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TMI Blog1983 (7) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. The assessee got this information from the balance sheet of Dhrangadhra Chemical Works Ltd. for the accounting year ending 31-3-1979. It may be stated that Dhrangadhra Chemical Works Ltd. was the holding company of Plastic Resins and Chemicals Ltd. In the aforesaid balance sheet, there was a note of the auditors to the following effect : " The estimated realisable value of the fixed assets of Plastic Resins and Chemicals being lower than the amount due to secured creditors of that company, the amount due to this company from Plastic Resins and Chemicals Ltd. being unsecured loan amounting to Rs. 1,66,13,968 has been written off as bad and irrecoverable debt. Amounts due to the company from Plastic Resins and Chemicals Ltd. for supplies of materials, furnace oil and services and for arrears of interest aggregating to Rs. 1,00,31,063 was written off during 1978-79. " Since the holding company of the assessee's debtor had written off a huge amount of more than Rs. 1 crore as bad and irrecoverable and as the accumulated losses of Plastic Resins and Chemicals Ltd. far exceeded its paid-up capital and reserves, the assessee came to the conclusion that the commission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, in fact, recovered till the date of order, namely, 30-11-1981. Respectfully following the decision in the case of Motor Credit Co. (P.) Ltd., he held that no real income has resulted out of the mere entries made by the assessee in its books of account, or from the mere system of accounting followed by the assessee. Hence, he directed the ITO to delete the sum of Rs. 53,982. 4. Aggrieved by the above decision of the Commissioner (Appeals), the department is in appeal before us. Shri M.N. Nambiar, the learned representative for the department, urged before us that the learned Commissioner (Appeals) erred in his decision. He stated that the commission under consideration had already accrued, due to the assessee, during the year under consideration and the same had been duly taken into account in the assessee's books. If they are subsequently found to be irrecoverable, then the proper course for the assessee was to write off the amount as bad debt and claim the same as such in a subsequent year. He pointed out that the assessee had, in fact, written off this amount in the assessment year 1980-81, and claimed it as bad debt in that year. He also stated that the ITO has, however, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. for the proposition laid down therein, namely, that no real income liable to tax would arise if the income did not materialise ultimately, even though there are entries to the contrary in the books of the assessee. Then he referred to the decision in the case of CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. Har.), wherein a similar view has been taken. In this case, the High Court followed the principles laid down in Chamanlal Mangaldas Co.'s case, Shoorji Vallabhdas Co.'s case and also the decision of the Bombay High Court in the case of H.M. Kashiparekh Co. Ltd. v. CIT [1960] 39 ITR 706. In the last mentioned case, the Bombay High Court held that it was the income of the assessee that is liable to tax, and in ascertaining the real income, the fact that the assessee followed the mercantile system of accounting did not have any bearing. Finally, he referred to the decision of the Madras High Court in the case of CIT v. Devi Films (P.) Ltd. [1983] 143 ITR 386. In this case, the Madras High Court reviewed the earlier decisions on the subject. The High Court followed the decisions in the cases of Motor Credit Co. (P.) Ltd. and H.M. Kashiparekh Co. Ltd.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on any accounting principle or accounting entries. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation, and not with reference to the system of accounting followed by the assessee or the entries made by him in the books according to his understanding. These principles are culled out from the decisions of the Supreme Court in the cases of Chamanlal Mangaldas Co., Shoorji Vallabhdas Co. and Poona Electric Supply Co.. In this case, the Madras High Court considered and approved their earlier decision in the case of Motor Credit Co. (P.) Ltd.. In that case, the assessee was doing the business of financiers under hire purchase scheme. Money had been advanced to a party carrying on bus transport business. The routes of that party were taken over by the State transport corporation. The party defaulted in making the payments of the instalments. The assessee saw that there was no prospect of recovering even the principal amount. It did not, therefore, credit any entry due from the party even though it followed the mercantile system of accounting. The ITO, however, included the accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution was passed after the accounting year, when the commission had accrued, and that case was not concerned with the theory of real income vis-a-vis the method of accounting followed by the assessee. 7. In our opinion, the aforesaid principles support the case of the assessee. The facts of the case before us are that it was entitled to certain commission as a result of an old agreement. The assessee credited the commission amount in its books. However, it later on discovered that the commission was not realisable at all and so it remained illusory. After looking into the resolution passed by the holding company writing off a debt of more than Rs. 1 crore and looking into the balance sheet of Plastic Resins and Chemicals Ltd., wherein the accumulated losses far exceeded the paid-up capital and reserves, no reasonable man can entertain any hope of recovery of any debt from that party. In such a case, two courses were open to the assessee. If the assessment is still open, then it could file a revised return under section 139(5) of the Income-tax Act, 1961 ('the Act') claiming that the commission wrongly credited in the books as income was, in fact, not income and should be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X
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