Ratnam J.
1. These tax case references relate to the same assessee, though for different assessment years and they are, therefore, dealt with together. The assessee is a money-lender and followed the mercantile system of accounting. She had advanced loans on mortgages. One such loan was advanced to one K. N. Krishnasami on a simple mortgage of agricultural lands of extent of 96 odd acres and the share of interest of the debtor in the firm, Sriram Bus Service. She had also advanced monies to one N. Chockalingam Chettiar on equitable mortgage. From the account copy extracts produced by the assessee in the course of the assessment proceedings, it is seen that, for the assessment years 1964-65 to 1969-70, the assessee had debited the interest accruing on the mortgages as per the system of accounting followed by her and offered the accrued interest for assessment. For the assessment year 1970-71 up to 1973-74, the assessee did not credit any interest. However, in the course of the assessment proceedings for the assessment year 1970-71, the Income-tax Officer made an addition of Rs. 24,250 as accrued interest, which was also upheld by the Appellate Assistant Commissioner. There was a remit order by the Tribunal and pursuant to that, the Appellate Assistant Commissioner deleted the addition. On appeal by the Revenue before the Tribunal, the addition of Rs. 24,250 made by the Income-tax Officer was sustained by the Tribunal for the assessment year 1970-71. Similarly, for the assessment years 1971-72 and 1972-73, the addition of accrued interest on the mortgages was accepted by the assessee. In the course of the assessment proceedings for the assessment year 1973-74, the Income-tax Officer added a sum of Rs. 23,600 being the interest on the mortgage loans, as in the prior assessment years. On appeal by the assessee, the Appellate Assistant Commissioner took the view that the assessee had already been burdened during the course of the prior assessments with considerable liability and there was, therefore, no justification to include the accrued interest on the mortgage loans in the assessment and though the loans were mortgage loans, the chances of recovery had become remote. In that view of the matter, the Appellate Assistant commissioner directed the deletion of interest of Rs. 23,600. In the departmental appeal before the Tribunal it was contended that having regard to the secured nature of the loans and the system of accounting adopted by the assessee, the interest on the mortgage loans should not have been deleted. The Tribunal took the view that there was no foreseeable prospect of receipt of interest in the accounting year when there were large outstandings of principal and dismissed the appeal. In respect of the assessment year 1973-74, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the following question of law has been referred to this court for its opinion in T. C. No. 1167 of 1979.
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the sum of Rs. 23,600 being interest due to the assessee on certain mortgage loans cannot be assessed to tax in the assessment for the year 1973-74 and, accordingly, in deleting the same ?'
2. In respect of the assessment years 1974-75 and 1975-76, the Income-tax Officer added accrued interest in respect of the mortgage loans in sums of Rs. 29,492 and Rs. 39,615, respectively. On appeal by the assessee, the Appellate Assistant Commissioner upheld the additions for both the assessment years. The Tribunal, following its order in respect of the same assessee for the assessment year 1973-74, deleted the addition of interest. That has given rise to T. C. Nos. 894 and 895 of 1982, where, at the instance of the Revenue, under section 256(1) of the Act, the following questions of law have been referred to this court for its opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the sums of Rs. 29,492 assessed as accrued interest in the assessment for assessment year 1974-75
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the sum of Rs. 39,615 assessed as accrued interest in the assessment for the assessment year 1975-76 ?'
3. The assessee, during the accounting period ending on April 30, 1974, relevant for the assessment year 1974-75, wrote off Rs. 1,03,842 as a bad debt under section 36(1)(vii) of the Act and claimed it as a deduction which was disallowed by the Income-tax Officer and also affirmed in appeal. However, on further appeal by the assessee, the Tribunal directed the exclusion of the same Under section 256(2) of the Act, at the instance of the Revenue, the following questions of law have been referred to this court for its opinion in T. C. No. 233 of 1990 :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the deduction of Rs. 1,03,842 as bad debt, under section 36(1)(vii) of the Income-tax Act, 1961
2. Whether the Appellate Tribunal's finding that the debt had become a bad debt during the previous year relevant to the assessment year 1974-75 is based on valid and relevant materials and is sustainable in law ?'
