Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Uikam Investment And Finance (P) Ltd. on 12 July, 2004
Equivalent citations: (2005)94TTJ(DELHI)195
ORDER
N.V. Vasudevan, J.M.
1. This appeal filed by the Revenue against the order dt. 20th Dec., 2000, of CIT(A), New Delhi, relating to asst. yr. 1997-98. The grounds of appeal of the Revenue read as follows :
2. The grounds of appeal of the Revenue read as under:
"1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in holding that the right of the assessee to receive the principal amount got extinguished due to unilateral termination of agreement and specific denial by the debtors to pay any interest. If as has been held, the action of the debtors was unilateral, the same would not affect the right of the assessee to receive the amount.
2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in holding that really no income had become due to the assessee.
3. On the facts and in the circumstances of the case, the learned CIT(A) has erred in not appreciating that the attachment notices issued by the Department to the debtors had the effect of only attaching the income which accrued to the assessee, and thus such income was legally taxable as assessee's income."
3. The assessee is a company. In the course of assessment proceedings, the AO noticed that the company had advanced monies to three persons (a) Sh. P.C. Yadav, (b) Smt. Chanda Chubey, (c) Md. Salim Gauhar. The assessee follows mercantile system of accounting. In respect of the loans given to the aforesaid three persons, the assessee had declared interest received on these loans. In the case of Smt. Chanda Chubey and Md. Salim Gauhar, interest receipts were shown upto the period May, 1996 and in the case Shri P.C. Yadav, it was shown till October, 1996. The AO further noticed that even as on the last date of the previous year, the money due from these persons were shown as outstanding. In these circumstances, the AO called upon the assessee to explain as to why the interest accrued on the loans given to the aforesaid parties has not been shown for the full year. The plea of the assessee before the AO was that the assessee lost its right to recover the said amount from the parties. According to the assessee, the borrowers did not even accept the existence of liability either of the principal or the interest. The recovery of the principal and interest was doubtful and, therefore, no interest has been accounted for. In view of the refusal of the borrowers to acknowledge existence of their liability to pay, no interest can be deemed to have accrued to the assessee. The AO, however, did not agree with the submissions as made by the assessee. He held that since the loan given by the assessee to the aforesaid parties is still outstanding and that the assessee is entitled to interest on these amounts. The assessee also pleaded before the AO that the IT Department attached the moneys payable by the aforesaid three persons and as to whether these amounts were paid to the Department by the debtors is again not known to the assessee. In the circumstances, it was pleaded that the borrowers must have treated the principal and the interest payable to the assessee as remitted. This argument was also rejected by the AO by observing that the money has not come to the IT Department also. The AO calculated the interest at 18 per cent and made an addition on account of interest at a sum of Rs. 4,83,340 as follows :
Rs.
Smt. Chanda Ghaubey 1,12,500
Shri Salim Gauhar 1,20,840
Shri P.C. Yadav 2,50,000
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4,83,340
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4. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A). The assessee reiterated the contentions as put forth before the AO. The assessee further brought to the notice of the CIT(A) that one of the debtors namely, Mr. P.C. Yadav was arrested by the CBI in June, 1996. That the other two debtors were also persons who were introduced by Sh. P.C. Yadav, to the assessee. Shri P.C. Yadav blamed one of the directors of the company for his arrest by the CBI. Because of these developments, neither Sh. P.C. Yadav nor the other two persons who were introduced to the assessee by P.C. Yadav were inclined to make any payments either of the principal or the interest to the assessee. It was also submitted that Mr. Anil Sanghi, director of the assessee-company was also implicated in the case by the CBI and these facts also appeared in the newspapers. In these circumstances, the assessee relied on the oral refusal by the three debtors to pay any money to the assessee as an act of remission of the debt by them. The CIT(A) agreed with the submissions made by the assessee. He held that the right to receive the particular amount got extinguished due to unilateral termination of the agreement and specific denial by the debtors to pay any interest or to refuse the principal amount. The CIT(A) relied on the theory of real income and by making a reference to the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC), he held that no addition on account of notional interest can be made in the hands of the assessee by taking note of the reality of the situation.
5. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us.
6. We have heard the submissions of the learned Departmental Representative as well as the learned counsel for the assessee. The principal grievance of the Revenue in this case is that there was no basis for the CIT(A) to have given a finding that the principal amount payable by the debtors to the assessee got extinguished due to unilateral termination of agreement and specific denial by the debtors to pay any interest. According to her, the assessee was following mercantile system of accounting and the loan due by the debtors still appears as due and payable. In the circumstances, she submitted that the interest income was to be construed as having accrued and arisen to the assessee. The learned counsel for the assessee, on the other hand, reiterated his submissions as made before the CIT(A) and the various judicial pronouncements relied upon before the CIT(A).
