Income Tax Appellate Tribunal - Kolkata
Jayanti Commerce Ltd. vs Assistant Commissioner Of Income-Tax on 15 November, 1996
Equivalent citations: [1997]61ITD183(CAL)
ORDER
Shri D. Manmohan, J.M.
1. These two cross appeals were directed against the order of the CIT(A)-VII, Calcutta and they relate to the assessment year 1989-90. The issue involved in the assessee's appeal as well as in the department's appeal is common and so we proceed to dispose of the appeals together, for the sake of convenience.
2. The assessee is a company earning interest income and also income from hire charges of trailors and trucks. The assessee was consistently following the mercantile system of accounting. The accounting year in the immediately preceding assessment year ended on 30-6-1987.
3. For the assessment year 1989-90, in view of the change in the law, the assessee-company had closed its books of account on 31-3-1989 and the aforesaid previous year consisted of 21 months. As per the system hitherto followed by the assessee, the books of accounts were closed as on 30-6-1988 (i.e., 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 been further resolved that the legal proceedings would be taken against those persons for realisation of principal and interest up to date who are not making payments of interest since long time."
4. By virtue of the aforesaid resolution, the company has not accounted for the interest accrued from 1-7-1988 to 31-3-1989 in its books of account. However, the interest having shown as accrued for the period ending 30-6-1988, reverse entry was passed at the end of the accounting year i.e., 31-3-1989 claiming the same as bad debt written off. While completing that assessment, the Assessing Officer was of the opinion that the resolution of the Board is not applicable to the interest of Rs. 1,20,750, relatable to interest up to 30-6-1988, as no decision was taken under the said resolution to write off the same. He has also observed that the change of method of accounting is not acceptable as it is not an approved method. According to the said resolution, cash basis of accounting is to be followed in respect of the persons from whom interest is not received since long, which implies that in respect of other loans, the assessee-company is not following cash basis. Assessing Officer also observed that the method followed by the assessee is rather surprising, inasmuch as, interest is treated as bad and written off, whereas the principal is treated as good and has not been written off. Accordingly, the claim of writing off of interest amounting to Rs. 1,20,750 relatable to the period up to 30-6-1988 was not accepted by the Assessing Officer. Further he has made an addition of Rs. 90,564 relatable to the interest accrued for a part of the accounting year, i.e., from 1-7-1988 to 31-3-1989.
5. Aggrieved against both the additions, the assessee filed an appeal before the first appellate authority. It was contended before him that the assessee-company could not receive interest from its debtors since past several years and as the receipt of principal itself was doubtful, the company has changed the system of accounting by passing a resolution to that effect and accordingly contended that the interest income cannot be treated as accrued in the accounting year under consideration. The amount of Rs. 1,20,750 which was written off by the assessee was allowed by the first appellate authority under section 36(1)(vii) of the Act, inasmuch as, the amount of interest was taken into 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 as 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 paper book wherein account copies of all the debtors were filed and pointed out to us that in majority of the cases, the principal amount itself was not recovered fully even after lapse of a decade. He has furnished account copies up to 31-3-1996 and submitted the latest position of the debts as per the account as on 30-6-1987 on as follows :
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Name Balance as Balance as Remarks
per a/c. as per a/c. as
on 30-6-1987 on 30-3-1996
----------------------------------------------------------------------
Rs. Rs.
----------------------------------------------------------------------
Arun Kumar 1,35,967.12 1,35,967.12 Still outstanding
Bhutaria
Daga Tea Co. 4,02,030.47 4,02,031.00 -do-
Nawratan Arts 24,577.59 - Amount outstanding
Ltd. as on 30-6-1987
recovered on
25-3-1994. Interest
for the period
commencing from
1-7-1987 was not
paid and account
closed.
Orient 1,24,000.00 - Paid principal and
Abrasives Ltd. interest of
Rs. 40,000 by
9-11-1990. Interest
offered for taxation
in A.Y. 1991-92 and
taxed accordingly.
Perfect Engg. 1,50,687.47 - Amount outstanding as
Works on 30-6-1987 recovered
on 29-3-1994. Interest
for subsequent period
not paid. Account
closed.
Perfect 1,82,123.29 - - do-
Services
Radha Krishan 23,600.00 23,600.00 Still outstanding
& Sons
Shimnsu 1,12,000.00 Amount paid by
Vyaparik 25-3-1994 and
Kendra Ltd. account
closed - interest
for the period
commencing from
1-7-1987 not paid.
