1. This appeal by the department raising the following two grounds is directed against the CIT(A)'s order pertaining to the assessment year 1981-82 : 1. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals), erred in holding that as per facts brought on records the assessee-company was correct in writing off the debt amounting to Rs. 9,73,772 due from Kumardhubi Engg. Works Ltd. and thereby deleting the disallowance of the same from the assessment.
2. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals), erred in holding that the Income-tax Officer was not justified in taking the interest of Rs. 1,68,895 as income of the assessee and thereby deleting the same from the assessment.
2. The facts pertaining to the first ground in brief are that both the assessee and the debtor-company, vis., M/s Kumardhubi Engineering Works Ltd. (in short, the KEW) are managed by the same group of people controlling the two companies. Before the ITO the assessee claimed deduction of bad debt amounting to Rs. 9,73,772 being the amount outstanding in the accounts of M/s KEW up to the end of 31-3-1981 as follows :Bad debt pertaining to Period of Amount transactionPassage A/c.
11-4-78 to Rs. 22,709.03 8-5-79Foundry Chemicals A/c.
8-8-78 to Rs. 5,51,804.27 16-5-79Grease A/c.
18-12-78 to Rs. 40,959.73 31-12-79Central A/c.
25-10-78 to Rs. 3,58,249.32 31-3-80 In the first three accounts, the amounts outstanding are in respect of goods and provisions supplied by the assessee. In respect of the 4th.
account the same represents the unrealised rent and establishment charges payable by M/s KEW to the assessee. Both the companies, we have been informed, carried on their respective business from the same premises, viz., Chartered Bank Building, B.B.D. Bag, Calcutta. The assessee explained before the ITO in its letter dated 15-12-1980 the reasons for writing off the aforesaid sum during the relevant accounting year. The reasons given were that no payments were being made by M/s KEW against the bills submitted to them in the earlier years; that M/s KEW "continued to remain as a sick Co. and its works had been lying closed since mid-1979. In fact it was not functioning as a company at all. Furthermore, it was amply" clear that there was no prospects at all for realising the dues in view of the utterly hopeless financial position of the company and the gross uncertainties of even the priority creditors being paid their dues"; that the debtor-company did not prepare any audited accounts subsequent to the period ending 31st March, 1977; that by a letter dated 10th April, 1980 the Chairman of the Allahabad Bank stated that the company's net worth of M/s KEW came to a negative figure and that the total outstanding liabilities exceeded Rs. 10 crores. In fact, in the said letter the bank suggested the assessee "to transfer shares belonging to your group at Re. 1 per lot"; that the Calcutta High Court directed the winding up of M/s KEW by an order dated 15-12-1980 ; that the transactions in respect of M/s KEW shares were suspended as per the Calcutta Stock Exchange quotations dated 28-2-1981 and 8-5-1981 and that as per the Press report appearing in the Business Standard, dated 24th August, 1983, the Bihar Government had already taken over the entire unit of M/s KEW. In the said letter it was further pointed out that from another Press report appearing in the Economic Times, dated 11-11-1983 there was a suggestion that even the Allahabad Bank, being a secured creditor of M/s KEW was not likely to get back their entire dues. It was pointed out before the ITO that the assessee on the strength of the following directors' resolution passed in the meeting held on 12-5-1981 wrote off the unrealised dues of Rs. 9,73,722 as a bad debt : The Board discussed in detail about the company's dues from Kumardhubi Engineering Works Ltd. (KEW) amounting to Rs. 9,73,722.
Having regard to the facts and circumstances that (?) KEW continues to be a sick company ; (ii) its works had been lying closed since mid-1979 ; (iii) it has not been functioning as a company ; (iv) there are no prospects at all of realising the dues in view of the utterly hopeless financial position of the company and the gross uncertainties of even the priority creditors being paid their dues ; (v) there are no possibilities of revival of the above unit ; and (vi) KEW is in the process of being wound up by Court and an Official Liquidator has been appointed in that regard by the Calcutta High Court, the Board after consideration of all aspects passed the following resolution: RESOLVED that the company's unsecured dues of Rs. 9,73,722 from Kumardhubi Engineering Works Ltd. (In Liquidation) be written off as irrecoverable in the financial accounts of the company for the year ended 31st March, 1981.