7. We have considered the rival submissions. As far as the findings of the CIT(A) that the principal amount as well as the right to receive interest got extinguished is concerned, we do not find any basis for the CIT(A) to have given such a finding. There is no evidence on record to justify this finding. It is also not correct to say that a debtor could unilaterally terminate his liability to pay his creditors. The assessee as a creditor was always at liberty to proceed against the debtors in spite of denial by the debtor to pay the debt or pay any interest thereon. The fact that the IT Department had attached the moneys payable by the debtors to the assessee is also not relevant in this regard. Except for the statements about the dispute between the assessee and the three debtors in assessee's written submission dt. 20th Nov., 2000, there is no evidence whatsoever, which could establish the existence of a dispute. The argument of the learned counsel for the assessee was that the AO never disputed the fact that the relationship between the assessee and the debtors were strained and that they refused to pay the amounts due to the assessee. From a perusal of the order of assessment it transpires that the assessee merely relied on the fact that IT Department had attached the monies payable by the debtors to the assessee and that the debtors must have remitted the money to the IT Department. As already observed by us, there is no material on record to show that the debtors refused to pay the monies to the assessee. A mere denial by the debtor to pay amounts to a creditor is not enough to come to a conclusion that there was a remission of liability.
8. We shall now examine the relevance of the decision of the Supreme Court in UCO Bank's case (supra). The Supreme Court in the aforesaid case was concerned with interest payable on loans, which were considered as sticky by a bank. The bank had debited the borrower with interest but had not accounted the interest receivable in the P&L a/c. The bank had followed a consistent policy in this regard and the assessee relied upon a circular of the CBDT permitting such interest to be excluded while computing income. The Hon'ble Supreme Court relied more on the circular and upheld the plea of the assessee for exclusion of such interest in determining its income. Even the circular relied upon by the assessee in that case contemplated satisfaction of the AO that recovery of the amount was practically improbable. The Hon'ble Supreme Court followed its own decision in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) wherein certain principles regarding taxability of income under the accrual concept of income had been laid down. Some of them are :
(a) 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 not really accrue.
(b) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act.
(c) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.
(d) Mere improbability of recovery, where the conduct of the assessee is not unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee.
(e) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within well recognised limits.
The conduct of the assessee in showing the principal as still outstanding in its books of account would only show that the assessee still considers the principal as recoverable. There was no remission of debt or liability by the assessee. In such circumstances, the accrual concept of income was rightly applied by the AO. As already observed by us, there is no evidence to show that the debtors refused to pay any monies to the assessee. In the absence of any evidence, there can be no question of applying the theory of real income to the facts of the present case.
9. The learned counsel for the assessee has relied on a number of judicial pronouncements which are as follows :
(a) Where the debtor was in financial difficulties, no interest can be said to have accrued to the creditor [Jawala Prasad Radha Kishan v. CIT (1992) 198 ITR 415 (All), CIT v. Ferozpur Finance (P) ltd. (1980) 124 ITR 619 (P&H), CIT v. Motor Credit Co. (P) Ltd. (1991) 127 ITR 572 (Mad), Western India Oil Distribution Co. Ltd. v. CIT (1994) 206 ITR 359 (Bom)]- We may mention that it was not the case of the assessee before the Revenue authorities that the debtors were in financial difficulties and, therefore, the assessee could not recover his dues.
(b) If circumstances are beyond control of the assessee then a, different approach has to be adopted by the IT authorities [Ashutosh Brothers v. Jatinder Mohan Seal AIR 1954 Cal 238, Ramkumar v. Umedram Bora & Co. 59 Comp Cas 892 (MP)]. As already observed by us, there is no evidence to show that things were not beyond the control of the assessee in the present case. Some other decisions on what is 'sufficient cause' were relied upon and we find no relevance to those decisions to the present case.
(c) For the proposition that Courts should look beyond the words mentioned in the statute, if the circumstances warrant so. CIT v. National Taj Traders (1980) 121 ITR 535 (SC), K.P. Varghese v. ITO (1981) 131 ITR 597 (SC), etc. We are of the view that the propositions laid down in those cases are not applicable to the facts of the present case. In the present case, we are concerned with a factual issue as to whether there was remission of debt and as to whether there were facts and circumstances, which could suggest that the debtor had remitted debt payable to the assessee. We have already held that there was no evidence on record to show that the debt or payment of interest was ever denied by the debtor.
10. For the reasons stated above, we allow the appeal by the Revenue by reversing the order of the CIT(A) and restoring the order of the AO.
11. In the result, the appeal by the Revenue is allowed.