TMI Blog1992 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-72. The corresponding accounting year ended on March 31, 1971. The method of accounting followed was mercantile. The assessee-company is a manufacturer and dealer in motor cars, trucks, flanges, steel sheet castings, spare parts and also scrap. For the relevant assessment year, it returned a loss of Rs. 3,72,26,065. The assessment was, however, completed on total loss of Rs. 3,36,33,197. In the course of the assessment proceedings, the Income-tax Officer noticed that the assessee-company did not charge interest for the relevant previous year on the outstanding amount of Rs. 24,24,124 due to it by its 100 per cent. subsidiary, namely, the Hindusthan Motor Corporation Ltd. It was explained to the Income-tax Officer that, owing to the difficult financial position of the subsidiary company, the board of directors decided not to charge interest in order to enable the subsidiary to tide over the financial crisis. The Income-tax Officer held that interest accrued day to day whereas the decision not to charge interest was taken by the assessee-company after the end of the relevant accounting year, i.e., long after the accrual of interest. He further held that it was only on compassionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sound financial position of the subsidiary company. The attention of the Tribunal was also drawn to the balance-sheet of the subsidiary company in order to show that its financial affairs were in doldrums. During the previous year, the subsidiary sustained a huge loss of Rs. 10,29,338 as against its share capital of Rs. 25 lakhs only and the report of the directors to the shareholders for the year ended March 31, 1971, presented a very gloomy picture in support of the proposition that the relinquishment by an assessee of an amount due to it by another party could be allowed as a deduction under section 37(1) if such a relinquishment had been made on grounds of commercial expediency. The assessee's learned counsel relied upon the authorities in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) and CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601 (SC). It was urged by him that interest on the balance outstanding never formed part of the real income of the assessee and that there was an arrangement between the subsidiary company and the assessee-company not to charge interest. Learned counsel pointed out to the resolution passed by the board of directors of the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement having been concluded between the assessee-company and its subsidiary within the previous year relevant to the assessment year 1971-72. The assessee-company is, admittedly, following the mercantile system of accounting. Interest on monies advanced accrue from day to day and, in any event, such interest definitely accrues and becomes payable at the end of the accounting year. If the assessee-company and its subsidiary would have agreed before the close of the accounting year relevant to the assessment year 1971-72 not to charge any interest and/or to waive such interest otherwise chargeable, one could have said that, in view of the substitution or novation by a subsequent agreement, the original liability to pay interest to the assessee-company by its subsidiary does not subsist any longer. This is, however, not the situation in this case. The decision of the Supreme Court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, is clearly distinguishable and has no application in this case. There, the Supreme Court was considering the accrual of managing agency commission receivable at 12 per cent. of the net profits of the managed company. Although no due date was fixed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accrual of income even where the assessee follows the mercantile system of accounting (at page 145): "It may be reiterated that in some limited fields where something which, in the reality of the situation, prevents the accrual of the income, then the notion of real income, i.e., making the income accrued in the real sense of the term, can be brought into play. " There is some distinction in the manner of accrual of interest income and the accrual of managing agency commission. The accrual of the managing agency commission depends upon the terms of the agreement. In the case of Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC), the date on which the commission was receivable was stipulated in the managing agency agreement. It was receivable by the managing agent only after ascertainment of the profits of the managed company. The Supreme Court emphasised that, as the managing agency commission receivable would have been ascertained only after the managed company had made up its accounts, the commission could accrue not on the expiry date of the accounting year but on the date on which the accounts are made up. In connection with the decision in Birla Gwalior (P.) Ltd.'s case [1973 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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