1972 (9) TMI 18 - HC - Income Tax

Whether having regard to the admitted fact that the assessee s method of accounting was mercantile the interest of Rs. 9, 275 for the assessment year 1959-60 was liable to inclusion in the assessee s total income having regard to the provisions of sections 10 and 13 of the Indian Income-tax Act

Summary

Issues:
Determination of tax liability based on interest income under mercantile accounting system for assessment years 1959-60 and 1960-61.

Analysis:
For the assessment years 1959-60 and 1960-61, the primary issue revolved around the inclusion of interest income in the total income of a limited company engaged in money-lending and banking business, following the mercantile method of accounting. The company's balance sheets revealed outstanding loans from debtors, with interest not accounted for in the profit and loss statements. The Income-tax Officer calculated interest on these loans, considering the mercantile system's accrual principle, and included the balance as taxable income after accounting for interest charged to one debtor. The Appellate Assistant Commissioner upheld this decision, but the Tribunal reversed it, emphasizing the uncertainty of recovering interest based on the company's historical records.

The crux of the dispute lay in whether the interest income, despite not being realized, should be taxable under the mercantile accounting system. The revenue contended that income accrues when due, regardless of receipt, especially in a money-lending business maintaining mercantile accounts. Citing the Full Bench decision of the Allahabad High Court, it was argued that under the mercantile system, profits are taxable when earned, irrespective of actual receipts. The Bombay High Court's precedent in a similar matter supported this interpretation, emphasizing that taxability is not contingent on actual receipt but on the accrual or arising of income.

In response, the assessee argued that the absence of interest receipts over several years indicated a lack of real income, making it unjustifiable for tax liability. Referring to a relevant case, the assessee highlighted the importance of real income for tax assessment, even under the mercantile system. The court stressed that the reality of income generation should prevail over theoretical considerations, especially in commercial contexts. Despite the lack of recent interest receipts, the court found insufficient grounds to conclude that the company had no real income, as no debts were written off, nor was evidence presented of interest waivers.

Ultimately, the court affirmed that under the mercantile system, income accrues when due, and the absence of actual receipts does not negate tax liability. The court ruled in favor of the revenue, holding that the interest income was liable for taxation, and directed the assessee to bear the costs of the reference.