1. The assessee-company has filed the present appeal against the order passed by the CIT(A) for the asst. yr. 1988-89, in respect of the additions of Rs. 5,86,365 made by the ITO. The business of the assessee-company is giving machineries on lease to different parties. At the time of assessment, it was noticed by the AO that the company has not accounted for the income by way of service charges for non/delayed payment of instalments of deferred credits and lease rent amounting to Rs. 5,86,365 due from Nirlon Synthetics Fibres & Chemicals Ltd. In Note No. 5 of Schedule 12 of the annual audited accounts, it has been mentioned that this income will be accounted for in the year of receipt. To this extent loss for the year has been overstated or the income of the company has been understated. The assessee explained the position before the AO 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 Nirlons 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 AO that there was settlement between the assessee and Nirlon by executing a memorandum of understanding on 27th March, 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 AO was not satisfied with the explanation and added the amount to the income of the assessee-company.
3. The first appellate authority confirmed the finding for the reasons mentioned in the impugned order.
4. The learned counsel on behalf of the assessee has submitted that the following facts have been accepted by the authorities below which emerge from their orders that the amount of Rs. 5,86,365 was due from Nirlon to the assessee, in respect of penal rent for the non/delayed payment of the principal amount which has not been received by the assessee. Being a company the assessee has been maintaining its account under the mercantile system. The memorandum of understanding was reached with the Nirlon whereby it was agreed to settle all the dues at Rs. 74.50 lacs and the company has also written off the amount of Rs. 27.26 lacs being not recovered in the accounts for the year ended 31st March, 1989. The CIT(A) in para 11 of the impugned order has admitted that the dues from Nirlon are doubtful to recover. It was submitted that the AO was not satisfied with the facts that the financial position of Nirlon was so bad by which the amount of Rs. 5,86,365 can be said to be not recoverable. Further ground on which the amount was treated as income was that the assessee in Note No. 5 of Sch. 12 of the accounts has mentioned that the income will be accounted for when the same would be received is not acceptable on the ground that the assessee cannot change the system of accounting from mercantile to cash system. In similar ground the first appellate authority has confirmed the finding relying upon the decision of State Bank of Travancore vs.
CIT (1986) 158 ITR 102 (SC) which according to the learned counsel on behalf of the assessee is not relevant for the purpose of even case. It has been submitted that the assessee has explained by his letter dt.
4th September, 1989 before the AO that it had fully accounted for income from deferred credits and also lease rental on accrual basis.
Secondly, the present amount has not been accounted for because the income was in the nature of penalty for non-payment or delayed payment of the principal amount. Thirdly, Nirlon has been continuously defaulting in making the payment of lease rental/instalment of deferred credit on account of adverse financial position. In fact, the amount received from Nirlon as on 31st March, 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 31st March, 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 P. 26).
