Madras High Court
Commissioner Of Income-Tax vs Jayalakshmi Trading Co. on 8 September, 1994
Equivalent citations: [1995]214ITR660(MAD)
JUDGMENT Gulab C. Gupta, J.
1. This is a reference at the instance of the Revenue referring the following questions of law for decision of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the additions of Rs. 54,390 and Rs. 39,426 for the assessment years 1972-73 and 1973-74 ?
(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in allowing the assessee's appeal on the ground of the absence of a specific finding on the part of the Income-tax Officer that the true profits could not be ascertained from the method of accounting adopted by the assessee ?"
2. The assessee carries on business of lending and receiving money. On the money lent, he charges interest but on the money which he borrows, he pays interest. In the month of account which he had been maintaining, he did not show the interest accrued to him on a sum of Rs. 3,02,168 admittedly loaned by him. He has, however, shown the interest payable by him in his account books even though he has actually not paid the same. His explanation for not showing interest on the amount of Rs. 3,02,168 was that the loan has become stagnant. No enquiry whether the claim was correct was made by the Income-tax Officer. The Income-tax Officer, however, noticed that since the assessee has himself shown the accrued interest payable by him as expenditure he was not maintaining correct accounts. According to the Income-tax Officer, the assessee was following the cash method of accounting in so far as the receipts are concerned, but the mercantile system of accounting in so far as payments are concerned. This, according to the Income-tax Officer, is not permissible. He, therefore, calculated interest at the rate of 18 per cent. per annum on the aforesaid amount of Rs. 3,02,168 and added a sum of Rs. 54,390 as the income of the assessee during the relevant year. The assessee felt aggrieved by the aforesaid addition and challenged the order of the Income-tax Officer in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner also held that the assessee is following two types of systems of accounting which was not permissible and, therefore, upheld the addition made by the Income-tax Officer. On a further appeal to the Tribunal, the Tribunal was of the opinion that even on a finding that the account was not properly maintained, it has not been held that the correct income cannot be assessed. According to the Tribunal, as long as the true profit of the assessee can be gathered on the basis of entries in the account books, the Income-tax Officer was under an obligation to reach the said true profit. Since this was not done, the Tribunal disallowed the addition and directed the Income-tax Officer to amend the assessment accordingly. Thereafter, the Revenue has requested for the reference which has been made.
3. There is no doubt that the system of accounting followed in the relevant years i.e., assessment years 1972-73 and 1973-74, is the same system that has been followed by the assessee for earlier years. The accounts of the earlier years have been admittedly accepted by the Department. It is true that each accounting year is a unit by itself and the Income-tax Officer has ascertained the taxable profit each year in accordance with law and in doing so, the decision in the earlier year would not operate as res judicata. Even then it cannot be ignored that the system is one which had received the approval of the Department earlier. It can also not be ignored that in the earlier years, the Department had been able to decide the correct profit of the assessee based on the accounts maintained by him. Under the circumstances, there should be something more to hold that it was not possible for the Income-tax Officer to decide the true profits of the assessee. What is to be taxed is the income of the assessee. The taxable income has to be reached in accordance with the provisions of the Income-tax Act. In a case where the income has accrued but its receipt has been delayed there may be justification for the Department to include the same in the taxable income. This, however, can be done only if the income has really accrued or arisen to the assessee and not otherwise. As to what should be the method of deciding whether a particular income has really accrued or arisen to the assessee or not the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102 may be profitably looked into. In the said case, the Supreme Court has on a consideration of all its earlier decisions laid down eight broad propositions to ascertain whether the income has really accrued to the assessee or not. The following passage from the judgment being relevant needs reproduction (at page 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 if 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."
4. Under the circumstances, the basic question inviting the attention of the Income-tax Officer was whether the interest payable on the loan of Rs. 3,02,168 had really accrued to the assessee during the year. The defence of the assessee was that the loan has become stagnant and perhaps for that reason he claimed that the interest on the said sum had really not accrued. Whether this claim of the assessee was true or false has to be decided by the Income-tax Officer on the basis of the law laid down by the Supreme Court as aforesaid. In the instant case, nothing whatsoever has been done to hold that it was making a false claim and, therefore, wrong in not showing the income which has really accrued to him. In the absence of such a finding, the Income-tax Officer was not justified in adding the amount of interest to the income of the assessee during the relevant year. Under the circumstances, it must be held that the Tribunal was right in deleting those additions. In this view of the matter, the question referred to this court must be answered in the affirmative and against the Department though for different reasons.
5. As regards the second question, it is really not an independent question but, the basis for making the addition of interest to the income of the assessee. The case of the assessee as would be clear from the assessment order was that the loans having become stagnant, interest has not been shown on the mere possibility. If this submission be found to be correct, there would be no justification for finding fault with the case of the assessee. But, it appears that the Income-tax Officer has noticed that the assessee has shown accrued interest in the account of his creditors which was the proper course to be adopted in the mercantile system of accounting. For this reason, the Income-tax Officer has held that the assessee was following the cash system of accounting in so far as the receipts are concerned and the mercantile system of accounting in so far as payments are concerned and, therefore, held that this was not the correct method of maintaining accounts. No effort was made by the Income-tax Officer to ascertain the true profits of the assessee on the basis of the account books made available to him. Since the accounts maintained by the assessee during the years preceding the assessment years in question were similar and the true profits of the assessee had been ascertained during those years, there would really be no justification for the submission that true profits could not be ascertained from the method of accounting adopted by the assessee. Apparently, therefore, it is a case where the Income-tax Officer has not followed the correct legal principle for ascertaining the true profits of the assessee. In this view of the matter, the decision of the Tribunal must be held to be correct. Under the circumstances, our answer to the second question is also in the affirmative. No costs.