Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Vidhata Textiles (P) Ltd. on 31 August, 1998
Equivalent citations: [1999]70ITD357(MUM)
ORDER
Pradeep Parikh, A.M.
1. The Department is in appeal before us against the order of the learned CIT(A), dt. 20th December, 1990, for asst. yr. 1987-88. The first ground is against the deletion of addition of interest of Rs. 62,100.
2. The assessee-company has income from interest, capital gains and from sale of grey cloth. It declared its total income at Rs. 77,410 for the year under appeal. On scrutiny of accounts it was revealed that the assessee had not accounted for interest income amounting to Rs. 62,100 on advances of Rs. 33,93,297 given to M/s. Rampratap Bansidhar on the ground that borrower was not in a position to pay and was also disputing the rate of interest at 15 per cent. Assessee had also filed copies of correspondence which had ensued between it and the borrower. The AO, however, was of the view that it was immaterial whether the borrower had paid the interest or not or whether he was in a position to pay it or not, when the accounts were maintained on merchantile basis. Hence addition was made of the impugned amount.
3. The CIT(A) noted that after much discussion between the assessee and the borrower, ultimately 9 per cent rate of interest was agreed upon which was accounted for by the assessee and the sum of Rs. 62,100 represented the difference of 6 per cent. He deleted the addition on the ground that reduction of interest on commercial ground was nothing but alteration of the original contract. He also observed that though alteration was effected immediately after the end of the accounting year, yet effect had to be given in the current year.
4. The learned Departmental Representative submitted that the accounting year ended on 31st March, 1987, whereas the dispute was settled on 27th July, 1987, i.e. almost 4 months after the end of the accounting year and hence income of Rs. 62,100 had accrued for the year ending on 31st July, 1987. Thus, it was pleaded for the restoration of the addition.
5. The learned counsel submitted that while finalising the accounts, assessee took into consideration the reality of the situation. He, no doubt, agreed that the assessee followed mercantile system of accounting and whatever income had accrued would be taxable but according to him accrual of income also should be determined on real income basis. He relied on the decisions in CIT vs. Shiva Sagar Estates (AOP) (1993) 204 ITR 1 (Bom), CIT vs. Janak Prasad & Co. (P) Ltd. (1996) 222 ITR 583 (SC), State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC) and CIT vs. Kerala State Industrial Development Corpn. Ltd. (1990) 182 ITR 67 (Ker).
6. Before us, the argument of real income has been vehemently stressed upon. A similar argument, with greater force, was made before their Lordships of the Supreme Court in the case of State Bank of Travancore vs. CIT (supra). In response to the argument, the Supreme Court observed as follows :
"We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax as developed."
The above observations were quoted with approval in a later decision by the Supreme Court in the case of CIT vs. Shiv Prakash Janak Raj & Co. (P) Ltd. (supra). We shall keep the above observations in mind while deciding the issue in this appeal. Further, in Shiv Prakash's case (supra), the proposition enunciated by the Supreme Court in the case of State Bank of Travancore (supra) was reiterated, which, being very pertinent to decide the present appeal, is reproduced below (from p. 155) :
"(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 light 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 not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) 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. (7) Mere improbability of recovery, where the conduct of the assessee is 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. (8) 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."
7. Of the above, point Nos. (1), (2), (4), (6) and (8) are very relevant for the case before us. However, before we resolve the dispute before us in the light of the above points, it would be advantageous to refer to some of the other decisions so that we may properly apply the above tests.
8. In Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835 (SC), under the managing agency agreement, commission was due to the assessee on 31st December, 1954, and 31st December, 1955, and it was payable immediately after the annual accounts of the managed company had been passed in general meetings, which were held on 24th November, 1955 and 21st July, 1956, respectively. By Board resolutions dt. 4th April, 1955 and 19th June, 1956, respectively (i.e. after the commission had become due but before it had become payable as per the agreement), the assessee relinquished its commission because the managed company had been suffering losses in the past years. The Supreme Court held that the amounts of income for the two years in question were given up unilaterally. After they had accrued to the assessee-company. As such the assessee could not escape the tax liability for those amounts. At this juncture, we may note that in the instant case, the interest income was not given up unilaterally but both the parties had agreed to reduce the rate of interest from 15 per cent to 9 per cent.
9. In CIT vs. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC), the assessee-company was entitled to an agreed managing agency commission and an office allowance from two managed companies. No date for payment was stipulated. The accounting year of the managing company as well as the managed companies was the financial year. The assessee-company gave up the managing agency commission from both the managed companies for the asst. yr. 1954-55 to 1956-57, after the end of the relevant financial years but before the accounts were made up by the managed companies. In the light of these facts, an important finding was given that the money became due to the assessee not at the end of the accounting year, but on the date of managed company made up its accounts. The Supreme Court observed that the assessee gave up its commission even before it accrued to it, i.e. before the managed company made up its account. For this reason it was held that the commission had not accrued to the assessee by or before the date it gave it up.
10. In the instant case, though not specified, it can be inferred that the interest was payable to the assessee after the end of the year, though it did accrue to the assessee from day-to-day. It follows, therefore, that the assessee surrendered 6 per cent of interest after it had accrued and after it had become due, though not unilaterally.
