Income Tax Appellate Tribunal - Delhi
Magnum Power Generation Ltd. vs Assistant Commissioner Of Income Tax on 30 September, 2005
Equivalent citations: (2006)102TTJ(DELHI)163
JUDGMENT
N.S. Saini, A.M.
1. These are appeals filed by the assessee against the order of the CIT(A).
2. The common ground of appeal taken in both these appeals by the assessee is that the learned CIT(A) erred in law and in facts in confirming the addition of a sum of Rs. 10,80,000 in the asst. yr. 1998-99 and Rs. 12,60,123 in the asst. yr. 2001-02 on account of interest income. The brief facts of the case are that the assessee had given inter-corporate deposits (in short 'ICD') to M/s Padmani Polymers Ltd. (in short 'PPL') for a period of 90 days from 22nd Sept., 1995 to 3rd Jan., 1996 @ 24 per cent. The ICD of Rs. 1 crore was renewed for another period of 90 days from 3rd Jan., 1996 to 3rd April, 1996 @ 24 per cent interest. At the time of repayment M/s PPL did not have sufficient funds and requested for deferment and rollover which had to be accepted under compulsion and finally received post-dated cheques as follows:
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Date Amount(Rs.) Remarks
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17-9-1996 10,00,000 Encashed on 17-9-1996
10-10-1996 10,00,000 Encashed on 16-10-1996
30-11-1996 70,00,000 Request for deferment' of
presentation of this cheque to
2nd week of March 1997 in view
of the financial constraints
16-12-1996 10,00,000 Encashed on 19-12-1996
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3. The balance remaining was of Rs. 70 lakhs. Therefore, a sum of Rs. 30 lakhs was received and the cheque for Rs. 70 lakhs was not presented at the request of the debtor. The contention of the assessee is that there was no renewal as alleged by the CIT(A) but an involuntary act taken under compulsion. The cheque for Rs. 70 lakhs was presented to the bank in the second week of March, 1997 but received a returning memo from the bank on 25th March, 1997 informing about the dishonouring of the cheque. Legal notice under the Negotiable Instruments Act was given on 25th March, 1997. Pursuant to the notice under the Negotiable Instruments Act, Rs. 5 lakhs was received on 1st May, 1997. Complaint was then filed under Section 138 of the Negotiable Instruments Act before the Addl. Chief Metropolitan Magistrate, New Delhi on 15th May, 1997. Again pursuant to the complaint filed under the Negotiable Instruments Act, another Rs. 5 lakhs was received on 2nd Aug., 1997 and interest was received upto 31st May, 1997 which was pursuant to the proceedings before the Court. No interest was received thereafter. Balance of Rs. 60 lakhs remained as on 31st March, 1998.
4. Thereafter no amount was received against the balance of Rs. 60 lakhs. Winding up petition under the Companies Act was filed before the Delhi High Court on 17th May, 1999. Pursuant to the directions of the High Court, the assessee received Rs. 10 lakhs on 6th Sept., 2000 and another Rs. 10 lakhs on 30th Nov., 2000. Pursuant to the proceedings in the High Court, the assessee was able to recover the principal amount from time-to-time. Finally, pursuant to ^ the settlement before the Delhi High Court, the Delhi High Court ordered on 7th Dec, 2004 that the balance principal payment of Rs. 50 lakhs which was to be paid by two post-dated cheques each on 20th Dec, 2004 and 20th Dec, 2005, respectively. The Court also ordered the payment of Rs. 1,01,000 towards interest for the entire period in full and final settlement which the Court directed to be paid in two equal instalments one of which was on 20th Feb., 2005 and the other on 20th March, 2005. The Delhi High Court recognized that payment had been received vide its order dt. 20th Jan., 2005.
5. According to the AO, the borrower company had not become sick and no reference had been made before the Board of Industrial and Financial Reconstruction (BIFR) and the company had not. become insolvent. The borrower company was a listed company which shows prevailing share price was quoted at Rs. 40 for a share of Rs. 10. The delay in the legal process should not be construed to conclude that the recovery was uncertain. He noted that the change of method of accounting of treating interest income of cash basis, i.e., following a mixed method was not permissible under Section 145 of the Act and the change in the method of accounting made by the assessee was not bona fide. For this, he placed reliance on the following judgments:
(i) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT
(ii) CIT v. Annapurani Veerappan (1992) 193 ITR 426 (Mad)
(iii) CIT v. Confinance Ltd.
