Saraswati Insurance Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

Excerpt:
direct taxation - waiver - sections 5 and 256 (1) of income-tax act, 1961 - whether tribunal justified in holding that income by way of interest waived by assessed includible in its total income for relevant assessment years - in light of precedent income accrues when it falls due that is when it becomes legally recoverable irrespective of whether it is actually received or not - accrued income is that income which assessed has legal right to receive - after accrual of income waiver does not take away taxability of amount - interest had already accrued for both years by time resolutions waiving interest were adopted - resolutions were of no consequence - question answered in affirmative. - - for the assessment years 1977-78 and 1978-79, the assessed claimed that it had not charged any interest from the subsidiary as it was running into huge losses and its financial position was very weak. (3) where a debt has become bad, deduction in compliance with the provisions of the act should be claimed and allowed. (8) the conceptof 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.arijit pasayat, c.j.1. these two reference applications at the instance of the assessed involve an identical question which has been referred by the income-tax appellate tribunal, delhi bench-a ('the tribunal' in short), for the opinion of this court under section 256(1) of the income-tax act, 1961 ('the act' in short) :'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the income by way of interest, waived by the assessed, was includible in its total income for the assessment years 1977-78 and 1978-79 ?'2. the assessment years involved are 1977-78 and 1978-79.3. the factual position as indicated in the statement of case is as follows :the assessed, saraswati insurance company limited, had a wholly owned subsidiary by the name of saraswati manufacturing and trading company limited. the assessed had advanced certain loans to the subsidiary company on which payment of interest at 12 per cent, per annum was stipulated. such interest was being charged from the very beginning up to and including the assessment year 1976-77 and it was also being included by the assessed in its total income. for the assessment years 1977-78 and 1978-79, the assessed claimed that it had not charged any interest from the subsidiary as it was running into huge losses and its financial position was very weak. on verification, however, the income-tax officer found that for both these years, interest had actually accrued to the assessed on the basis of the method of accounting regularly employed by it and there was waiver of interest only after its accrual. thereforee, he added the accrued interest to the total income for each of the assessment years. the matter was carried in appeal before the commissioner of income-tax (appeals) (in short 'the cit (a)'). the said authority affirmed the assessing officer's views. the matter was carried in further appeal before the tribunal. it was urged by the assessed that a resolution was passed on november 29, 1976, forgoing interest for the accounting year ending on december 31, 1976. similarly, another resolution was adopted on february 28, 1978, forgoing the interest due for the accounting year ending on december 31, 1977. in the light of the above resolutions it was contended that no interest had accrued to the assessed on the amount advanced to the subsidiary company. the tribunal agreed with the conclusions recorded by the commissioner of income-tax (appeals). it was pointed out that in view of the agreement between the assessed and the subsidiary company stipulating interest at 12 per cent, per annum on the loans advanced by the assessed, interest accrued on day to day basis. the resolution of theassessed for the accounting year ending on december 31, 1976, was passed only a few days before the close of the accounting year. by that time the bulk of the interest for that year had already accrued. similarly, for the subsequent assessment year for which accounting year ended on december 31, 1977, the resolution waiving interest was passed after the close of the accounting year. in the circumstances, it was held that what was waived by the assessed was income which had already accrued to it according to the method of accounting regularly employed by it.4. on being moved for a reference the question as set out above has been referred.5. we have heard learned counsel for the revenue. there is no appearance on behalf of the assessed in spite of service of notice. it is submitted by learned counsel for the revenue that after accrual of an income waiver thereof does not take away the taxability of the amount in question. in the case at hand, interest had already accrued for both the years by the time the resolutions were adopted and, thereforee, these resolutions were really of no consequence. it was submitted that the tribunal had placed reliance on a full bench decision of the allahabad high court in cit v. singari bai : [1945]13itr224(all) and of the bombay high court in cit v. con-finance ltd. : [1973]89itr292(bom) . both these decisions have been noted by the apex court in state bank of travancore v. cit : [1986]158itr102(sc) and the ratio laid down has been approved.6. the following propositions emerge on the question of income which has really accrued or arisen to the assessed that becomes taxable :(1) it is the income which has really accrued or arisen to the assessed that is taxable. whether the income has really accrued or arisen to the assessed 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 assessed. (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 assessed is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessed. after debiting the debtor's account and not reversing that entry--but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessed or has been treated as such by the assessed. (8) the conceptof 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.7. the above position was highlighted by the apex court in state bank of travancore's case : [1986]158itr102(sc) . as rightly contended by learned counsel for the revenue, in the said decision the allahabad and bombay decisions referred to by the tribunal were taken note of. the view taken in state bank of travancore's case : [1986]158itr102(sc) , was followed by the apex court in cit v. shiv prakash janak raj and co. pvt. ltd. : [1996]222itr583(sc) . it has to be noted that the language used in section 5 deals with taxability of income. taxability is attracted not only when income is actually received, but also when it is accrued, as observed by the apex court in cit v. k. r. m. t. t. thiagaraja chetty and co. : [1953]24itr525(sc) and in morvi industries limited v. cit : [1971]82itr835(sc) . income accrues when it falls due, that is to say, when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessed has a legal right to receive. the above being the position, we answer the question referred in the affirmative, in favor of the revenue and against the assessed.8. the references stand disposed of.