4. We may first proceed to consider the questions referred in T. C. Nos. 1167 of 1979 and 894 and 895 of 1982 relating to the accrued interest on the mortgage loans. We find from the account copy produced in the course of the assessment proceedings that, consistent with the system of accounting followed by the assessee, interest on the basis of accrual had been debited up to the assessment year 1969-70. It is not in dispute that the interest on mortgage loans, which had accrued, had also been disclosed and subjected assessment year 1970-71 onwards, the assessee did not credit the accrued interest on the mortgage loans, as according to her realisation of the debt was doubtful. Even so, in respect of the assessment year 1970-71, the Tribunal found that it was idle on the part of the assessee to contend that, in fact and reality, interest did not accrue as realisable income and upheld the addition of accrued interest for purposes of assessment. In respect of the assessment years 1971-72 and 1972-73, the accrued interest was added and the assessment had accepted the additions. In this background of assessment of the accrued interest on the mortgages till the assessment year 1972-73, the question of assessability of the accrued interest for the assessment years 1973-74 to 1975-76 has to be considered. While upholding the addition of the accrued interest for purposes of assessment in respect of the assessment year 1970-71, the Tribunal had stated that, having regard to the acceptance of the addition by the assessee for the assessment years 1971-72 and 1972-73, it would look incongruous, if the interest income did not accrued for the assessment year 1970-71. However the Tribunal, while considering the same question for the assessment year 1973-74, had stated that there was no foreseeable prospect of recovery of interest in the accounting year when the principal was outstanding and that would justify the deletion of the addition. With reference to the assessment year 1974-75, the Tribunal had followed its earlier order in respect of the assessment year 1973-74 forming the subject-matter of reference in T. C. No. 1167 of 1979. Likewise, for the assessment year 1975-76, the Tribunal upheld the deletion of the addition of accrued interest in a sum of Rs. 39,615 as the debt had been written off as a bad debt in the assessment year 1974-75, which question has been referred in T. C. No. 233 of 1990. Learned counsel for the Revenue, referring to section 5(1)(b) of the Act and the method of accounting followed by the assessee, submitted that when once accrual of interest had taken place, such accrued income cannot be rendered non-income and the difficulty of recovery would not make the accrual a non-accrual. Reliance in this connection was placed by learned counsel upon the decision in Kedarnath jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) , Morvi Industries Ltd. v. CIT : [1971]82ITR835(SC) and CIT v. Devi Films Pvt. Ltd. : [1990]182ITR200(Mad) . On the other hand, learned counsel for the assessee pointed out that the Tribunal had taken into account the long-standing nature of the mortgage loans, the irrecoverability of even the interest apart from the principal and other circumstances to conclude that, though the assessee had adopted the mercantile system of accounting, the interest on the mortgages was highly illusory and very unrealistic and had, therefore, rightly deleted the addition of interest for the assessment years in question. Reference in this connection was also made to the decision in CIT v. Motor Credit Co. P. Ltd. : [1981]127ITR572(Mad) .
