TMI Blog2003 (4) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thereafter, it was extended from time to time. The last agreement was made on14-2-1997. However, on the due date the said company defaulted in payment and such payment remained irrecoverable despite the arbitration suit filed by the assessee. It was also submitted that the assessee had received only Rs. 33,50,560 as interest in financial year 1996-97 and thereafter not even a single paisa was received or could be recovered. It was also submitted that similar issue was decided in favour of the assessee by the CIT(A) in respect of assessment years 1996-97 and 1997-98 by holding that the assessee should be assessed only on the amount received by it. It was also contended that no tax could be levied on hypothetical income on the basis of theory of real income. Reliance was placed on the judgment of Punjab Haryana High Court in the case of CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 and the judgment of Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746. Accordingly, it was prayed that the addition of Rs. 30 lakhs be deleted. 4. The CIT(A) noted (i) that loan was given on personal guarantee of Mr. Sagar Suri and Mr. Ashwani Suri as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the arbitration proceedings and the liquidator opposed the same on the ground of lack of funds and in such circumstances, the assessee agreed to pay the arbitration fees and on such concession, the Company Judge allowed the assessee to continue arbitration proceedings; (vi) though the arbitrator awarded the suit in favour of the assessee, not even a single paisa could be recovered till date. In view of these facts, it was submitted that no income could be said to accrue in real terms and tax could not be levied on hypothetical income. Heavy reliance was placed on the judgment of P H High Court in the case of Ferozpur Finance (P.) Ltd., the judgment of Supreme Court in the cases of Godhra Electricity Co. Ltd., R.B. Jodhamal Kuthiala v. CIT [1971] 82 ITR 570, K. Govindan Sons v. CIT [200l] 247 ITR 192, CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 and UCO Bank v. CIT [1999] 237 ITR 889. He also relied on the decision of Tribunal in the case of IRCON International Ltd. v. Dy. CIT [2000] 74 ITD 117 (Delhi). Further, reliance was placed on judgment of Calcutta High Court in the case of ANZ Grindlays Bank Ltd. v. CIT [2001] 250 ITR 125 and of Allahabad High Court in the case of Jwal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as neither claimed nor argued before the lower authorities. 7. In reply, it was submitted by the learned counsel for the assessee that award of 30% interest after14-5-1997was only in the nature of damages and could not be said to accrue in the year under consideration at all. The award was also not before the Assessing Officer. It was also submitted that judgment of Supreme Court in the case of State Bank of Travancore has been overruled in the case of UCO Bank. Since all the rights of the assessee had been abrogated, it was pleaded by the learned counsel for the assessee that there was no accrual of real income. 8. Rival submissions of the parties have been considered carefully in the light of the case law referred to and the materials placed before us. The question for consideration is whether, by applying the theory of real income, can it be said that no income resulted at all to the assessee in respect of interest on loan advanced to GAL. Therefore, it would be appropriate to discuss the case law where such theory has been dealt with. This theory was discussed in detail by the Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144. In that ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT v. Chamanlal Mangaldas Co. [1960] 39 ITR 8. In that case also, the assessee was entitled to commission of 3-1/2% on the sale price of all cotton yarn and cloth manufactured and sold by the company and also commission of 10% on the profits made by the company from its ginning or pressing operations. On December 28, 1950, the directors of that company passed resolution modifying the terms of the managing agency agreement in regard to the commissioning and added a proviso that for the year 1950-51, if the directors of the company, having regard to the result of working, were of the opinion that a lesser remuneration then that given in the agreement should be paid to the managing agents then the directors shall have the right, in their absolute discretion to fix such lesser remuneration payable either by way of lump sum or at a reduced percentage. This resolution was accepted by the assessee on the same date. OnMarch 17, 1951, a supplemental agreement was entered into between the company and the assessee embodying the terms of resolution. A meeting of the Board of Directors by resolution dated 8th April, 1951 resolved that managing agents should accept a commission of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the interest income. Their Lordships of Bombay High Court answered the question against the assessee by holding that interest income was chargeable to tax in view of the mercantile system of accounting followed by the assessee and merely the fact that interest was not received, could not be a ground for holding that no real income accrued to the assessee. 