Judgment:
1. This is an appeal by the Revenue against the order dt. 26th Aug., 1999, of the CIT(A)-I, Raipur and it relates to the asst. yr. 1996-97.
"On the facts and in the circumstances of the case the learned CIT(A) has erred in deleting the addition of Rs. 28,696 made by the AO on account of Pooja expenses claimed." 3. The assessee is a company. The AO noticed that the assessee had debited a sum of Rs. 1,97,154 to miscellaneous expenses account. It was further noticed by the AO that" a sum of Rs. 22,964 out of the said miscellaneous expenditure was spent towards Vishwakarma Pooja and Rs. 3,710 was spent towards purchase of sweets for the Pooja. Relying on the decision of the Karnataka High Court in the case of Sangameshwara Coffee Estates Ltd. v. State of Kamataka (1986) 160 ITR 203 (Kar) the AO disallowed the amount. On appeal by the assessee the CIT(A) deleted the addition by relying on the decision of CIT(A) in the case of Hira Ferro Alloys Ltd. wherein a similar claim for deduction was allowed, the claim of the assessee was allowed and the addition was directed to be deleted. Aggrieved by the order of the CIT(A) the Revenue has preferred the present appeal.
4. The learned Departmental Representative relied on the order of the AO and the learned counsel for the assessee relied on the order of the CIT(A) and further brought to our attention the decision of this Bench in the case of Hira Ferro Alloys Ltd. wherein the Tribunal has allowed a similar deduction.
5. We have considered the rival submissions. We find that a similar issue arose in the case of Hira Feno Alloys and this Tribunal in ITA 38 and 39/Nag/1997 had allowed a similar claim for deduction holding as follows : "We have considered the rival submissions. Regarding the judgments relied upon by the AO, the judgment of the Bombay High Court is distinguishable on facts inasmuch as the Hon'ble High Court in the said case, the expenses included providing a dinner to the employees in a sugar factory after the end of the season in which outsiders were also present. The Hon'ble Delhi and Kamataka High Courts have taken a view that the expenses in connection with Poojari for maintenance of the temple cannot be said to be connected with the business. The Hon'ble Punjab and Haryana High Court as well as the Hon'ble Gujarat High Court have taken a view that such expenses are for welfare of the labour and are wholly and exclusively for the purpose of business. This Bench of the Tribunal has been following the views taken by the Punjab and Haryana High Court and Gujarat High Court and allowing the deduction on this ground. Respectfully following the decisions of the Punjab & Haryana High Court and the Gujarat High Court, we dismiss this ground of the appeal of the Revenue." Respectfully following the earlier decision we hold that the CIT(A) was justified in deleting the addition and his order does not call for any interference and accordingly this ground of appeal of the Revenue is dismissed.
"On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 1,64,343 made by the AO on account of accrued interest on sticky loans." The AO noticed that in the notes on accounts there was a reference to interest that accrued but which had not been accounted for which according to the assessee will be accounted as and when received. The following were the interest amounts in this regard.
According to the assessee these companies had become sick and have been referred to the BIFR and since the financial position was not sound the assessee had not provided for the interest accrued during the year. The assessee also relied on it's Board resolution wherein a decision was taken not to charge interest but to pursue only recovery of principal amounts due by these companies. The assessee thus pleaded that only real income has to be assessed notwithstanding the fact that the assessee follows a mercantile system of accounting. The assessee relied on the decisions in CIT v. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad), H.M. Kashiparekh & Co. Ltd v. CIT (1960) 39 ITR 706 (Bom), Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC), CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), Shiv Parkash Janakmj & Co. (P) Ltd. v. CIT (1978) 112 ITR 872 (P&H). The AO however held that the notes on accounts states that interest will be accounted for when received which itself suggests that there is still hope for recovery.
In such circumstances the AO was of the view that interest had accrued to the assessee and ought to be considered while determining the total income liable to tax. He accordingly added the sum of Rs. 1,64,343 to the total income of the assessee.
7. Aggrieved by the order of the AO the assessee preferred appeal before CIT(A). The CIT(A) relied on his order in the case of Saket Industrial Gases Ltd. for asst. yr. 1995-96 wherein a similar issue came up for consideration and the CIT(A) had deleted the addition made by the AO in that case. Following his order in the said case and finding that the facts of the present case were identical he directed the AO to delete the addition made.
8. Aggrieved by the order of CIT(A) the Revenue is in appeal before us.
The learned Departmental Representative relied on the order of the AO and the learned counsel for the assessee relied on the order of the CIT(A). We have considered their submissions and perused the relevant material on record. It is seen from the copy of the Board Resolution dt. 4th April, 1996, placed at page Nos. 18 to 20 of assessee's paper book Vol. E that the Board of Directors considered the outstanding of these debtors and resolved not to provide for interest and recover only the principal sum. The Board considered the financial difficulty of the debtors and thereafter resolved not to provide for interest. The various correspondence between the assessee and Gulmohar Paper Ltd. is placed at pp. 21 to 29. The correspondence would show that M/s Gulmohar Paper Ltd., had become sick as early as 1st April, 1993. That borrower had also not provided for interest payable to the assessee in it's books. Similarly M/s Gomti Products Ltd. had also become sick as early as 1st April, 1994, and the position is the same in this,case also as that of M/s Gulmohar Paper Ltd. The relevant correspondence and balances as per assessee's books and the debtors books are placed at pp. 30 to 38 to the assessee's paper book Vol-IUI. The correspondence and accounts with regard to M/s Panihati Castings (P) Ltd. are placed at pp. 39 to 48 of the assessee's paper book Vol. II. These correspondence also shows similar state of affairs.
In the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) the Honourable Supreme Court had laid down the following tests in determining the taxability of income under the accrual concept of income : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
(2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue.
(3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed.
(4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act, (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee.
(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.
(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's, account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee.
(8). The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits.
9. Applying the tests laid down by the Honourable Supreme Court, we find that in the present case the conduct of the parties clearly shows that they never treated the interest payable and receivable as real liability. The conduct of the assessee has been such that they had virtually given up their claim to receive the interest. Though making entries in the books of accounts may not be conclusive, yet the conduct of the assessee in not making such an entry for interest accrued in it's books of accounts coupled with the resolution of the Board of Directors shows it's prima facie intention that it had treated the interest income as non existent. Thus, the case of the assessee in our view would come well within the recognized limits while applying the concept of real income. We are therefore, of the view that the CIT(A) was justified in deleting the addition made by the AO and his action does not call for any interference.