Fifthly, Nirlon has suffered huge losses amounting to Rs. 1517.95 lakhs as on 30th September, 1986, and Rs. 5237.32 lakhs as on 30th September, 1987 respectively. The total accumulated loss as on 30th September, 1987 stood at Rs. 3632.80 lakhs against the share capital of Rs. 1576.21 lakhs. As a result, the entire share capital has been wiped out and the net worth stood at a negative balance of Rs. 2056.50 lakhs and lastly, that apart Nirlon had outstanding liabilities to the tune of Rs. 15645.34 lakhs as on 30th September, 1987 against which the net worth was a negative balance of Rs. 2056.59 lakhs. The above figures amply establish the appellant's case that the recovery was completely doubtful. In fact, a memorandum of undertaking was signed on 29th March, 1989, under which a sum of Rs. 74.50 lakhs was accepted from Nirlon in full and final settlement of all the dues recoverable from it. A copy of the said memorandum was also placed before the learned AO. It was this claim that in light of the above facts the appellant had not charged interest for delayed payment. In fact, the amount of Rs. 27.26 lakhs was written off in the subsequent year ending on 31st March, 1989. There was thus no hope of recovery of the impugned amount which is sought to be assessed as appellant's income. Further, it was submitted that the matter was carried to the first appellate authority who has observed that there was no dispute either about the quantification of the amount or about the non-recovery of the same. The agreement reached between the two parties has also been accepted by the first appellate authority. In the course of hearing, before the CIT(A), the assessee filed a copy of the Resolution dt. 23rd September, 1987, which has been mentioned in the impugned order. On scrutiny of these details, it has been observed by the CIT(A) that the resolution does not indicate any mandate to change the method of accounting. It only suggests the steps to be taken for recovery of the amount. However, it was admitted by the CIT(A) that the recovery of the amount became doubtful. It has been submitted on behalf of the assessee that there is no doubt that the accounts were maintained under the mercantile system but under the compelling situation as mentioned above, the assessee had to treat the impugned amount as not yet accrued and such system of accounting is not new which has been held by the decisions of different High Courts in the case of CIT vs. Citibank N.A. (1994) 208 ITR 930 (Bom), wherein it has been held that an assessee following a system of accounting may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. It has been submitted that the decision of State Bank of Travancore (supra) relied on by the CIT(A) is not applicable in the present case because in that case the party's accounts were debited with the interest amount accrued, but in the present case before us, the assessee has 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 (supra). 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 became 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 the RBI is known as non banking financial company (NBFC).
The said company can borrow deposit to the extent of 10 times of its paid-up capital and free reserves. Thus, the borrowing power of this company is much more than any other normal company. It is for this reason that Government of India has appointed various committees from time to time viz., Narsinhan Committee, Shah Committee etc. As pointed out by these committees from time to time any amount outstanding for more than six months' is treated as non performing assets (NPA) and that has to be excluded from the net worth of the company which will, in other words restrict the borrowings powers of the company to that extent. Several other guidelines also have been framed by the Shah Committee to monitor the work of these NBFC's. From the above, it is clear that from various committees appointed also are in favour of the fact that if something is not realisable the same should not be considered. It is a fact that last year the banks have also to be given instructions by Honourable Ministry of Finance not to provide interest on such non performing assets which has severely affected the working of the banks. It is thus apparent that the Government is also having positive view for not providing such interest while in the present case it is more than as a matter of service charges for late payment rather than providing for interest. Moreover, as per the directives of RBI in case of rehabilitation package, penal interest is always waived.
Similar is the case of the company when BIFR will not allow for such penal interest. It is in this reference no provision has been made for such interest on late payment being in the nature of penal interest.
In support of his contention, the learned counsel for the assessee relied upon the following decisions : (1) Shiv Prakash Janakraj & Co. (P) Ltd. vs. CIT (1978) 112 ITR 872 (P&H); (11) Calcutta Investment Co. Ltd. vs. CIT (1983) 142 ITR 120 (Cal); and 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 leasing and financing company. As per indenture of lease dt. 3rd October, 1984 the assessee gave on lease an equipment viz., S.S. Autoclave 4 M3 capacity "Anup" make to Nirlon Synthetic Fibres and Chemicals Ltd. (NSFCL) worth Rs. 22,00,000 for a period of eight years in consideration of payment of lease rentals totalling to Rs. 35,70,612 as described in Schedule III to the said indenture of lease. The assessee-company also as per agreement of hypothecation dt. 9th December, 1985, deferred finance facility was granted to NSFCL under which assessee disbursed and paid a sum of Rs. 88,70,008 to NSFCL for acquiring 5 Nos. of single yarn twisters, 3 Nos. of cable twisters with its spare parts costing Rs. 1,26,71,440 repayable in such instalments as prescribed in Schedule II of the agreement of hypothecation aggregating to Rs. 1,38,37,212. Such deferred finance facility was given by way of hypothecation of the said imported equipments to Nirlon and the first charge thereon in favour of the assessee-company was registered with Registrar of Companies.