5. Under section 5(1)(b) of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to him in India during such year. Though, in the course of the proceedings before the Tribunal, an attempt appears to have been made on behalf of the assessee to contend that there was a change in the system of accounting, that had not been either made good or accepted and we have, therefore, to proceed on the footing that the assessee had been following only the mercantile system of accounting, which she had followed in the preceding assessment years also. Under the system of accounting adopted by the assessee, interest on the mortgage loans became due when it became legally payable, though before it was actually received. The accrual of income referable to interest on the mortgage loans cannot be made to depend on its quantification and even on the computation of profits. Further, under section 5(1)(b) of the Act, even deemed accrual of income should be included in the total income. We are also unable to appreciate how when interest income had accrued, it could be regarded as non-income, merely because there was no prospect of receipt of interest, as there were large outstandings of principal. In this connection, it would be useful to refer to Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) , where, in a case in which the assessee was following the mercantile system of accounting, it was pointed out that the assessee was entitled to deduct sales tax for the payment of which he was liable during the relevant accounting year and the failure on the part of the assessee to debit the liability in the books did not debar him from claiming the same as a deduction. It was also further pointed out that the view of the assessee regarding his rights will not be of any avail; but the question will depend on the provision of law relating thereto and the existence or absence of entries in the books of account cannot be decisive. Applying this principle to the instant case, when once under section 5(1)(b) of the Act, income which is deemed to accrue or arise would also be included in the total of entries made by the assessee in his books of account, the interest income would accrue and would be includible in the total income under section 5(1)(b) of the Act. To similar effect is the decision in Morvi Industries Ltd. v. CIT : [1971]82ITR835(SC) , where it had been pointed out that, under the mercantile system of accounting, profits or gains, though not actually realised, accrued and the fact that the amount of income is not subsequently received by the assessee, would not also detract from or efface the accrual of interest. This decision also further emphasises that income accrues when it becomes due and the postponement of in the books of account show nothing more than the accrual or arising of the said profits to the material point of time. We have earlier pointed out sufficient for inclusion of such income in the total income under section 5(1)(b) of the Act and, under the system of accounting adopted by the assessee, the interest income on the mortgages must be deemed to have accrued to the assessee during the relevant assessment years. We may also draw attention to the fact that the assessee offered the interest on accrual basis for assessment in all the assessment years from the beginning up to the assessment year 1969-70; but only thereafter the assessee did not credit any interest but that, as we have earlier pointed out, is not very material. We may also refer in this connection to the decision of the Supreme Court in State Bank of Travancore v. CIT : [1986]158ITR102(SC) . The Supreme Court had elaborately examined the accrual of income in relation to the adoption of the mercantile system of accounting and had also considered the effect of the concept of real income on the accrual of income, according to the mercantile system of maintenance of accounts. The Supreme Court had pointed out that the notion of real income cannot be brought into play where income had accrued according to the accounts of the assessee and there is no indication of the assessee treating amounts as not having accrued. It had also been further pointed out by the Supreme Court that, after the event of accrual, on a mere ipse dixit of the assessee, no reversal of the situation can be brought about and the concept of real income cannot be so used as to make the accrued income non-income simply because, after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with diminished hope of recovery in the suspense account. The court had also cautioned that the extension of the concept of real income to this field, to negate accrual after the amount had become payable is contrary to the postulates of the Act and where interest had accrued and the assessee had debited the account of the debtor, the difficulty of recovery would not make its accrual a non-accrual. We are of the view that the aforesaid principles would be applicable to this case also and when once the interest on the mortgage loans had accrued, irrespective of whether the assessee had debited the account of the debtor or not, the difficulty of recovery would not alter such accrual into non-accrual and to enable the assessee to claim that no interest at all had accrued justifying its non-inclusion on the total income under section 5(1)(b) of the Act. In CIT v. Devi Films P. Ltd. : [1990]182ITR200(Mad) , to which one of us was a part (Ratnam J.), we had only applied the principles laid down in the case in State Bank of Travancore v. CIT : [1986]158ITR102(SC) and there is, therefore, no need whatever to notice that decision in greater detail.
