TMI Blog1983 (7) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the parties could only help in interpreting the agreement when doubtful but could not change it when it was clear. 2. Telerad had debited interest at the rate of 11.25 per cent in its books of account and the assessee had received and credited the said interest at the rate of 11.25 per cent only. 3. On behalf of the assessee it was urged that since the assessee had, in fact, received interest only at the rate of 11.25 per cent, he could not be taxed on the basis of a mere accrual. The argument was that there was no real income which could be taxed. This part of the argument remained to be dealt with in the earlier order of the Tribunal and, therefore, the assessee moved a miscellaneous application which we have heard and we shall now deal with it. 4. The learned counsel for the assessee has relied on what is generally known as the real income theory and cited the following authorities in support of his contention : H.M Kashiparekh Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.), CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC), CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) and CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.). He has urged that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Birla Gwalior (P.) Ltd. the assessee-company was entitled to certain managing agency commission from two managed companies. It gave up the commission from both the companies for the assessment years 1954-55 to 1956-57, after the end of the relevant financial years but before the accounts of the managed companies were made up. No due date was fixed for the payment of the commission under the managing agency agreements. The commission receivable could have been ascertained only after the managed company made up its accounts. The Supreme Court held that the mere fact that the assessee-company was maintaining its accounts on the basis of mercantile system could not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. 9. In the case of Motor Credit Co. (P.) Ltd. the Madras High Court held that the Tribunal was right in its conclusion that though the assessee had adopted the mercantile system of accounting, no interest income could be assessed in its hands on accrual basis as it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest. In that case the assessee-company was advised that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the managed company were made up and the commission was given up before that time. In the case of Motor Credit Co. (P.) Ltd. since there was no prospect of recovery of even principal amount, the question of accrual of interest thereon did not arise. The resulting position is that the claim must have been given up by the assessee. That is not so in the present case. We are of the view that there must be some evidence of positive act of waiver of its claim by the assessee. The reason is simple. Accrual means the right to receive the income, i.e., debitum in praesenti, solvendum in futuro ; as held in the case of E.D. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27 (SC). It is a vested right with regard to future benefit. The right can be extinguished only by satisfaction or waiver. As stated above in this case there is no evidence of waiver. All that we have, are entries in books of account with regard to the receipt of the lesser amount by the assessee and debit of corresponding amount by the debtor. From this we cannot infer any waiver with regard to the balance. In the case of Zaverchand Laxmichand Co. the Gujarat High Court held that mere forbearance from insisting upon the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truth recorded interest receivable at 11.25 per cent only. The point for consideration is whether the interest at 2 per cent could be said to have accrued to the assessee on which it could be subject to tax. The assessee admittedly maintains accounts on mercantile system of accounting. It is true that the mercantile system of accounting postulates taxing of income on accrual basis even though the same may not have been received yet. In mercantile system of accounting the tax has to be levied on the basis of real income and not on the basis of hypothetical income. In CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. Har.) the following principle is laid down, after considering the decision of the Supreme Court in the cases of Shoorji Vallabhdas Co. and CIT v. Chamanlal Mangaldas Co. [1960] 39 ITR 8. It reads as follows : "Income-tax is levied on income, whether the accounts are maintained on mercantile system or on cash basis. If income does not result at all, there cannot be levy of tax. Even if an entry of hypothetical income is made in the books of account, where the income does not result at all as there is neither accrual nor receipt of income, no tax can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s debt the holding company transferred debts due to it from two allied concerns Sercon (P.) Ltd. ('Sercon') and Telerad. Sercon owed Rs. 77,99,850 to the holding company and Telerad Rs. 21,81,970. The assignments were made by tripartite assignments-agreements, dated 22-9-1973, in respect of each of the debts. In the deeds of assignment it was stated that the assessee-company would be entitled to receive interest at the rate of 4.25 per cent over and above the bank rate. As far as the assignment of Sercon was concerned it would appear that letters were exchanged by the parties and resolutions were passed indicating that though the deed of assignment specified interest payable as above, the original creditor himself, namely, Karamchand Premchand (P.) Ltd., not being entitled to any interest, Sercon had no liability to pay interest. In relation to the assignment of the debt from Telerad it was claimed by the assessee that interest was to be charged at 11.25 per cent only. As a matter of fact, for part of the previous year the bank rate being 7 per cent, 4.25 per cent above that stood at 11.25 per cent. The bank rate having gone up to 9 per cent as per the assignment deed the rate of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ?" 