1977 (9) TMI 31 - HC - Income Tax

Summary

Issues involved:
The judgment involves the interpretation of the Income-tax Act, 1961 regarding the accrual of interest income under the mercantile system of accounting and the impact of a resolution to waive interest on tax liability.

Issue 1: Accrual of Interest Income
The controversy arose when the assessee-company decided not to charge interest from a firm for the assessment year 1971-72 after advancing a loan and subsequently passing a resolution to waive the interest. The Income-tax Officer added a sum to the income of the assessee-company under the head "Interest" due to the relinquishment of interest without commercial consideration. The Appellate Assistant Commissioner upheld the addition based on the accrual of interest before it was waived, following the mercantile system of accountancy. The Income-tax Appellate Tribunal noted that interest had been charged previously, the resolution was passed after the accounting period, and the interest had already accrued to the assessee-company. The Tribunal considered the accrual of income under the mercantile system and the relinquishment of interest after it had accrued.

Issue 2: Legal Arguments
The counsel for the assessee argued that income tax liability arises only when income accrues or is received, emphasizing that the agreement for the loan did not specify a fixed date for interest payment. The revenue contended that once interest accrues, it cannot be written off to avoid tax liability, highlighting the daily accrual of interest and the relevance of the mercantile system of accounting in determining accrual. Reference was made to legal precedents such as Morvi Industries Ltd. v. Commissioner of Income-tax to support arguments on income accrual and the differences between cash and mercantile accounting systems.

Issue 3: Precedent and Decision
The judgment referenced Commissioner of Income-tax v. Birla Gwalior (P.) Ltd. to support the conclusion that the mere adoption of the mercantile system does not imply immediate accrual of income. It distinguished another case, Commissioner of Income-tax v. Dr. Sham Lal Narula, where interest was deemed to accrue at the end of the year due to a specified rate. Ultimately, the court ruled in favor of the assessee-company, stating that even under the mercantile system, income from interest had not accrued on the specified date due to the absence of actual payment or fixed payment date in the loan agreement.

This judgment clarifies the principles governing the accrual of income under the mercantile system of accounting and the implications of waiving interest on tax liability, providing guidance on the treatment of interest income in similar cases.