S.M.S. Investment Corpn. (P) Ltd. vs Commissioner of Income Tax

On an application u/s 256(1) of the Income Tax Act, 1961, Tribunal has referred the following question for the opinion of this court :

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest on amount advanced to M/s. Citric India Ltd., Bombay, as per the agreement letter dated 27-7-1965; had accrued to the assessee-company following the mercantile system of accounting ?"

The assessee-company agreed to advance a sum of Rs. 20,00,000 to M/s. Citric India Ltd. @ 12 per cent interest per annum, but assessee failed to advance full amount of Rs. 20.00,000, under the agreement. The borrowing company raised an objection regarding non-fulfilment of the terms and conditions of the agreement as assessee has not advanced full amount of Rs. 20,00,000 as per agreement. It fall short of Rs. 3,00,000. The assessee thereafter has also advanced some more amount in the year 1967. As no interest has been received, therefore, assessee has not shown any income from the interest on the money advanced to M/s Citric India Ltd. in the assessment year 1973-74.

Uptil 1972-73, the interest has been tax on the basis of the accounting method followed by the assessee i.e. Mercantile System of Accounting. Income Tax Officer has also noticed that the borrowing company has offered to pay interest @ 8 per cent per annum, which assessee has not accepted. Considering these facts the assessing officer has taxed the interest income i.e. Rs. 2,08,669 on the basis of accrual as assessee has followed the mercantile system of accounting.

In appeal, the Commissioner (Appeals) as well as Tribunal also upheld the view taken by the assessing officer.

Heard learned counsel for the parties.

Mr. Ranka, learned counsel for the assessee submits that when the assessee has not received the interest income, the hypothetical income should not be taxed. He further submits that when assessee has not shown interest income in his books of account and borrowing company has also not shown the interest liability on account of interest payable by that borrowing company to the assessee, the interest income should not be taxed on the basis of accrual in this case. He placed reliance on the decision of Madras High Court in the case of Commissioner of Income Tax, Tamil Nadu-V Vs. Motor Credit Co. P. Ltd., , decision of their lordships in the case of UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, and again the decision of their lordships in the case of Commissioner of Income Tax Bihar-II Patna Vs. Bokaro Steel Limited, Bokaro,

The facts are not in dispute that there was an agreement for advance of Rs. 20,00,000 loan to Citric India Ltd. @ 12 per cent interest per annum, but the amount of Rs. 20,00,000 was not advanced. About a sum of Rs. 17,00,000 has been advanced under the agreement to Citric India Ltd. There is also no dispute in the fact that assessee has followed the Mercantile System of Accounting. Till 1972 -73, the interest has been taxed on the basis of accrual in the hands of the assessee on the amount advanced by the assessee to Citric India Ltd. The arguments advanced by Mr. Ranka are almost considered by the Tribunal in para 4 of its order. Relevant decision reads as under :