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The ld. counsel for the assessee also furnished before us the assessment orders for the assessment year 1990-91 (completed under section 143(3) of the Act) and intimation under section 143(1)(a) for the assessment years 1991-92 to 1994-95, and submitted that the interest income was not taken into consideration by the Assessing Officer. It was thus contended that in reality interest income has not accrued to the assessee during the year under consideration and also during the subsequent assessment years 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 (supra) 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 222. He has also submitted that the assessee has not produced any evidence to show that interest is not recoverable and hence the principal of real income has no application to the facts of this case. He has also relied upon the decision of the Hon'ble Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR 1/[1989] 45 Taxman 90 and submitted that the assessee is following mercantile system of accounting and the change in the method of accounting by following cash system only with regard to certain debts is not a permissible change. He has also submitted that income once accrued, cannot be written off on the basis of the Board's Resolution which was adopted by the Board only on 2-1-1989.
8. We have heard the rival submissions and also carefully considered the issue. In respect of both the amounts in dispute, the main question to be considered is as to whether there is accrual of interest income during the year under consideration and whether real income principle can be applied to the facts of the present case. The ld. counsel for the assessee did not contest the position with regard to the validity of the change in the method of accounting. In other words, the decision of the Commissioner (Appeals) that the so-called change in the method of accounting, is not a systematic method of accounting, calling for acceptance, becomes final. We, therefore, proceed on the basis that the assessee is following mercantile system where the receipts as well as the payments are to be recorded on accrual basis. Board's resolution to that effect need not be considered.
9. In the case of Shoorji Vallabhdas & Co. (supra), the concept of real income has been discussed wherein their Lordships observed that income-tax is a levy on income and the taxability in the mercantile system, is on accrual on income, but the substance of the matter was income and if income did not result at all, there cannot be any tax, even though in book-keeping an entry was made about a hypothetical income which did not materialise. However, where income has, in fact, been received and is subsequently given up, in such circumstances it remains the income of the recipient, even though given up and tax might be payable. This decision of the Supreme Court as well as the decision of several other High Courts were considered by the Hon'ble Supreme Court in the case of State Bank of Travancore (supra). 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, where as 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 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."
10. While considering the judgment of the Hon'ble High Court in the case of CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.), his Lordship Justice Sabyasachi Mukharji observed in State Bank of Travancore's case (supra) at p. 150 as follows :
"It was held in that case after discussing the facts that there were hardly any receipts in respect of items of interest or that the bona fides of the assessee in not charging interest were not disputed, were circumstances which were by themselves insufficient to support the conclusion that there was no real income in respect of the items of interest as none of the debts due by the several debtors was written off by the assessee and no evidence was produced to show that interest in respect of the debts was given up. The High Court, therefore, held that there was no giving up and these incomes were assessable. I am in respectful agreement with the conclusion of the Bombay High Court. In the instant case before us, the facts are still worse. The assessee has not only not written off, but it is still treating loans as alive by keeping them in the suspense account. Kantawala, J., as the Chief Justice then as, followed the correct principle therein after considering Kashiparekh's case. The principles 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 the relevant accounting year, the assessee had not abandoned its claim for interest and, as such, the amounts were assessable on accrual basis. On a reference, the High Court held that the alteration of practice in book-keeping and transfer of amounts to the suspense account could not be termed as a change in the method of accounting. In the instant appeal before us, the position is still worse for the assessee. There is no claim that there was any change in the method of accounting. The High Court further held in James Finlay's case [1982] 137 ITR 698 (Cal.), that though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax."
