TMI Blog2003 (12) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... s(s) : 11/12/2003 Judge(s) : M. KATJU., UMESHWAR PANDEY. Court : JUDGMENT The judgment of the court was delivered by M.KATJU J. -Heard learned counsel for the parties. These two income-tax appeals under section 260A of the Income-tax Act, 1961, are being disposed of by a common judgment. The questions of law involved in these two appeals are as follows; "(i) Whether, in the facts and circumstances of the case, the receivable amount of interest which has been credited by the assessee-appellant to the account, named as 'Deferred credit interest on overdue interest bills account' and debited to the account named as 'Deferred credit interest receivable account' was merely hypothetical income and not real income of the assessee-appellant and was taxable under the Income-tax Act, 1961? (ii) Whether, the Income-tax Appellate Tribunal erred in law in appreciating and applying the correct concept of real income (either actually received or accrued), as laid down by the Supreme Court in various cases to find out the taxability of the aforesaid amount under the Income-tax Act, 1961?" These two appeals relate to the assessment years 1990-91 and 1991-92. The facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the user-agencies. The assessee maintains its accounts according to the mercantile system. As regards the interest, it is alleged by the assessee that it does not have any legal or customary right enforceable against its customers for recovery of interest. The assessee does not, and cannot, debit the same to the account of the user-agencies from whom it may be received on account of delay in payment. In fact, no entry is made with regard to such interest during the currency of the year. At the end of the year such interest, which is not received but the assessee thinks might be receivable from the user-agencies, is totalled. For making entries of this amount, the assessee has opened two accounts in its ledger: (1) "Deferred accrued interest"; and (2) "Deferred accrued interest receivable". The aforesaid interest, which is not received and is only treated as receivable, is credited to the aforesaid account, namely, "Deferred accrued interest" and, according to the mercantile system of accounting, its corresponding entry is debited to the account, namely, "Deferred accrued interest receivable". The assessee makes the entries in such manner so that its accounts may not reflect n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to treat it as accrued income. Hence, in our opinion, the aforesaid amounts do not represent either the accrued income or real income of the assessee. The Tribunal has treated the aforesaid amounts to be the income of the assessee on the ground that "The assessee has himself kept the issue of interest alive in the form of deferred interest liability; the assessee has not accounted the same as per amended provision of the Companies Act." The Tribunal has further observed "nothing prevented the assessee to write off the interest which was not forthcoming and to disclose subsequently in part/whole of it if received in the subsequent years as per the mercantile system of accounting". The Tribunal relied upon the judgment of the hon'ble Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. It is well settled that income cannot be generated, actual or accrued, by mere entries in the accounts of the assessee. Further, income cannot be said to be generated merely because the assessee has not written off the amount of interest, which was not forthcoming. The decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), which has been relied upon by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribuna1." A basic concept in income-tax law is that the assessee must have received or have acquired a right to receive the income before it can be taxed. There must be a debt owed to it by somebody, if the amount is to be taxed on mercantile (accrual) basis. Unless a debt has been created in favour of the assessee by somebody it cannot be said that the income has accrued to it or it has a right to receive the income vide E.D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC); Seth Pushalal Mansinghka (P.) Ltd. v. CIT [1967] 66 ITR 159 (SC) and CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), etc. When one refers to the right of an assessee to receive an income so as to make it taxable, it necessarily means a right enforceable under law. If the claim is not legally enforceable the assessee cannot be said to be vested with a right to claim the amount The enforceability of the right to receive the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actice does not even constitute a mixed or hybrid method of accounting because the interest received by the assessee was never legally due or claimable from the user-agencies; and nothing had been debited to their account. However, even if it is treated to be a mixed/hybrid method of accounting, adopted by the assessee, it is permissible as a method of accounting vide UCO Bank v. CIT [1999] 237 ITR 889 (SC). Merely because such amount is treated by the assessee to be its income and surrendered for tax in the year of actual receipt, it would not lead to the conclusion that similar receivable amounts which the user-agencies were not under legal obligation to pay and which never became debt due to the assessee, would also become income of the assessee, accrued or otherwise only because they have been cumulatively credited to the "Deferred accrued interest" account. A Division Bench of this court in Income-tax Application No. 30 of 2000 (CIT v. Sahara Investment India Ltd. [2004] 266 ITR 641 decided on November 18, 2003), has held following several decisions of the Supreme Court that mere entries in the account books are not determinative of the true character of the transactions. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Bros. [1979] 119 ITR 537 (Patna); National Newsprint and Paper Mills Ltd. v. CIT [1978] 114 ITR 172 (MP); CIT v. Roberts McLean and Co. Ltd. [1978] 111 ITR 489 (Cal); CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd. [1964] 53 ITR 134 (SC); Seth Champalal Ramswarup v. CIT [1964] 52 ITR 201 (All); Pankaja Mills Ltd. v. CIT [1963] 50 ITR 665 (Mad); CIT v. Shewbux Jahurilal [1962] 46 ITR 688 (Cal); CIT v. Mathulal Baldeo Prasad [1961] 42 ITR 517 (All) and Kanpur Tannery Ltd. v. CIT [1958] 34 ITR 863 (All). In CIT v. Oriental Motor Car Co. (P.) Ltd. [1980] 124 ITR 74 (All) although the principal had made a claim for infringement compensation the assessee was contesting the rate and not admitting his liability. The Allahabad High Court held that the liability would become crystallised only when the assessee agreed to make the payment, and not earlier. In Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33 (All), there was a dispute about the contractual amount payable by the assessee. It was held that the amount paid could be included in the income only in the assessment year in which the dispute was settled. Before a credit or debit entry can legitimately be made in the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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