(iv) Balraj Vimani v.
(v) CIT v. Tamil Nadu Industrial Investment Corporation Ltd. (1996) 218 ITR 616 (Mad)
(vi) Addl. CIT v. Swadeshi Cloth Dealers
6. The AO also noted that the assessee received Rs. 10 lakhs from the debtors M/s PPL during the previous year relating to the assessment year under consideration. Therefore, a sum of Rs. 10.80 lakhs represents interest @ 27 per cent per annum w.e.f. 1st June, 1997 to 31st March, 1998. The details of calculation of interest are as under:
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(a) From 1-4-2000 to 31-3-2001 on 9,45,000
Rs. 35 lakhs @ 27% P.A.
(b) From 1-4-2000 to 22-5-2000 on 19,233
Rs. 5 lakhs @ 27% P.A.
(c) From 1-4-2000 to 5-9-2000 on 1,16,876
Rs. 10 lakhs @ 27% P.A. i.e.,
158 days
(d) From 1-4-2000 to 28-12-2000 on
Rs. 10 lakhs @ 27% P.A. i.e., 1,79,014
242 days
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12,60,123
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7. In appeal, the CIT(A) confirmed the action of the AO considering the submissions made by the learned Authorised Representative of the assessee and findings are to quote as under:
5.7 Based upon the aforesaid factual position, the appellant argued four propositions which along with my findings are discussed below:
It was submitted that the appellant had no right to receive the interest as the initial agreement for ICD had expired on 3rd April, 1996 and there was no legally enforceable contract for recovery of interest on the outstanding principal, the recovery of which itself was doubtful.
5.8 This claim of the appellant is contradicted by the facts of the case. In the written submissions filed on 7th Jan., 2002 it was categorically admitted that the inter-corporate deposit of Rs. 70 lakhs was to be repaid in terms of repayment schedule as mutually agreed to by the appellant-company and after the request of PPL the appellant had no choice but go along with the renewal. It is stated in the submissions that pursuant to representations made by M/s PPL The inter-corporate deposit of Rs. 70 lakhs was renewed...'. It is further admitted in written submissions that as per the agreement the amount of Rs. 70 lakhs was to be repaid on 10th March, 1997 with interest at 27 per cent. Thus, there was an agreement entitling the appellant to interest at 27 per cent after the expiry of the ICD on 3rd April, 1996. In the notice under Section 434 of the Companies Act, dt. 2nd March, 1998 available at p. 99 of the paper book filed on 13th Sept., 2002, the counsel for the appellant specifically mentioned 'you are also liable to pay interest at 27 per cent per annum from 1st June, 1997 qua the ICD.' The winding up petition filed by the appellant, copy of which is available at pp. 104 to 136 of the paper book mentions in para 8, that M/s PPL was indebted to the petitioner for a sum of Rs. 60 lakhs being the principal amount and Rs. 29,94,041 as interest calculated at 27 per cent per annum from 1st June, 1997. This petition is accompanied by an affidavit of the Authorised Representative of the appellant verifying the petition and, inter alia, affirming that the statement made in para 8 was true in the knowledge of the deponent. Thus, it is clear that the appellant entered into agreement subsequent to expiry of the ICD which was a legally enforceable contract.
The second proposition argued by the appellant was that in case of doubtful or sticky debts, interest cannot be taxed as no interest accrues. The appellant relied upon the following judgments in support of this proposition:
(i) CIT v. M.P Finance Corporation
(ii) CIT v. Motor Credit Co. (P) Ltd,
(iii) CIT v. Bengal Jute Mills Co. Ltd. (1986) 56 CTR (Cal) 267: (1987) 165 ITR 631 (Cal)
(iv) CIT v. Ferozepur Finance (P) Ltd.
