2017 (5) TMI 1221 - HC - Income Tax

Addition on waiver of interest - accrual of income - debtors inability to pay the interest for years - Tribunal in the rectification proceeding rejected assessee plea on the ground that it maintained mercantile system of accounting the debts were not declared as bad debts and the assessee continued to receive back the principal sums from the borrowers - Held that - Mere following of mercantile system ought not to result in accrual of income from interest when there is no interest income in real terms and the statements of account of the assessee also did not reflect any credit entry in respect of interest receipt from the aforesaid borrowers. Commercial decision was taken by the appellant-assessee not to charge interest from these two borrowers as the assessee wanted to ensure recovery of the principal sums lent. In absence of realization of real income and there being no accrual of such income subsequent to the aforesaid Board resolutions interest income could not be added to the income of the assessee for the relevant financial year We find the points of law involved in this appeal are covered by Shoorji Vallabhdas (1962 (3) TMI 6 - SUPREME Court) and Poona Electric (1965 (4) TMI 20 - SUPREME Court ). The interest income could not said to have had accrued for the appellant for the assessment year in the background of the resolutions taken for waiver of interest. - Decided in favour of the assessee.

Summary

Issues Involved:

1. Whether the Tribunal was right in confirming the addition of interest, though waived by the assessee, due to the debtors' inability to pay, based on the mercantile method of accounting.
2. Whether the Tribunal's order was based on a wrong premise that there was no resolution passed by the Board of Directors for the waiver, rendering the order perverse.

Issue-Wise Detailed Analysis:

1. Addition of Interest Based on Mercantile Method of Accounting:

The assessee, an incorporated company, had waived interest on loans given to Shroff Chemicals Pvt. Ltd. and Eastern Commercial Enterprises due to the borrowers' financial difficulties. The company maintained its accounts on a mercantile basis and did not credit any interest from these borrowers from the financial year 1987-88 to the assessment year 1990-91. The assessing officer added notional interest to the assessee's income for the assessment year 1990-91, which the CIT(A) confirmed, stating that the mercantile system required interest to be added on a due basis.

The Tribunal upheld this addition, noting that the assessee continued to receive principal repayments and had not declared the debts as bad. The Tribunal also mentioned that no Board resolution was passed for waiving the interest, a point contested by the assessee.

The assessee argued that the waiver was a commercial decision to ensure the recovery of the principal amount and that no real income from interest had accrued. The Supreme Court's decisions in Commissioner of Income Tax vs. Birla Gwalior Pvt. Ltd., C.I.T. vs. Shoorji Vallabhdas & Co., and Poona Electric Supply Co. Ltd. vs. CIT were cited, emphasizing that income must result in real terms for tax liability to arise.

2. Tribunal's Order Based on Wrong Premise:

The assessee presented Board resolutions dated 15th May 1987, waiving the interest for the two borrowers, which were not considered by the Tribunal. The Tribunal's decision was partly based on the absence of such resolutions, a point the assessee sought to rectify through a Miscellaneous Application, which the Tribunal rejected.

The High Court noted that the Tribunal's rejection of the assessee's plea was primarily due to the mercantile system of accounting and the non-declaration of the debts as bad. The High Court found that the Tribunal's reliance on the absence of Board resolutions was misplaced, as the resolutions were indeed passed before the assessment year in question, and the waiver was based on commercial considerations.

Conclusion:

The High Court distinguished the present case from Commissioner of Income Tax vs. Shiv Prakash Janak Raj and Co. Pvt. Ltd., where the waiver of interest occurred after the relevant accounting year. In the present case, the resolutions were passed before the assessment year, and there was no nexus between the assessee and the borrowers, unlike in Shiv Prakash.

The High Court concluded that the interest income could not be said to have accrued to the assessee for the relevant assessment year due to the Board resolutions waiving the interest. The appeal was allowed, and the Tribunal's decision was set aside, with no order as to costs.