Calcutta High Court
Dr. N. K. Brahmachari vs Commissioner Of Income Tax. on 17 March, 1989
Equivalent citations: (1992)104CTR(CAL)209
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
ORDER
SUHAS CHANDRA SEN, J. :
The following three questions of law have been referred by the Tribunal to this Court under s. 256(2) of the IT Act, 1961.
"(1) Whether, the finding of the Tribunal that the interest became due to the assessee during the previous years and was liable to assessment on accrued basis is perverse and/or is based upon its failure to take into consideration relevant material and evidence and/or by taking into consideration irrelevant materials and/or is sustainable ?
(2) Whether the finding of the Tribunal that the amount due from Brahmachari Research Institute Private Ltd. cannot be said to be irrecoverable unless there is evidence of that the official Liquidator declares the final dividend or writes to the creditor that the full amount is not likely to be recoverable, is based on its failure to take into consideration the relevant material and/ or evidence and/or by taking into consideration irrelevant materials and/or is perverse ?
(3) Whether on the facts and in the circumstances of the case the Tribunal was justified in sustaining the additions of Rs. 41,534 and Rs. 43,240 for the asst. yrs. 1971-72 and 1972-73 respectively being the estimated amount of interest as income from undisclosed sources on accrual basis and in doing so whether the Tribunal has acted perversely and/or by not taking into consideration that relevant facts and materials and/or by failing to take into consideration the relevant materials and evidence ?"
2. The assessment years involved are asst. yrs. 1971-72 and 1972-73, for which the corresponding period of account were the financial years ending on 31st March, 1971 and 31st March, 1972 respectively.
In making the assessment for the aforesaid two years, the ITO added interests of Rs. 41,534 and Rs. 43,240 respectively for the two asst, yrs. 1971-72 and 1972-73.
The finding of fact is that the assessee lent certain sums of Money to M/s. Brahmachari Research Institute Pvt. Ltd. This company was passing through financial crisis. The total advances made by the assessee to the company was about Rs. 4 lakhs but total liability of the company was about Rs. 18 lakhs whereas the value of the assets of the said company was about Rs. 5 lakhs. Ultimately the company went into liquidation on 16th March, 1972.
3. The dispute in this case was about the justifiability of exclusion of the interest payable on the loan by Brahmachari Research Institute Pvt. Ltd. to the assessee on accrual basis. The Tribunal noted that Brahmachari Research Institute was maintaining its accounts on mercantile basis and the interest payable to the assessee was shown on accrual basis in its accounts. The Tribunal has also noted that the assessee was maintaining regular books of account on cash basis. The Tribunal came to the conclusion that the assessee had to be assessed on accrual basis.
4. The assessee is an individual. If an individual lends money to a company and receives interest, he has to be assessed in accordance with the system of accounting he follows. The company may maintain its accounts on mercantile basis. From that it does not follow that the individual assessee must be taxed on mercantile basis. If an individual does any business with a company, he cannot be taxed on accrual basis only because the company maintains its accounts on accrual basis.
5. In the instant case, the borrower, M/s. Brahmachari Research Institute Private Ltd., shown the interest payable to be assessee on accrual basis in its books of accounts without making any actual payment. The Tribunal was not justified in holding that the interest that was shown as to have become due to the assessee in the books of accounts of the assessee on the basis of system of accounting followed by M/s. Brahmachari Research Institute Pvt. Ltd.
6. Reliance on s. 5(1)(b) placed by the Department and accepted by the Tribunal was misplaced Sec. 5(1) is as follows :
"5(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatsoever source derived which -
(a) is received or in deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year, or
(c) accrues or arises to him outside India during such year :
......................................."
7. The total income of any previous year of a person will include all income from whatever source derived which is received or is deemed to be received in India in such year. Alternatively, the total income will include all income which accrues or arises or is deemed to accrue or arise to an assessee in India during such year. But s. 5 does not contemplate that the total income will include simultaneously not only what is received but also what accrues to an assessee during a particular year. If the assessee maintains accounts and files his return on case basis, there is no reason to tax him on accrual basis. The assessees income cannot be taxed partly on accrual and partly on cash basis at the option of the Department.
8. A point has also been taken that the assessee did not maintain any books of accounts. But that cannot be a ground for taxing the assessee on accrual basis. Unless the assessee is engaged in any business or profession, there is no obligation under the IT Act for the assessee to maintain an account book. Most of the salaried employees and many person who have earnings from interests or dividends do not have regularly maintained books of account. That fact will not entitle the ITO to tax the income of such an assessee on accrual basis. The assessee always has a choice to calculate his income on cash basis and file his return accordingly. The ITO cannot bring the assessees income to tax on accrual basis disregarding the fact that the assessee does not maintain his accounts on the mercantile basis.
9. The assessee has applied under s. 256(1) for reference four common questions of law for the asst. yrs. 1971-72 and 1972-73. The Tribunal, however, had referred only one question of law to this Court, which is as follows :
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the accrued interest on advance to M/s. Brahmachari Research Institute Pvt. Ltd. amounting to Rs. 41,534 for the asst. yr. 1971-72 and Rs. 43,240 for the asst. yr. 1972-73 was the assessees income liable to tax under the IT under the IT Act, 1961 ?"
10. The question referred in this case were directed to be referred by the High Court under s. 256(2) of the IT Act.
The question No. 1 is in two parts. The first part is a question of law and relates to assessability of accrued interest in the hands of the assessee on mercantile basis. The second part is a question comes within the ambit of the question No. 3 are both reframed as under :
"Reframed question No. 1Whether on the facts and in the circumstances of the case the Tribunal was justified in sustaining the additions of Rs. 41,534 and 1972-73 respectively being the estimated amount of interest as income from undisclosed sources on accrual basis ?Reframed question No. 3
Whether the Tribunal has acted perversely by not taking into consideration that relevant facts and materials and/or by failing to take into consideration the relevant materials and evidence ?"
11. The reframed question No. 1 is answered in the negative and in favour of the assessee. The question No. 2 is answered in the following manner :
Whether the amount of loan has become irrecoverable or not depends on facts and circumstances of the case. It is not necessary for a moneylender to wait till the company actually goes into liquidation before writing off the loan amount or to consider the loan amount and the interest payable on that loan amount as irrecoverable.
12. The question No. 3 is answered in the affirmative and in favour of the assessee.
There will no order as to costs.
BHAGABATI PRASAD BANERJEE, J. :
I agree.