"We have given a careful consideration to the rival submissions. The Appellate Tribunal has already decided this issue in favour of the revenue for the assessment years 1968-69 and 1969-70 vide its order dated Sept. 1976 in ITA No. 3915 and 3916/JP/74-75. The Income Tax Officer had also included interest with reference to the loans to M/s. Citric India Ltd. in the income of the assessee for the subsequent assessment years viz., 1970-71,71-72 and 72-73. The additions made by the Income Tax Officer were also upheld by the Commissioner (Appeals). The assessee on appeal before the Tribunal for these assessment years argued that the decision of the Tribunal for the assessment years 1968-69 and 69-70 needed review. The same arguments were advanced for the assessment year 1970-71 to additions made by the Income Tax Officer. The Tribunal held that terms and conditions of the agreement regarding payment of the loan were modified and the assessee made further payments subsequent to the dates originally stipulated. The Tribunal had observed that upto 15-10-1969 the amount advanced by the assessee-cornpany were at Rs. 23,36,280/49 against the stipulated amount of Rs. 20 lakhs. At any rate the Tribunal held there was substantial compliance of the term of the agreement as contained in the assessee-company''s letter dated 15-7-1965. In our order for the assessment years 1970-71 to 1972-73, it is also pointed out that the assessee-company had advanced loans of Rs. 18,87,723/45 upto 21-10-1970. The assessee-company has filed copies of its accounts as appearing in the books of M/s. Citric India Ltd. for the periods 4-8 -1965 to 31-3-1975. The accounting period of the assessee for the assessment year 1973-74 under appeal ended on 30-6-1972. According to the copy of account filed the balance outstanding with M/s. Citric India Ltd. as on 1-4-1972 was Rs. 17,39,165/75. Such balance as on 1-4-1971 was also the same. In addition to these balance an amount of Rs. 1,48,557.67 on account of interest for the years 1965-66 and 66-67 was also outstanding which was transferred to the liabilities account. Thus according to the assessee itself the amounts outstanding with the borrowing company was on 1-4-1971 and 1-4-1972 were at Rs. 18,87,723/42. It may not be out of place to mention that as per the report of the Auditor (Sch. ''C'') with the audited accounts for the year ending 30-6-1972 relevant to the assessment year 1973-74 the outstanding amount as on 30-6-1972 with M/s. Citric India Ltd. was at Rs. 17,07,264 whereas according to the copies of the accounts filed the liability on 1-4-1972 was Rs. 17,39,165/75 in addition to the interest outstanding at Rs. 1,48,557.67. Even two accounts i.e. in the books of the assessee and those in the books of the borrowing company do not appear to tally. Again according to the audit note referred to earlier, the outstanding balance as on 30-6-1971 was at Rs. 19,01,319 whereas as per copies of accounts of the assessee with M/s. Citric India Ltd., the balance as on 1-4-1971 was at Rs. 17,39,165.75 only. Here also the accounts do not appear to tally in the books of Borrower and the lender companies. May be that the difference is on account of difference accounting periods followed by the two companies. Apparently as per copies of accounts of the assessee appearing in the books of M/s. Citric India Ltd. as filed in the paper book, there was no transaction with M/s. Citric India Ltd. after 21-10-1970 and, thereafter only balance had been carried forward. If that is so there are definitely discrepancies in the account. As on 1-4-1971 the balance as per entries in the books of account M/s. Citric India Ltd. is Rs. 17,39,165.75. There is no transaction thereafter. But according to the assessee''s own version the outstanding as on 30-6-1971 were at Rs. 19,01,319. Even if the outstanding interest of Rs. 1,48,557.67 is taken into consideration, even then the outstanding balance would be at Rs. 18,87,723.42 and not Rs. 19,01,319 as mentioned in the balance sheet for the period ending 30-6-1972. There is as such definite discrepancy in the accounts maintained by the assessee. We are drawing this inference because right from 4-8-1965 to 21-10-1970 all entries relating to credits and debits have been shown in the accounts. It is not known whether the assessee has taken into consideration the outstanding interest of Rs. 1,48,557.67 while mentioning the outstandings at Rs. 19,01,319 as on 30-6-1971 and of Rs. 17,07,264 as on 30-6-1972. As discussed above definitely there are discrepancies in the two accounts. At any rate we would like to add that because the breach of contract on the part of the assessee the borrowing company had stopped to give interest is not borne out from the records. If the borrowing company had stopped giving interest to the assessee from 1-7-1967, there was no reason why the assessee-company should have advanced further amounts. At any rate, the terms of the agreement were substantially complied with by the assessee-company, and therefore, it cannot be said that there was breach of the contract. There is no evidence on record that there was any modification in the terms of the agreement so as to reduce the rate of interest or not to charge any interest at all. The assessee-company has been mentioning in the audit notes year after year that no interest has been provided and not that the interest has been waived, If the assessee-company wanted to waive the interest, it could have passed a resolution for such waiver once for all, instead of mentioning in the audit note every year that no interest was provided. In our opinion, it is not a case of waiver of interest at all. We have discussed in detail in our order dated 30-10-1980 referred to supra relating to the assessment years 1971-72 & 72-73 that there was no waiver of interest. For the same reasons we hold that there was no waiver of interest. The interest, therefore, accrued to the assessee on the lending to M/s. Citric India Ltd. and has rightly been included in the income of the assessee. It is not a case where the assessee could have earned interest but has not earned inasmuch as there is no evidence on record that the assessee waived interest. In the circumstances, we have no hesitation in upholding the orders of the authorities below for the assessment year 1973-74 also."

When assessee is following the Mercantile System of Accounting, actual receipt of the interest is not necessary and till 1972-73 the interest has been taxed on the basis of accrual. Shri Ranka failed to satisfy this court as when the interest has been accrued and taxed in just preceding year i.e. 1972-73, why interest has not accrued in the year in hand.

Delhi High Court has recently considered the issue of accrual in the case of Saraswati Insurance Co. Ltd. Vs. Commissioner of Income Tax, and followed the decision of their lordships reported in COMMISSIONER OF Income Tax, MADRAS Vs. K. R. M. T. T. THIAGARAJA CHETTY and COMPANY., and Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, and observed at page 434 as under :

"...Income accrues when it falls due, that is to say, when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. The above being the position, we answer the question referred in the affirmative, in favour of the revenue and against the assessee"

Whether income has been accrued or not to the assessee depends on the facts of each case. In our considered view when the income of the interest had been taken as accrued and taxed in the just preceding year and there is no change in the facts and circumstances in the year in hand i.e. 1973-74, we found no infirmity in the order of the Tribunal.

In the result we answer the question in affirmative i.e. in favour of the revenue and against the assessee.

Reference so made stands disposed of accordingly.