TMI Blog1997 (9) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer stating that the aforesaid service charged for non-payment or delayed payment of instalments of deferred credits and lease rentals was not taken as income during the year for the reason that Nirlon was continuously defaulting in making the payment of lease rentals and instalments in respect of the machineries. On account of its adverse financial position, the Government of Maharashtra had declared Nirlon as Relief Undertaking and a reference has also been made to the BIFR to declare the industry as a sick unit. There was a huge outstanding due from Nirlon who was not paying to the assessee and the recovery of the principal amount and interest become doubtful. In such circumstances, the recovery of the amount towards penalty for non/delayed payment does not arise. It was further brought to the notice of the Assessing Officer that there was settlement between the assessee and Nirlon by executing a memorandum of understanding on 27-3-1989 by which Nirlon would pay to the assessee Rs. 74.50 lacs as full and final settlement of all dues. During the next year, the aforesaid amount has already been paid by Nirlon to the assessee. However, the Assessing Officer was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as on 31-3-1988 stood at Rs. 31.78 lakhs towards deferred credit and Rs. 7.50 lakhs towards lease rental. Fourthly, the Government of Maharashtra had declared Nirlon as a Relief Undertaking under the provisions of Bombay Relief Undertakings (Special Provisions) Act, 1956. On 31-3-1988 a reference was also made to the Board for Industrial Reconstruction for determination of measures to be adopted for revival of the company which has otherwise been declared as a sick unit by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 (Refer Annexure-II Pg. 26). Fifthly, Nirlon has suffered huge losses amounting to Rs. 1,517.95 lakhs as on 30-9-1986 and Rs. 5,237.32 lakhs as on 30-9-1987 respectively. The total accumulated loss as on 30-9-1987 stood at Rs. 3,632.80 lakhs against the share capital of Rs. 1,576.21 lakhs. As a result, the entire share capital has been wiped out and the net worth stood at a negative balance of Rs. 2,056.59 lakhs. And lastly, that apart Nirlon had outstanding liabilities to the tune of Rs. 15,645.34 lakhs as on 30th September, 1987 against which the net worth was a negative balance of Rs. 2,056.59 lakhs. The above figures simply establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us, the assessee had not debited the amount of interest nor any interest was credited to separate account as was the case in the case of State Bank of Travancore. It has been mentioned that in the present case since the assessee was satisfied that no amount can be recovered from Nirlon, it had not credited interest due for the year under consideration on the ground of commercial expediency because the recovery of the principal amount become doubtful. In such circumstances, the bona fide of the transaction cannot be doubted. Moreover, the authorities below have not doubted the amount due from Nirlon. The most important factor has submitted on behalf of the assessee that in view of the financial position of Nirlon the appellant had settled the entire amount for a sum of Rs. 74.50 lacs in the subsequent year as full and final settlement of the amount. In such circumstances, as a prudent businessman the assessee thought fit not to charge the interest purely on the ground of commercial expediency and no other consideration was involved in it. It is further submitted that the assessee is a company engaged in the business of leasing and hire purchasing which as per directives of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port House Ltd. [1992] 194 ITR 695/61 Taxman 152 (Cal.). 9. Jitpan Holdings (P.) Ltd. v. Asstt. CIT [1994] 48 ITD 369 (Bom.). 10. Sir Sarupchand Hukamchand (P.) Ltd. v. CIT [1982] 133 ITR 295 (MP). 11. Calcutta Investment Co. Ltd. v. CIT [1983] 142 ITR 120/13 Taxman 422 (Cal.). 12. Citibank N.A.'s case. 5. On the other hand, the learned departmental representative has supported the orders passed by the authorities below. It has been submitted that the assessee being a company has been maintaining its accounts on mercantile system. Therefore, the impugned amount which has already been accrued to the company has rightly been included as income of the assessee by the authorities below. The assessee cannot follow the cash system of accounting for the present amount only at its convenience. The learned departmental representative heavily relied on the orders passed by the authorities below. 6. We have carefully considered the facts, material on records and also the rival submissions. We have also gone through various documents filed in the compilation on behalf of the assessee to which our attention was drawn during the course of hearing. We find that this is the case of a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of service charges due for delay/non-payment of instalments on accrual basis as per the terms of Indenture of Lease and Agreement of Hypothecation on the ground of bad financial position of Nirlon. In the audit report under the head 'Operations' following remarks are made: "You would note from the balance sheet that the company had invested in leased assets and hypothecated machines to Nirlon Synthetic Fibres Chemicals Ltd. Since NSFCL has been facing adverse conditions it has been defaulting in its payment to the Company which resulted in severe set-back to the Company's working. The Board has been informed that with the assistance of financial institutions NSFCL's working has improved considerably. However, despite this fact your company has been able to meet its commitments and liabilities to its bankers, debenture holders, fixed deposit holders and all other agencies. The company is hopeful that it will be above to recover its clues from NSFCL very soon." Further, in the notes on accounts given in Schedule 12 to the Audited Accounts, Note Nos. 4 5 given in respect to amount outstanding against Nirlon are reproduced hereunder: "4. The company has leased certain equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revival of Nirlon. Its working was improving and the assessee-company was hopeful of recovering the amount due. The assessee-company however did not account for the income by way of service charges for delayed/non-payment of instalments totalling to Rs. 5,86,365 and the same was required to be accounted in the year of receipt. 