6. We may now refer to CIT v. Motor Credit Co. P. Ltd. : [1981]127ITR572(Mad) . The assessee in that case was a private company financing the purchase of motor vehicles on hire purchase and had advanced amount to two firms plying buses, whose routes had been taken over by the State Transport Corporation, leading to the commission of default by the company in the payment of hire purchase instalments. The buses had also been seized. The assessee company did not credit the interest on the outstandings from the two debtors, though it was adopting the mercantile system of accounting. The Income-tax Officer added the accrued interest, which was deleted by the Appellate Assistant Commissioner and the Tribunal also took the view the assessee could not have expected to get any interest income on the outstandings found due from the debtors and it would be unrealistic to take credit for the interest income. Affirming the view of the Tribunal, this court held that the accrual of interest income for purposes of assessment would be unrealistic and illusory. In so holding, reference had been made to the mercantile system of accounting and it had been stated that hypothetical accrual of income on the method of accounting followed by the assessee cannot be taken into account, but what should be considered is whether income has really materialised or resulted to the assessee. It had also been further pointed out that the debtors' transport routes had been taken over by the State Transport corporation and there was thus no prospect of recovery of any amount and the system of accounting would be relevant only to determine the point of time when the tax liability is attracted and cannot be relied on to determine whether the income had in fact resulted or materialised, in favour of the assessee. Finally, it was held that merely on the basis of the system of accounting, the interest income on the outstandings cannot be held to have accrued. We are unable to appreciate how this decision would be of any accrual under section 5(1)(b) of the Act based on the mercantile system of accounting adopted by the assessee was not considered at all and we are of the view that, in view of the latter decision of the Supreme Court in State Bank of Travancore v. CIT : [1986]158ITR102(SC) , the decision in CIT v. Motor Credit Co. P. Ltd. : [1981]127ITR572(Mad) would be in inapplicable. We would also like to point out that, considering the availability of very extensive mortgaged properties, viz., 96 odd acres of agricultural lands and also the share income of the debtor in the transport business, the assessee cannot be said to have lost all hopes of recovery of any interest. It is also seen from the account extract given that at least two years prior to the relevant assessment years, the assessee had been paid a sum of Rs. 13,120. We also find that other amounts had been paid by the mortgagors in the earlier years. Considering the payments made, though not much and regular and the availability of extensive properties and that too by way of mortgage security, we are unable to hold that the assessee had lost all hopes of recovery of even the principal amount. Thus, on a due consideration of the facts and circumstances, we hold that the Tribunal was in error in having deleted the addition of interest in respect of the assessment years in question. We, therefore, answer the questions referred to us in T. C. Nos. 1167 of 1979 and 894 and 895 of 1982 in the negative and in favour of the Revenue.
7. That leaves for consideration the question of write-off of the debt. Even as regards this, we find from the order of the Tribunal that it had misdirected itself. According to the Tribunal, the Department had not placed any material to show that the assessee was in management of the mortgaged lands and that the mortgage was only a simple mortgage and that the question of management of the lands would not arise. However, we find from the order of the Appellate Assistant Commissioner that, under the very mortgage deed executed by the debtors in favour of the assessee, the assessee had the power of managing the properties. For all that, the mortgage, perhaps, was an anomalous mortgage. This had been omitted to be taken note of by the Tribunal. Further, the Tribunal had proceeded on the assumption that the remedy under the mortgage as well as the personal remedy was barred. We do not find on what basis or materials, the Tribunal has arrived at such a conclusion. The Tribunal had also not adverted to the value of the security, as either being adequate or inadequate to meet the liability of the assessee. The Tribunal had also taken note of the non-payment of any interest by the mortgagor after 1969-70. We find from the extract of accounts that, during the course of accounting year relevant to the assessment year 1970-71, Rs. 13,200 had been paid by the mortgagor. It is, therefore, clear that the mortgagor had made payments, though not fully and regularly, towards interest. The assessee had not taken any steps whatever to realise the amounts due under the mortgage. No doubt, the Tribunal