3. The ITO on the basis of the IAC's direction under Section 144B(4) rejected the assessee's contentions as contained in the aforesaid letter as also in the assessee's subsequent letter dated 15-2-1984 by observing, inter alia, that- (a) the assessee raised bills against supplies made to M/s KEW in the period subsequent to the closure of the unit, i.e., mid-1979 to the early part of 1980 ; (b) that the assessee had controlling interest in M/s KEW and for no valid reason it raised bills even after the closure of M/s KEW with the hope of recovering the amounts due from M/s KEW in the subsequent period ; (c) that the Allahabad Bank's letter referred to by the assessee, "indicates that there was a possibility of revival of the company .... According to the ITO, the negative worth indicated was, "because of temporary lull in the activities of KEW which did not mean complete loss of hope of its functional recovery" ; (d) that in deference of the Allahabad Bank's desire to purchase the entire lot of shares of the assessee's group for Re. 1, the assessee sold the shares of M/s KEW at a much higher price of Rs. 71,706 which implied that the financial position of the debtor-company was not so bleak as was being made out by the assessee ; (e) that in pursuance of the High Court's order dated 15-12-1980 an official liquidator was appointed, who "has not given his findings nor has he passed any order to that effect'' ; (f) that there were no materials before the Board of Directors as on 12-5-1981 when it passed the resolution writing off the amount due from M/s KEW of Rs. 9,73,722 ; and (g) that on the ratio of the Calcutta High Court decision in the case of V.N. Rajan & Co. v. CIT [1983J 142 ITR 545, the assessee was not entitled to the deduction claimed as a bad debt in terms of Section 36(1)(vii).
4. The CIT(A) held that from the discussion made by the IAC under Section 144B(4) it was evident that the debt arose out of transaction entered into by the assessee with the debtor-company during the course of its day-to-day business ; that the amount claimed had been taken into account in computing the assessee's income in the earlier years and that the amount claimed as bad debt had been actually written off in the books of the assessee during the relevant accounting year. The only point to be examined according to the CIT(A) was whether the assessee had been able to discharge its onus, namely, that the debt became bad in the relevant accounting year. On this point, the CIT(A) held that- ... the appellant company after a very elaborate exercise of evaluating the assets backing of the debtor, the realisable value of securities and the prospects of revival or otherwise of the debtor's business, came to a tentative conclusion that the debt became bad.
... the appellant could not hope to have any chance of recovery, when the compensation by the Bihar Govt. has been fixed at Rs. 4 crores whereas the Allahabad Bank has got decree for over Rs. 7 crores besides having other priority creditors and also other claims....
5. Before us, a paper book has been submitted containing copies of letters of the assessee to the ITO (undated) letter dated 15-2-1984, the assessee's objections submitted before the IAC during the course of proceedings under Section 144B, written submissions dated 18-9-1984 filed before the IAC, zerox copy of the published accounts of M/s. KEW for the year ending 31-3-1977, summary of debtor-com pany's position as per the IT records with copies of assessment orders for 1979-80 and 1980-81, copy of the Bihar Gazette Notification dated 10-8-1983 taking over the assets of M/s. KEW (excluding its liabilities) and copy of the Tribunal's order in the case of Anniversary Investment & Agencies Ltd. [IT Appeal No. 2093 (Cal.) of 1985] wherein also a claim for bad debt arose out of transactions entered into by the said company with M/s.
