Income Tax Appellate Tribunal - Pune
Naik Weaving Mills vs Income Tax Officer on 25 August, 1999
ORDER
K. C. Singhal, J.M.
1. The only issue arising out of this appeal is whether the CIT(A) was justified in sustaining the addition of Rs. 28,950 on account of accrued interest.
2. The brief facts giving rise to this appeal are these. The assessee is a partnership firm. During the asst. yr. 1989-90, it entered into a development agreement with M/s Atul Enterprises on 25th September, 1988, in respect of Plot No. 14, CTS No. 136 Erandavana, Pune, against consideration of Rs. 20,00,000. The assessee was to receive the aforesaid payment in installments as under :
1. Rs. 11,10,000 on the date of execution of the agreement.
2. Rs. 3,82,000 within three months from the date of agreement.
3. Rs. 4,93,000 within six months from the date of agreement.
4. Rs. 15,000 at the time of execution of final conveyance.
3. Clause 6 of the agreement provided that if there was any delay in payment of the aforesaid instalments, the interest at the rate of 15 per cent shall be charged and the said plot shall stand charged with for the payment of all the delayed instalments along with interest. However, the other party could not pay the 3rd instalment of Rs. 4,93,000 which was due to be paid on 25th March, 1989. The sum of Rs. 3,00,000 against the 3rd instalment was paid only on 18th January, 1991. The assessee did not offer any income on account of accrued interest in respect of the above instalment which could not be paid. However, the AO was of the view that interest income accrued to the assessee the moment there was a default for non-payment of the instalment. Accordingly, he computed the interest income at Rs. 28,950 at the rate of 15 per cent on Rs. 1,93,000. It is not know why the AO computed the interest on the sum of Rs. 1,93,000 instead of Rs. 4,93,000. The default was committed by the other party in respect of the entire instalment of Rs. 4,93,000. The matter was carried by the assessee before the CIT(A) but, remained unsuccessful. Hence, the present appeal was preferred by the assessee before the Tribunal.
4. The learned counsel for the assessee Mr. Sathe has assailed the order of the CIT(A) by contending that in reality no income had accrued to the assessee since it was waived by the assessee. In this connection, he invited our attention to the letter of M/s Atul Enterprises dated 5th April, 1991 appearing at p. 11 of the paper-book requesting the assessee to waive the interest in respect of the 3rd instalment which could not be paid. In this letter, the reason for non-payment given by that firm was that they could not get the complete possession of the said property because of encroachment by one of the tenant of the assessee Shri P. S. Deshpande and a civil suit was pending in the Court in this regard. He also invited our attention to the letter of assessee dated 9th April, 1991, appearing at p. 12 of the paper-book to show that right to receive interest on the delayed payment of 3rd instalment was waived by the assessee keeping in view the facts and circumstances of the case. He also invited our attention to cl. 6 of the agreement to point out that no date of payment of interest was specified though the assessee was entitled to interest at the rate of 15 per cent. It was also submitted by him that interest was nothing but the compensation which could be quantified only when the said instalment was finally paid and, therefore, no income could be said to have accrued. In support of his contention, he relied on the decision of the Supreme Court in the case of CIT vs. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC), decision of Punjab and Haryana High Court in the case of CIT vs. Ferozepur Finance (P) Ltd. (1980) 124 ITR 619 (P&H), decision of Madras High Court in the case of CIT vs. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad). He also referred to the latest decision of the Supreme Court in the case of CIT vs. Shiv Prakash Janak Raj & Co. (1996) 222 ITR 583 (SC) at p. 595. On the other hand, the learned Departmental Representative has strongly relied on the reasonings given by the AO and the CIT(A).
5. Rival submissions of the parties have been considered carefully. The case law cited before us have also been gone through carefully. As far as the legal position is concerned, it is well settled that under the Mercantile system of accounting, the taxable event is the moment when income accrues to the assessee though not received. The meaning of word "accrue" was considered by the Hon'ble Supreme Court in the well celebrated judgment in the case of E. D. Sassoon & Co. Ltd. & Ors. vs. CIT (1954) 26 ITR 27 (SC). Their Lordships held that income could be said to have accrued when an enforcible debt was created in favour of the assessee. The relevant portion of the judgment at p. 51 is being reproduced for the benefit of this order.
6. "It is clear therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro. [See W.S. Try Ltd. vs. Johnson (Inspector Taxes) (1946) 1 All ER 532 and Webb vs. Stenton & Ors., Garnishees 11 QBD 518.] Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him."