5.9 I am, however, of the view that from the facts of the appellant's case it is not established that the debt had become sticky, doubtful or irrecoverable and, therefore, the case laws cited by the appellant are of no assistance. The appellant did receive interest for the period until 1st May, 1997 which partly falls within the assessment year under consideration. The appellant received Rs. 10 lakhs of the principal amount in two instalments of Rs. 5 lakhs each on 1st May, 1997 and 2nd Aug., 1997 and these dates also fall within the previous year relevant to assessment year under consideration. Further sum of Rs. 15 lakhs was received in September/November, 2000 after filing of the winding up petition. AO has rightly pointed out that M/s PPL were not insolvent and were not even before BIFR and its share quoted above par value. Therefore, on facts the amount had not become bad or irrecoverable. It is to be noted that even in cases of banks where recovery of sticky advances was a perpetual problem and taxability of interest thereon was subject-matter of long litigation, CBDT finally came out with a circular stating that where there had been no recovery for 3 consecutive accounting years, the interest will not be subjected to tax only in the fourth year. The parameters of this circular were accepted by the Supreme Court in the UCO Bank v. CIT In the case of the appellant there was recovery during the previous year relevant to the assessment year under consideration and hence the amount cannot be treated as doubtful debt.
5.10 Under Section 5 read with Section 28 of the Act, the liability attaches to profits which have been either received by the assessee or which have accrued to him during the year of accounting. It is well-settled that income accrues when it 'falls due', i.e., becomes legally recoverable irrespective of whether actually received or not and 'accrued income' is that income which the assessee has a legal right to receive. Reliance in this regard is placed upon Supreme Court judgments in the cases of CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525, 531 (SC) and Morvi Industries Ltd. v. CIT admittedly, the assessee has been maintaining its accounts on mercantile basis and in terms of Section 145 does not have an option to adopt cash system for one item, i.e., interest from M/s PPL.
The third proposition argued by the appellant was that the issue has to be viewed from the concept of real income and no real income had come into existence. However, I am of the view that this theory of real income cannot be extended so as to exclude from chargeability such income which has accrued but merely suffers from high improbability of recovery. As held by Supreme Court in the case of State Bank of Travancore v. CIT 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 Court further held that 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. In the case of the appellant, there is clear statement in the accounts in note No. 8 to the note to accounts forming part of audited balance sheet and P&L a/c that suit has been filed for recovery and the interest will be credited when received. There is not a whisper of the amount being irrecoverable and interest not having accrued. No provision is made for bad debt. There is only change in accounting policy which is not permissible under Section 145. The claim of income was very much alive and was being pursued through appropriate legal remedy.
5.11 Supreme Court in the case of CIT v. Shiv Prakash Janak Raj & Co. (P) Ltd. that The concept of ' real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules.' In the case considered by the Supreme Court, the assessee had not charged interest in view of the difficult financial position of the borrower and in subsequent year even passed a board resolution deciding not to charge interest. The Court however upheld the taxability of interest on accrual basis. The claim of the appellant regarding irrecoverability is even weaker as no board resolution was passed for not charging of interest. The appellant only postponed accounting of interest income which is against the mercantile system followed by the appellant.
The last proposition argued by the appellant was that if it is held that the interest accrued, then the company's claim was that it had written it off because the interest was not recoverable. To elaborate this issue, the appellant stated that the following entries may be considered to have been passed:
Interest recoverable Debit 100 Interest received Credit 100 5.12 The appellant on writing off of irrecoverable amount as bad debt will pass the following entry:
Bad debt Debit 100 Interest recoverable Credit 100 5.13 The net effect to the profit is claimed to be nil and it is stated that the appellant had written off the amount by not passing two sets of entries explained above.
5.14 I find no merit in this alternative plea of the appellant. The appellant has not written off any bad debt and cannot claim benefit of Section 36(1)(vii) on the basis of these notional entries. In fact, the note No. 8 to the notes to accounts forming part of audited balance sheet and P&L a/c of the company extracted below shows that the appellant cannot be construed even notionally to have written off the amount:
'The company has advanced sums aggregating to Rs. 60 lakhs to Padmini Polymer Ltd. which has not been repaid along with the interest according to terms and conditions and suit has been filed for recovery. Pending the outcome of the suit no interest has been provided for the period June, 1997 to March, 1998 and same will be accounted for, to the extent as and when received. The appellant proposes to only postpone credit of interest accrued and not abandon its claim.
