TMI Blog2006 (2) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1996-97 on account of lease rent. Facts of the case leading to this dispute briefly are that during the course of assessment proceedings for assessment year 1995-96, the learned Assessing Officer found that in the computation of income chargeable to tax annexed with the return of income, the assessee made deduction of a sum of Rs. 24,95,630. According to the Assessing Officer there was no brought forward loss from earlier year and assessment for assessment year 1994-95 had been made on an income of Rs. 9,14,908. He, therefore, disallowed the assessee's claim of deduction of the sum of Rs. 24,95,630 to the income as declared by the assessee. For assessment year 1996-97 the learned Assessing Officer found that the assessee had in the computation of income chargeable to tax annexed with return of income made a deduction of Rs. 28,94,974. The assessee explained that it had entered into lease agreements with M/s. Mittal Tubes Pvt. Ltd. and M/s. Rinasu Steel Pvt. Ltd., New Delhi on 6-4-1994 for leasing machinery worth Rs. 69,25,000 and Rs. 25 lakhs for a period of 8 years against the payment upfront of Rs. 17,71,250 and Rs. 6,25,000 byway of 25 per cent security deposit. As per the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into lease agreements with both the parties. The assessee had also received 25 per cent security in accordance with the terms of lease agreements. The assessee had also received 12 months lease rent amounting to Rs. 4,88,552 from M/s. Rinasu Steel Pvt. Ltd. The assessee had similarly received lease rentals of Rs. 24,06,432 from M/s. Mittal Tubes Pvt. Ltd. for a period of 12 months. The assessee had, however, transferred the entire lease amount to loan account and credited the lease money received from the lessees. According to the learned Assessing Officer the entries made by the assessee in the books of account subsequently could not be accepted because the assessee was maintaining accounts on mercantile system of accounting and the lease rentals had already accrued to the assessee for these years. Moreover the assessee could not convert the lease agreements into loan agreements unilaterally without filing any documentary evidence that the lessee had made such request. Moreover the lessee was not entitled to make such request after having paid lease instalments. The assessee had filed suit for recovery against M/s. Mittal Tubes Pvt. Ltd. but from that it did not follow that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (SC). 5. During the course of hearing of appeal for assessment year 1995-96 before the learned CIT (Appeals), the assessee contended that after the lessees M/s. Rinasu Steel Pvt. Ltd. and M/s. Mittal Tubes Ltd. ceased making payment of instalments, the assessee came to know that neither of the two lessees had purchased the machineries in question for which drafts had been given to them in the name of the suppliers suggested by them to the assessee. In such view of the matter, the assessee took steps to reverse the lease rent that had been provided for in the books of account on accrual basis and the return of income was revised for the reason that the recovery of the lease rent appeared to be doubtful. The assessee also filed a suit in Delhi High Court against M/s. Mittal Tubes Pvt. Ltd. The assessee had in past claimed deduction under section 32AB of the Act on deposits made with IDBI from time to time. The assessee had withdrawn the entire amount of Rs. 94.25 lakhs from IDBI for purchasing machinery in relation to the transactions in question. The deduction claimed was surrendered for taxation during assessment year 1995-96. Accordingly the lease rental recorded in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as per the agreements. If the debtors declined to make payment, that had nothing to do with the accrual of income. In the present case the assessee was required to be assessed on accrual basis in accordance with mercantile principle. Non-recoverability of the amount could at best lead to a suitable claim from the assessee for deduction of bad debt in the year in which the debt is found to have become bad and irrecoverable. In support of his arguments the learned DR placed reliance on the judgment of Hon'ble Supreme Court in the case of K.C.P. Ltd. v. CIT [2000] 245 ITR 421. 