable and managed by an ad hoc Board of Trustees, and thus, the interest income should be assessed based on the agreed terms of the deposit.

Third Member's Order:
The Third Member, concurring with the Accountant Member, held that the interest income did not accrue during the assessment year 1980-81 due to the ongoing liquidation and the uncertainty surrounding the finalization and audit of the Savings Trust's accounts. The Third Member emphasized that the income could only be assessed after the accounts were finalized and the interest income was credited to the assessee's account.

Conclusion:
In accordance with the majority view, the appeal was allowed, and the interest income of Rs. 17,962 was not included in the assessee's income for the assessment year 1980-81.