5.15 I confirm the action of the AO in assessing the interest income at Rs; 10,80,000.
8. Following the order of the asst. yr. 1998-99, the learned CIT(A) confirmed for the same reasons in 2001-02 the addition on account of interest income of Rs. 12,60,120.
9. The learned Authorised Representative of the assessee submitted that on the fact of the case real income by way of interest cannot accrue on sticky and doubtful debts. After the lapse of the agreement on ICD and bouncing of the cheques given to repay the deposit, and after filing of a complaint under Section 138 and subsequent winding of petition under the Companies Act, it can be said that the amount due has become sticky and doubtful and thus there was no accrual of interest income. On the facts of the case, an amount which has become sticky and doubtful will not change its character merely because there is realization against principal from time to time after 31st March, 1997 pursuant to the directions of the Court both in the proceedings under Negotiable Instruments Act and winding up petition under Companies Act. In the absence of a valid contradiction but purely on the claim for recovery of the principal amount in the proceedings under Section 138 under the Negotiable Instruments Act and the claim for interest levy along with principal in the winding up proceedings under the Companies Act before Delhi High Court there can be no accrual of interest income, i.e., a mere claim before the Court cannot lead to crystallisation of interest due only on the decision of the Court. As per current status of the case, where the entire principal amount has been recovered pursuant to directions of the Court and in view of the directions of the Court on 7th Dec, 2004 that the debtor has to pay interest of only Rs. 1,01,000 for the period from 1st Jan., 1997 till 7th Dec, 2004 no interest can be said to accrue in the asst, yr. 1998-99 as alleged by the AO and confirmed by the CIT(A) and that interest of Rs. 1,01,000 has crystallised on 7th Dec, 2004 and, therefore, taxable in the asst. yr. 2005-06.
10. The learned Counsel for the assessee submitted that because the interest as income has not accrued on doubtful and sticky advance, the assessee changed its accounting method from mercantile to cash basis which was not allowed by the AO.
11. He submitted that the AO did not recognise that the mercantile accounting method itself provided that any revenue which has significant uncertainty as to measurability or collectability, i.e., not ascertained and subject to litigation cannot be recognized. He submitted that the assessee had taken action under Negotiable Instruments Act under Section 138 and winding up petition under the Companies Act but in the opinion of the AO the delay in the legal process does not take away the accrual of income. He submitted that the logic of the AO was that interest will not accrue only after the debt becomes totally irrevocable. He submitted that the AO passed order on the fact that the claim of 27 per cent was made in the winding up petition before the Delhi High Court claiming interest @ 27 per cent w.e.f. 1st Jan., 1996 to 31st March, 1998 and taxed Rs. 10,90,000. He submitted that the AO was not justified in doing so both on merits and factual and legal position.
12. He submitted that after the expiry of the contract of ICD and in the circumstances of the case as the amount was sticky and doubtful of recovery no interest accrued for the year ended 31st March, 1998. The CIT(A) was not able to appreciate the facts of the case and was under mistaken belief that the renewal of the ICD continued past 3rd April, 1996 in perpetuity. She was not able to understand the factual position, that it was not under the control of the assessee to do anything but to accept in compulsion the deferment of the repayment till the post-dated cheques were received, i.e., 17th Sept., 1996, 10th Oct., 1996, 30th Nov., 1996 and 16th Dec, 1996. The CIT(A) was not able to understand that the payment of Rs. 1 crore by way of four post-dated cheques, three cheques of Rs. 10 lakhs each and one cheque of Rs. 70 lakhs was received as compensation of the ICD. The delay in presentation in case of Rs. 70 lakhs was not a renewal but acceptance under compulsion to defer the cheque to second week of March hoping that litigation will not have to be restored to. The CIT(A) did not appreciate that the cheques for Rs. 70 lakhs bounced on 10th April, 1997 and thereafter the assessee filed a complaint under Section 138 of the Negotiable Instruments Act as also winding up petition under the Companies Act and this cannot give a different character to the amount due. The CIT(A) held that as under the winding up petition interest had been claimed at 27 per cent, therefore, there was a valid agreement pursuant to which interest accrued at 27 per cent. The CIT(A) was not able to comprehend the concept of sticky and doubtful debt and probably in her mind she was of the opinion that interest does not accrue only if the debt has become totally irrevocable. The CIT(A) took into account the payments received under pressure subsequent to filing of the complaint and pursuant to the winding up petition as an indication that the amount was not doubtful and sticky. Obviously, she did not appreciate from the facts that the assessee had to file the cases and the fact that the payment was received pursuant to Court's pressure was an indication by itself that the amount was sticky and doubtful. The CIT(A) has only restricted herself to the fact that the amount due has not become bad or irrecoverable in view of the subsequent payments, therefore, not accepting the proposition of the assessee that no interest accrued because there was no valid enforceable debt, no valid agreement and that the alleged claim before the Court does not lead to accrual of income.