11. In the case of State Bank of Travancore (supra) interest income on sticky advances was held to have accrued to the assessee and hence taxable, mainly because the bank did not treat the advances as irrecoverable and though it was credited to interest suspense account. at the same time the corresponding debit was given to the accounts of respective parties.
12. In the case before us, though the borrower was not in a sound financial position, the assessee had never considered the loan to be bad. Moreover, since the rate of interest was modified by negotiations, and the settlement was reached before the accounts were finalised, the assessee did not make any entry relating to it in its books of account.
13. Finally we deal with the decision in CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC). Under the managing agency agreement, the assessee-firm, as a managing agent of two shipping companies, certain commission became due to it which was taken credit of in the books of corresponding debits to the managed companies. This commission was upto 31st December, 1947. But in November, 1947, the assessee desired to have the managing agency transferred to two private limited companies floated by the assessee-firm. Under the new dispensation, the commission was to be reduced for the year 1947 as well as for future years, to which the assessee-firm agreed. The two private limited companies were appointed as managing agents w.e.f. 1st January, 1948. Subsequently, at the annual general meeting of the two managed companies held in December, 1948, the commission of the assessee-firm was reduced, as already agreed. (underline, italicised in print, by us). The assessee-firm, accordingly, gave up seventy-five per cent amount as its earnings in the assessment proceedings. The assessing authorities held that the commission had already accrued to the assessee during the previous year ending on 31st March, 1948, and since the assessee had given up seventy-five per cent of the said amount after such accrual. The whole of the commission amount which was actually credited in the books of the assessee, is includible in its income. On appeal, there was a difference of opinion between two members of the Tribunal. On a reference to the President, he held that even though the actual reduction took place after the year of account was over, there was, in fact, an agreement to reduce the commission even during the currency of the accounting year and hence it cannot be said that the larger income had accrued to the assessee-firm. The High Court and the Supreme Court agreed with the view taken by the President of the Tribunal.
14. Following principles clearly emerge from the decisions discussed above :
(a) The surrender of income, earlier agreed upon, should not be unilateral; and
(b) The agreement to reduce the income should have taken place before the income finally accrued to the assessee.
15. In order not to attract tax, both the above conditions should be fulfilled. If any one condition remains unfulfilled, the assessee cannot escape the tax liability.
16. Reverting to the case before us, it cannot be disputed that the surrender was undoubtedly bilateral. Hence, the first condition is certainly fulfilled by the assessee. But so far as second condition is concerned we are afraid, as per the facts of the case, it remains unfulfilled. In other words, the agreement of reduced rate of interest took place after the income at a higher rate had accrued to the assessee. The first request from the borrower to reduce the interest came after the close of the year on 10th April, 1987, when the assessee had already sent a statement of account showing interest calculation at the rate of 15 per cent. For quite some time, the request was protested also by the assessee, and finally it agreed to the reduced rate on 27th July, 1987.
17. Thus, in our opinion, considering the principles laid down by the Supreme Court in the various decisions discussed above, in the case before us, the assessee cannot escape its tax liability on the income of Rs. 62,100 accrued to it. Accordingly, we restore the addition of Rs. 62,100 deleted by the CIT(A).
18. The second ground is against the order of the CIT(A) restoring back the issue of addition of Rs. 3 lakhs made by the AO on account of cash credits. Assessee obtained loans from various persons including companies, amongst which M/s Ganpati Udyog Ltd. West Bengal was one of the lenders. At the beginning of the year the outstanding was Rs. 2,51,662 and further Rs. 3 lakhs were advanced during the year on 27th March, 1987. AO observed that assessee had purchased 6,000 shares of this company at Rs. 2 per share though its face value was of Rs. 10 per share. Therefore, it was inferred that assessee had substantial interest in the said Ganpati Udyog Ltd. and hence should not have had any difficulty in producing said company's accountant to show necessary evidence regarding the loan advanced. But not having done so AO was of the view that Rs. 3 lakhs belonged to the assessee and hence added it to the total income.
19. The CIT(A) was of the view that since AO alleged the genuineness of the transaction, he should have himself conducted further enquiries. Not having done so he restored the matter for readjudication after due enquiries.
20. It is brought to our notice by the learned counsel that consequent upon the setting aside AO repeated the addition in his order dt. 26th March, 1993. The CIT(A), for the second time, restored the matter back by his order dt. 30th April, 1993. The AO, still repeated the addition. On appeal, CIT(A) deleted the addition by his order dt. 1st May, 1998. Copy of the said order giving effect to this order of the CIT(A) is placed on record, on perusal of which we find that the addition is deleted by the CIT(A). Nonetheless, in the present appeal, we are concerned as to whether CIT(A) was justified in setting aside the issue. In our opinion, simply because assessee did not produce accountant of the lender company, may be because of long distance, it was not fair for the AO to straightaway conclude that it was assessee's income without further enquiry. Hence, CIT(A) was justified in restoring back the matter for readjudication.
21. In the result, the appeal of the Department is partly allowed.