6.1 Nirlon after having taken on lease the said equipments paid to the assessee-company 10 quarterly instalments of lease rentals amounting to Rs. 17,19,302 and last amount was paid on 12th February, 1987 for the quarter ending January, 1987, and thereafter 26 instalments of Rs. 18,51,310 were payable as per the Indenture of lease upto 16th October, 1991. Similarly, Nirlon after availing deferred finance facilities paid to the assessee-company an amount of Rs. 31,83,721 and thereafter, 16 instalments of total amount of Rs. 1,06,53,351.40 remained payable upto 31st October, 1990 as per the agreement of hypothecation. The above amount of Rs. 1,06,53,351.40 was comprised of amount payable towards principal and interest of Rs. 76,20,575.71 and Rs. 30,32,775.69 respectively. The assessee-company as per the terms of Indenture of lease and the agreement of hypothecation was entitled to claim service charges from Nirlon for delay/non-payment of instalments payable within due time as per the Schedule of payment in instalments.
6.2 The assessee-company was maintaining books of accounts on mercantile system of accounting. The assessee during the year under consideration declared income on account of interest/lease rentals on accrual basis as per the system of accounting followed. The assessee, however, did not declare income on account 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 Synthetics Fibres & Chemicals Ltd. Since NSFCL has been facing adverse conditions it has been defaulting in its payment to the company which resulted in severe setback 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 about to recover its dues from NSFCL very soon." Further in the notes on accounts given in Schedule 12 to the audited accounts, Note No. 4 & 5 given in respect to amount outstanding against Nirlon are reproduced hereunder : "4. The company has leased certain equipments and has also provided deferred credit facilities (secured by hypothecation of specific machines) to Nirlon Synthetic Fibres & Chemicals Ltd. (NSFCL). On account of adverse financial position, NSFCL, is defaulting in making the payment of lease rentals and instalments of deferred credit and the amount due but not received as on 31st March, 1988 are as under :-(ii) Lease rentals 7,49,856 ----------- The Government of Maharashtra declared NSFCL as a relief undertaking under the provisions of the Bombay Relief Undertaking (Special Provisions) Act, 1958. NSFCL has made reference to the Board for Industrial & Financial Reconstruction (BIFR) for determination of measures to be adopted with respect to the company. NSFCL has also approached the financial institutions and banks for rehabilitation package for revival of the company and the interim financial assistance has already been made available to NSFCL and therefore the working of NSFCL is improving.
No provision is considered necessary against amount due from NSFCL in view of following : (a) The finalisation of the total rehabilitation package and determination by the BIFR for the remedial and other measures to be taken with respect to NSFCL is still pending. In the opinion of the management this amount is expected to be fully realised after the finalisation of rehabilitation package.
(c) In respect of the deferred credit the company has first charge over specific machines viz. twister machines by way of hypothecation having an estimated replacement cost of Rs. 270 lakhs.
5. In view of what is stated in note No. 4 above regarding financial affairs of Nirlon Synthetic Fibres & Chemicals Ltd. the company has not accounted for income by way of service charges for non-delayed payments of instalments of deferred credits and lease rentals amounting to Rs. 5,86,365. This income will be accounted in the year of receipt. To this extent, loss for the year have been overstated." It would be seen from the remarks given under the head "operations" and Note No. 4, the assessee-company was satisfied with the interim financial assistance given by financial institutions and banks for 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 the system of accounting during the year from mercantile to cash in respect of income from service charges. The assessee-company in the meeting of board of directors held on 21st September, 1987, considered the status of recoveries from Nirlon and in the minutes of the meeting following resolution was recorded : "The Board was informed by the managing director about the status of recoveries from Nirlon Synthetic Fibres & Chemicals Ltd. The managing director informed the Board that the company has been made to understand by Shri Manharbhai Bhagat himself and from other sources that Nirlon is planning to transfer/sell its assets.