13. The learned Counsel for the assessee further argued and submitted that the CIT(A) has referred to the decision of the Supreme Court in UCO Bank v. CIT wherein a circular has been issued by CBDT for banks who had credited the interest to interest suspense account rather than P&L a/c. The CIT(A) has tried to apply the circular here so that after consecutive three financial years of non-receipt, the interest will not be subject to tax. This circular is not applicable because it is for banking companies only; where a valid contract of loan is due; where the interest has been credited to suspense account. None of these distinguishable facts were applicable to the assessee. The essence of the judgment of UCO Bank's case (supra) was that in case the amount is doubtful of recovery, the income on account of interest can be taxed only when received. Circular again laid down the law. It is only issued for the benefit of the taxpayer not to its detriment. Because of the confusion in the banking sector, on account of huge debts which according to RBI's definition had his non-performing assets. The CBDT wanted to lay down a constant to be adopted by the banks under the circumstances the banks were placed in. The circular, therefore, cannot create an accrual where there is no contradiction and the debt is doubtful and sticky.
14. He further argued and submitted that in para 5.10 the CIT(A) has accepted that income accrues when it falls due, i.e., becomes legally recoverable irrespective of whether actually received or not and part accrued income "is that income which the assessee has a legal right to receive." It is crystal clear that in this appeal there is no legal recoverable interest income on which the assessee has legal right to receive. The matter is sub judice and the claim thereon will accrue when the decision is taken.
15. He also submitted that the CIT(A) has got confused between the cash basis and mercantile basis of accounting. Nowhere has the assessee stated that it has changed its accounting policies to cash basis. In the balance sheet and notes to accounts it has been mentioned that the corporate deposit is considered doubtful and since the matter is before the Court the interest can only accrue on the date of decision in the suit and then taxable.
16. He submitted that the CIT(A) on p. 8 states that the theory of real income cannot be extended so as to exclude from chargeability of such income which is accrued but merely suffers from high improbability of recovery. She has not appreciated that in the facts of the case no income accrued. She has relied on the decision of the Supreme Court in State Bank of Travancore v. CIT The decision of the Hon'ble Supreme Court in State Bank of Travancore (supra) is not relevant at all and the remarks therein were in the context of the circumstances before the Court. There was a valid agreement. As a matter of fact, the subsequent decision of the Supreme Court in UCO Bank (supra) has considered the judgment of the State Bank of Travancore (supra) and not followed the same. In State Bank of Travancore (supra) the amount of interest had been credited to the interest suspense account and the Hon'ble Supreme Court relied upon this unequivocal conduct of the bank and thereby accepted that interest accrued pursuant to a valid contract. The credit to the interest account was critical. Therefore, CIT(A) has accepted that there is high improbability of recovery but is under misconception that the amount due is against a case of valid enforceable claim. The CIT(A) has also swayed by the fact that only in case the amount became totally irrecoverable interest will not accrue and held that the assessee had never pointed out that the amount was irrecoverable and, therefore, interest .accrued. This is contrary to the facts because in the appeal before the Tribunal interest income did not accrue because there was no valid contract but only a claim was before the Court. The CIT(A) has accepted on p. 8 at the end of para 5.10 that there was a "claim of income" before the Court and being pursued. The claim by itself does not lead to accrual because there is no valid enforceable debt, no enforceable right to receive interest as at 31st March, 1998.
