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TMI Blog2005 (9) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... hich had to be accepted under compulsion and finally received post-dated cheques as follows: --------------------------------------------------- Date Amount (Rs.) Remarks --------------------------------------------------- 17-9-1996 10,00,000 Encashed on 17-9-1996 10-10-1996 10,00,000 Encashed on 16-10-1996 30-11-1996 70,00,000 Request for deferment of presentation of this cheque to 2nd week of March 1997 in view of the financial constraints 16-12-1996 10,00,000 Encashed on 19-12-1996 --------------------------------------------------- 3. The balance remaining was of Rs. 70 lakhs. Therefore, a sum of Rs. 30 lakhs was received and the cheque for Rs. 70 lakhs was not presented at the request of the debtor. The contention of the assessee is that there was no renewal as alleged by the CIT(A) but an involuntary act taken under compulsion. The cheque for Rs. 70 lakhs was presented to the bank in the second week of March, 1997 but received a returning memo from the bank on 25th March, 1997 informing about the dishonouring of the cheque. Legal notice under the Negotiable Instruments Act was given on 25th March, 1997. Pursuant to the notice under the Negotiable Instruments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997) 227 ITR 172 (SC) (ii) CIT vs. Annapurani Veerappan (1992) 193 ITR 426 (Mad) (iii) CIT vs. Confinance Ltd. (1973) 89 ITR 292 (Bom) (iv) Balraj Virmani vs. CIT (1974) 97 ITR 69 (All) (v) CIT vs. Tamil Nadu Industrial Investment Corpn. Ltd. (1996) 218 ITR 616 (Mad) (vi) Addl. CIT vs. Swadeshi Cloth Dealers (1991) 99 CTR (All) 66 : (1991) 187 ITR 620 (All). 6. The AO also noted that the assessee received Rs. 10 lakhs from the debtors M/s PPL during the previous year relating to the assessment year under consideration. Therefore, a sum of Rs. 10.80 lakhs represents interest @ 27 per cent per annum w.e.f. 1st June, 1997 to 31st March, 1998. The details of calculation of interest are as under: ------------------------------------------------ (a) From 1-4-2000 to 31-3-2001 on Rs. 35 lakhs @ 27% P.A. 9,45,000 (b) From 1-4-2000 to 22-5-2000 on Rs. 5 lakhs @ 27% P.A. 19,233 (c) From 1-4-2000 to 5-9-2000 on Rs. 10 lakhs @ 27% P.A. i.e., 158 days 1,16,876 (d) From 1-4-2000 to 28-12-2000 on Rs. 10 lakhs @ 27% P.A. i.e., 242 days 1,79,014 ------------- 12,60,123 ------------------------------------------------ 7. In appeal, the CIT(A) confirmed the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful or sticky debts, interest cannot be taxed as no interest accrues. The appellant relied upon the following judgments in support of this proposition: (i) CIT vs. M.P. Finance Corporation (1996) 136 CTR (MP) 312 : (1997) 227 ITR 888 (MP) (ii) CIT vs. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad) (iii) CIT vs. Bengal Jute Mills Co. Ltd. (1986) 56 CTR (Cal) 267 : (1987) 165 ITR 631 (Cal) (iv) CIT vs. Ferozepur Finance (P) Ltd. (1980) 18 CTR (P&H) 227 : (1980) 124 ITR 619 (P&H). 5.9 I am, however, of the view that from the facts of the appellant's case it is not established that the debt had become sticky, doubtful or irrecoverable and, therefore, the case laws cited by the appellant are of no assistance. The appellant did receive interest for the period until 1st May, 1997 which partly falls within the assessment year under consideration. The appellant received Rs. 10 lakhs of the principal amount in two instalments of Rs. 5 lakhs each on 1st May, 1997 and 2nd Aug., 1997 and these dates also fall within the previous year relevant to assessment year under consideration. Further sum of Rs. 15 lakhs was received in September/November, 2000 after filing of the winding up petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of income-tax as developed. The Court further held that mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. In the case of the appellant, there is clear statement in the accounts in note No. 8 to the note to accounts forming part of audited balance sheet and P&L a/c that suit has been filed for recovery and the interest will be credited when received. There is not a whisper of the amount being irrecoverable and interest not having accrued. No provision is made for bad debt. There is only change in accounting policy which is not permissible under s. 145. The claim of income was very much alive and was being pursued through appropriate legal remedy. 5.11 Supreme Court in the case of CIT vs. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 136 CTR (SC) 421 : (1996) 222 ITR 583 (SC) reiterated that 'The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room nor would it be permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1998-99, the learned CIT(A) confirmed for - the same reasons in 2001-02 the addition on account of interest income of Rs. 12,60,120. 9. The learned Authorised Representative of the assessee submitted that on the fact of the case real income by way of interest cannot accrue on sticky and doubtful debts. After the lapse of the agreement on ICD and bouncing of the cheques given to repay the deposit, and after filing of a complaint under s. 138 and subsequent winding of petition under the Companies Act, it can be said that the amount due has become sticky. and doubtful and thus there was no accrual of interest income. On the facts of the case, an amount which has become sticky and doubtful will not change its character merely because there is realization against principal from time to time after 31st March, 1997 pursuant to the directions of the Court both in the proceedings under Negotiable Instruments Act and winding up petition under Companies Act. In the absence of a valid contradiction but purely on the claim for recovery of the principal amount in the proceedings under s. 138 under the Negotiable Instruments Act and the claim for interest levy along with principal in the win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not under the control of