6.3 We also find that the assessee-company had not changed the system of accounting from mercantile to cash system either in the case of income from lease rentals/interest or income due on account of service charges for the delay/non-payment of instalments within due time as per the terms of agreements. We also note that there was no amendment made in the Indenture of lease or agreement of hypothecation with the consent of Nirlon for not claiming the service charges for delayed/non-payment of instalments as provided in the original agreements on account of bad financial position of Nirlon. The assessee rather had declared income from lease rentals/interest on accrual basis, as per the terms of Indenture of lease/agreement of hypothecation. The learned counsel for the assessee during the course of hearing before us admitted that there was no change made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personal interest in the matter and recognize the seriousness of the situation and facilitate clearance of all overdue payments as also future instalments immediately. Resolved that if needed the next meeting of the Board of Directors be kept at the office of Shri Manhar Bhagat, Managing Director, Nirlon also a Director of the Company. Resolved That the Managing Director be authorised to negotiate with potential buyers of the plant equipment leased/financed to M/s. Nirlon Synthetic Fibres and Chemicals Ltd. and if found necessary take possession of the same from M/s. Nirlon Synthetic Fibres Chemicals Ltd. Resolved That the Managing Director be hereby authorised to initiate appropriate legal action against the Company if found necessary. Resolved That Mr. Manhar M. Bhagat, Managing Director, Nirlon Synthetic Fibres Chemicals Limited also Director of the company be requested on behalf of the Board of Directors to arrange to be personally present in the next meeting of the Board of Directors of the Company'." 6.4 It would be seen from above that even in the meeting of the Board of Directors, there was every hope of recovering the amount due from Nirlon and there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on could not be said to have accrued, as the profit of the business could be computed only after the 31st March, and therefore, the commission could not be subjected to tax when it is no more than a mere right to receive. This argument involves the fallacy that profits do not accrue unless and until they were actually computed. The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual..... The date has as much to do with the accrual of the commission as it has to do with the accrual of the profits...' In view of the above finding of the Hon'ble Supreme Court, the argument that income does not accrue unless and until they are actually computed has been held to be fallacious. 5. In the case of Morvi Industries Ltd. v. CIT (82 ITR 835) (Cal.), Hon'ble Supreme Court have held that once the income accrue on the last date of the accounting year, any condition that payment shall be deferred after the accounts have been passed, does not prevent the accrual of the income on the last date of the accounting year. In the case before Hon'ble Supreme Court, the income pertained to the accounting years ending on 31-12-1954 and 31-12-1955 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gate the income. 7. The entries made in the books of account incorporating the income do not affect the accrual of income. In fact, non-incorporating of income cannot postpone the accrual of income and incorporation of an income which has not accrued cannot make it taxable. This proposition finds support from various decisions of several Courts. It was held by the Hon'ble Madras High Court in the case of T.N.K. Govindrajulu Chetty (87 ITR 22)--- '... Whether the assessed is to be assessed on accrual basis or on receipt basis would depend on the method of accounting regularly employed by him and it does not depend on the choice of the Income-tax Officer. If an income is assessable on accrual basis as the assessee had adopted mercantile basis of accounting, the fact that the income accrued has not been shown in the accounts books by the assessee will not make it taxable in a later year on receipt basis.' 8. It has been consistently held by the various Courts that or surrender or relinquishment before the expiry of the accounting year has the effect of extinguishing the income which has not accrued as on the date of the decision. This position finds support from the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culty of recovery could not make the accrual of such income as non-accrual. The appellant's reliance on the observations of Mr. Justice V.D. Tulzapurkar in the same judgment is of no avail in view of the majority decision given by Mr. Justice Sabyasachi Mukherji and Rangnath Misra, JJ." 6.6 It is evident from the facts discussed above, that the assessee-company apart from income from lease rental or interest was also entitled to service charges for delayed/non-payment of instalments as per the terms of indenture of lease and agreement of hypothecation. During the year under consideration, there was no change or modification effected in these terms. What the assessee had done was that through an agreement dated 27th March, 1989 while settling the outstanding debts the assessee-company agreed to waive the balance interest, total overdue service charges and any other charges which the assessee company was entitled to claim from Nirlon by virtue of indenture of lease and agreement of hypothecation for delay/non-payment of instalments on due dates. Such an agreement was thus effected only after the close of the accounting year. The assessee-company therefore surrendered or relinquishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the audited accounts decided to account for such income on receipt. It would however be seen from remarks given under the head 'Operations' and Note No. 4 in the notes on accounts in Schedule 12 to the audited accounts and further resolution passed on 21st September, 1987, the assessee-company was all along hopeful of recovering the amount due from Nirlon and with the assistance received from financial institutions and banks, its financial position was said to be improving and it was for this reason that the assessee-company did not waive or relinquish the right to receive service charges for delay/non-payment of instalments. Moreover, the assessee-company has declared the lease rental/interest on accrual basis. Had the assessee-company considered the financial position of Nirlon so bad, income from lease rental/interest would also not have been declared on accrual basis and the same could have also been accounted in the year of receipt. This contradicts the plea taken by the assessee with respect to the service charges. The assessee never treated the amount involved as doubtful. The plea taken by the assessee for not disclosing the income from service charges for adverse financia ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
