TMI Blog2007 (7) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... ew the aforesaid note of the auditors, the assessee was called upon by the Assessing Officer during the course of assessment proceedings to offer its explanation for not treating the interest receivable on investment of Rs. 20 lakhs made by it in the debentures as its income. In reply, it was submitted on behalf of the assessee-company that interest free advance of Rs. 20 lakhs was received by it from M/s. Premier Automobile Ltd. (PAL) for development of certain products and since the project of development of the said products was getting delayed considerably, PAL required the assessee to invest the said amount of Rs. 20 lakhs in their other group company, i.e., M/s. PAL Enterprises (P.) Ltd. It was submitted that both M/s. PAL as well as M/s. PAL Enterprises (P.) Ltd. became sick units and their cases were referred to BIFR due to adverse financial position. Consequently, there was no possibility of recovery of any interest on the debentures held by the assessee in the said company. It was submitted that the recovery of interest on debentures thus had become uncertain and due to this uncertainty, the same was not recognized as 'income' of the year under consideration as per Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment completed under section 143(3). 4. Aggrieved by the order of the Assessing Officer, an appeal was preferred by the assessee-company before the learned CIT(A) and it was submitted on its behalf before him that there was no real income which had been received or was likely to be received on the debentures held in M/s. PAL Enterprises (P.) Ltd. due to the adverse financial position faced by the said company. It was contended that the said income, therefore, could not be treated as accrued to the assessee-company due to uncertainty of recovery so as to bring the same to tax in its hands. Reliance in support of this contention was placed on the decision of Hon'ble Supreme Court in the case of State Bank of Travancore. Reliance was also placed on the Accounting Standard-9 issued by the ICAI submitting that non-providing of interest on the debentures by the assessee-company in its books of account was in conformity with the said Accounting Standard laying down guidelines in respect of revenue recognition on account of interest etc. It was contended that following of the said Accounting Standard was mandatory for the assessee-company. 5. The aforesaid submissions made o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes payable on specified date and with the concept of mercantile system of accounting the interest becomes accrued on the date on which the interest was payable as per terms and conditions of the debentures. Therefore, in view of above facts, I agree with the conclusion drawn by the Assessing Officer that in the system of accounting followed by the assessee, the interest on debentures has accrued and has to be included in the income on accrual basis. The concept of real income relied upon by the appellant would arise only when the assessee waives its right to receive any interest on the debentures or the appellant treats the investment in debentures as a bad debt/irrecoverable. Since both these factors are missing in this case, the concept of real income would not apply to the case of the appellant to stop the accrual of the interest income in the mercantile system of accountancy followed by the appellant. The Board's resolution passed on30-6-2001clearly indicates that "Appropriate measures shall be taken to realize the interest receivable and the principle amount of investments". In view of above discussion and detailed facts it is held that it is premature to apply the concept of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain or almost impossible in the facts of the case. He contended that such accrual of income would be there only when there is a possibility of recovery of interest income and in the absence of such possibility, it cannot be said that the said income had accrued to the assessee during the year under consideration. He invited our attention to a copy of resolution passed by the Board of Directors of the assessee-company placed at page No. 5 of his paper book to show that the decision for not providing for interest on debenture in question was taken by the Board keeping in view that there was no possibility of receiving the said interest income. He contended that there was thus no accrual of the said interest income to the assessee-company and the same, therefore, was not chargeable to tax during the year under consideration even though mercantile system of accounting was being followed by the assessee. In support of this contention, he relied on the following case laws:- (i) B.D. Sassoon Co. Ltd v. CIT [1954] 26 ITR 27 (SC). (ii) CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC). (iii) CIT v. Balarampur Commercial Enterprises Ltd. [2003] 262 ITR 439 (Cal.). (iv) CIT v. Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recognized when no significant uncertainty as to measurability or collectibility exists and if at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. Although it is mandatory on the part of the assessees like the one in the present case being companies registered under the Companies Act, 1956 to follow the Accounting Standards issued by ICAI and as held by Hon'ble Supreme Court in the case of Dai Ichi Karkaria Ltd., the ICAI is an authoritative body in the matter of laying down Accounting Standards, the taxable income of the assessee has to be computed in accordance with the Income-tax Act and it is, therefore, relevant to ascertain the position in this regard under the Income-tax Act. 10. In the case of Ashokbhai Chimanbhai, Hon'ble Supreme Court has held that when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. In the case of Shoorji Vallabhdas Co., Hon'ble Supreme Court has held that no doubt income-tax is a levy on income and the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstanding between the assessee and his father to the effect that his father would repay the whole amount standing to his debit as soon as possible provided no further interest would be charged from January, 1971 and on these facts, it was held by the Hon'ble Calcutta High Court that no interest income could be said to be accrued to the assessee from January, 1971 onwards as a result of the said waiver. 12. The legal position which clearly emanates from the resume of the judicial pronouncements discussed above is that when the right to receive a particular income vested in the assessee is waived by him as a result of a revised agreement or understanding entered into in the relevant year, the income so waived could not be said to be accrued to the assessee in that year and, accordingly, the same could not be assessed to tax in his hands in that year. Even the authorities below in their orders or the learned that the time of hearing before us have not disputed this position. As a matter of fact, in the case of Confinance Ltd. relied upon by the revenue authorities, there was no evidence produced by the assessee to show that interest income in question was given up by him and in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch acts, deeds and things as are incidental and ancillary to give effect to the aforesaid resolution." 13. As is evident from the aforesaid extracts of the Minutes of the Board, a letter was received by the assessee-company from M/s. PAL Enterprises (P.) Ltd. expressing their inability to provide for any interest expenditure due to deep financial crisis and requesting the assessee-company to treat the said investment as interest free. After considering and discussing the matter, it was decided by the Board not to provide for the said interest income as there was no possibility of receiving the same. It was also decided that appropriate measures should be taken to realise the interest receivable which was already provided for in the books of account of the assessee-company in the earlier years as well as the principal amount of investment and, accordingly, an appropriate resolution was passed incorporating the said decision. It shows clearly that the request of M/s. PAL Enterprises (P.) Ltd. to treat the investment made by the assessee-company in the debentures as interest free was accepted by it insofar as the previous year relevant to the assessment year under consideration is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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