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TMI Blog2012 (8) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... NDRABAABU, JJ. JUDGMENT Mrs. Chitra Venkataraman, J. The following is the substantial question of law raised in this Tax Case Appeal filed by the assessee, relating to the assessment year 1998-99: "Whether the Tribunal was right in law in holding that the interest income has to be taxed on accrual basis under Section 145 of the Income Tax Act, though the same has become irrecoverable?" 2. It is seen from the facts herein that the assessee advanced loan of Rs. 25 lakhs to Credential Finance on 11.5.1995. We may immediately point out herein that the borrower is not a sister concern, though it has been said so in the Tribunal's order. The assessment order nowhere states this concern as the sister concern. Learned counsel appearing for the assessee/appellant herein also pointed out that the borrower was not a sister concern. It is seen that the company received interest at 24.5% till 16.8.1996. After that, the assessee had not received any interest and it made necessary provision for the year ending 31.3.2001 in respect of the interest receivable by it at 24.5%. Since no amount was forthcoming from the borrower, notice was issued to the borrower to repay the amount. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an income for the purpose of assessment, that even notional income has to be treated as a real income. He pointed out that such line of reasoning of the Tribunal runs contra to the decision of the Apex Court reported in [1997] 225 ITR 746 ( Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ) as well as to the decision of this Court reported in [1981] 127 ITR 572 ( Commissioner of Income-tax v. Motor Credit Co. P. Ltd. ). Given the fact that the assessee had not received any interest beyond May, 1996, rightly, the assessee did not recognise any income even on an accrual basis for assessment for the assessment year 1998-99. He submitted further that considering the improbability of the realisation in the background of the default committed, the Assessing Authority as well as the Tribunal should have allowed the case of the assessee and not to have taxed so, for the accrued interest, as a real income. 5. In the decision reported in [1997] 225 ITR 746 ( Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ), considering the question as to whether, in a mercantile system of accounting, on a mere accrual of an income, there could be any assessment made on a hypo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bombay High Court reported in [1960] 39 ITR 706 (Bom) ( H.M. Kashiparekh Co. Ltd. v Commissioner of Income-Tax ), which reads as under: "In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language." 7. Referring to the decision reported in [1986] 158 ITR 102 (SC) ( State Bank of Travancore v. Commissioner of Income Tax (Appeals )), the Apex Court pointed out: "...In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in [1997] 225 ITR 746 ( Godhra Electricity Co. Ltd. v. Commissioner of Income-tax ), does not, in any manner, advance the cause of the assessee. On the other hand, applying the decision of the Apex Court, we hold that it is difficult to accept the case of the assessee that there was only accrual of a hypothetical income and hence, could not be a subject matter of assessment. 11. It is no doubt true that the Tribunal as well as the Assessing Officer had recorded the fact that the assessee was following the mercantile system of accounting. Hence, the accrual theory of interest income was to be assessed in the year in which it had accrued and had become due. 12. As already pointed out by the Apex Court, in the mercantile system of accounting, even though the principle of accrual is followed, the real income theory, nevertheless, has its relevance to find out the assessability of an income. Thus, even though the assessee had followed the mercantile system of accounting, the materials placed before the Assessing Authority and before the Tribunal, do not, in any manner, advance the cause of the assessee to substantiate its contention that the accrued interest was only hypot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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