13. On the other hand, the different view was expressed by the Hon'ble P H High Court in the case of Ferozpur Finance (P.) Ltd. by holding that even in a mercantile system of accounting an assessee could forego the whole or part of a debt which was irrecoverable and the same could not be added to the income of the assessee. Since it was not possible for the assessee to recover the amount advanced from the debtor, the assessee was justified in not charging interest thereon and the interest was rightly foregone by it. In coming to this conclusion, their Lordships followed the Supreme Court judgment in Shoorji Vallabhdas Co.'s case and dissented from the Bombay High Court judgment in the case of Confinance Ltd. 14. This controversy was resolved by Hon'ble Supreme Court in the case of State Bank of Travancore [1986] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as much as the loans in question were interest bearing loans and because the assessee company had relinquished the interest without any commercial considerations and further because the directors of the assessee company were interested in the firm, it was a case of collusion between them to evade the tax liability. Accordingly, he added the amount of interest to the income of the assessee. The appeal before the Tribunal was without success. However, the High Court held that interest had accrued to the assessee. On appeal to the Supreme Court, the issue was decided against the assessee. 16. This issue has also been considered by the jurisdictional High Court in the case of Saraswati Insurance Co. Ltd. In that case, the assessee had advanced certain loans to its subsidiary company on interest @ 12% p.a. In respect of assessment years 1977-78 and 1978-79, the assessee claimed that it had not charged interest from the subsidiary company due to financial condition. The ITO found on verification that interest had actually accrued for both the years on the basis of method of accounting followed by the assessee and the interest was waived only after the accrual. The Tribunal upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1963to 35 n.p. per unit with a maximum of Rs. 7 per month for every installation. A few months thereafter onJune 22, 1963, the assessee company increased the rates for electricity supplied for lights and fans to 17 n.p. per unit with a minimum of Rs. 5 for every installation w.e.f.July 1,1963. This unilateral increase in the rates led to the institution of two representative suits by the consumers which were decided by the trial court in favour of the consumers but the High Court held that assessee was entitled to enhance the charges unilaterally subject to the conditions prescribed. This judgment of High Court was confirmed by Supreme Court on26th February, 1969. During the pendency of litigation, the assessee was not able to realize the enhanced charges from the consumers. After the decision of the Supreme Court, some of the citizens of Godhra met the Minister of Industries with a view to persuade him to intervene and restrict the assessee company from recovering the enhanced rates from the consumers. Thereafter, the Under Secretary to the Government of Gujarat and Industries, addressed a letter dated19th March, 1969to the assessee suggesting that the company may be advised to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account of such hypothetical income. (2) If the income, on mutual understanding is given up or surrendered by the assessee before its accrual then the income surrendered cannot be taxed on the principle of real income theory. However, if such surrender is made after the accrual of such income then such income would be taxable though the assessee may be entitled to claim bad debt on the basis of evidence. (3) If the income has accrued or arisen from the transactions, then its taxability cannot be postponed on the ground of improbability of recovery. (4) The issue, whether income has resulted or not to the assessee, should be decided after considering all the facts and circumstances of the case including the subsequent events. (5) Considering the genuine hardship of the assessee, if the Board exercise its option under section 119 and issues a circular to mitigate the hardship then the above legal position shall not be applied and the assessee would be entitled to relief in terms of the circular/instructions of the Board. Let us now apply the above legal position with reference to the facts of the present case. We have examined the relevant material placed before us a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad financial position. At this stage, the assessee undertook to pay such fees. On this undertaking, the Company Judge allowed the assessee to continue with the arbitration proceedings. (ix) The arbitrator vide order dated 31-7-2000 issued the award under which assessee was entitled to recover the sum of Rs. 1 crore along with interest @ 30% p.a. It was held by him that the clause providing 45% interest p.a. in case of default was invalid and the assessee was only entitled to interest @ 30% p.a. (x) The learned counsel for the assessee Mr. Singhvi has made his statement at Bar that despite all efforts, till today not even a single paisa could be recovered by the assessee. 20. Considering the overall factual position mentioned above, we are of the view that no income had resulted at all to the assessee. The latest agreement dated14-2-1997was executed under compulsion as the assessee was not able to recover any amount from the original borrower. Since M/s. GAL was the guarantor, it was replaced as the principal borrower. However, the assessee could not recover any sum from this borrower also as the cheque was bounced. The assessee was forced to invoke the arbitration clause. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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