Bombay High Court
S.R. Doshi Finance & Investment (P) Ltd. vs Assistant Commissioner Of Income Tax on 9 December, 1999
Equivalent citations: [2001]75ITD434(MUM)
ORDER
The assessee is in appeal before us against the order of the learned Commissioner (Appeals) dated 25-1-1995 for assessment year 1991-92. First ground in the appeal relates to the addition of lease rent of Rs. 3.96 lacs and interest of Rs. 59,400 thereon.
2. Assessee-company returned a loss of Rs. 3,79,090 for the year under consideration, which was assessed to a positive income of Rs. 3,79,820 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act). In the course of assessment proceedings, it was observed by the assessing officer that the assessee who was in leasing business, did not credit lease rentals amounting to Rs. 3.96 lacs accrued to it from M/s Usha Atlas Hydraulic Equipment Ltd. (the lessee) along with interest on overdue rentals. It was stated by the assessee that it had not received any rent since three years. Assessing officer was of the view that facts remained the same as in assessment year 1990-91 and that there were no fresh facts or evidence for consideration. He was also of the view that the transaction itself did not appear to be bona fide further, according to the assessing officer, the financial position of the debtor-lessee was proved to be not that of bankruptcy. Thus, in view of these facts, assessing officer added the amount of Rs. 3.96 lacs and Rs. 59,400 being interest thereon to the total income of the assessee.
3. Commissioner (Appeals) applied the decision of the Supreme Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and observed that since the agreement provided for the entitlement of the assessee to receive the rental along with interest on overdue rental and since the assessee was following the mercantile method of accounting, the contention of the assessee about the weak financial condition of the assessee did not carry any force. It was also observed by him that it was not a notional income given up by the assessee. Thus, the addition of Rs. 3.96 lacs and Rs. 59,400 was confirmed by the Commissioner (Appeals).
4. Shri Subhash Shetty, the learned counsel for the assessee, relied on the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), which, it was stated, was reaffirmed by the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC). In the light of these decisions it was stated that the assessee in the present case had leased the assets on 15-5-1958 and in eight years since then, only one instalment had been received. Even post-dated cheques had bounced and hence in reality no income had accrued to the assessee and accordingly, the addition deserved to be deleted. The learned Departmental Representative relied on the order of the Commissioner (Appeals) and stated that as a matter of fact, the assessee should have claimed the impugned amount as bad debt.
5. We have given our thoughtful consideration to the issue before us. The learned counsel has placed heavy reliance on the decisions of the Supreme Court in the case of Godhra Electricity Co. Ltd. (supra) and in the case of Shoorji Vallabhdas & Co. (supra). The latter decision was considered in detail by the Supreme Court in the case of State Bank of Travancore, which in turn has been referred to in the case of Godhra Electricity (supra). It would, therefore, be advantageous to take note of certain propositions laid down by the Supreme Court in the case of State Bank of Travancore (supra). At page 155 of the report (158 ITR), the court observed as follows:
"As a result of the aforesaid discussion, the following propositions emerge (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 which 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.
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 defecat the fundamental principles of the law of income-tax as developed."
6. Of the eight propositions laid down, proposition Nos. (1), (2) and (7) are directly relevant for the present appeal. Taking up proposition No. 1, let us examine whether income really accrued to the assessee or not in the light of the reality of the situation. Admittedly, the assessee had leased its assets by virtue of the lease agreement dated 15-5-1988 and follows mercantile system of accounting. According to the lease agreement, the lease rent was due and payable on the first day of each quarter. Thus income accrued to the assessee by virtue of the lease agreement entered into between the parties. There is nothing on record to suggest that the contract, i.e., the lease agreement, came to an end in any manner. There is also nothing on record to indicate that the assessee took back the possession of the leased asset, though it was entitled to do so under the lease agreement. In other words, the lessee remained in possession of the asset and hence under the lease agreement, income kept accruing to the assessee.
