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TMI Blog1983 (1) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... wing interests Period Amounts Rs. A 1-10-1959 to 31-12-1959 2,42,606.69 B 1-1-1960 to 30-10-1960 7,20,571.84 C 1-10-1960 to 31-12-1960 2,41,943.84 The assessee took credit of these interests in its accounts. The previous years relevant to the assessment years under reference respectively ended on 31st December, 1959, and 3lst December, 1960. Item " A " of the above interest fell within the assessment year 1960-61, and remaining two items within the assessment year 1961-62. These two latter items aggregated to Rs. 9,62,515. The assessee exercised its option in February, 1961, for the transfer of the shares by its Indian subsidiary. The shares were ultimately transferred to the assessee in March, 1961. The company, ACCI, declared dividend for the period for which the interest had been credited by the assessee in its accounts after the assessee had become a registered shareholder of those shares and consequently the assessee received the entire dividend from these shares. Considering that, according to the terms on which the loan had been advanced, no interest became due from its Indian subsidiary, the assessee reversed the entries with respect to the above interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me when the assessee had not decided to get the shares transferred to it and placing reliance on the decision in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC), he was of the view that making of the entries in the accounts did not create a right to receive interest from the Indian subsidiary. He deleted the addition made by the ITO in both the years under reference. Aggrieved by the order of the AAC, the Department went up in appeal before the Tribunal. It was urged by the learned representative of the Department that the matter of interpretation of the terms of the advancing of the loan by the assessee to the Indian subsidiary came up for consideration before the Tribunal in the case of the Indian subsidiary for the assessment year 1962-63 in I.T.A. Nos. 20229 and 20252 of 1967-68 and in that case the Indian subsidiary was allowed a deduction of interest of Rs. 9,63,179 in the assessment year 1961-62, and that it was treated as profit in the assessment year 1962-63. It was urged that in those appeals the Tribunal did not accept the contention that the interest could accrue only in case the Indian subsidiary received the dividend. The Tribunal accepted the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the sum of Rs. 2,42,607 and Rs. 9,62,515 respectively did not accrue as interest to the assessee for the previous year ending on the 31st December, 1959, and 31st December, 1960, respectively ? " The case of the Revenue before us is that a loan was given by the Imperial Chemical Industries, London, to the Imperial Chemical Industries (India) Private Limited which is the Indian subsidiary of the London company. This loan was to carry interest and the interest accrued at the end of the accounting year. It has been argued that subsequent conduct or transaction of the parties after the end of the accounting year will not prevent any accrual of income. The Imperial Chemical Industries (India) Pvt. Ltd. may have good reasons for giving up the interest after the end of the accounting year. The assessment, however, was being done in this case on the basis of the mercantile system of accounting followed by the assessee-company. Therefore, the interest had to be assessed on that basis. It was further argued that in an earlier case the Tribunal itself had held in an appeal arising out of the assessment of the Indian company that the Indian company was entitled to get a deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er these shares to ICI, London, in settlement of the loan that was taken. It was made quite clear in the correspondence that the loan was to be given only for the purpose of buying the shares in Alkali and Chemical Corporation of India Limited. The first instalment of the loan was to be advanced in March, 1957, and the balance as and when calls were made on the shares sold by Alkali and Chemical Corporation of India Limited. Interest was to be paid at the rate of 1 1/2% above the bank rate but this rate was not to exceed the rate of dividend paid by Alkali and Chemical Corporation of India Limited in any year. The only question before us is whether the interest on the loan was unconditionally payable by ICI (India) Pvt. Ltd. at the end of the accounting year or was it unconditional upon receipt of dividend by the Indian company. On a reading of the documents that have been placed before us we are of the view that there was no unconditional accrual of interest in the facts of this case. This was not a simple loan transaction between the London company and the Indian company. ICI, London, wanted to finance Alkali and Chemical Corporation of India Limited. The money was routed throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany on its ordinary shares." It appears from this correspondence that the clear understanding of the parties was that the Indian company was to invest the loan of Rs. 1,80,00,000 given by the London company in the purchase of shares of ACCI which was going to embark upon a polythene project and which was likely to give dividend at about 6% almost immediately. The Indian company was to retain the dividend and to pay an amount to the London company which should not exceed the amount of dividend received by it on its ACCI shareholding. It is quite clear that it was not the intention of the parties to treat this loan as an ordinary loan transaction. The loan was being given for a definite purpose. It could only be invested in the purchase of shares in the ACCI. No interest was to be paid on that loan until and unless the new shares acquired by the Indian company became eligible for dividend. The interest that was to be paid to the London company was not to be in excess of the dividend that was going to be received by the India & company. Therefore, it cannot be said that the Tribunal erred in holding that the payment of interest on the loan was conditional upon receipt of the divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in our opinion, the Tribunal was not wrong in this case in holding that there has been no accrual of interest to the assessee for the previous year ending on the 31st December, 1959, and 31st December, 1960, respectively. A large number of cases have been cited in which the principle of accrual of income and mercantile system of accounting has been explained. Reliance has been placed on the decisions of the Supreme Court in the cases of CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. (1953] 24 ITR 525, CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 and also E.D. Sassoon & Company Ltd. v. CIT [1954] 26 ITR 27, in which the principles of the mercantile system of accountancy have been explained. The principles applicable to a case of accrual of income are well-settled. But, in our opinion, in this case a perfected debit for payment of interest had not come into existence on the last day of the accounting year. The liability to pay interest was conditional upon the receipt of the dividend by the Indian company and that was made quite clear by the resolution passed by the board of directors of the Indian company at the time of accepting the loan. In this case, the parties had made payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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