KEW. The assessee's learned counsel pointed out that the Calcutta High Court decision referred by the ITO in his assessment order had been duly considered by the Tribunal in Anniversary Investment & Agencies Ltd.'s case (supra) as also the Madhya Pradesh High Court decision in the case of CIT v. Malhuralal Kapoorchand & Co. [1983] 141 ITR 297 which incidentally has been relied on before us by the departmental representative. It has been pointed out that with reference to the Bihar Government Gazette Notification dated 10-8-1983 laying down the provisions of 'Kumardhubi Engineering Works Limited (KEW) (sic) 1982 which received the assent of the President of India on 29-7-1983 that the entire compensation payable for taking over the management of the said debtor-company was fixed at Rs. 4 crores and that the liabilities of the debtor-company had not been taken over in terms of the said enactment. It has further been pointed out that in terms of the priorities laid down in the said Act for payment of the compensation sum so fixed secured loans from the nationalised banks and secured loans from,All India and State Financial institutions have been categorised as No. 2 in the list of priorities and trade and other creditors for the period prior to the take over of the undertaking has been relegated to the last category, i.e., category No. 4 in order of priorities. Our attention was drawn to the assessee's letter to the IAO dated 13-9-1984 wherein it was mentioned that the Allahabad Bank on 27-2-1980 filed a suit in the Calcutta High Court (Suit No. 157 of 1980) against the debtor-compa,ny for realisation of their secured dues aggregating to Rs. 7.49 crores. It has been pointed out in the said letter that the Hon'ble Pligh Court by an order dated 27-2-1980 restrained the debtor-company from transferring, disposing of, alienating, letting out, encumbering or dealing with the securities pledged to the bank as mentioned in the bank's petition to the High Court. In the said letter it has been further stated that the High Court by an order dated 19th March, 1980, appointed a receiver for taking over charge of all the assets, account books, etc., belonging to the debtor-company. The High Court by another order dated 10th June, 1980, gave liberty to the Allahabad Bank to sell 93,800 shares of McNally Bharat Engg. Co. Ltd. which belonged to the debtor-company that were pledged as security with the bank. Accordingly it has been pointed out that there was no ray of hope for recovery of any part of the dues outstanding from M/s. KEW as at the end of the accounting year, i.e., 31-3-1981.
6. The facts mentioned in the assessee's letter dated 18-9-1984 are not in dispute before us. The authorities below rejected the assessee's claim for deduction of bad debt claimed by the assesses mainly on the ground that there was no sufficient material before the directors of the assessee-company for coming to the conclusion that 'the hope of realisation of the debt was totally lost during the particular previous year' and that the liquidation proceedings initiated as per the orders of the Hon'ble High Court dated 15-12-1980 were not yet completed. In regard to the first objection of the IAC as well as the ITO, the resolution of the Board of Directors dated 12-5-1981 which has been extracted above, indicates that they took into consideration the fact that there was no possibility of revival of M/s. KEW as it was in the process of being wound up under the order of the Hon'ble High Court.
The Allahabad Bank's letter dated 10th April, 1980, which was also before the Board of Directors, mentioned clearly that the net worth of M/s. KEW was a negative figure as its outstanding liability exceeded Rs. 12 crores. It is also apparent from a perusal of the provisions contained in the Kumardhubi Engineering Works Limited 1982, that the compensation to be paid by the company for taking over the undertaking's assets without its liabilities was fixed at Rs. 4 crores.
The amount payable to Allahabad Bank by the debtor-company alone come to Rs. 7.49 crores which was much in excess of the compensation fixed by the Bihar Government as is evident from the bank's petition dated 27-2-1980 moved before the Hon'ble Calcutta High Court for realisation of the debts outstanding against M/s. KEW of over Rs. 7.49 crores. The Hon'ble Calcutta High Court in the case of V.N. Rajan & Co. (supra) laid down the principles applicable in the granting of allowance envisaged in Section 36(1)(Vii) which are : (a) that the facts and circumstances of each case have to be considered in judging whether a particular debt could be considered to be a debt or not; (b) that the question of its allowance must be looked at from the practical point of view, i.e., from the business point of view even though the onus is on the assessee to establish that the debt has become bad in the relevant accounting year.