7. It is also well settled that interest accrues on day-to-day basis according to the principle of de die in diem. That is why it is taxable year after year even though it is not received. Reference can be made to the decision of the Supreme Court in the case of Rama Bai Etc. Etc. vs. CIT (1990) 181 ITR 400 (SC). In our opinion, it would not make any difference whether interest is received under a contract or a statute. Another settled legal position is that no tax can be levied on notional basis where right to receive interest is given up or waived before its accrual. This proposition is based on the theory of real income as laid down by the Hon'ble Supreme Court in the case of CIT vs. Shoorji Vallabdas & Co. (1962) 46 ITR 144 (SC), but such proposition cannot be extended to a case where right to receive income is given up after its accrual. Reference can be made to the decision of Supreme Court in the case of Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835 (SC).
8. In view of the above legal position, let us consider the issue before us in the light of the facts of the case. There is no dispute that books of account are maintained by the assessee on mercantile system. The right to receive interest accrued to the assessee by virtue of cl. 6 of the agreement which is being reproduced as under :
"Since it is an Development Agreement, the time shall not be essence of the contract and however if any delay in payment of the said amount, the interest at the rate of 15 per cent (fifteen) per cent shall be charged. The said plot shall stand charged with for the payment of all delayed instalment along with interest."
9. By virtue of aforesaid clause, the assessee was entitled to interest the moment there was failure to pay the instalment as provided in the agreement. We are not concerned with the first two instalments. The third instalment which was due on 25th March, 1989 was paid to the assessee on 18th January, 1991. That means, there was default committed by the other party on 25th March 1989 which continued upto the date of the payment. Hence, an inferable debt was created in favour of the assessee. It is to be noted that a charge was created by cl. 6 of the agreement on the land to the extent of instalment along with interest if it was not paid. Therefore, it would be incorrect to say that interest did not accrue to the assessee during the period of default. Therefore, in our opinion, interest income accrued to the assessee for the entire period of default relevant to asst. yr. 1990-91. It is pertinent to note that there was neither a request of waiver from the other party nor decision was taken by the assessee to waive such interest income before the end of the accounting year relevant to the asst. yr. 1990-91. There is also no material on the record to suggest that there was any encroachment on the land by any of the tenant of the assessee during the year under consideration. On the contrary, material on the record clearly shows that request for waiver was made on 5th April, 1991 and the decision to waive such interest was taken by the assessee on 9th April, 1991. Both these dates fell much after the date of the accrual of the income. Therefore, the case of the assessee falls within the ratio laid down by the Supreme Court in the case of Morvi Industries (supra) which was decided by a Bench of three Judges. Accordingly, it is held that interest income accrued to the assessee for the period of default and, therefore, the same was rightly taxed by the AO and sustained by the CIT(A).
10. The decision of the Supreme Court in the case of Birla Gwalior (P) Ltd. which was heavily relied on by the learned counsel for the assessee is, in our opinion, distinguishable on the facts of the case. In that case, the assessee was entitled to commission which was based on the net profits of the managed company. There was no clause to say that income was to accrue on a particular date. On the contrary, the earning of the commission was dependent on the profits of the managed company. Therefore, no sum could be said to be due to the assessee unless such profits were ascertained. In view of this particular fact, the date of accrual was held to be the date when the accounts of the managed company were finalised. Admittedly, the right to commission was given up before the ascertainment of such profits. It is because of this fact, the Hon'ble Supreme Court held that no income arose to the assessee. But, in the present case, the rate of interest, the amount on which it was payable and the period of default were known to everybody and nothing was to be ascertained. The interest accrued to the assessee on the principle of de die in diem therefore, the date of accrual could not be postponed beyond the last date of the accounting year. It is useful to point out that both the decisions of the Supreme Court in the case of Morvi Industries and Birla Gwalior (P) Ltd. were examined by the apex Court recently in the case of Shiv Prakash Janak Raj & Co. (supra) wherein it has been held that there is no conflict between the aforesaid two decisions of the Supreme Court. Therefore, these decisions would apply according to the facts of each case. But, one thing is clear that waiver after the accrual of the income would not take away the case of the assessee from the net of taxation. Merely because the date of payment of interest was not specified in the agreement, in our opinion, the assessee cannot escape the incidence of taxation.
11. In view of the above discussion, the order of CIT(A) is upheld and the appeal of the assessee is dismissed.