Commissioner of Income-tax Vs. Mahavir Co. (P.) Ltd. - Court Judgment

V.K. Singhal, J.

1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated June 30, 1980, in respect of the assessment year 1978-79 under Section 256(1) of the Income-tax Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 22,080 made by the Income-tax Officer being notional interest in the account of Messrs. Ranglal Devkinandan Bagaria ?'

2. The brief facts of the case are that the assessee-company advanced a sum of Rs. 75,000 to Messrs. Ranglal Devkinandan Bagaria on April 2, 1969. The interest was duly adjusted in the account from year to year up to the assessment year 1977-78. While finalising the assessment for the period, that is the year ending on October 20, 1977, i.e., 1978-79, the Income-tax Officer found that though the company has maintained the accounts on mercantile basis it has not taken into account the accrued interest of Rs. 22,080. On the amount of Rs. 75,000 which was advanced on April 2, 1969, a sum of Rs. 94,847 has accrued as interest and the balance on the opening day was Rs. 1,69,847. The debtor stopped crediting the accrued interest to the assessee's account and this information was sent to the assessee-company. On December 14, 1977, the directors passed a resolution approving the action of not crediting the accrued interest to the debtors' accounts as they were not sure of the recovery of interest and the principal amount. The Income-tax Officer was of the opinion that simply because the interest has not been received, the debt cannot be taken for granted as bad and, therefore, Rs. 22,080 was added in the total assessable income.

3. In the appeal preferred before the Commissioner of Income-tax (Appeals), Rajasthan-I, Jaipur, it was submitted that the debtor-firm had been dissolved and the directors of the company had decided in their meeting held on December 14, 1977, not to debit any interest to the account of the debtor. Since the interest of previous years had only accumulated and was not paid, there was no use of debiting any further interest in the account of the debtor. It was also pointed out that ultimately in November, 1978, only a sum of Rs. 89,000 could be recovered in full and final settlement of the above debt and Rs. 80,847 was written off as a bad debt in the books of the assessee-company on July 14, 1979. The Commissioner of Income-tax (Appeals) was of the view that the company was taking steps for recovery of the loan including the interest and there was no iola of evidence on record to show that the financial position of the debtor was not sound or there was any doubt about the recoverability of the debt and interest thereon. Since mercantile system of accounting was followed, interest was chargeable on the debt and it was further observed by the Commissioner of Income-tax (Appeals) that the resolution was passed only after the close of the relevant previous year and that, therefore, no benefit can be given on that account and the appeal was dismissed.

4. In the second appeal preferred before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, it was submitted that the interest amount was not debited as the financial position of the debtor-firm was not happy and that there was no chance of recovery of the amount already due. The debtor-firm had already closed its business and had been dissolved consequent on the death of one of the two partners. The debt in question had been taken over by the surviving partner, Shri Devkinandan, on December 29, 1975, and there was neither any receipt of the principal amount or the interest either from the debtor-firm or Shri Devkinandan. The Income-tax Tribunal came to the conclusion that, vide letter dated January 8, 1976, the debtor-firm informed the assessee that, consequent upon the death of Smt. Rani Devi on December 31, 1975, the firm had been dissolved and the business had been closed. On March 31, 1977, the assessee-company was informed that the debt in question has been taken over by Shri Devkinandan Bagaria on March 29, 1977. On May 25, 1977, Shri Devkinandan Bagaria wrote to the assessee-company that he was facing financial stringency and requested the company not to charge any interest as that would only increase his burden which he would not be able to bear. It was in the light of these letters that the resolution dated December 14, 1977, was passed. The Tribunal ultimately came to the conclusion that, taking into account this fact and the fact that eventually in November, 1978, Rs. 89,000 only could be recovered and the balance was written off, the inclusionof the notional interest income was held not liable to taxation. It was held that, after all, what has to be charged to tax is the real income of the assessee and simply because the system of accounting was mercantile, it would not warrant inclusion of any accrued interest if the amount is not likely to be recovered.

5. Learned counsel for the Revenue has submitted that, on account of the system of accounting being mercantile, the accrued interest should have been included in the taxable income and, therefore, the Income-tax Appellate Tribunal was not justified in setting aside the same.

6. We have considered the matter. Primarily, we feel that it is a finding of fact which has been given and more particularly to the facts of the present case where the debtor-firm has already been dissolved and the accounts have been squared up by paying a sum of Rs. 89,000 in November, 1978, which would include Rs. 75,000 towards the principal amount and Rs. 14,000 against the outstanding liability of Rs. 94,847 as interest. It would not be proper to add the amount of Rs. 22,080 by way of accrued interest to the assessee-company. In the mercantile system of accounting, no doubt the interest which has accrued has to be shown as income but in a case where, without alleging any mala fides, collusion or financial soundness of the debtor, a resolution has been passed to waive interest, it cannot be said that any income has accrued to the assessee. The finding given by the Tribunal primarily is a finding of fact and is in accordance with law and, therefore, it is held that the Tribunal was justified in deleting the addition of Rs. 20,080 made by the Income-tax Officer being notional interest in the account of Shri Ranglal Devkinandan Bagaria.

7. The reference is accordingly answered in favour of the assessee and against the Revenue. No order as to costs.