TMI Blog1991 (1) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... 1973-74, the assessee did not credit any interest. However, in the course of the assessment proceedings for the assessment year 1970-71, the Income-tax Officer made an addition of Rs. 24,250 as accrued interest, which was also upheld by the Appellate Assistant Commissioner. There was a remit order by the Tribunal and pursuant to that, the Appellate Assistant Commissioner deleted the addition. On appeal by the Revenue before the Tribunal, the addition of Rs. 24,250 made by the Income-tax Officer was sustained by the Tribunal for the assessment year 1970-71. Similarly, for the assessment years 1971-72 and 1972-73, the addition of accrued interest on the mortgages was accepted by the assessee. In the course of the assessment proceedings for the assessment year 1973-74, the Income-tax Officer added a sum of Rs. 23,600 being the interest on the mortgage loans, as in the prior assessment years. On appeal by the assessee, the Appellate Assistant Commissioner took the view that the assessee had already been burdened during the course of the prior assessments with considerable liability and there was, therefore, no justification to include the accrued interest on the mortgage loans in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 36(1)(vii) of the Act and claimed it as a deduction which was disallowed by the Income-tax Officer and also affirmed in appeal. However, on further appeal by the assessee, the Tribunal directed the exclusion of the same. Under section 256(2) of the Act, at the instance of the Revenue, the following questions of law have been referred to this court for its opinion in T. C. No. 233 of 1990 : " 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the deduction of Rs. 1,03,842 as bad debt, under section 36(1)(vii) of the Income-tax Act, 1961 ? 2. Whether the Appellate Tribunal's finding that the debt had become a bad debt during the previous year relevant to the assessment year 1974-75 is based on valid and relevant materials and is sustainable in law ?" We may first proceed to consider the questions referred in T. C. Nos. 1167 of 1979 and 894 and 895 of 1982 relating to the accrued interest on the mortgage loans. We find from the account copy produced in the course of the assessment proceedings that, consistent with the system of accounting followed by the assessee, interest on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the difficulty of recovery would not make the accrual a non-accrual. Reliance in this connection was placed by learned counsel upon the decisions in Kedarnath jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) and CIT v. Devi Films Pvt. Ltd. [1990] 182 ITR 200 (Mad). On the other hand, learned counsel for the assessee pointed out that the Tribunal had taken into account the long-standing nature of the mortgage loans, the irrecoverability of even the interest apart from the principal and other circumstances to conclude that, though the assessee had adopted the mercantile system of accounting, the interest on the mortgages was highly illusory and very unrealistic and had, therefore, rightly deleted the addition of interest for the assessment years in question. Reference in this connection was also made to the decision in CIT v. Motor Credit Co. P. Ltd. [1981] 127 ITR 572 (Mad). Under section 5(1)(b) of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to him in India during such year. Though, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gains, though not actually realised, accrued and the fact that the amount of income is not subsequently received by the assessee, would not also detract from or efface the accrual of interest. This decision also further emphasises that income accrues when it becomes due and the postponement of the date of payment would not affect the accrual and that the entries made in the books of account show nothing more than the accrual or arising of the said profits at the material point of time. We have earlier pointed out how either actual accrual or even deemed accrual of income would be sufficient for inclusion of such income in the total income under section 5(1)(b) of the Act and, under the system of accounting adopted by the assessee, the interest income on the mortgages must be deemed to have accrued to the assessee during the relevant assessment years. We may also draw attention to the fact that the assessee offered the interest on accrual basis for assessment in all the assessment years from the beginning up to the assessment year 1969-70 ; but only thereafter the assessee did not credit any interest, but that, as we have earlier pointed out, is not very material. We may also ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of motor vehicles on hire purchase and had advanced amounts to two firms plying buses, whose routes had been taken over by the State Transport Corporation, leading to the commission of default by the company in the payment of hire purchase instalments. The buses had also been seized. The assessee-company did not credit the interest on the outstandings from the two debtors, though it was adopting the mercantile system of accounting. The Income-tax Officer added the accrued interest, which was deleted by the Appellate Assistant Commissioner and the Tribunal also took the view that the assessee could not have expected to get any interest income on the outstandings found due from the debtors and it would be unrealistic to take credit for the interest income. Affirming the view of the Tribunal, this court held that the accrual of interest income for purposes of assessment would be unrealistic and illusory. In so holding, reference had been made to the mercantile system of accounting and it had been stated that hypothetical accrual of income on the method of accounting followed by the assessee cannot be taken into account, but what should be considered is whether income has really ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf. According to the Tribunal, the Department had not placed any material to show that the assessee was in management of the mortgaged lands and that the mortgage was only a simple mortgage and that the question of management of the lands would not arise. However, we find from the order of the Appellate Assistant Commissioner that, under the very mortgage deed executed by the debtors in favour of the assessee, the assessee had the power of managing the properties. For all that, the mortgage, perhaps, was an anomalous mortgage. This had been omitted to be taken note of by the Tribunal. Further, the Tribunal had proceeded on the assumption that the remedy under the mortgage as well as the personal remedy was barred. We do not find on what basis or materials, the Tribunal has arrived at such a conclusion. The Tribunal had also not adverted to the value of the security, as either being adequate or inadequate to meet the liability of the assessee. The Tribunal had also taken note of the non-payment of any interest by the mortgagor after 1969-70. We find from the extract of accounts that, during the course of the accounting year relevant to the assessment year 1970-71, Rs. 13,200 had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. CIT [1963] 49 ITR 874 (Mad), that, in order to determine whether the assessee could have entertained an honest judgment at the time of write-off, his subsequent conduct in accepting the debtor as solvent and sound would also be relevant. In this case, it is seen that substantial amounts had been paid by the mortgagor to the assessee in 1980, even after the so called write-off. That would also establish that the assessee could not be said to have lost all hopes of recovery. We find that, in V. N. Rajan and Co. v. CIT [1983] 142 ITR 545 (Cal), it had been pointed out that the question whether a debt could be considered to be bad debt or not must depend on the facts and circumstances of each case and if a Tribunal, after considering all facts, had arrived at a conclusion that the debt was to be considered to be bad, that conclusion should not be interfered with, but that the question must be looked at from a practical point of view and the entry made by the assessee is prima facie evidence, but that is not conclusive, unless the entry is justified and the onus is on the assessee to establish that the debt had become bad in the relevant year. We have earlier pointed out that, in t ..... 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