TMI Blog2003 (3) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... r and confirmed and enhanced by the Commissioner of Income-tax (Appeals) to Rs. 2,69,685 on account of interests from the Hindu undivided family debtor on accrual basis?" The Assessing Officer had held that the income had accrued and, therefore, had directed the addition of Rs. 2,04,000. On appeal the Commissioner (Appeals) had confirmed the order of the Assessing Officer and found that the addition would be enhanced to Rs. 2,69,685. The learned Tribunal, however, deleted the said addition. The relevant assessment year was 1988-89 relating to the accounting year (previous year) 1986-87 ending with October, 1987. The assessee had advanced loan to one Tulsidas Rajivlochan (HUF) on February 25, 1983. The said loan was carrying interest at the rate of 12 per cent. per annum. Interest was paid on the said loan for some time. But after May 30, 1986, no interest was paid. There were correspondences. The debtor pleaded that it had some difficulty in the repayment and payment of the loan and the interest, respectively. It had requested the assessee to waive the arrear interest after June 30, 1986. It had agreed to repay the principal amount. By a resolution dated August 1, 1987, this su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is on the basis of the accrual of interest that the income becomes chargeable. Subsequent waiver will not enable the assessee to claim the allowance. According to him, the decisions to waive interest was taken only on August 1, 1987, namely, after the closing of the accounting of the previous year 1986-87. Unless the accrual was prevented, the income was liable to be charged. He had relied on the decisions in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC); State Bank of Indore v. CIT [2002] 257 ITR 463 (MP); Mercantile Bank Ltd. v. CIT [2001] 252 ITR 225 (Bom); CIT v. Jai Hind Travels P. Ltd. [2000] 243 ITR 451 (Ker); Aspinwall and Company (Travancore) Ltd. v. CIT [1990] 184 ITR 56 (Ker); CIT v. Kerala Financial Corporation [1985] 155 ITR 228 (Ker); CIT v. Smt. M. Sarojini Devi [2001] 250 ITR 759 (AP) and CIT v. Shiv Prakash Janak Raj and Co. Pvt. Ltd. [1996] 222 ITR 583 (SC) to support his contention. We shall refer to these decisions at the appropriate stage. Mr. R.N. Bajoria, learned senior counsel assisted by Mr. J.P. Khaitan, learned counsel for the assessee, on the other hand, contended that the crux of the point is to be found within the ratio decided in State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. This question had occupied the attention of different High Courts and the apex court from time to time starting right from the decision in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC). In the said decision, it was held that: "...the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." While referring to the decision in Shoorji Vallabhdas's case [1962] 46 ITR 144, the apex court in State Bank of Travancore's case [1986] 158 ITR 102 had observed that: "This d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made 'no income'." These decisions point out that the tax is payable on the income. It is only when the accrual is prevented in the real sense the notion of real income can be brought into play. But where the income is accrued according to the accounts of the assessee and there is no indication by the assessee to treat the income as not having accrued there is no suspension of the accrual of the income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction but still enters the same with a diminished hope of recov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such interest was thenceforward credited to the suspense account. The alteration of practice in book-keeping and transfer of amounts to the suspense account could not be termed as a change in the method of accounting. The High Court further held in James Finlay and Co. v. CIT [1982] 137 ITR 698 (Cal), that though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax. In State Bank of Travancore's case [1986] 158 ITR 102 the apex court had laid down the following propositions: "(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assessable to tax. The other relevant factor that weighed with the apex court in that case was that the Tribunal had found as a fact that the waiver was not based upon any commercial considerations and that the directors of the assessee were also interested in the firm of the debtor and that some of the partners/directors were common. Therefore, the said decision does not help us in the present facts and circumstances of the case inasmuch as it was the act and conduct of the parties which were relevant and on such act and conduct it was found not to come within the scope and ambit of the proposition laid down in the case of State Bank of Travancore's case [1986] 158 ITR 102 (SC). The principle that has been laid down is clear and unambiguous. It is when the debt seems to be bad, there is a question of non-accrual of interest by reason of conduct of the parties. In Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom), it was held that whether a debt has become a bad debt is an objective fact. If the finding of that question of fact is vitiated by any factor, then undoubtedly the court would consider whether the Income-tax Officer was right in coming to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the method of accounting regularly employed by the assessee. The substantive part of section 36(1)(vii) makes it clear that the income is to be computed "in accordance with the method of accounting regularly employed". The Income-tax Officer may include in the computation of income an amount which does not figure in the accounts but the inclusion of which is required by the assessee's method of accounting that is to say, the Income-tax Officer may, without deviating from the assessee's method, make such adjustments in the profit and loss account as are necessary for giving full and true effect to that method itself. Having adopted a regular method of accounting the assessee cannot be allowed to change it or depart from it for a particular year or for part of the year or in respect of particular transaction. In this country, by and large, two systems of account keeping are followed--cash and mercantile. Plainly speaking, the cash system postulates actual receipt of money for the exigibility of income-tax. Such receipt from business, profession or vocation or from other sources has to be actual in the relevant year of account. The mercantile system, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was justified in allowing the assessee's claim." In Smt. M. Sarojini Devi's cage [2001] 250 ITR 759 (AP), on which Mr. Saha had relied, we do not find anything, which goes to support us. In fact, in the said decision, it was held that the Assessing Officer need not wait till the final decision of a pending proceeding for the purpose of taxing the interest accrued on the amount enhanced in a land acquisition proceeding since in case the assessee is unsuccessful, he can ask for rectification of the assessment or refund of the tax paid. The meanings of the words "accrues", "arises" and "is received" are three distinct terms as was distinguished in Jai Hind Travels P. Ltd.'s case [2000] 243 ITR 451 (Ker). In the said case, it was held that as soon the assessee acquires a right to receive the income, the income accrues to him, though the same may be received later. A mere claim to income without an enforceable right cannot be regarded as accrued income for the purpose of the Act. So far as the receiving of income is concerned, there cannot be any difficulty. It conveys a clear and definite meaning. The words "accrue" and "arise" are not definite in the Act, but these three express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and it can be so concluded by the Assessing Officer. In that event, subsequent attempt to recover the bad debt would not mean that the income had accrued in that particular previous year. It is not when the amount becomes recoverable and not when the assessee gives up the claim that the debt becomes bad. It is not that if the debt is not easy to recover, the debts become bad. A debt becomes bad when the recovery is commercially inviable. At the same time, it is not that when the debt becomes irrecoverable, the debt becomes bad but depends on the facts of each case to ascertain whether the debt was bad. This bad debt is to be determined on the basis of the evidence that might be on record with relation to the facts as well as the conduct of the parties as to how it was treated. If it appears that after a debt is treated to be a bad debt and then in the subsequent year the debt appears to have been recovered, then it would be treated to be deferment of income to avoid taxability in a particular year. By introducing the concept of real income, an assessee cannot be allowed to defer an income to the subsequent previous year in order to avoid taxability of the income in the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
