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TMI Blog1998 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by the assessee-company to Shri Ambica Jute Mills Ltd. was not proper and in that view deleted the accrued interest of Rs. 1,15,625 for the period from June 1, 1983, to August 31, 1983, from the total income of the assessee ?" In respect of the order of the Commissioner of Income-tax (Administration) dated March 15, 1989 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the interest accrued for the period from September 1, 1983, to March 31, 1984, in respect of the loan advanced by the assessee-company to Shri Ambica Jute Mills Ltd. should not be added to its income and, therefore, the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, was not called for ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that there was no basis for passing order under section 263 of the Income-tax Act by the Commissioner of Income-tax ?" The questions at the instance of the assessee are as follows : In respect of the order of the Commissioner of Income-tax (Appeals) dated March 15, 1989: "1. Whether, on the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 23,84,375 was paid against the said hundis of Rs. 25 lakhs. The assessee did not account for any interest in its books of account. In the order of assessment passed on March 9, 1987, under section 143(3) of the Act, the Income-tax Officer treated the difference between the face value of the said hundis, namely, Rs. 25 lakhs, and the sum of Rs. 23,84,375 paid by the assessee, that is Rs. 1,15,625 as its interest income. Apart from the said sum of Rs. 1,15,625, the Income-tax Officer did not add any further sum on account of interest in his order of assessment. The assessee appealed against the said order of assessment before the Commissioner of Income-tax (Appeals) (the "CIT(A)"). By an order dated November 3, 1987, the Commissioner of Income-tax (Appeals) affirmed the said order of the Income-tax Officer assessing the said sum of Rs. 1,15,625 as interest income. In his said order, the Commissioner of Income-tax (Appeals) held that since the resolution for not charging the interest was passed on November 24, 1983, i.e., subsequent to the due date of the said hundis, namely, August 31, 1983, the assessee was liable to be assessed on the said sum of Rs. 1,15,625. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration) had jurisdiction to initiate any proceedings under section 263 of the Act since the order of the Income-tax Officer had merged in the order of the Commissioner of Income-tax (Appeals) and (b) whether any interest income could be notionally assessed for the period September 1, 1983, to March 31, 1984, in respect of the said dishonoured hundis. The Tribunal also held that there was no merger of the order of the Income-tax Officer in the order of the Commissioner of Income-tax (Appeals) and rejected the assessee's contention on the point. It has been argued on behalf of the assessee before us that the said finding of the Tribunal is erroneous and contrary to law. The order of the Income-tax Officer merged with the order of the Commissioner of Income-tax (Appeals'). The issue involved before the Income-tax Officer and the Commissioner of Income-tax (Appeals) was whether any interest in respect of the said dishonoured hundis could be assessed. The relevant portion of the order of the Commissioner of Income-tax (Appeals) referred to by learned counsel for the assessee is set out hereinbelow : "It is an undisputed fact that the loan amount of Rs. 23,84,375 advanced on June 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appeals) with reference to the date of resolution decided the issue that interest on the due date of the dishonoured hundis, namely, August 31, 1983, had accrued before the date of such resolution and was liable to be assessed. The Tribunal erred in proceeding on the basis that since the period from September 1, 1983, had not been considered by the Income-tax Officer, there was no merger of the issue involved in the order of the Commissioner of Income-tax (Appeals). The Tribunal failed to appreciate that the issue or the subject-matter before the Commissioner of Income-tax (Appeals) was whether interest could be assessed in respect of the said dishonoured hundis and that the Commissioner of Income-tax (Appeals) powers in the appeal were coterminus with those of the Income-tax Officer and no bifurcation of the issue could be made with reference to different parts of the same accounting year or on the basis that an aspect of such issue or the subject-matter was not specifically dealt with by the Commissioner of Income-tax (Appeals) in his order. The Tribunal erroneously distinguished the decision of this court in the case of Oil India Ltd. v. CIT [1982] 138 ITR 836. In the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals. Apart from those two cases if an assessment is the subject-matter of appeal then any ground which was held in favour of the assessee can also be held against him though the appeal was preferred by the assessee. This jurisdiction of the Appellate Assistant Commissioner is indisputable. In this case the question is whether the quantum of allowance or disallowance or depreciation was the subject-matter of appeal or not. It is true that whether depreciation should be calculated on the basis of 12 months or it should be calculated on the basis of 11 months was not a specific aspect which was agitated before the Appellate Assistant Commissioner nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed five per cent. or two and half per cent. depreciation and should have directed the Income-tax Officer to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation. If that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from September 1, 1983, to March 31, 1984. It appears that the assessee had advanced amounts against the hundis maturing on August 31, 1983. There was no loan