In laying down the aforesaid principles their Lordships considered the Bombay High Court decision in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792. In our opinion, the directors on the basis of the materials available before them took a practical approach in deciding to write off the debts outstanding against M/s. KEW of Rs. 9,73,772. We would, accordingly, uphold the CIT(A)'s order in this regard.
7. The facts relating to the second ground are that the assessee advanced interest-bearing loans aggregating to Rs. 15 lacs during the relevant previous year to one of its subsidiary company, viz., M/s.
Dalhousie Jute Co. The said sum was paid in three instalments-the first one being Rs. 10 lacs advanced on 23rd July, 1980 and the second two instalments of Rs. 3 lacs and Rs. 2 lacs each had been advanced on 14-10-1980. In respect of the first sum of Rs. 10 lacs the minutes recorded in the meeting of the Board of Directors dated 7-7-1980 read as follows : The Board authorised the grant of Rs. 10 (ten) lakhs to its Subsidiary Company, The Dalhousie Jute Co. Ltd. at such rate of interest as the subsidiary company pays on its borrowings from its Bankers.
Similarly, the two instalments of loan advanced have been authorised by the Board of Directors in their meeting held on 21-8-1980 mentioning, inter alia, that : "The rate of interest chargeable on the loan would be the same as the Dalhousie Jute Co. Ltd. pays on its cash credit account with its Bankers". Subsequently, the assessee sold its entire equity holdings of the said subsidiary company and with effect from 4th February, 1981 M/s. Dalhousie Jute Co. Ltd. ceased to be the subsidiary company of the assessee. In its books for the year ending 31-3-1981 the assessee charged interest on the said loan of Rs. 15 lacs but the entry was reversed subsequently on the basis of the resolution passed in the meeting of the Board of Directors held on 12th May, 1981 which, inter alia, read as follows : 10. Settlement of accounts with the Dalhousie Jute Co. Ltd.-The Chairman explained that certain claims have been made by the Dalhousie Jute Co. Ltd. (hereinafter referred to as 'The Dal Jute').
The details of these claims were laid on the table and the Chairman apprised the Board in regard to each claim. Apart from these claims The Dal Jute have also claimed rebates on the sales effected by the company from April 1980 onwards. The Chairman further explained that in regard to these claims and other matters, long and protracted discussions have taken place between the company and The Dal Jute.
The Board also noted that large amounts (including unsecured loan) were due from The Dal Jute. The question of recovering the dues by taking legal action was discussed but in view of cost and time factor involved in this course of action, it was considered to be in the best interest of the company to avoid litigation and arrive at an amicable settlement. Having considered all aspects and with the ultimate object of reaching an amicable settlement and ensuring speedy recovery of the net dues from The Dal Jute it was unanimously agreed that the following debit notes from The Dal Jute and the company's credit notes as per details given here-under be and are hereby accepted. In this connection, it was further resolved to authorise the Chairman to reach a final settlement with The Dal Jute incorporating, inter alia, the various debit/credit notes as detailed below and any other matter of claim that may arise during the course of negotiations. Mr. K. L. Dua, Executive Vice-President and Mr. M. L. Chadha, Secretary of the company, were also severally authorised to sign such papers, documents etc. as may be necessary in this connection....
(B) To treat the loan of Es. 15.00 lakhs given to The Dal Jute as interest-free loan from the date the loan was first given to The Dal Jute until the date of repayment notwithstanding what has been recorded in item No. B of the Board meeting held on 7-7-1980 and item No. 13 of the Board meeting held on 21-8-1980.