17. He also submitted that without prejudice as an alternative plea the assessee has raised another proposition. The claim for interest was sticky and doubtful of recovery because the principal amount itself was pending litigation before the Court, no interest can, therefore, be said to accrue after 31st May, 1997. The assessee following AS-9, revenue on account of interest was unascertained as on 31st March, 1998 not legally enforceable and the amount of interest pending determination by Court, and, therefore, cannot be recognized. The Hon'ble Supreme Court has recognized in Challapalli Sugars Ltd. v. CIT the proposition that where the accounting bodies have laid down the policy for recognition of accounting of income such accounting standards should be followed. In the instant case, there is no valid contract, the matter is sub judice in Court, the claim for interest is pending decision, revenue recognition should be in line with AS-9.
18. Summarising his submissions the learned Counsel submitted that keeping in view the factual matrix the totality of the circumstances, the assessee was placed in the existence of complaint under the Negotiable Instruments Act and winding up petition before the Delhi High Court resulting in the principal amount becoming doubtful and sticky and the interest claimed being a mere claim before the Delhi High Court and finally in view of the decision of the Delhi High Court in the winding up petition, determining the interest of Rs. 1,01,000 payable in January, 2005, no interest can be said to have accrued and, therefore, Rs. 10,80,000 in the asst. yr. 1998-99 and Rs. 12,60,123 in the asst. yr. 2001-02 cannot be taxed.
19. Having heard the rival submissions and perused the orders of the lower authorities and the materials available on record, we find that the facts of the case are that the cheque of Rs. 70 lakhs was presented to the bank in the second week of March, 1997 which was returned by the bank on 13th March, 1997 informing about the bouncing of the cheque. Thereafter the assessee issued legal notice to M/s Padmini Polymers Ltd. (PPL) under the Negotiable Instruments Act on 25th March, 1997. Pursuant to the notice, the assessee received Rs. 5 lakhs on 1st May, 1997. Thereafter complaint under Section 138 of the Negotiable Instruments Act was filed before the Addl. Chief Metropolitan Magistrate on 15th May, 1997 and the assessee received another Rs. 5 lakhs on 2nd Aug., 1997 and interest was received by 31st May, 1997. The balance amount of Rs. 60 lakhs remained outstanding for which the assessee filed winding up petition under the Companies Act before the Delhi High Court on 17th May, 1999. Pursuant to the direction of the High Court, the assessee received Rs. 10 lakhs on 6th Sept., 2000 and another Rs. 10 lakhs on 30th Nov., 2000. Finally, the Hon'ble Delhi High Court ordered on 7th Dec, 2004 that the balance amount of Rs. 50 lakhs was to be paid by two post-dated cheques dt. 28th Dec, 2004 and 20th Dec, 2005. The Court also ordered for payment of interest of Rs. 1,01,000 in two equal instalments for the entire period one of which was on 20th Feb., 2005 and the other on 20th March, 2005. On the basis of this it is the claim of the assessee that since the principal amount was doubtful of recovery, therefore, no interest accrued to the assessee and, therefore, the AO was not justified in including interest of Rs. 12,60,123 in the asst. yr. 2001-02 and Rs. 10,80,000 in the asst. yr. 1998-99 in the income of the assessee. The learned Authorised Representative of the assessee has placed, reliance on the decision of the Hon'ble Supreme Court in the case of UCO Bank (supra) wherein it was held that the AO was right in not taxing interest arising in respect of doubtful or sticky loan.