7. The contention of the learned counsel is that only one instalment has been received in eight years and hence no income in reality has resulted. Note No. 2 to the annual accounts, for the year under consideration is to the same effect (page 70 of the paper-book) and which we reproduce below:
"Lease rentals accrued Rs. 3,96,000 (previous year Rs. 3,96,000) alongwith interest on overdue lease rentals have not been recognised as revenue in the profit & loss account as the said sum has not been received till date and according to the management the recovery is doubtful."
From the abovenote it is clear that the management also accepts that the income has accrued but its recovery is doubtful. This brings us to proposition No. 7 (reproduced above) which states that mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be related as evidence of the fact that income has not resulted or accrued to the assessee. In order to appreciate this proposition in the light of the facts of the present case, we need to take note of the conduct of the assessee.
8. Firstly, as the note to the accounts reproduced above shows that (a) accrual of income is admitted, and (b) the recovery is only doubtful. The debt has not really become bad in the opinion of the management. In this connection, it would be pertinent to quote from the decision in the case of State Bank of Travancore (supra) wherein at page 154 (of 158 ITR), the Supreme Court observed as follows :
"It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made no income".
9. The above observation directs us to consider in a realistic manner the probability or improbability of realisation of the income and accordingly, leads us to take not of the next conduct of the assessee. When the lessee defaulted in making payment of the lease rentals, assessee, in terms of the lease agreement, referred the matter to an arbitrator who by his award dated 9-11-1990 awarded a sum of Rs. 18,21,082 and interest of Rs. 3,96,082 for the period 17-11-1988 to 9-11-1990. Pursuant to this award, the Bombay High Court, by its order dated 3-5-1991 directed the lessee to furnish security to the extent of Rs. 18.00 lacs. While passing this order, the High Court observed that the said order had been passed in view of near admitted liability to pay the amount under the leasing agreement. Since the lessee failed to furnish the security as aforesaid, assessee has filed further suits in the Bombay High Court, the outcome of which, if any, is not on records. Be that as it may, the point we are driving at is that the assessee, by its own conduct has neither given up nor surrendered the income accrued to it. There are no winding up proceedings against the lessee.
10. This brings us to proposition No. (2) reproduced earlier which says that concept of real income would apply where there has been a surrender of income. As observed in the preceding para, there has been no surrender in the present case. Further, the surrender must be of such 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. This loads us to consider the case of Godhra Electricity Co. Ltd. (supra) where, in theory, income had accrued, but in the reality of the situation it did not really accrue. How? The court observed as follows at page 759 (of ITR 225) "It would thus appear that after the decision was taken by the assessee company to enhance the charges it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed by the letter of the Under Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and the undertaking was subsequently transferred to the Gujarat State Electricity Board.
It is no doubt true that the letter addressed by the Under Secretary to the Government of Gujarat to the assessee-company had no legally binding effect but one has to look at things from a practical point of view. The assessee-company being a licensee could not ignore the direction of the State Government which was couched in the form of an advice, where by the assessee-company was asked to maintain status quo for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during this period. Before the expiry of the period of six months the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and subsequently, it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges."
11. The situation in the present case is wholly different. Unlike in the case of Godhra Electricity Co. Ltd. (supra), in this case the assessee has ample remedies to recover the amount and it has taken steps in that direction. Mere doubt about the recovery cannot lead us to conclude that in reality income has not accrued to the assessee. In the case of Godhra Electricity Co. Ltd. (supra), the letter of the under secretary and the subsequent transfer of the undertaking to the Gujarat State Electricity Board led the court to conclude that in reality there was no accrual. We are not drawing such a conclusion in the present case in view of Supreme Court's observations in the case of State Bank of Travancore (supra) to the effect that (at page 154) "it would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only". It further observed that "the extension of such a value judgment to such a field is pregnant with the possibility of misuse and should be treated with caution; otherwise one would be on sticky grounds. One should proceed cautiously and not fall a prey to the shifting sands of time."
12. Thus, in view of the above discussion we hold that taking into consideration the reality of the situation and in the light of several Supreme Court decisions, the Commissioner (Appeals) was justified in confirming the addition of lease rent of Rs. 3.96 lakhs and interest thereon of Rs. 59,400.
13. In the result, the appeal of the assessee is dismissed.