However, Nirlon has assured the company that it will clear all the unpaid past instalments as also future instalments fully and thereafter seek the company's NOC without which it will not transfer any of the assets leased/financed by the company as per the lease/hypothecation agreements entered into between the company and Nirlon. The managing director further informed the Board that he and other directors namely, Mr. B. R. Handa and Mr. Tarun K. Kothari have visited Bombay several times and have been following up with Mr. Mahar Bhagat, managing director, Nirlon, Synthetic Fibres & Chemicals Ltd. for release of overdue payments as also for assuring future payments. They have even discussed various alternative proposals including taking back possession of the plant and equipment. The managing director informed the Board that unfortunately Nirlon has not shown any serious concern or response to either of the proposals. The managing director and other Directors Shri Tarun Kothari and Shri B. R. Handa, also met the financial institutions and bankers associated with Nirlon, namely ICICI and Hong Kong & Shanghai Banking Corporation, including the chairman of ICICI. The financial institutions and bankers are working on a revival programme which has yet not been finalised.
However, they assured that as and when the proposal to rehabilitate Nirlon is finalised our interests will be fully protected. This assurance was also given by Shri Manhar Bhagat, managing director, Nirlon. The Board further discussed the options available to it and passed the following resolutions : "Resolved that Mr. Manhar Bhagat, managing director, Nirlon Synthetic Fibres and Chemicals Ltd., also a director of the company, be requested on behalf of the Board of Directors to take personal interest in the matter and recognise 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 and equipment leased/financed to Nirlon Synthetic Fibres and Chemicals Ltd. and if found necessary take possession of the same from 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 Ltd. 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 resolution passed for not claiming the service charged from Nirlon for delay/non-payment of instalments due as per the agreement. We also find that the assessee company through an agreement dt. 27th March, 1989, with Nirlon agreed to settle the outstanding amount of Rs. 1,25,04,661 on payment of Rs. 75,00,000 on the following terms on account of their bad financial position : "1. The parties hereto agree to terminate the said indenture of lease and the agreement of hypothecation and agree to forego their rights thereunder.
2. The GLFL agree to accept the sum of Rs. 63 lakhs and Rs. 11.50 lakhs towards the full and final settlement of the amount recoverable under the agreement of hypothecation and indenture of lease respectively to be paid by NSFCL to GLFL 3. GLFL waives the balance interest, total overdue service charges and any other charges which it is entitled to claim from NSFCL by virtue of the Agreement of hypothecation and the indenture of lease for delay/non-payment on due date of instalments thereunder.
4. GLFL agrees to sell the said leased equipments to NSFCL for consideration of Rs. 50,000 and agrees to transfer all rights of ownership thereon to NSFCL w.e.f. the date of realisation of the sale proceeds. On realisation of sale proceeds GLFL shall issue a sale note in favour of NSFCL and thereafter right of ownership in respect of said leased equipment shall be automatically transferred to NSFCL.