20. In our considered opinion, the steps taken by the assessee were for recovery of the principal amount with interest. We also observe that in the suit filed before the Delhi High Court, the assessee had claimed the loan amount of Rs. 70 lakhs together with interest at 27 per cent. Thus, in the circumstances it cannot be said that the loan amount was sticky or was doubtful of recovery. It is also seen that with the legal efforts pursued by the assessee, the assessee was able to realize the entire principal amount and also an interest of Rs. 1,01,000. We find that the assessee has placed reliance on the decision of the Hon'ble Supreme Court in UCO Bank (supra). We would like to mention that in order to aid proper determination of the income of money lenders and banks, the CBDT issued Circular dt. 6th Oct., 1952 providing that where interest accruing on doubtful debt is credited to the suspense account it need not be included in the assessee's taxable income provided the ITO is satisfied that recovery is practically improbable. On 20th June, 1978 in view of the judgment of the Hon'ble Kerala High Court in State Bank of Travancore v. CIT , the Board by another circular withdrew with immediate effect the earlier circular. By Circular dt. 9th Oct., 1984 the Board decided that only in respect of doubtful debts interest credited to suspense account by banking companies cannot be subjected to tax but interest charged in the account where there has been no recovery for 3 consecutive accounting years would not be subjected to tax in the 4th year and onwards. This was done for the purpose of laying down a uniform test for the AO to decide whether the interest income which is transferred to suspense account is in fact arising in respect of a doubtful or "sticky" loan. This was done by presuming that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. In the case on hand, the assessee is not a banking company and we find that 3 years has not elapsed to term the outstanding loan as "sticky" or doubtful. Therefore, in terms of this circular of the CBDT the interest cannot be treated as interest on a doubtful loan so as not to include the same in the income of the assessee. Further the Hon'ble Supreme Court in the State Bank of Travancore (supra) has observed that:
The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under Section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act.
21. In the instant case, the assessee is following mercantile system of accounting for recognizing its income. For the year under appeal, the loan amount has not become bad or "sticky" or doubtful of recovery as the assessee was very much hopeful in recovering the amount and, therefore, had filed complaint under Section 138 of the Negotiable Instruments Act and also suit of liquidation under the Companies Act against the debtor company. It is also an admitted fact that the assessee realized the whole amount of principal loan from the debtor company. Thus, as the amount had not become sticky or doubtful of recovery the interest income accrued to the assessee according to the regularly employed method of accounting by the assessee. Therefore, to say so that the said income is not liable to tax by taking recourse to the real income theory is not sustainable in view of the above observation of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra). The assessee received interest for the period until 1st May, 1997 which partly falls in the asst. yr. 1998-99 under consideration. The assessee received Rs. 10 lakhs of the principal amount in two instalments of Rs. 5 lakhs each on 1st May, 1997 and 2nd Aug., 1997 and these dates also fall within the previous year relevant to asst. yr. 1998-99 under consideration. Further sum of Rs. 15 lakhs was received in September/November 2000 after filing of the winding up petition. Still further, M/s PPL were not insolvent and were not even before BIFR and its share was quoted above par. The Hon'ble Supreme Court in the case of CIT v. Shiv Prakash Janak Raj &. Co. (P) Ltd. reiterated that "The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply it is only those provisions which must be applied and followed. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules." In the case considered by the Supreme Court, the assessee had not charged interest in view of the difficult financial position of the borrower and in subsequent year even passed a board resolution deciding not to charge interest. The Court, however, upheld the taxability of interest on accrual basis. The claim of the appellant regarding irrecoverability is even weaker as no board resolution was passed for not charging of interest. The appellant only postponed accounting of interest income which is against the mercantile system followed by the appellant. The next argument of the assessee is that if it is held that interest accrued, then the company's claim was that it had written it off because the interest was not recoverable. We find no merit in the plea of the assessee. The assessee has not written off any, bad debt and cannot claim benefit of Section 36(1)(vii) on the basis of notional entries. In fact the note No. 8 to the notes to accounts forming part of audited balance sheet and P&L a/c of the company extracted below shows that the assessee cannot be construed even notionally to have written off the amount:
The company has advanced sums aggregating to Rs. 60 lakhs to Padmini Polymer Ltd. which has not been repaid along with the interest according to terms and conditions and suit has been filed for recovery. Pending the outcome of the suit no interest has been provided for the period June, 1997 to March, 1998 and same will be accounted for, to the extent as and when received." The appellant proposes to only postpone credit of interest accrued and not abandon its claim.
22. Hence, we do not find any infirmity in the order of the CIT(A) in upholding the additions made by the AO on account of interest income of Rs. 10,80,000 in the asst. yr. 1998-99 and Rs. 12,60,123 in the asst. yr. 2001-02. Therefore, the ground of appeal of the assessee taken in both the years under appeal are dismissed.
23. In the result, the appeals of the assessee are dismissed.