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TMI Blog2000 (9) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... id advance @ 15%. In the accounting year relevant to the present assessment year, the assessee company did not charge any interest on the said advance and consequently not shown any income on this account on accrual basis. In response to a query, it has been explained in writing that on a resolution passed by the Directors in the meeting of the Board of Directors on 29-3-1983, it was resolved not to charge any interest from this year on the grounds, as mentioned in the minutes of the meeting, that Shri K. R. Patel had no source of income to pay any interest, that he served the company for a long time at a paltry remuneration and that his physical condition being not well, he had already resigned from the company with effect from 1-7-1982. It appears that by merely passing a resolution by the Directors, one of whom happens to be his son, the Directors cannot remit the interest which is due to the company on the amount of advances already made with specific condition of claiming interest and cannot deprive the company from earning the said interest. Of course, considering the financial and other difficulties of Shri K. R. Patel the company might have extended the time for payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and this is the normal practice of a business to charge interest and secondly the building on which investment has been made of the advance taken is not used for the company rather it is given on rent to the third party and there is an agreement with the third party to pay rent which means that Mr. K. R. Patel is drawing income from the property constructed by the funds of the company. Whether he actually received the amount or he may receive after litigation is immaterial because he is legally entitled to receive the rent from that building. The company who had advanced the loan to K. R. Patel is also entitled legally to charge interest on the basis of the agreement with them. Hence, the income accrued to the company and waiver of interest on the basis of a latest resolution is to be ignored as it is a colourable transaction and the ITO has rightly added the same as income accrued to the appellant. I, therefore, confirm the addition accordingly." Aggrieved by the order of the CIT(A) the assessee filed the present appeal before the Tribunal. 5. The assessee's counsel filed before us a paper-book of 48 pages. The arguments of the assessee's counsel were to the following effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this meeting". The loans were given to Shri Patel bearing simple interest @ 15 1/2% per annum. This can be seen from the resolution of the Board of Directors dated 7-6-1977 placed at page 38 of the paper-book. But by mistake the interest has been debited to his account on the basis of compound rate of interest. If interest were to be calculated for the assessment year 1983-84 on the balance due from him, it would be Rs. 54,487 only. The working is given at page 47 of the paper-book. The principal amount as on 1-4-1982 comes to Rs. 3,51,581 (Rs. 5,17,081 minus repayments made upto 31-3-1982 of Rs. 1,65,500) : The addition should have been only Rs. 54,487 in place of Rs. 77,562. Further, the assessee-company has not paid any interest payment. No interest should have been included in the total income of the assessee as per the decisions in CIT vs Ferozepur Finance (P.) Ltd. (1980) 124 ITR 619 (4 Taxman 439.) (Punj. Har.) and CIT vs Motor Credit Co. (P.) Ltd. (1981) 127 ITR 572 (6 Taxman 63.) (Mad.). 6. The arguments of the departmental representative were to the following effect it is true, as per page 38 of the paper-book filed by the assessee, the loan was given to Shri Pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no prospect of recovering even the principal amount. The legal opinion taken by that assessee indicated that there was no prospect of recovery of any of the amount loaned by initiating legal proceedings against the debtor. In the present case, since the loans were given to Shri Patel on simple interest @ 15 1/2% per annum, the interest had accrued from 1-4-1982 to 29-3-1983. Reference may be made to the decisions in the case of CIT vs Kerala State Drugs Pharmaceutical Ltd. (1991) 192 ITR 1 (59 Taxman 515.) (Ker.), Peter John vs CIT (1986) 157 ITR 711 (Ker.) (FB), Govind Sharan vs CIT (1982) 133 ITR 225 (Raj.). The Board of Directors of the assessee-company had given up the interest only after the interest had accrued to it. Thus, the assessee cannot escape the liability to tax on the interest, income that had already accrued from 1-4-1982 to 29-3-1983 as per the decision of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. vs CIT (1971) 82 ITR 835. 9. We may mention that though the assessee has indicated some case laws at page 47-D of the paper-book, the counsel for the assessee did not refer them during the course of arguments. 10. In these circumstances, follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anganath Misra, J. concurred rejected this contention and held that interest had already accrued and concept of real income cannot be used to make accrued income non-income simply because after the event of accrual, the assessee neither decided to treat it as a bad debt nor claimed deduction under section 36(2) of the Act. Their Lordships in the course of discussion extensively dealt with the question as to when income accrues. A large number of cases inclusive of the case of Morvi Industries Ltd. are discussed in the judgment. I have underlined the position to emphasise that income would accrue only on the end of the accounting year. The first relevant case to which reference is made is that of CIT vs K.R.M.T.T. Thiagaraja Chetty Co. (1953) 24 ITR 525 (SC). In the said case the assessee firm was entitled to commission etc. for managing a company. For the period ending March 31, 1942, the assessee was entitled to a commission of Rs. 2,26,850. On March 30, 1942, the assessee wrote to the company to write off a debt owned by the assessee. The directors by a resolution refused to write off the amount and resolved to keep the sum of Rs. 2,26,850 in suspense pending the settlement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this case it is observed as under : "In that case, there was a provision for reduction of commission where profits were insufficient in the case of the managing agent. There was modification of the commission before the end of the year. The amount was given up by the managing agent. The question that arose was whether the income had accrued and what was the effect of the entries made in the books of account. It was held by this court that the agreement was an integrated and indivisible one and the managing agent's commission