Calcutta High Court
Commissioner Of Income-Tax vs Shree Export House Ltd. on 22 February, 1990
Equivalent citations: [1992]194ITR695(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The Tribunal has referred the following two questions of law to this court under Section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest on the loan advanced to Newspaper Ltd., was not part of the real income of the assessee and was, therefore, not liable to be assessed to tax ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest forgone by the company was for commercial expediency and that should be treated as business expenditure in computation of the income of the assessee for the assessment year 1980-81 ?"
2. The assessment year involved is 1980-81 for which the relevant accounting period ended on March 31, 1980.
3. The facts narrated by the Tribunal in the statement are as follows :
"The assessee-company filed its return on June 17, 1980 showing "nil" income. In the course of examination of the accounts, it was found that a loan of Rs. 2,90,000 was advanced by the assessee-company to Newspaper Limited earlier and for which the company charged interest regularly in these years but, in the relevant accounting year, no interest was, however, charged on the said loan. It was submitted before the Income-tax Officer that a resolution was passed by the board of directors on March 21, 1980, wherein it was decided that from April 1, 1979, that loan should be treated as a non-interest bearing loan and this was done by the company taking into consideration a letter dated November 20, 1979, received from Newspaper Limited. In the said letter, Newspaper Ltd., made a request in this regard on the ground of the difficult financial position of the concern. The Income-tax Officer, however, held that the resolution was passed on March 21, 1980, when the accounting year of the assessee had almost ended and since the assessee was following the mercantile system of accounting, the interest on the loan had already accrued to it. The Income-tax Officer, in this connection, relied on the decision of the Supreme Court in the case of Morvi Industries Ltd. [1971] 82 ITR 835. According to the Income-tax Officer, there was nothing to show that the interest was forgone for the purpose of the assessee's business on the ground of commercial expediency. It was, however, noted by the Income-tax Officer that it was stated in the letter of Newspaper Ltd. that it had initiated certain measures to improve the working condition of the organisation to liquidate the outstanding as soon as their financial position permitted. The Income-tax Officer, therefore, held that the interest of Rs. 44,950 on the basis of the previous years had accrued and had to be assessed as income of the year.
In view of the discussion made in the earlier paragraphs on the subject drawing support from the Supreme Court's decision in the case of Morvi Industries Ltd. [1971] 82 ITR 835, I am of opinion that the interest of Rs. 44,950 on the basis of the previous year which accrued to the assessee cannot escape assessment by a stroke of the pen in a resolution passed just a few days before the end of the accounting year."
4. The argument of the assessee before the Commissioner of Income-tax (Appeals) was as under :
"It is submitted before me that this interest was not given up by the appellant unilaterally but, on the basis of the letter received from Newspaper Limited. It is on this basis that the resolution was passed by the board of directors in which it was resolved not to charge interest from April 1, 1979. It is pointed out that this was primarily done because of the bad financial position of Newspaper Ltd. In this connection the appellant has filed before me a copy of the balance-sheet of Newspaper Ltd. as on March 31, 1980, according to which the accumulated loss is more than the share capital of the company. According to the appellant, the interest was forgone on account of commercial expediency and the case cited by the Income-tax Officer is not applicable to the facts of the present case. Reliance in this connection is placed on the decision of the Tribunal, Calcutta Bench, dated February 10, 1978, in the case of Hindusthan Motors Ltd., and it is submitted that, on the facts of the case, this decision is fully applicable.
I have considered the submissions made before me and, according to my opinion, they are well-founded. In the case of Hindusthan Motors Ltd., the Tribunal took into consideration various decisions on this point and held that a relinquishment pursuant to an arrangement between the assessee and the other party which has been entered into by the company on the grounds of commercial expediency has to be distinguished from any unilateral relinquishment by the assessee on compassionate grounds on extra-commercial considerations. Here also, interest was forgone in view of the letter received from Newspaper Ltd. in which a request was made to convert the loan into a non-interest bearing one due to its difficult financial position. It is true that the resolution was passed on March 21, 1980, at the fag end of the accounting period but this was before the interest had actually accrued. This was done on the assurance given by Newspaper Ltd., for liquidation of the outstanding dues as soon as its financial position permitted. According to my opinion, therefore, this was on the ground of commercial expediency with a view to getting back the amount advanced. Under these circumstances, the decision of the Tribunal cited before me is fully applicable on the facts of the case. Respectfully following this decision, the appellant's contention is accepted and the addition of Rs. 44,950 is deleted."
5. The Tribunal merely affirmed the order of the Commissioner of Income-tax (Appeals) on the basis of the decision in the case of Hindusthan Motors Ltd., Calcutta (I. T. A. No. 43/(Cal) of 1976-77 decided on February 10, 1978) and dismissed the appeal preferred by the Department.
6. Mr. Mitra, appearing on behalf of the Revenue, has firstly contended that there is no finding on the commercial expediency and for giving up the claim of interest in the relevant year of account. The argument before the Commissioner of Income-tax (Appeals) was that the interest was not given up by the company but, on receipt of the letter from Newspaper Ltd., (company), a resolution was passed by the board of directors not to charge interest. It was pointed out that the Newspaper Ltd. was in a bad financial condition. A copy of the balance-sheet of the Newspaper Ltd. as on March 31, 1980, shows that the accumulated loss was more than the share capital of the company. The Commissioner of Income-tax (Appeals) noted that the request of the newspaper company was to convert the loan into a non-interest bearing advance due to its difficult financial condition and an assurance was given by the newspaper company for liquidation of the outstanding dues as soon as its financial position permitted. These findings have not been challenged. On the basis of these facts, the Commissioner of Income-tax (Appeals) came to the conclusion that the interest was given up on the ground of commercial expediency. There was sufficient material before the Commissioner of Income-tax (Appeals) for coming to this conclusion.
7. In this case, the interest was forgone before the closing of the accounting year and, as the Commissioner of Income-tax (Appeals) has pointed out, before the accrual of the interest income. It was held by the Division Bench of this court in the case of James Finlay and Co. v. CIT [1982] 137 ITR 698, at page 716 :
"The real principle seems to be that the root or the germ as to accretion of income must be in the accounting year and if such root or germ fructifies in the subsequent years, that can be taken into account and not otherwise. Now, applying the same principle to the facts and circumstances of this case, if it could be demonstrated that the right of giving up, which stopped the accrual in the year of income which had been laid or planted in the year of account, then the subsequent giving up might help the assessee in the theory of real income. Therefore, it is necessary to examine the question whether, in the facts and circumstances of this case, such a situation arose."
8. In the instant case, the assessee is in a strong position. Not only the root or the germ to stop accrual of interest was planted in the relevant year of account, but the root or germ also fructified in the relevant year of account. A request came for giving up of the interest by a letter from the debtor-company within the year of account and the assessee also, in its return, within the year of account and before its accrual, gave up the claim of interest.
9. On behalf of the Revenue reliance was placed on the judgment in the case of Gappumal Kanhaiyalal v. CIT . On the facts of that case, the Allahabad High Court held that the interest had in fact accrued at the end of the accounting year. This decision was given on the basis of the finding of fact made by the Tribunal that a letter dated February 2, 1988, was written as an afterthought, only after the interest had, in fact, accrued, on January 31, 1968. In fact, on that date, the debtor-company had credited the accounts of the assessee with the amount of interest.
10. There is no finding in the instant case that interest was given up as an afterthought. In fact, the interest was given up in the course of the relevant accounting year itself.
11. In that view of the matter, both the questions are answered in the affirmative and in favour of the assessee.
12. There will be no order as to costs.
Bhagavati Prasad Banerjee, J.
13. I agree.