5. GLFL agrees to release its charge over the said imported equipments in favour of NSFCL on realisation of full amount of Rs. 63 lakhs towards the amount recoverable under the agreement of hypothecation by way of registration of satisfaction of charge with ROC, Maharashtra." 6.5 The question under consideration is whether income on account of service charges due on accrual basis for delay/non-payment of instalments is taxable or not. The first appellate authority has considered this question in light of various judicial decisions and he has given a finding against the assessee as under : "4. According to Kanga & Palkhiwala's 7th Edn., p. 169, "income may accrue at a point of time prior to its quantification or computation which is not a condition precedent to accrual". The Hon'ble Supreme Court of India in the case of CIT vs. K.R.M.T.T. Thiagraja Chetty & Co. (1953) 24 ITR 525 (SC) have held as under (pp. 533-534) :- "...... Lastly, it was urged that the commission 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 are 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. vs. CIT (1971) 82 ITR 835 (SC), 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 the Hon'ble Supreme Court, the income pertained to the accounting years ending on 31st December, 1954, and 31st December, 1955, respectively and it was payable immediately after the annual accounts of the managed company had been passed in General Meetings which were held on 24th November, 1955 and 21st July, 1956 respectively. By a resolution of the Board of Directors dt. 4th April, 1955, and 19th June, 1956 i.e. after the commission became due but before it became payable, the assessee relinquished the commission. The question was the taxability of such commission. The Hon'ble Supreme Court held (p. 839) : "...... the commission for the two years in question became due to the appellant on the 31st December, 1954 and the 31st December, 1955. The appellant also became entitled to receive fixed office allowance of Rs. 12,000 for each of the two years. It, therefore, can be said that the income of Rs. 50,719 had accrued to the appellant on 31st December, 1954 and of Rs. 13,973 on the 31st December, 1955. The fact that the payment of the managing agency commission was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income of those amounts on 31st December, 1954 and 31st December, 1955 respectively." 6. In the case of Rungta Sons (P) Ltd. vs. CIT (1966) 62 ITR 468 (Cal), it was held by the Hon'ble Calcutta High Court that the office allowance which was payable at the end of the every month became due and accrued to the assessee at the end of the every month.
Relinquishment of such allowance cannot entitle the assessee to claim the deduction of the allowance which had already accrued. In the present case, the amount is payable annually. In fact, such amount is payable annually. This clearly shows that as per the terms, the amount becomes due at the end of the accounting year. Similarly it was held in the same judgment that in respect of commission and office allowance receipt by the assessee from another company, it was payable annually.
The resolution to surrender the commission and allowance passed after the end of the accounting year do not have the effect of diminishing the income. Similar view has been taken by the Hon'ble Delhi High Court in the case of Ashoka Hotels Ltd. vs. CIT. The question before their Lordship was whether the licence fees from the stall holders accrued during the year when the resolution to reduce the fee was passed after the end of the accounting year. It was held that once the income had accrued, subsequent act cannot mitigate the income.
7. The entries made in the books of accounts 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 vs. CIT (1973) 87 ITR 22 (Mad).
"...... Whether the assessee 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 ITO. 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 on 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 Supreme Court's decision in the case of CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC). Conversely, where the relinquishment takes place after the expiry of the accounting year, the claim of the appellant has not been allowed by the Courts. In the case of CIT vs. Bachubhai Nagindas Shah (1976) 104 ITR 551 (Guj), the question before the Hon'ble Gujarat High Court was whether the remuneration of sum of Rs. 4,800 which had become due to the assessee for the Calendar year 1962 and which was waived on 18th March, 1963, will still make the amount liable for taxation. The Hon'ble Gujarat High Court held that once the income has accrued, subsequent waiver cannot undo the act of the accrual. Similar view has been expressed by the Hon'ble Madras High Court in the case of CIT vs. P. Nataraja Sastri (1976) 104 ITR 245 (Mad) and Delhi High Court in the case of CIT vs. Gian Singh Kalsi (1980) 123 ITR 373 (Del).
9. The appellant being a limited company, the change in the method of accounting cannot be brought about without proper resolution from the Board. Such resolution has to be passed within the accounting year. The change in the method of account has been allowed by the various High Courts when the resolutions have been passed in time as in the case of CIT vs. Eastern Bengal Jute Trading Co. Ltd. (1978) 112 ITR 575 (Cal). But any correspondence after the expiry of the accounting period are not found to be relevant for the purpose of change of the accounting year as held by the Hon'ble Allahabad High Court in the case of CIT vs. Cosmopolitan Trading Co. (1979) 116 ITR 728 (All).
10. In view of the facts obtained in this case and the legal position, I hold that a change in the method of accounting has not been effected by the appellant company. Even if the change is taken as effected, it cannot be operated only for the receipts from one client. Unless such change is made for all receipts from all the clients and all the payments, it cannot change the method of accounting.
