9911796707
TMI Blog1986 (10) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5065. The assessee filed this revised return with a view to claim deduction of interest of Rs. 58,520 on accrual basis payable to Shri F.P. Gaekwad, one of the former partner. This deduction on accrual basis was claimed because the assessee maintains books of accounts on mercantile basis. 2. During the asst. year 1977-78, practically no business was done in the real estate. While scrutinising the case, it was noticed that under a registered deed dated 19-12-1975, the assessee had sold a land known as " Anandbaug land " to the Baroda Municipal Corporation for consideration of Rs. 13,78,252. An amount of Rs. 4,14,255 was paid by the Municipal Corporation by way of earnest money and the balance of Rs. 9,63,997 was payable to the assessee in two instalments of Rs. 5,51,300 and Rs. 4,12,697 on 12-3-1976 and 12-9-1976 respectively. The balance consideration was agreed to be a charge on the property. In the event when the vendee is failed to pay the instalment in time as mentioned above, the assessee was entitled to an interest at 12% on unpaid purchase price. As it so happened, the Municipal Corporation failed to make payment of the two instalments. The assessee firm promptly filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd interest of Rs. 60,850 was agreed to be paid to the assessee, the amount of Rs. 60,850 should be substituted for the figure of Rs. 97,139 included in the assessment." 2. After considering the submissions made in writing by the assessee, the ITO levied the penalty on following basis as stated in the order :--- " The arguments are not convincing. As pointed out above, the assessee had taken care to see that a provision was incorporated to charge interest on non-fulfilment of monetary obligation. It is not denied that it was an enforceable contact in the Court of law. The assessee's contention that there is no evidence put by the Income-tax Officer to show that the entire transaction was concealed cannot be accepted because the assessee had not shown this income while filing the return of income. When some income is taxable it is the duty of the assessee to show such income in the return of income and claim the same as exempt by giving clear note in Part-III of the return. The assessee has while filing the revised return written " Nil " in this part. In view of this, but for the detection, the amount could not have been taxed in the year of account. I am therefore satisfied th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee could not predictably determine the accrued part, which was finally determined only on a compromise decree made on October 1980. 3. In normal practice, in drafting the sale deed, a term is generally included for charging interest on payments which are defaulted. This does not necessarily mean, that in a case of every default recovery is taken to court of law and interest is pressed for payment. Normally, as it happened in the assessee's case, negotiations were made with the Baroda Municipal Corporation for payment of the principal amount even after due dates and only after a sufficient time when it was found that the payment is not forthcoming, recourse to court of law was made. Realisation of interest is therefore an incidental result of a suit which the assessee firm never anticipated on the date of preparation of final accounts. 4. Whatever is stated in paras 1, 2 3 sufficiently proves that the explanation regarding non-provision, of interest was bona fide and all the facts relating to the same were before the Income-tax Officer. 5. It is not for the first time that such a question of non-provision of accrued interest should arise. The first instalment which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to disclose in the return of income interest accruing on the basis of the sale deed was rejected. (ii) Even the disclosure made in the accounts for the year ending 31-3-1976 could not be of any help to the assessee because the amount outstanding was exclusive of interest. (iii) Copy of the sale deed was filed with the ITO in or after March 1979, when the first hearing was actually held. The fact remained up to the part of the time of filing the original as also revised returns for A.Y. 1977-78, the assessee had not disclosed to the department the existence of a stipulation for interest. (iv) The assessee had filed revised return to claim liability in respect of contractual obligation for payment of interest an outstanding amount due to retired partner, but conveniently failed to disclose even the existence of stipulation of fight to receive interest and this circumstance itself made the assessee liable to penalty. 5. At the time of hearing before us, it was initially submitted by the learned representative of the assessee that the assessee was not a money-lender. The default was committed on 12th March, 1976 because the first instalment itself was not paid and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or assessment year 1977-78, since that appellate order was accepted by the assessees. 6.1 The Senior Departmental Representative supporting the order passed by the CIT(A) relied upon number of decisions given on page 2 3 in the book by Shri K.H. Kaji on " Gujarat High Court digest on direct tax cases ". For assessment year 1976-77, the interest accrued was only for 18 days and the amount being small, no such adjustment was found necessary. Besides, even in the absence of stipulation regarding charge of interest, BMC was required to pay minimum interest at 4 1/2 per cent as per the Rules. Referring to the Auditor's Report, it was submitted that no mention of such accrual was ever mentioned even by the C.As. The decision in the case of CIT v. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231 (SC) was relied on for the proposition that even when the amount of interest was received subsequently, the same was required to be bifurcated according to the period during which the interest could be said to have accrued. Besides, the submission that the assessee had also taken Clearance Certificate in form envisaged u/s. 230A of the Act could not advance the case of the assessee because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed." 7.2 On the basis of the law prevailing in this assessment year, therefore, we have to decide whether the explanation offered by the assessee is bonafide and all the facts relating to the explanation and material to the computation of the total income had been disclosed or not. This again puts us in the situation to find out whether there was an absence of bonafide belief or not. In other words, whether there was conscious concealment of particulars of income or filing of inaccurate particulars. For necessary findings firstly we shall consider whether on the basis of law prevailing at the time of filing of the return of income whether the assessee had any basis for the belief as said to have been entertained. This again would requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. (iv) Where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non-accrual. (v) The following propositions emerge in relation to the theory of real income : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognised and accepted practice of commercial accountancy, that is wholly consistent with the mercantile method of accounting and it prevents the wrong crediting and improper and illegal distribution or remittance of inflated and unreal profits. (v) Even under the mercantile system of accounting whenever adopted, it is only the accrual of real income which is chargeable to tax, accrual is a matter of substance and it is to be decided on commercial principles having regard to the business character of the transactions and the realities and specialities of the situation and cannot be determined by adopting a purely theoretical or doctrinaire or legalistic approach. If, therefore, for the purpose of determining whether there has been accrual of real income or not regard is to be had to the business character of the transactions and the realities and specialities of the situation in preference to a theoretical, doctrinaire or legalistic approach, interest on sticky loans, which has theoretically accrued but has not factually resulted or materialised at all to, an assessee during the accounting year, can certainly be regarded as hypothetical income and not real income. There is no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld. But it should be remembered that we are deciding the issue of penalty in penalty proceedings. The decision has a binding effect on merits because two of the three Hon. Judges have taken a particular view but what is more important to bear here in mind is that one of them held a different view as that of assessee, informing us that other view could be entertained by many in the judicial and professional circles. If this is acceptable and indeed it must be, we are not in a position to agree that there was conscious concealment. It is not as if the assessee held the view as was held by the two Judges in the aforesaid decision and yet no mention was made in part-3 of the return of income or anywhere disclosing the legal position on the basis of which claim regarding non-accrual was required to be considered. This being the position, we state that Explanation I which is newly inserted though diluting the rigour of law regarding burden on the revenue, the case does not come within the provisions regarding levy of penalty. 7.4 We are entirely in agreement with the finding given by the CIT(A) that totality of the facts and circumstances is required to be appreciated in the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim the accepted liability in respect of payment of interest and since it was accepted, on the basis of settled legal position with regard to the deductibility of expenditure on the basis of accounting system followed, the only year would be the year to which the liability pertained. The assessee could not have claimed in future such liability in respect of this year even on the basis of payment when made in future. But when the issue has to be considered with regard to the accrual of income, certain factual concepts do have impact on consideration even after the Supreme Court decision referred to above. There was clear distinction in these two matters even at the time when the revised return was filed especially because the income when received in future could be taxed on which legitimate tax to the revenue could be collected but in the case of deduction for liability, the legal position being clear, no such allowance could be claimed in future asst. years. 8. For assessment year 1978-79, the difference in the fact as stated would not alter our decision. We, therefore, delete the penalties levied in both the years. The orders passed by the CIT(A) are set-aside. 9. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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