11. The ld. counsel for the assessee no doubt relied upon the decision of the Hon'ble Calcutta High Court in the case of Kewal Chand Bagri (supra) but the decision and observation of their Lordships are not applicable to the facts of the case. We also find that the Hon'ble Calcutta High Court has not taken into consideration the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra). The facts in the case of Kewal Chand Bagri (supra) were that the assessee charged interest on the debit balance in the account of Sri Manik Chand Bagri (father of assessee) up to the year 1970 but did not charge interest from 1-1-1971. Undisputed facts were that on account of shortage of working capital and loss, the assessee's father, the debtor, was not in a position to repay even the capital sum, not to speak of interest. In the said case, there was an unwritten agreement/understanding between the assessee and his father to the effect that his father would repay the whole amount outstanding to his credit up to the year 1970 provided no further interest would be charged from January 1971. A confirmatory statement in respect of the loan transaction with the father duly confirmed by the said debtor to show that the said debtor had also not provided for any interest in his books, was produced in the course of assessment proceedings. Under these circumstances, the Hon'ble High Court held that by applying the real income principle, interest cannot be 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 ceased, and such cessation prevented accrual. In our view, this doctrine of real income is not appropriate on the facts of the case. It applies in a limited segment of cases where the reality of the situation prevents the accrual of real income whose accrual alone is material from the view-point of its taxability. It is not the case here that the subsidiary was under no obligation to pay or the deteriorating financial condition of the subsidiary blotted out the last ray of hope so that we can accept the interest income as unreal."
13. Again his Lordship observed at page 846 as under :
"We may also add that our view is, to all intents and purposes, covered by the decision in James Finlay Co. v. CIT [1982] 137 ITR 698 (Cal.). There, it has been held that, unless there was material to show that there was any agreement with the debtors to waive the interest during the previous year, i.e., the year of account, the claim for interest cannot be stated to have been given up so as to call for exclusion from the total income. Once the income accrues, it continues to remain as income accrued and, therefore, income assessable to tax."
14. Reverting back to the facts of the instant case, we find that the assessee has not waived interest as could be seen from the resolution of the board of directors. As per the resolution, the method of accounting is proposed to be changed in respect of interest on loans advanced to persons from whom interest has not been received since long time.
15. On a careful reading of the resolution it is seen that the assessee never intended to waive the interest but only change the method of accounting. At best, waiver, if any, is only an unilateral act and there is no agreement with the debtors to the effect that the interest would not be charged from a particular date.
16. It can be seen from the observations of the Hon'ble Supreme Court and Calcutta High Court [Hindusthan Motors Ltd. (supra)] that only when the assessee abandons its claim for interest, by virtue of an agreement with the debtors (oral or written) to waive interest, the principle of real income applies.
17. In the instant case, the income accrued to the assessee under the mercantile system of accounting. As the assessee, at no point of time, had given up the claim for interest, except merely omitting to record the interest on accrued basis, under the guise of change in method 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 clause 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 year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee."
19. Prior to amendment, the assessee, in order to write off a bad debt, should establish that the debt has become bad in the previous year. However, the words "any debt, or part thereof, which is established to have become a bad debt in the previous year" have been deleted from sub-clause (vii) w.e.f. 1-4-1989 meaning thereby, the assessee is not required to establish that the debt has become bad during the previous year relevant to the assessment year under consideration. As per section 36(2)(i), in order to claim deduction under section 36(1)(vii), the precondition is that the debt or part thereof should have 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 year.
20. In the present case, we have held that the amounts of Rs. 1,20,750 and Rs. 90,564 accrued to the assessee as income and liable to be taken into account in computing the total income of the assessee. It is the claim of the assessee that the principal amount itself could not be recovered from the aforesaid persons and hence the company bona fide considered that the interest relatable to the period after 1-7-1987 could not be recovered. It is also not in dispute that in the later years the Assessing Officer has not made any addition in this regard, implying hereby that the recovery of interest is doubtful and it was considered by the Assessing Officer. At any rate, for the assessment year 1989-90 onwards, the only pre-condition for writing off a debt is that the assessee should bona fide believe that the debts are not recoverable and it is not necessary for the assessee to establish that the debts have, in fact, become bad debts in the previous year under consideration.
21. Considering the facts and circumstances of the case, we hold that the first appellate authority is justified in holding that the interest of Rs. 1,20,750 written off by the assessee is allowable as deduction in accordance with the provisions of sections 36(1)(vii)/36(2)(i) of the Act. Similarly, by applying the same analogy and also by taking the overall circumstances into consideration, the interest of Rs. 90,564 is also allowable as deduction 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 Steel Containers Ltd. v. CIT [1978] 112 ITR 995 held that the Tribunal is entitled to grant relief under another section, if the facts and circumstances so suggest. In the substantial interests of justice, we, therefore, direct the Assessing Officer to allow Rs. 90,564 as deduction under sections 36(1)(vii)/36(2)(i) of the Act.
22. In the result, the appeal filed by the assessee is allowed and that of the revenue is dismissed.