11. The fact that the dues from Nirlon Synthetics Fibres & Chemicals Ltd. became doubtful is not doubted. Even when the recovery of the debt is not certain, the interest and the other dues become an income of the lender as held by the Hon'ble Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC). It has been categorically held by the Supreme Court that in the case of sticky advance, the interest becomes taxable as per the notion of real income. The difficulty 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 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 dt. 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 relinquished its claim for service charges for delayed/non-payment of instalments within due time only on 27th March, 1989. The accounting year of the assessee ended on 31st March, 1988.
The income on account of service charges for delay/non-payment of instalments within time, therefore, accrued as on the closing date and subsequent relinquishment or waiver of such charges is of no consequence so far as the current assessment year is concerned. The Courts have taken a consistent view that on surrender or relinquishment before the expiry of the accounting year has the effect extinguishing the income, but in the present case the income from service charges was waived after it had already accrued on 31st March, 1988.
(i) According to the Hon'ble Supreme Court in the case of CIT vs.
Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) where income has been received and subsequently, given up. It remains the income of the recipient even though given up, the tax may be payable.
(ii) The Hon'ble Gujarat High Court in the case of CIT vs. Bachubhai Nagindas Shah (supra) has held that once the income has accrued, subsequent waiver cannot undo the act of accrual. Similar view has been taken by the Hon'ble Madras High Court in the case of CIT vs.
P. Nataraja Sastri (supra) to the effect that once the income had accrued its waiver may only be an application of income.
6.7 It would be seen from above that the assessee-company has not changed the method of account from mercantile to cash so far as income from service charges is concerned. Though there are Court decisions that where system of accounting is changed from mercantile to cash income on accrual basis is not taxable, but in the present case, there being no change in the accounting system and the assessee admittedly having followed the mercantile system of accounting, the income from service charges did accrue as on the closing date and the same is liable to tax.
6.8 According to the assessee, Nirlon suffered heavy losses and accordingly the Maharashtra Government declared it as a relief undertaking under the provisions of the Bombay Relief Undertaking (Special Provisions) Act, 1958 and it was also referred to BIFR for revival. Nirlon also suffered heavy losses and was not in a position to pay back even the principal amount and looking to the financial condition of the debtor the assessee as per the note given in 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 financial position of Nirlon therefore, carries no weight.
6.9 The assessee has placed reliance on various decisions in support of its claim and the same are considered hereunder : In this case system of accounting was changed from mercantile to cash system whereas in the present case there was no such change made in the system of accounting and as such ratio of this decision does not apply to the facts of the present case.
In this case a resolution was passed to waive the interest due whereas in the present case, no such resolution for waiver of income from service charges was passed or terms of indenture of lease or agreement of hypothecation were modified to the effect that the income from service charges would not be claimed. The facts being distinguishable the ratio of this decision is also not helpful to the assessee.
In this case, there was no prospect of recovering even the principal amount whereas in the present case, the assessee was hopeful of recovering the total amount due. The facts being distinguishable the ratio of this decision is also not applicable to the facts of the present case.
In this case, there was no date fixed for payment of interest and as such at the end of the year income from interest did not accrue. The interest was later on waived. The ratio of this decision also does not help the claim of the assessee the facts being distinguishable.
In this case, the debtor company was taken over by authorised controller and suit for recovery of principal amount as well as interest became barred by limitation. Interest therefore did not accrue, evidently the facts of this case are distinguishable and ratio of this decision also does not rescue the assessee from the situation.
In this case, assessee made provision for bad debt in respect of the principal amount and the same was accepted by the Revenue. Interest amount due on such principal amount was not held taxable. The facts of this case are also distinguishable and ratio of this decision also does not support the claim of the assessee.
7. Having considered all the facts, ratio of various decisions and material on records, we are of the considered view that the AO rightly charged income on account of service charges on accrual basis. We, therefore, see no infirmity in the order of the first appellate authority and the same is upheld.