transaction as such at any given rate of interest for any period repayable on demand. The transaction against the hundis was limited to the hundis alone and the amount was required to be paid on August 31, 1983. No rate of interest was stipulated or agreed to between the assessee and the parties to the hundis after the date of maturity of the said hundis on August 31, 1983. Since, there was no contract for giving any loan or advance after August 31, 1983 nor any interest was agreed at any specified rate, there could be no question of accrual of any income after September 1, 1983. It is for this reason that the Commissioner of Income-tax (Appeals) in his order also did not direct for inclusion of any interest from September 1, 1983, although the resolution had been passed on November 24, 1983. When there was no contract or agreement for paying any interest or giving any loan after the maturity of the hundis the question of any notional accrual of interest does not and cannot arise. The judgment and decision in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain, Since the rate of interest payable on the bank deposits was dependent on the period of deposit, the quantum of interest which can be said to have accrued on the said deposit was not ascertainable during the periods under consideration. In this view of the matter, there was no occasion on the part of the assessee-company to include the supposed quantum of accrued interest in its income. It was open to the assessee-company to treat the entire amount of interest as income of the year during which it was computed and paid. The Tribunal has erred in holding that the Income-tax Officer had rightly added the alleged accrued interest as income of the periods in question on a hypothetical and proportionate basis." It, therefore, appears that even on the merits the order of the Commissioner of Income-tax (Administration) for seeking to notionally assess the interest for the period after maturity of the hundis is contrary to the law as laid down by this court and settled in the aforesaid decisions. It is not in dispute that there is no contract for giving any loan at any rate of interest after maturity of the hundis. The question of including any interest notionally does not and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said hundis were not accepted by it and that those were not recorded in its records and the purported acceptance on its behalf as appearing on the hundis was void and of no effect. When the document itself is questioned and avoided by the party as void, namely, the bank in the instant case, the question of accrual of any income with reference thereto cannot arise. In these circumstances, there is no real income which arises to the assessee. Shri Ambica Jute Mills being the drawer of the hundis is a company, which has gone into liquidation and has no substance. It was only the acceptance of the hundis by the bank which was the basic foundation of the hundis and the bank had to pay on maturity. But for the acceptance by the bank as shown in the hundi documents, the assessee would not have advanced any money. When the bank disputed its acceptance of the hundi documents as void and fraudulent, there could be no accrual of any real income or even any income theoretically on the basis of such disputed documents. It appears that no income has in fact accrued in the real sense of the term which could be assessed to tax. In this connection, the decision of the Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was reflected in making entries in the books of account are evidence of whether such income accrued or not. The distinguishing feature of the aforesaid case, i.e., State Bank of Travancore [1986] 158 ITR 102 (SC), is that the bank debited the amount of interest to the account of the debtors but instead of crediting it in the profit and loss account as interest income, took it into balance-sheet in the suspense account. This conduct of the bank in the said case clearly showed that it had treated the interest income as having accrued to it. In the instant case, the assessee has not debited to the debtor any interest. No entry in the books were at all made. Its board of directors in fact resolved not to do so considering the facts and circumstances. In the said case, the Supreme Court even held that if an entry was made and reversed that conduct would have been sufficient evidence of the real circumstances. The same principles have been reiterated by this court in the case of Sri Kewal Chand Bagri v. CIT [1990] 183 ITR 207 and in the case of CIT v. Eastern Investments Ltd. [1995] 213 ITR 334 (Cal). The relevant portion of the above judgment, i.e., Sri Kewal Chand Bagri's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bentures should be included in the assessment." It is thus clear on a perusal of the aforesaid decisions that the principles of real income have not been overruled by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 and the income cannot be assessed only because an assessee is following the mercantile system of accounting and theoretically or notionally income accrues. In the case of State Bank of Travancore [1986] 158 ITR 102 (SC) the conduct of the bank in debiting the interest to the account of the debtor and even not reversing such debit was considered for treating the income as accrued. In the instant case, as stated, the evidence clearly establishes that income did not accrue as the assessee did not make any entry at all for it in the accounts. Considering all the aspects of the matter the questions before us are answered in the manner hereunder. Question No. 1 raised at the instance of the Department in respect of the order of the Commissioner of Income-tax (Appeals) dated November 3, 1997, is answered in the affirmative and against the Revenue and in favour of the assessee. Similarly, questions Nos. 1 and 2 in respect of the order of ..... 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