refers to the issue of notice and the sending of a reply by the mortgagor. When, even according to the assessee, she had thought that, at the time when she issued a notice, the mortgagor was in a position to pay the amounts, we fail to see how the assessee lost all her hopes of recovery. The Tribunal has proceeded on the footing that the notice of demand issued by the assessee in 1976 cannot be taken as indicating that the assessee had entertained hope of recovery, for, the mortgage had become barred on March 7, 1975, and nothing could, thereafter, be recovered and if at all anything could be recovered, that depended on the sweet will and pleasure of the mortgagor. We are unable to discern any basis for all the assumptions so made by the Tribunal. Whether the mortgage was kept alive as a result of the payments made periodically, though irregularly, by the debtors during the assessment years in question had not been considered by the Tribunal, but an assumption had been made that it had become barred by time and, thereafter, it was left to the sweet will and pleasure of the mortgagor to pay off the amounts. The Tribunal had also, without any material whatever, proceeded to consider the notices issued by the assessee in 1976 to the mortgagor as having been written without any ray of hope, but out of frustration and almost as a speculative attempt to recover something. The Tribunal had referred to the threat contained in the notice issued by the assessee regarding the institution legal proceedings, but it wondered what proceedings could have been instituted. We are unable to appreciate the view so taken by the Tribunal. The failure to take legal proceedings and the impossibility of taking such proceedings are two different things. The failure to take proceedings cannot be equated to an assumed impossibility as has been assumed by the Tribunal. The Tribunal had also referred to the payment of Rs. 40,000 in 1980 by the mortgagor and if that be so, then, it is difficult to believe that the assessee had lost all hopes of recovery even in 1974. We may also observe in this connection, as pointed out in Devi Films Ltd. v. CIT : [1963]49ITR874(Mad) , that, in order to determine whether the assessee could have entertained an hones judgment at the time of write-off, his subsequent conduct in accepting the debtor as solvent and sound would also be relevant. In this case, it is seen that substantial amounts had been paid by the mortgagor to the assessee in 1980, even after the so called write-off. That would also establish that the assessee could not be said to have lost all hopes of recovery. We find that in V. N. Rajan and Co. v. CIT : [1983]142ITR545(Cal) , it had been pointed out that the question whether a debt could be considered to be a bad debt or not must depend on the facts and circumstances of each case and if a Tribunal, after considering all facts, had arrived at a conclusion interfered with, but that the question must be looked at from a practical point of view and the entry made by the assessee is prima facie evidence, but that is not conclusive, unless the entry is justified and the onus is on the assessee to establish that the debt had become bad in the relevant year. We have earlier pointed out that, in the course of its order, the Tribunal had made several assumptions for which there is no basis whatever and it had also not considered the value of the available security, the reasons for not having taken proceedings for the realisation of the amounts due and the conduct of the mortgagor in having made a payment even long subsequently. Therefore, the conclusion arrived at by the Tribunal cannot be stated to have been made after a consideration of all the relevant materials. We are, therefore, left only with the factum of write-off by the assessee by means of an entry in the books of account, but that is not conclusive, as there is no other material to justify the conclusion that the debt had become bad in the relevant year. We may also refer to Chettinad Co. P. Ltd. v. CIT : [1984]147ITR724(Mad) setting out the requirements to be fulfilled under section 36(1)(vii) of the Act. It has been pointed out by the Division Bench that section 36(1)(vii) of the Act requires that the debt should have been established to have become a bad debt in the previous year concerned and that the information of the assessee whether the debt had become bad and if so when is not decisive for enabling the assessee to claim allowance, but that the satisfaction of the Income-tax Officer on evidence that the debt had actually become bad during the accounting year is necessary. The Tribunal, in this case, had merely proceeded to act upon the information of the assessee in this regard and, as pointed out earlier, has not considered the facts and circumstances having a bearing upon the bona fide belief of the assessee that the debt in question had become bad. We, therefore, answer questions Nos. 1 and 2 referred to in T. C. No. 233 of 1990 in the negative and in favour of the Revenue. There will be no order as to costs.
Bhagabati Prasad Banerjee J.
8. I agree.