9911796707
TMI Blog1996 (11) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed by the assessee, the books of accounts were closed as on 30-6-1988 (ie., from 1-7-1987). Due to change in the previous year the books of accounts were ultimately closed on 31-3-1989. In the course of carrying on its activities, assessee lent cash to several persons and in turn, earned interest income. However, in respect of some of the debtors, the company found that the receipt of principal itself is in doubt and hence, the question of receiving interest may be a remote chance. Since the company was following mercantile system, interest accrued as on 30-6-1988 was shown in the books. However, on 21-12-1988 (before the end of the accounting year relevant for the assessment year 1989-90), the assessee-company has passed resolution in its Annual General Meeting, which is as follows : "Resolved that method of accounting has been changed in respect of interest on loans on mercantile basis to cash basis with effect from 1st July, 1987 in respect of persons from whom interest has not been received since long time after making several reminders for payment of interest. Further resolved that the above cash basis method would be followed consistently from next year onwards. It has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, as income, by the assessee on accrual basis in the previous year ending 31-3-1989. However, addition of Rs. 90,564 was confirmed on the ground that the change in the method of accounting is not an acceptable change as the method is not workable as a systematic method with reference to any definite source of income. 6. Aggrieved by the order of the first appellate authority, both the revenue is well as the assessee-company are in appeal before us. The case of the revenue is that the sum of Rs. 1,20,750 cannot be allowed as bad debt in the year under consideration as it is only an outstanding interest. On the other hand, ld. counsel for the assessee contended that the sum of Rs. 1,20,750 having been allowed as bad debt written off, by following the same analogy the sum of Rs. 90,564 cannot be treated as accrued to the assessee in the accounting year under consideration. He, therefore, contended that the first appellate authority is not justified in granting partial relief. The ld. counsel for the assessee contended that the assessee is not staking its claim on the basis of the change in the method of accounting but on the principal of real income. He has filed a pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and this fact is further supported by the conduct of the assessee in not showing the interest in the books of account. He has relied upon the following decision in this regard : (a) State Bank of Travancore v. CIT [1986] 158 ITR 102 at pages 104, 124 to 131/24 Taxman 337 (SC) (b) Kewal Chand Bagri v. CIT [1990] 183 ITR 207 (Cal.) (c) CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC) (d) CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572/6 Taxman 63 (Mad.) (e) CIT v. N.D. Radha Kishan Co. [1983] 140 ITR 860/14 Taxman 233 (Punj. Har.) and (f) CIT v. Devi Films (P.) Ltd. [1983] 143 ITR 386 (Mad.). 7. On the other hand, ld. departmental representative submitted that if once income accrues on the basis of method of accounting followed by the assessee, the same is taxable in the year under consideration and by mere giving up of the interest by the assessee voluntarily does not convert accrual into non-accrual. In this regard he has strongly relied upon the majority decision of the Hon'ble Supreme Court in State Bank of Travancore's case and also the decision of the Calcutta High Court in the case of James Finlay Co. v. CIT [1982] 137 ITR 698/[1981] 6 Taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vancore. The reasons and the conclusion reached by the Hon'ble Justice Sabyasachi Mukharji were accepted by Hon'ble Justice Ranganath Misra and thus the reasons and observations of the Hon'ble Justice Tulzapurkar was a minority view in the aforesaid case. The ld. counsel for the assessee has relied upon several observations of the Hon'ble Justice Tulzapurkar, at pages 104 to 131 of the report, whereas the dissenting judgment starts at page 134. With due respects we may state that minority view cannot be followed in preference to the majority view. We now briefly discuss and analyse the majority view in the aforesaid judgment. His Lordship Justice Sabyasachi Mukharji has considered all the leading decisions on this issue and broadly evolved the following propositions : "(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 fight 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iples enunciated therein are in consonance with the decision of the Calcutta High Court in James Finlay Co. v. CIT [1982] 137 ITR 698, where all these relevant authorities including Kashiparekh's case [1960] 39 ITR 706 (Bom.) as well as Birla Gwalior (P.) Ltd.'s case [1973] 89 ITR 266 (SC), have been discussed and analysed. In that case, the accounts of the assessee-company for the year 1970-71, included an amount of Rs. 8,264 from B G and Rs. 55,920 from S.P. Ltd. receivable as interest. The interest due from B G were on advances made in 1966 and that from S.P. Ltd. were on advances made in 1965. The assessee was following the mercantile system of accounting and the Income-tax Officer treated both the items of interest as the assessee's income for 1970-71. The assessee used to credit the interest to its profit and loss account. It urged that it had decided to change with effect from January 1, 1968, its method of accounting in respect of interest, which was doubtful of recovery and that such interest was thenceforward credited to the suspense account. The Tribunal held that there was no change in the method of accounting and that before the closing of the books of account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have been accrued to the assessee during the impugned assessment year. 12. In a later decision of the Hon'ble Calcutta High Court in the case of CIT v. Hindusthan Motors Ltd. [1993] 202 ITR 839, a similar issue has come up before his Lordship Justice Ajit K. Sengupta, wherein the facts were slightly different. In the aforesaid case, the board of directors of the assessee decided not to charge interest owing to difficult financial condition of the subsidiary company, in order to enable the subsidiary to tide-over the financial crisis. While considering the submission on behalf of the assessee, his Lordship observed at page 845 as under : "It was contended on behalf of the assessee that the doctrine of real income shall apply in the case of the assessee and it is not mere accrual that renders an income taxable but what accrues must be real and not illusory. It was urged that, in this case, the interest forgone never formed part of the real income of the assessee. It is submitted that, by reason of the arrangement between the assessee and the subsidiary company before the accounts of the relevant previous year were adjusted and made up, the liability of the subsidiary cea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting, we are of the opinion that the interest has accrued to the assessee during the year under consideration and hence, the amounts of Rs. 1,20,750 and Rs. 90,964 are liable to be considered as accrued income for the assessment year 1989-90. 18. However, the other aspect that needs consideration is with regard to the claim under section 36(1)(vii) of the Act. Section 36(1)(vii), as amended w.e.f. 1-4-1989 and section 36(2)(i) are reproduced hereunder : "36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. AND (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 36(1)(vii) of the Act. Assessee's claim, all along, was that the interest income has not accrued and it has, in fact, not recorded the interest of Rs. 90,564 in its books of account. Thus the question of making a claim under section 36(1)(vii) before the Assessing officer would have been preposterous. However, the fact that it has not shown the income as accrued, clearly demonstrates that in the opinion of the assessee the interest income is not recoverable. As we have already held that the interest income accrues to the assessee, the claim of the assessee, that the circumstances were such that the recovery of interest is not possible, should be considered under section 36(1)(vii) of the Act as, otherwise, it would lead to an anomalous situation where the interest relatable to the earlier part is allowable as deduction under section 36(1)(vii), merely because the claim is made before the Assessing Officer and for the later part no such deduction is allowable, as, the assessee could not have made such a claim before the Assessing Officer, for, it would have been contrary to its main claim. We may, in this regard state that the Hon'ble Calcutta High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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