TMI Blog1980 (4) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... 34,000 was found outstanding as against M/s. Prakash Transports. The assessee did not account for any interest either on accrual or receipt basis from these two firms on the ground that it was not possible even to recover the capital from these two firms. The ITO did not accept the assessee's contention and included sum of Rs. 56,163 by way of accrued interest on the amounts outstanding from these two firms. On appeal, the AAC held that though under the mercantile system of accounting accrued interest should be treated as income, in the peculiar facts and circumstances of the case, even where the capital was not capable of being realised, there was no point in making debit entry in respect of a hypothetical unrealised interest and on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest which had accrued under the hire-purchase agreements executed with the two firms and so long as the interest income has accrued it has to be included in the income of the assessee even though the assessee may not be able to actually realise the interest from the two firms on account of their financial position and it is always open to the assessee to write off the interest in any year in which it became irrecoverable. In support of this contention, the learned counsel for the revenue relied on decision in Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 (All) and the decisions of the Supreme Court in CIT v. Thiagaraja Chetty Co. [1953] 24 ITR 525 and Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. In H. M. Kashiparekh Co. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court observed : " The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business of the matter viewed as a whole when that can be done without disregarding statutory language. I " The Supreme Court in CIT v. Shoorji Vallab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted, it cannot be said that income has accrued merely on the ground that the assessee has been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised there can be no liability to tax a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account but, what should be considered is, whether the income has really mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come has, in fact, resulted or materialised in favour of the assessee. Merely because the assessee has been maintaining his accounts on the basis of mercantile system of accounting, the interest income on the outstandings in the two firms cannot be held to have accrued at the end of the accounting year. Viewed against the background of commercial and business realities of the situation in which the assessee was placed, the Tribunal came to the conclusion that it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest. The Tribunal was fully justified in arriving at this conclusion. The question referred to us is answered in the affirmative and in favour of the assessee. The assessee is entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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