TMI Blog1993 (9) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... ged on or after 1st of October 1988 (no rate prescribed) and that the deposits made by the assessee were to be utilised only for the investment in the shares of Orkay Silk Mills. Ltd. 4. Devang Exports, incurred huge losses and could not pay back even the principal amount advanced by the assessee to them by 30th September, 1986. The Assessing Officer took the view that as envisaged by the contract between the assessee and M/s. Devang Exports interest was chargeable on the advances with effect from 1st October 1988, and the assessee following Mercantile system of accounting interest at an amount of Rs. 84,81,300 accrued to them for the period 1-10-1988 to 31-3-1989 i.e., the remainder period of the accounting year. As stated, although no rate of interest was provided in the contract between the parties, the Assessing Officer calculated the interest @ 12 per cent. In all, the assessee made advance aggregating to Rs. 14,13,55,000 to M/s. Devang Exports which remained unpaid. On their part, M/s. Devang Exports asked for full performance from the assessee, namely, the advance of the remainder of Rs. 16.50 crores in terms of the agreement referred to supra. The dispute was eventually r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61,16,329 which included a loss of Rs. 14,53,14,039 from share trading, the balance sheet also reflects that Devang Exports had to pay unsecured loan to the extent of Rs. 40,70,20,903 to several parties including the assessee before us. In their submission, since there was not even a freak ray of hope of the realisation of even the principal amount from Devang Exports whose Authorised Capital was as meagre as a sum of Rs. 3,000, interest on the arrears could not be calculated and said to accrue which would be purely hypothetical, besides, being artificial and unrealistic. It was also contended that the assessee created provision for doubtful debts amounting to --- Rs. 14,13,55,000 in their Profit Loss account on the premises that they had not received any part of this amount from Devang Exports; the whole of which had become irrecoverable. 7. Both the Assessing Officer and the CIT (Appeals) have proceeded on the basis that since the assessee is following Mercantile system of accounting, therefore, the interest did accrue to them in terms of the agreement between M/s. Devang Exports making them liable to offer the same for taxation during the assessment year 1989-90. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the learned counsel for the assessee, submitted that the balance sheet of M/s. Devang Exports itself was enough to justify the drawing of an inference by the assessee that nothing was recoverable from them and as such there was no point in wasting good money after a bad one and chasing the issue with no point of return. 11. We have considered the matter carefully. As far as the facts with regard to the advance made by the assessee to Devang Exports and the losses as reflected in the latter's accounts are concerned, there does not appear to be any quarrel. Incidentally, the assessee also filed before us copy of an order dated 28th February 1992, rendered by the CIT (Appeals) in the case of M/s. Mamnu Holdings Pvt. Ltd. wherein the issue of payment of Rs. 2 crores by them to M/s. Devang Exports as compensation in similar circumstances and arising out of the same Award given by Sri J.C. Kapoor came up for consideration and it was held that the transaction was not sham or collusive in nature, although the learned CIT (Appeals) qualified to say that the entire amount of compensation was not allowable as a business loss incurred by M/s. Mamnu Holdings as a trader. Before we proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well-settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom.) of 1983] wherein after going through the various case laws, the Tribunal took the view in a case where although the debtor did not refuse to pay the principal interest, but it had no capacity to pay even the principal amount, it was futile to hold that the interest continued to accrue. Similar is the view taken by the High Court of Madras in the case of CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572. 13. Before we pass on to our final conclusion by applying the various case laws on the facts of the case in hand, it appears necessary to refer hereto the ratio of a decision of the Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792, oft relied on behalf of the assessee wherein Their Lordships of the Bombay High Court held that a debt becoming bad would depend on the facts of each case. No infallible proof was essential. Date on which assessee wrote off debt is a material circumstance but not conclusive. Effect on subsequent conduct of the assessee was also material and even the institution of a suit to recover such debt did not necessarily mean that the debt was not bad. 14. If we take stock of the entire gamut of facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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