9911796707
TMI Blog1985 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ither from Bhadohi Cold Storage or from Carpet Traders. The IAC was of the view that the interest had actually accrued from these two concerns according to the mercantile system of accounting followed by the assessee and was, therefore, includible as its income in the assessment. In the assessment year 1978-79 he, thus, brought to tax the interest of Rs. 1,07,700. In the assessment year 1979-80, he estimated such interest at Rs. 60,000 and included it in the assessment. 3. The assessee appealed to the Commissioner (Appeals). The Commissioner (Appeals) found that the figure of Rs. 1,07,700 brought to tax by the IAC was incorrect as it related to the arrear interest for the assessment years 1975-76 to 1977-78. He, thus, proceeded to correct the order of the IAC. On the basis of the average amount of advance to Carpet Traders, he held that only a sum of Rs. 4,500 could be included in the assessment. He, however, held that there was no question of taxing any such interest from Bhadohi Cold Storage as there was no hope of any recovery of even substantial portion of the principal amount. He also took note of the fact that the assessee had passed a resolution in the meeting of its board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed before the Commissioner (Appeals) in support of this argument of the assessee. Since the counsel for the assessee failed to produce the deponent of the affidavit, the Commissioner (Appeals) ignored it. Since the assessee had charged interest in the earlier years, as mentioned above, the Commissioner (Appeals) held that there was an agreement for charging interest even though it was an unwritten one. He rejected the assessee's contention that the directors had made of their mind not to charge interest much earlier to 28-12-1977, when a resolution to that effect was passed in their meeting. He finally held that the assessee was entitled to charge interest from Bhadohi Cold Storage for the entire previous year relevant to the assessment year 1978-79 and up to 28-12-1977 relevant for the assessment year 1979-80. This worked out to Rs. 37,776 in the first year and Rs. 21,060 in the second year. He upheld the additions to this extent. He similarly held that there was also no agreement for charging any interest from Carpet Traders. We have already stated above that an interest of Rs. 4,500 was brought to tax in the assessment year 1978-79 relating to this party. There was no appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel placed his legal arguments. The first argument was that in fact there was no agreement even with Bhadohi Cold Storage or Carpet Traders for charging of any interest and that the charge of interest by the assessee was an unilateral act. He specifically pointed out that no such interest was credited by Bhadohi Cold Storage in its books of account. His second submission was that there was no accrual of interest in either of the above two cases when their financial position was bad and the assessee had not charged any interest and, subsequently, it had passed a resolution for non-charge of interest from Bhadohi Cold Storage on 28-12-1977. His third submission was that the assessee was entitled to change its method of accounting regarding charge of interest and it had actually done so, change being from mercantile system to cash system. He also referred to the following authorities---CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. Har.), CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.), CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 815 (All.) and Beni Prasad Sidh Gopal v. CIT [1983] 15 Taxman 191 (All.). 9. The learned departmental representative, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal mainly on the ground that the facts of the case were not clear and, therefore, it was not possible for the Tribunal to come to either conclusion. It was in this connection that the Tribunal had also suggested that it may also be found whether there was any agreement for charging of interest with the parties and whether the principle laid down by the Hon'ble Supreme Court in the case of Morvi Industries Ltd. applied to the case. This, therefore, makes it clear that the Tribunal did not lay down any conclusive test for deciding the issue by the Commissioner (Appeals). It only directed him to ascertain the full facts and follow certain guidelines. We are mentioning this fact to clarify the issue before us, which in our opinion, is open for a fresh decision by us. 11. We will then go into the facts of the case. A perusal of the accounts of the debtors makes it clear that their financial positions were certainly not good. The interest of Rs. 1,07,700 due from Bhadohi Cold Storage for the assessment years 1975-76 to 1977-78 remained unrecovered till the end of the assessment year 1980-81. This is an indication of the position. The advance to the above debtor stood at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the financial position of the debtor had become bad and there was no hope of recovery of even the principal amount and, therefore, it was not considered necessary to charge any interest and for that reason no interest was added to the amount due from the debtor during the relevant previous year. It was held that even in mercantile system of accounting, an assessee could forego the whole or part of a debt, which was irrecoverable and the same could not be added to the income of the assessee. Since it was not possible for the assessee o recover the principal amount from the debtor, the assessee was justified in not charging any interest thereon and the interest was rightly foregone by it. The Court held that the Tribunal, therefore, was right in deleting the addition of interest during the relevant accounting year on the amounts due from the debtor. In coming to this conclusion, the Tribunal relied on the decision of the Hon'ble Supreme Court in CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144. 13. The above principle is also supported by a decision of the Madras High Court in Motor Credit Co. (P.) Ltd.'s case. In this case also, the financial position of the debtor had become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the assessee in respect of the outstandings for the accounting year relevant to the assessment year in question no liability to tax can be imposed on the ground that interest has accrued because of the mercantile system of accounting employed by the assessee. The mercantile system of accounting can be relevant only to determine the point of time at which tax liability is attracted and it cannot be relied on to determine whether income has, in fact, resulted or materialised in favour of the assessee. Merely because the assessee has been maintaining his accounts on the basis of mercantile system of accounting, the interest income on the outstandings in the two firms cannot be held to have accrued at the end of the accounting year. Viewed against the background of commercial and business realities of the situation in which the assessee was placed, the Tribunal came to the conclusion that it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest..." 14. The very same above principles were also enunciated by the Allahabad High Court in the cases of Cosmopolitan Trading Co. and Beni Prasad Sidh Gopal. In the case of Cosmopolitan Tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfinance Ltd's case. It is also noticed that the decision of the Hon'ble Supreme Court in Morvi Industries Ltd.'s case and of the Allahabad High Court in Shiv Prasad Ram Sahai's case were also referred to by the Madras High Court in Motor Credit Co. (P.) Ltd.'s case. The Court, however, followed the principle laid down by the Hon'ble Supreme Court in Shoorji Vallabhdas Co.'s case. 17. It may be clarified here that practically all the above decisions relate to accrual of interest according to mercantile system of accounting or in other words accrual of interest, as if there is an agreement for the same. The cases then dealt with the chargeability of such interest to tax. As noticed above, there is divergence of opinion by the Court on the issue. The Hon'ble Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 has held that if the Court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the Court has to adopt that interpretation which favours the assessee. Respectfully following this principle, we have no alternative but to hold that the assessee cannot be charged on the interest which it has not debited to the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no question of accrual of any interest during the assessment year 1979-80, even in the case of Bhadohi Cold Storage. About the accrual of interest in the case of Carpet Traders, the principles, which we have already discussed above, will apply. 20. We, therefore, hold that no interest accrued to the assessee either in the assessment year 1978-79 or in the assessment year 1979-80 (except the sum of Rs 4,500 already brought to tax in the assessment year 1978-79) from either Bhadohi Cold Storage or Carpet Traders. We, therefore, delete the additions of Rs. 37,776 in the assessment year 1978-79 and Rs. 10,500 and Rs. 21,060 in the assessment year 1979-80. 21. There is one more contention in the assessment year 1979-80 relating to disallowance of car expenses. The ITO disallowed Rs. 10,000 out of the claim of Rs. 89,226 on the ground that the car was also used by the directors for their personal purposes. This issue had also been set aside by the Tribunal for fresh consideration by the Commissioner (Appeals). The Commissioner (Appeals), while confirming the disallowance in principle, enhanced the disallowance to Rs. 17,845 following the finding in the assessment year 1978-79. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