4. The learned counsel for the assessee took us in detail through the facts of the case leading to the acceptance of an interest rate at 11.25 per cent. Even though originally the agreement referred to an interest rate of 4.25 per cent above the bank rate, there was some misunderstanding about the whole position with the result that even though Sercon did not pay any interest at all to the parent company, the assignment stipulated an interest of 11.25 per cent. In respect of the other assignment the stipulation 4.25 per cent above the bank rate remained. With regard to the former when it was understood that there was some mistake, through letters and resolutions this was corrected and the assessee claimed that no interest was payable. With regard to the second party it was orally agreed that the interest rate should be pegged at 11.25 per cent. Book entries were passed on this basis both in the case of the assessee-company as well as the debtor. Telerad claimed in its assessment a deduction of only 11.25 per cent. There was a complete understanding and a conscious agreement between the parties as to the actual amount of interest chargeable and charged. It was on this basis t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement if at all of a written one by an oral one. This was not permissible under law and the legal proposition set out by the Tribunal in its order really settled the issue. That apart, the real question which arose in the present case was whether in law the parties have reached an understanding about the variation in the rate of interest or they were even competent to come to that understanding. It was necessary to establish this fact in the first place that the parties complied with the formalities as envisaged by law for the purpose of modification of the agreement. It is necessary to prove that competent parties have in fact entered into an agreement. The Tribunal had not come to a conclusion that there was an oral agreement. All that it had held was that even if there was an agreement in law, that was not sufficient to displace the position as obtaining under the written agreement. Whether there in fact was such a modification orally or otherwise has not been established. According to the learned counsel there was no such modification. If the company were to file a suit for recovery of interest at 13.25 per cent it would certainly have succeeded. The mere entries did not ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as the debt from Telerad (P.) Ltd. is concerned, would be 13.25 per cent after the Reserve Bank of India raised its rate of interest from 7 per cent to 9 per cent." The above is quoted at length since there was a controversy before me that the Tribunal has accepted the existence of an oral agreement for reduction of interest which led to the argument about the real income of the assessee. A clear reading of the above does not seem to indicate that the Tribunal has accepted the existence of any oral agreement as a matter of fact or even gone into the evidence to support the same. Only the legal position has been expressed to the effect that written agreements between companies cannot be changed later on orally and the conduct of parties can only help in interpreting the agreement when doubtful but not when it was clear. Apparently the Tribunal has not accepted the existence of any oral agreement. That apart the assessee is a company. I have my own doubts whether the expression 'oral agreement' could be applied to the case of a company ; how much it may constitute a rule of evidence in the case of any individual ? Any agreement by a company can become effective only when in wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncluded that the Court would refrain from awarding interest at 13.25 per cent as stipulated by the agreement. It was pointed out before us by the learned counsel for the assessee that even today no higher interest than 11.25 per cent has been paid to the assessee. The entries together with this conduct establish once for all a modification of the agreement. In my view even this does not support the assessee's case. If the assessee on the basis of the agreement of September 1973 were to claim interest at a higher rate than credited in the books, in law he could recover the same. Even limitation for recovery cannot be said to have intervened : firstly, because whatever may be the position now, in 1974-75 certainly there was no limitation. Secondly, the parties being members of a closely tied group even if the matter has become time barred the debtor could make payment if he wanted. What is indicated is that even the conduct of the parties as obtaining till now does not indicate a modification of the agreement. 9. There is conflict in the two alternative claims made by the assessee. It was originally suggested that there was a modification of the agreement. It is alternatively sugg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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