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TMI Blog1986 (1) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... ge on the assets of the above firm. Besides, two of its partners, namely, Shri S.K. Vaid and Shri P.K. Vaid had also executed personal bonds as security for the repayment of the principal and the interest thereon. These terms are discernible from the assessee's letter dated 30-9-1972 addressed to Banarasidas Ramgopal, which were accepted by the letter on 1-10-1972 as per their endorsement on the letter itself. 3. The assessee also maintained regular books of account. Besides deposit with Banarasidas Ramgopal, the assessee had also put funds in fixed deposit with the United Commercial Bank, Lucknow. In its income and expenditure account, the assessee had accounted for the interest on the above deposits along with the interest on its savings account with the bank. It did not, however, include or account for the interest receivable from Banarasidas Ramgopal. Banarasidas Ramgopal, on the other hand, credited the interest to the account of the assessee from year to year. Copies of the assessee s account in their books for different years have been filed before us. The interest was, however, paid by the above firm to the assessee for the first time on 30-3-1979. On that date, an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it receipt for the interest amounted to actual payment of the interest to the assessee and, therefore, inclusion of such interest in its income and expenditure account did not amount to maintenance of the books on mercantile system, but that the assessee had been following cash system of accounting. The Division Bench of the Tribunal referred the question to a Larger Bench. While referring the matter, the Division Bench observed as under: "3. In our view, the view of the Tribunal in the assessment year 1973-74 requires reconsideration. The slender evidence on the basis of which the Tribunal came to the conclusion that the assessee had been following mercantile system of accounting was the conversion of interest from the bank and fixed deposits in fresh deposits. It was claimed before us that issuing of a fresh fixed deposit receipt for the interest amounted to actual payment of interest to the assessee and, therefore, the conclusion was that the assessee had been following cash system of accounting and had been crediting the interest in its books of account on their receipt. According to the assessee, conversion of interest into a new fixed deposit receipt amounted to its actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8. We have carefully considered the submissions placed before us. The facts are not in dispute. The assessee had advanced a sum of Rs. 1,37,500 to Banarasidas Ramgopal. The latter had been crediting the assessee's account with the interest due from year to year. There was no receipt of any such interest up to the assessment year 1978-79. For the first time, an amount of Rs. 22,343 was received in the assessment year 1979-80. Subsequently, there were further receipts and the entire amount including the principal had been cleared off by the end of the assessment year 1980-81. The interest from Banarasidas Ramgopal can, therefore, be assessed in the hands of the assessee only, if the latter has been following mercantile system of accounting. A decision cannot be taken against the assessee only because Banarasidas Ramgopal had been claiming deduction of the interest in their own assessment. That might be because they might have been following mercantile system of accounting. 9. The stand of the assessee is also supported by the language of section the 145(1) of the Income-tax Act, 1961 ('the Act'). It states that income from other sources shall be computed in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not as its debtor. We are, therefore, driven to the inevitable conclusion that the showing of the interest as receipt in the assessee's income and expenditure account fits in which the method of accounting, i.e., cash system followed by it. It does not, in any way, show that the assessee had been following mercantile system of accounting. A perusal of its accounts is also indicative of the same. We have already pointed out above that the other activities of the assessee relating to the donations and the expenses have been accounted for in the accounts on strictly cash basis. Once, we have come to the conclusion that the assessee had been following cash system of accounting, we have no option, but to hold that the interest from Banarasidas Ramgopal cannot be taxed on accrual basis. It has to be taxed only on the receipt basis. Since there was no such receipt in the assessment year 1976-77, the entire interest of Rs. 20,625 is excluded from the assessment. For the assessment year 1979-80, the ITO is directed to include the amount of actual receipt from the above firm in place of Rs. 42,795 included in the assessment. 12. We will now deal with the second contention in these appeals. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either adequate security or adequate interest or both;" He submitted that the ITO actually meant to apply the above section for holding that the funds of the assessee-trust had been used for the benefit of Shri S.K. Vaid. He, however, submitted that the above section was not applicable to the facts of the present case. 15. The first contention of the counsel for the assessee was that the sum of Rs. 1,37,500 had actually been deposited by the assessee with Banarasidas Ramgopal and that it had not been advanced as a loan or had been lent to it. He argued that there was a difference between a loan and a deposit. According to him, in the case of a loan, it is ordinarily the duty of the debtor to seek out the creditor and to have the money according to the agreement. On the other hand, in the case of a deposit, it is the duty of the depositor to go to the depositee and to make a demand for it---Gurcharan Das v. Ram Rakha Mal AIR 1937 Lahore 81. Referring to the facts of the case as contained in the assessee's letter dated 30-9-1972 addressed to Banarasidas Ramgopal, be argued that it was the assessee who had gone to Banarasidas Ramgopal for making a deposit with a view to earn hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefor or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and deposit. The observations of the Privy Council in Mohammad Akber Khan v. Attar Singh, 63 Ind. Appl. 279: AIR 1936 PC 171 were: "The distinction which is perhaps the most obvious is that the deposit not for a fixed term does not seem to impose an immediate obligation on the depositee to seek out the depositor and repay him. He is to keep the money till asked for it. A demand by the depositor would, therefore, seem to be a nominal condition of the obligation of the depositee to repay. Earlier the Board pointed out that in effect a deposit is a loan under conditions. Although that is the distinction between a loan and a deposit, the question in a given case whether a debt is a deposit or a loan will be one of fact which will have to be decided on the facts and circumstances in each case. The use of the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be equivalent to the adequate security even on the plain meaning of the words. Adequate security is a very powerful expression. Even 'good' security may not tantamount to 'adequate' security. It postulates adequacy of value. The decision of the Supreme Court in Tulsidas Kilachand v. CIT [1961] 42 ITR 1 shows that there is a well recognised distinction between the expressions 'good consideration' and 'adequate consideration'. The decision of the Calcutta High Court in P.J.P. Thomas v. CIT [1962] 44 ITR 897 lays down that 'adequate consideration' implies valuable consideration and the word 'adequate' postulates an objective measure for assessing the adequacy of the valuable consideration. The Andhra Pradesh High Court, in Potti Veerayya Sresty v. CIT [1972] 85 ITR 194, has pointed out that there must be some means to measure the adequacy of the consideration. 'Adequate consideration'... must, in our judgment, be construed as valuable consideration capable of being compared and measured with money or money's worth---CWT v. Khan Saheb Dost Mohd. Alladin [1973] 91 ITR 179 (AP). This view is reiterated in CIT v. Vivian Bose [1979] 118 ITR 989 (Bom.) wherein it is stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argovindas Charitable Trust v. Third ITO [1983] 2 SOT 88 had held that personal security is no security in the eyes of law, because in the event of dissolution of the firm, the debt due to the assessee could only be regarded as unsecured. 22. It was next submitted that, in any case, the rate of interest at 15 per cent was adequate interest. We agree with this submission. We are dealing with the assessment years 1976-77 and 1979-80. In those years, it could not be said that the rate of 15 per cent was not adequate compensation. 23. It was next submitted that the transaction went out of the scope of section 13(2)(a) if the lending was either for adequate security or at adequate interest. The learned departmental representative, on the other hand, submitted that it was necessary that not only the lending should be with adequate security, but also that it should be at adequate rate of interest. In other words, it was necessary that both these conditions should be satisfied before the transaction could be taken out of section 13(2)(a). 24. In our opinion, here also the view of the department must prevail. M.P. Agrawal has observed that the law not only requires that the loan shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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