TMI Blog1996 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., the assessment years 1968-69, 1969-70, 1970-71 and 1971-72. The two questions referred under, section 256(1) of the Income-tax Act, 1961, are (at page 874 of 112 ITR) : " (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest for the assessment year 1971-72, had already accrued to the assessee on October 31, 1970, under the mercantile system of accountancy ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsequent relinquishment of interest by a resolution dated November 24, 1970, did not affect the tax liability of the assessee on accrual basis ? " The partners of a firm, Shiv Prakash Janak Raj and Co. [the firm], are also the shareholders/directors of the assessee-company. The assessee-company had advanced a loan to the firm. During the accounting year relevant to the assessment year 1966-67, it charged interest in a sum of Rs. 25,048 on the loan so advanced. Similarly, for the assessment year 1967-68, it charged interest in a sum of Rs. 25,843. For the four assessment years concerned herein, however, the assessee adopted a different course. [The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts that the resolutions were passed after the expiry of the accounting year, that the assessee was maintaining its accounts on the mercantile system and further that the relinquishment of interest was not for any commercial reasons. On a reference, however, the High Court took a contrary view purporting to follow the decision of this court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266. The High Court held that in view of the said decision, the principle of the earlier decision of this court in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 cannot be applied to this case. In these appeals, it is contended by Sri J. Ramamurthy, learned senior advocate, for the appellant-Revenue, that in the facts and circumstances of the case, the view taken by the Tribunal was the correct one being consistent with the decisions of this court and that the High Court was in error in holding to the contrary. Sri G. C. Sharma, learned counsel for the assessee, however, sought to support the reasoning and conclusion of the High Court. Before we refer to the decisions of this court, it is necessary to reiterate the basic facts of the case. For the previous two assessment years, viz., 1966 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th and yarn. In the accounting years ended on December 31, 1954, and December 31, 1955, the managed company suffered losses and the assessee earned only commission on the sale of cloth and yarn for the two years. The total amounts including the office allowance which the assessee was entitled to receive were Rs. 50,719 and Rs. 13,963 for the two years. Under clause 2(e) of the managing agency agreement, the commission was due to the assessee on December 31, 1954, and December 31, 1955, respectively, and it was payable immediately after the annual accounts of the managed company had been passed in general meetings, which were held on November 24, 1955, and July 21, 1956, respectively. By resolutions of its board of directors dated April 4, 1955, and June 19, 1956, respectively, [i.e., after the commission had become due but before it had become payable in terms of clause 2(e)], the assessee relinquished its commission on sales and office allowance because the managed company had been suffering heavy losses in the past years. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due was of no effect. It also rejected the assessee's claim th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following : the respondent, which was the managing agent of two companies, maintained its accounts on the mercantile system. It was entitled to an agreed managing agency commission and an office allowance from each of the managed companies. No date for payment of the commission was stipulated in the managing agency agreements. The accounting year of the respondent as well as the managed companies was the financial year. The respondent gave up the managing agency commission from both the managed companies for the assessment years 1954-55 to 1956-57, after the end of the relevant financial years but before the accounts were made up by the managed companies. It also gave up before the end of the relevant financial years its office allowance from one of the managed companies for the assessment years 1955-56 and 1956-57. The Appellate Tribunal held that the commission given up was not the respondent's real income and that since it was given up on grounds of commercial expediency, it was an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. In relation to office allowance, the Tribunal found that the financial position of the managed company was not sound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was charging interest on the loans advanced by it. Some of the loans had become " sticky ", i.e., their recovery had become extremely doubtful. The bank, however, charged interest on these loans also, debiting the account of the concerned parties. But instead of carrying the interest amount to the profit and loss account, the appellant remitted the said interest amount to a separate account called " the Interest suspense account ". In the course of its assessment, the bank claimed that having regard to the poor financial condition of the said debtors and the poor chances of recovery of interest from them, the interest amount due from them was taken to the " Interest suspense account " to avoid showing inflated profits by including hypothetical and unreal income and further that the interest on such sticky advances was not its real income and, hence, not taxable. Both the Tribunal and the High Court rejected the plea. On appeal, this court, by majority, Sabyasachi Mukharji and Ranganath Misra JJ. [Tulzapurkar J., dissenting] affirmed the decision of the High Court. This court held that the interest on sticky advances did accrue to the appellant-bank according to the mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. " To the argument of real income pressed with great persistence in that case, the learned judge responded in the following words : " 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 the fundamental principles of the law of income-tax as developed. " We respectfully agree with the propositions as well as the observations of the learned judge with respect to the plea of real income. We may now deal with the decision in Shoorji Vallabhdas and Co.'s [1962] 46 ITR 144 (SC), relied upon strongly by Sri Sharma, learned counsel for the respondent-assessee. The assessee-firm was the managing agent of two shipping companies. Under the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven up seventy-five per cent. of the said amount after such accrual, the whole of the commission amount, which was actually credited in the books of the assessee, is includible in its income. On appeal, there was a difference of opinion between the two members of the Tribunal. On a reference to the President, he held that even though the actual reduction took place after the year of account was over, there was, in fact, an agreement to reduce the commission even during the currency of the accounting year and hence it cannot be said that the larger income at ten per cent.] had accrued to the assessee-firm. Accordingly, the assessee's appeal was allowed by the Tribunal. Thereupon, the following two questions were referred to the High Court under section 66, viz., (at page 147 of 46 ITR) : " (1) Whether the two sums of Rs. 1,36,903 and Rs. 2,00,625 are income of the 'previous year' ended March 31, 1948 ? (2) If the answer to the first question is in the affirmative, whether they represent an item of expenditure permissible under the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the assessee's income of that 'previous year' from its managing agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56] 29 ITR 987], which was approved by this court. " We may also mention that when this case was cited before this court in State Bank of Travancore's case [1986] 158 ITR 102, it has been distinguished on the basis of the above fact, viz., that the agreement to give up seventy-five per cent. of the commission was arrived at during the relevant previous year itself, i.e., before the close of the previous year and, therefore, what accrued to the assessee at the end of the relevant previous year was the commission at 2 1/2 per cent. of the freight alone and not at ten per cent. It cannot, therefore, be said that this case lays down any principle contrary to the one enunciated in Morvi Industries Ltd.'s case [1971] 82 ITR 835 (SC). Since the facts of the case in Chamanlal Mangaldas and Co. [1960] 39 ITR 8 (SC) are identical to the facts in Shoorji Vallabhdas and Co.'s case [1962] 46 ITR 144 (SC), we do not think it necessary to refer to the facts of that case separately. Sri G. C. Sharma submitted that applying the real income theory, it must be held that no interest had really accrued to or been received by the assessee for the said three assessment years [1969-70, 1970-71 and 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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