was only determinable and accrued when the year was over." Their Lordships then referred to the decision of the Bombay High Court in H.M. Kashiparekh Co. Ltd. vs CIT (1960) 39 ITR 706 and discussed that the facts and circumstances were quite peculiar in that case. The case of CIT vs Birla Gwalior (P.) Ltd. (1973) 89 ITR 266 (SC) is then considered. In that case the assessee for the period ending March 31, 1950, had earned commission but as a result of resolution passed the assessee company gave up Rs. 97,000 in December, 1950. With reference to the above case and that of H.M. Kashiparekh Co. Ltd. their Lordships made the following pertinent observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussing the facts that there were hardly any receipts in respect of items of interest or that the bona fides of the assessee in not charging interest were not disputed, were circumstances which were by themselves insufficient to support the conclusion that there was no real income in respect of the items of interest as none of the debts due by the several debtors was written off by the assessee and no evidence was produced to show that interest in respect of the debts was given up. The High Court, therefore, held that there was no giving up and these incomes were assessable. I am in respectful agreement with the conclusion of the Bombay High Court. In the instant case before us; the facts are still worse. The assessee has not only not written off, but it is still treating loans as alive by keeping them in the suspense account." Likewise, their Lordships approved of the decision of the Calcutta High Court in the case of James Finlay Co. vs. CIT (1982) 137 ITR 698 (11 Taxman 229.), that "though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep these in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite of resolution dated 29-3-1983 of the assessee-company validly giving up interest on loan to Shri K. R. Patel before the end of the accounting period, any interest accrued from 1-4-1982 to 29-3-1983 as a taxable income on the aforesaid loan?" 2. The facts are not in dispute. The assessee has been charging interest from one Shri K. R. Patel, its Director upto assessment year 1982-83. It did not credit interest for assessment year 1983-84 because it passed a resolution not to charge the same on 29-3-1983. The resolution as set out in para 5 of the Accountant Member's order aforesaid, reads as under: "Resolved that pursuant to the provisions of section 293(1)(b) of the Companies Act, 1956 consent be and is hereby accorded to the Company extending the time for repayment of at least the balance principal amount of Rs. 3,32,140.98 advanced to Mr. K. R. Patel, Ex-Managing Director of the company, by a further period of five years ending on 31-3-1988 without any interest. It was also further resolved 'hat the amount of interest receivable from Mr. K. R. Patel on the loans given to him for the years 1979-80 to 1982-83 amounting in all to Rs. 2,49,759.00 shall be written off in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of that year and as held by the Calcutta High Court in the case of CIT vs Hindusthan Motors Ltd. (1993) 202 ITR 839 at page 846 in the following words : "There is some distinction in the manner of accrual of interest income and the accrual of managing agency commission. The accrual of the managing agency commission depends upon the terms of the agreement. In the case of Birla Gwalior (P.) Ltd. (1973) 89 ITR 266 (SC), the date on which the commission was receivable was stipulated in the managing agency agreement. It was receivable by the managing agent only after ascertainment of the profits of the managed company. The Supreme Court emphasised that, as the managing agency commission receivable would have been ascertained only after the managed company had made up its accounts, the commission could accrue not on the expiry date of the accounting year but on the date on which the accounts are made up. In connection with the decision in Birla Gwalior (P.) Ltd.'s case (1973) 89 ITR 266 (SC), Justice Mukherji observed in State Bank of Travancore's case (1986) 158 ITR 102 (SC), at page 149 of the Reports : 'It is clear that the facts of the case were that the managing agency commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , being the last day of the previous year relevant to the assessment year 1971-72. Therefore, the passing of resolutions subsequently on May 10, 1971 and/or on August 21, 1971, in the meeting of the board of directors of the assessee-company is of no effect." 8. Main emphasis of the Calcutta High Court in the aforesaid decision is on day to day accrual and the words "in any event, on March 31, 1971, being the last day of the previous year relevant to the assessment year 1971-72", were used because in that case the waiver was after the accounting year. 9. Some what similar matter came up before the Kerala High Court in the case of CIT vs Podimattom Wines (1994) 205 ITR 450 wherein the question of interest on deposit with the Excise Commissioner was the subject matter of dispute. The assessee claimed there that the assessee would be entitled to the interest only when the Excise Department gives credit to him. Till such time although the interest may accrue on the deposits the assessee does not become entitled to it. That contention of the assessee was not accepted by the Kerala High Court and it was observed that interest will accrue on the said deposits de die in diem. That mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of S. C. Angre, though it is said that interest pertaining to period prior to 19th March, 1964 on which the additional compensation was awarded accrued in the year in which this date falls and interest pertaining to the period after 19-3-1964 is to be taxed on accrual basis in respective assessment years and in that context it was held that interest under section 34 accrues or arises at the time the possession of the land is taken and it accrues from year to year until the payment of interest is so deposited. The concept of accrual of interest on day to day basis not specifically discussed. 13. In the decision of the Supreme Court in the case of Shiv Prakash Janak Raj Co. (P.) Ltd., the Supreme Court held that interest which has already accrued during the accounting year but waived by a resolution which was passed after the close of the accounting year, was the income of the assessee assessable in the respective years. In one of the years, i.e., assessment year 1968-69, the resolution was passed before the accounting year but that year's appeal was not pressed before the Supreme Court and, therefore, the Supreme Court did not pronounce any judgment and the concept of accrual ..... X X X X Extracts X X X X X X X X Extracts X X X X
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