9. The learned counsel for the assessee pointed out that lease commenced in the case of M/s. Mittal Tubes Pvt. Ltd. on1-7-1994and in the case of M/s. Rinasu Steel Pvt. Ltd, on1-6-1994. While both parties paid lease rent for the relevant period relating to assessment year 1995-96 and Rinasu paid some more instalments relating to assessment year 1996-97; M/s. Mittal Tubes Pvt. Ltd. did not pay any of the instalments for assessment year 1996-97. Eventually M/s. Rinasu Steel Pvt. Ltd. also having made payment of 12 instalments regretted its inability to pay any further amounts. M/s. Rinasu Steel also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of income cannot be postponed on the ground of non-receipt of money. If, however, despite reasonable lapse of time and reasonable efforts an accrued income is not received, the provisions of bad debt entitle an assessee to claim deduction on account of bad debt. Thus, in a sense income is reversed subsequently by way of write off on account of bad debt. Similarly where an expenditure claimed in an assessment year is found to be not payable subsequently, there are certain provisions in the Act for assessment of the benefit arising to the assessee on account of remission or cessation of the liability. The ordinary rule of computation of income is as aforestated. In some judgments the courts have made an exception based on 'Real Income' principle. It is important to remember here that real income principle comes into play in exceptional circumstances where subsequently it transpires that there was never any right to receive income or there was no likelihood of enforcement of such right, if any. Real income cannot be pressed into service for the reason only that the income could not be subsequently recovered. These aspects are abundantly clear from the detailed discussion in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well recognised limits. We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee upfront payments agreed upon by way of security deposit for the leased assets. Both the lessees did pay lease rent for the period relevant to assessment year 1995-96. It is not possible on the facts scenario of the case before us to hold the view that lease rent amounts did not accrue at all. As to the surrender of right to receive, the assessee before us had instead gone to the court in litigation. The assessee cannot seek to enforce the right to receive before the court of law and at the same time argue that there is in reality no accrual of income. In the case of Rinasu Steel Pvt. Ltd., the assessee has not filed suit for recovery and no particular material has been relied upon by the assessee. Even the plea was taken before the learned CIT (Appeals) for the first time that lessees had purchased no machinery at all but no evidence/material placed on record. On these facts we see no support to the case of the assessee from the judgment ofApex Courtin the case of Godhra Electricity Co. Ltd., which is based on speciality of the facts of that case. 13. During the course of proceedings before the authorities below the assessee has pleaded that the entire withdrawal fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icates had been obtained by the assessee in relation to the items in question. Even otherwise the assessee had failed to produce any documentary evidence regarding write off of these articles. The learned Assessing Officer, therefore, held that the write off was nothing but sale of the sets outside the books of account. He, therefore, added the sum of Rs. 1,04,983 declared by the assessee for assessment year 1996-97. 15. On assessee's appeal for assessment year 1995-96 the learned CIT (Appeals) considered the detailed explanation given by the assessee. The assessee explained as to how the items in question had become unsaleable. The learned CIT (Appeals), therefore, deleted the addition of Rs. 1,60,000 made by the Assessing Officer. Similarly, for assessment year 1996-97 the learned CIT (Appeals) held that the assessee had maintained regular books of account, in which write off of TV sets and audio systems was properly recorded. The branches where these articles were written off has intimated the Head Office and the amounts were written off by the assessee in a normal manner. He, therefore, allowed the assessee's claim of deduction for the sum of Rs. 1,04,983. 16. On considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uniform and the same had been fluctuating. He, therefore, held that there was no case for making addition to the income declared by the assessee on account of low gross profit. 19. During the course of hearing before us the learned DR argued that the assessee had not kept proper records and, therefore, the Assessing Officer had rightly made addition to the declared trading results. The assessee explained that its business was declining. There was a lock out of the factory on31-10-1994and with that the assessee's manufacturing activity came to an end. Thereafter the assessee was carrying out only the sale of existing stock by way of winding up operation. These factors were duly appreciated by the learned CIT (Appeals) while deleting the addition of Rs. 10 lakhs. On consideration of the matter, we are of the view that the assessee has given cogent explanation for decline in GP rate. An addition to the declared trading results cannot be made even if the books of account are not properly maintained, as long as the trading results disclosed by the assessee are properly explained. In this view of the matter, we do not see any reasons to interfere in the impugned order of the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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