TMI Blog2001 (5) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment years 1979-80 to 1986-87. When the assessee was asked to explain the reasons for not accounting for the interest income on deposits with M/s. BCM, vide letter dated 10-3-1992, it was stated that the assessee has not charged any interest on debit balance of M/s. BCM as M/s. BCM was taken over by the Government by an ordinance with effect from 1-11-1972. Later, on M/s. BCM was nationalised with effect from 1-4-1974 by enacting. "The Sick Textile Undertaking (Nationalisation) Act, 1974", along with 102 other sick textile mills. It was further stated that the Government of India had appointed a Commissioner of Payment for this purpose, who drew up the priority of payment for this purpose, to various creditors including the assessee. In the schedule, the priorities for payments were mentioned; a copy of which was also filed before the Assessing Officer. The Commissioner of Payments, Government of India, accordingly disbursed the amount of compensation to the various creditors of M/s. BCM. It was stated that as per the schedule, the first priority for payment was in respect of the banks, the Government dues and then to the employees of M/s. BCM. The outstanding dues in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to become due ceased to exist. Thus, irrespective of method of accounting followed by assessee, there was no accrual of interest. It was also argued that in fact the assessee is entitled to claim bad-debt of the amount outstanding from M/s. BCM as on 1-4-1978 in his books of account. 5. It was further argued that the main issue is whether the interest income has become due to the assessee under mercantile or cash system of accounting. For this, the important fact which has to be kept in mind was whether the assessee was legally entitled to such interest or not. Once the very basis being the principal amount on which the assessee can earn any interest got extinguished there was no reason for accrual for any interest on the same. Reliance was placed on the decisions reported in 157 ITR 67 (SC); 46 ITR 144 (SC); 75 ITR 191 (SC); 56 ITR 42 (SC); 26 ITR 27 (SC) and 161 ITR 524 (SC). On the basis of these facts, the ld. counsel stated that the CIT(A) was not justified in sustaining the addition on account of notional interest receivable on the deposits made with M/s. BCM. On the other, the ld. D.R. stated that the assessee was following mercantile system of accounting and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as liable to pay compensation to the creditors of M/s. BCM. For this purpose, the Government of India appointed a Commissioner of Payments who could disburse the compensation awarded by the Government of India. For this purpose, the priorities for payments were listed in Schedule, which was part of the Act itself. The Banks and the Government held the first priority followed by employees of M/s. BCM. Their dues were more than the amount of compensation paid by the Government of India. Thus, the question of making payment to other classes of creditors did not arise. Under these circumstances, the assessee s right to receive even the principal amount finally ceased to exist on the date the Commissioner of Payments disbursed the amount in final settlement. Once the very nucleus which generated income, came to be extinguished by operation of law/an Act of Parliament, the question of any accrual of interest on such amount therefore, does not arise. We find that the order for disbursement was passed by Commissioner of Payments on 24-11-1978, which is the relevant date for the assessment year 1979-80 and onwards. Thus, it could be safely held that as the assessee had no right to receive t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure, which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income. Such proviso was brought in the substantive provisions of law and not by way of any explanation. This was not also made effective from an earlier date. Such proviso was therefore, not applicable to the assessment year in question. We, therefore, hold that though on the one hand, the CIT(A) was justified in confirming the addition under section 69C of the Act, but on the other hand, the assessee is also entitled to the deduction of the same on actual expenditure basis. We, therefore, direct the Assessing Officer to allow deduction for the same. This ground of appeal is decided with above observations. 10. In the assessment year 1979-80, the third ground raised by the assessee related to the S.T. liability. As this ground of appeal has not been pressed during the course of hearing, the same is dismissed. 11. In the assessment years 1983-84, 1984-85 and 1985-86, other issue relates to the addition of different amounts on account of short interest/rent received. 12. During the course of assessment proceedings, the Assessing Officer noted that the income from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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