the assessee to do anything but to accept in compulsion the deferment of the repayment till the post-dated cheques were received, i.e., 17th Sept., 1996, 10th Oct., 1996, 30th Nov., 1996 and 16th Dec., 1996. The CIT(A) was not able to understand that the payment of Rs. 1 crore by way of four post-dated cheques, three cheques of Rs. 10 lakhs each and one cheque of Rs. 70 lakhs was received as compensation of the ICD. The delay in presentation in case of Rs. 70 lakhs was not a renewal but acceptance under compulsion to defer the cheque to second week of March hoping that litigation will not have to be restored to. The CIT(A) did not appreciate that the cheques for Rs. 70 lakhs bounced on 10th April, 1997 and thereafter the assessee filed a complaint under s. 138 of the Negotiable Instruments Act as also winding up petition under the Companies Act and this cannot give a different character to the amount due. The CIT(A) held that as under the winding up petition interest had been claimed at 27 percent, therefore, there was a valid agreement pursuant to which interest accrued at 27 per cent. The CIT(A) was not able to comprehend the concept of sticky and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that income accrues when it falls due, i.e., becomes legally recoverable irrespective of whether actually received or not and part accrued income "is that income which the assessee has a legal right to receive." It is crystal clear that in this appeal there is no legal recoverable interest income on which the assessee has legal right to receive. The matter is sub judice and the claim thereon will accrue when the decision is taken. 15. He also submitted that the CIT(A) has got confused between the cash basis and mercantile basis of accounting. Nowhere has the assessee stated that it has changed its accounting policies to cash basis. In the balance sheet and notes to accounts it has been mentioned that the corporate deposit is considered doubtful and since the matter is before the Court the interest can only accrue on the date of decision in the suit and then taxable. 16. He submitted that the CIT(A) on p. 8 states that the theory of real income cannot be extended so as to exclude from charge ability of such income which is accrued but merely suffers from high improbability of recovery. She has not appreciated that in the facts of the case no income accrued. She has relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognition of accounting of income such accounting standards should be followed. In the instant case, there is no valid contract, the matter is sub judice in Court, the claim for interest is pending decision, revenue recognition should be in line with AS-9. 18. Summarising his submissions the learned counsel submitted that keeping in view the factual matrix the totality of the circumstances, the assessee was placed in the existence of complaint under the Negotiable Instruments Act and winding up petition before the Delhi High Court resulting in the principal amount becoming doubtful and sticky and the interest claimed being a mere claim before the Delhi High Court and finally in view of the decision of the Delhi High Court in the winding up petition, determining the interest of Rs. 1,01,000 payable in January, 2005, no interest can be said to have accrued and, therefore, Rs. 10,80,000 in the asst. yr. 1998-99 and Rs. 12,60,123 in the asst. yr. 2001-02 cannot be taxed. 19. Having heard the rival submissions and perused the orders of the lower authorities and the materials available on record, we find that the facts of the case are that the cheque of Rs. 70 lakhs was presented to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also an interest of Rs. 1,01,000. We find that the assessee has placed reliance on the decision of the Hon'ble Supreme Court in UCO Bank. We would like to mention that in order to aid proper determination of the income of money lenders and banks, the CBDT issued Circular dt. 6th Oct., 1952 providing that where interest accruing on doubtful debt is credited to the suspense account it need not be included in the assessee's taxable income provided the ITO is satisfied that recovery is practically improbable. On 20th June, 1978 in view of the judgment of the Hon'ble Kerala High Court in State Bank of Travancore vs. CIT 1975 CTR (Ker) 72 : (1977) 110 ITR 336 (Ker), the Board by another circular withdrew with immediate effect the earlier circular. By Circular dt. 9th Oct., 1984 the Board decided that only in respect of doubtful debts interest credited to suspense account by banking companies cannot be subjected to tax but interest charged. in the account where there has been no recovery for 3 consecutive accounting years would not be subjected to tax in the 4th year and onwards. This was done for the purpose of laying down a uniform test for the AO to decide whether the interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which partly falls in the asst. yr. 1998-99 under consideration. The assessee received Rs. 10 lakhs of the principal amount in two instalments of Rs. 5 lakhs each on 1st May, 1997 and 2nd Aug., 1997 and these dates also fall within the previous year relevant to asst. yr. 1998-99 under consideration. Further sum of Rs. 15 lakhs was received in September/November 2000 after filing of the winding up petition. Still further, M/s PPL were not insolvent and were not even before BIFR and its share was quoted above par. The Hon'ble Supreme Court in the case of CIT vs. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 136 CTR (SC) 421 : (1996) 222 ITR 583 (SC) reiterated that "The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply it is only those provisions which must be applied and followed. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules." In the case considered by the Supreme Court, the assessee had not charged interest in view of the difficult financial position of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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