In the printed balance-sheet the said loan of Rs. 15 lakhs was shown under the head "Loans and Advances-Unsecured Loan- Considered Good". In the Auditors' report dated 21st July, 1981 as per item No. 5 it has been mentioned thus : During the year an interest-bearing loan of Rs. 15,00,000 repayable on demand was given to its subsidiary company which has ceased to be subsidiary before the year end. As per new agreement with the borrowing company entered into subsequent to the close of the financial year the interest has been waived since the date when the loan was first given and a new stipulation for repayment of principal has been fixed and one instalment has since been recovered as per stipulation.
The ITO brought to tax interest on the aforesaid loan of Rs. 15 lacs which accrued to the assessee as at the end of the accounting year, viz., 31-3-1981 amounting to Rs. 1,68,895 by stating, inter alia, that "Interest amount had already accrued on 31-3-1981 as is seen from the copy of ledger account for interest on loan". The CIT(A), however, deleted the addition by bringing certain facts which are not borne out from the records. The CIT(A)'s finding that "No interest was ever paid by or received from the subsidiary company on the said accommodation"-is contrary to the ITO's finding that "interest was credited in ledger account but on the same date by a reverse entry the interest was squared up...." The CIT(A)'s other observation namely that "The company for some time was under deep financial crisis...." also remains unsubstantiated particularly in the light of the facts recorded in the Memorandum of Settlement dated 19th May, 1981.
8. The assessee's learned counsel by relying on the Calcutta High Court decision in the case of CIT v. North West Coal Ltd. [1987] 167 ITR 419 argued that the subsequent a,ction by the assessee to forego the interest receivable on the loan advanced to M/s. Dalhousie Jute Co.
which was a subsidiary company at the time the loan was granted and was to be examined in the light of the overall position as it existed at the relevant time. By citing the Supreme Court decision in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 the assessee's learned counsel stated that the concept of real income would apply where there has been a surrender of income. In the assessee's case the accrual of interest as also its subsequent waiver formed an integral part of the entire business transaction and, therefore, the surrendering of the interest amount must be held to relate back to the accounting year in question and not to the subsequent accounting year.
9. After hearing the departmental representative we are of the opinion that there was an accrual of interest income on the loans advanced by the assessee to M/s. Dalhousie Jute Co. on the basis of the two resolutions passed by the Board of Directors in their meeting held on 7-7-1980 and 21-8-1980 respectively. The subsequent action by the company in remitting the interest that was already charged as per the aforesaid two resolutions of the Directors was completely an independent action taken on the basis of the resolution passed in the meeting of the Board of Directors held on 12-5-1981. There is no dovetailing of the said two independent actions taken by the assessee, i.e. (i) for charging of interest and (ii) its subsequent action in waiving interest so charged on the strength of the resolution passed by the Board of Directors after the end of the accounting year. The Calcutta High Court decision in the case of North West Coal Ltd. (supra) at p. 43.1 is distinguishable on fact's with the present case as would be apparent from the following observation which reads as follows : It has been found as a fact that before the end of the accounting year involved, the contractor called upon the assessee to forgo a part of the depreciation charges. The proposal of the contractor was accepted by the Board of Directors of the assessee on the day immediately after the close of the previous accounting year. It is assumed and, in fact, it is not disputed by the assessee that under the agreement the depreciation charges might have accrued to the assessee. But the question of surrender or foregoing the accrued income has also to be considered. The proposal for surrender of the part of the depreciation charges was mooted before the end of the accounting year and immediately, after the end of the previous accounting year, the proposal was finally accepted by the assessee.
In this context we may refer to the following observation of their Lordships of the Supreme Court in the case of State Bank of Travancore (supra) at page 154 which reads as follows : 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 of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made 'no income'.
10. Considering the facts and circumstances of the case we hold that there was an accrual of interest income on the basis of the two resolutions passed by the Directors' meeting of the assessee-company in respect of the loan advanced to the tune of Rs. 15 lakhs to Dalhousie Jute Co. and there was no surrender of such income before the end of the accounting year. We, accordingly, by reversing the CIT(A)'s order, restore the ITO's order in this regard.