Commissioner of Income Tax vs Goyal M.G. Gases Pvt. Ltd.

Madan B. Lokur, J.—The Revenue is aggrieved by an order dated 21st July, 2006 passed by the Income Tax Appellate Tribunal, Delhi

Bench ''D'', New Delhi in ITA No. 811 (Del) of 2002 relevant for the assessment year 1998-99.

The Revenue has raised three substantial questions of law. The first substantial question of law reads as follows:-

Whether the ITAT was correct in law in allowing depreciation of RS.1,21,26,481/- to the assessed at the rate of 100% on tankers

It is submitted by learned Counsel for the Revenue that a similar question of law had arisen in the case of this assessed in ITA No. 1052/2006

and the decision of this Court was not in favor of the Revenue. It is submitted that the Revenue has preferred an SLP before the Supreme Court.

Following the decision in ITA No. 1052/2006, we are of the opinion that no substantial question of law arises for our consideration.

The second substantial question of law raised by the Revenue relates to the deletion of an addition of Rs. 4,24,43,689/- made on account of

bad debts. The assessed had given a bill discounting facility to M/s Kedia Castle Dellon Industries Ltd. (for short Kedia). The said company was

unable to repay the debts with the result that the assessed sent winding up notices to it and thereafter filed a winding up petition in the Calcutta High

Court. Kedia was declared a sick company by the Board for Industrial and Financial Reconstruction (BIFR). Under these circumstances, the case

of the assessed was that the amount given to Kedia was not recoverable and was written off in its books of accounts. The Assessing Officer

treated the winding up petition filed by the assessed in the Calcutta High Court as a suit for recovery of dues. This is obviously incorrect. The

winding up petition was filed by the assessed because the amounts were not recoverable from the said company. Moreover, the said company had

also been declared a sick company by the BIFR and, Therefore, the assessed was entitled to contend that the amounts were bad debts and were

not recoverable.

Learned Counsel for the Revenue contended that the BIFR had restrained Kedia from disposing of its fixed or current assets without the

consent of the BIFR. Learned Counsel for the Revenue is unable to tell us what were the assets of Kedia and there is nothing on record to show its

assets and whether the assessed was at all in a position to recover its debts from those assets. Both the Commissioner of Income Tax (Appeals)

[CIT (A)] and the Tribunal were of the view that the Assessing Officer had erred in not treating the amount as a bad debt, given the circumstances

of the case as also the fact that the assessed had written off the amount as irrecoverable in its accounts for the relevant previous year in accordance

with the provisions of Section 36(1)(vii) of the Income Tax Act, 1961.

We do not find any error in the view taken by the CIT (A) as well as by the Tribunal and are of the opinion that no substantial question of law

arises for our consideration. There is no doubt that given the facts of the case, there was no hope left with the assessed of recovering the amount

from Kedia and it is this which prompted the assessed to seek winding up of Kedia by an appropriate order to be passed by the Calcutta High

Court. Kedia had been declared a sick company by the BIFR and there is nothing to indicate what assets, if any, were with Kedia from which the

assessed could, if at all, recover its debts.

The third substantial question of law raised by the Revenue is with regard to the deletion of an addition of interest computed by the Assessing

Officer on an advance given by the assessed to seven parties. According to the Assessing Officer, since the assessed was following the mercantile

system of accounting, interest had accrued to the assessed as its income.

The contention of the assessed was that in the subsequent year, the assessed had written off the loans given to the seven parties as bad debts

and the Assessing Officer had also accepted the writing off of the principal amount. Learned Counsel for the Revenue submitted that both the CIT

(A) as well as the Tribunal were in error in taking note of subsequent events and should have strictly gone by the principles of the mercantile system

of accounting and on that basis it should have been held that the Assessing Officer was correct in taking the interest on those advances as income

having accrued to the assessed.

The Tribunal relied upon the decision of the Supreme Court in Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax,

Gujarat-II, Ahmedabad, . We have gone through this decision. The Supreme Court quoted a passage from an earlier decision rendered in

Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., where it had been stated as follows:-

income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz.,

the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even

though in book-keeping, an entry is made about a hypothetical income, which does not materialise.

The principle that the Supreme Court applied was that even if the accounts are maintained in the mercantile system, what has to be seen is

whether income can be said to have really accrued to the assessed. In support of this principle, reliance was placed upon Commissioner of Income

Tax v. Birla Gwalior (P) Ltd. [1973] 89 ITR 255 which approved the view taken by the Bombay High Court in H.M. Kashiparekh and Co., Ltd.

Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, , Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central)

Calcutta, as well as Poona Electric Supply Co. Ltd. Vs. Commissioner of Income Tax, Bombay, . In the penultimate paragraph of the judgment,

the Supreme Court held as follows:-

The question whether there was real accrual of income to the assessed-company in respect of the enhanced charges for supply of electricity has to

be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible

to hold that there was real accrual of income to the assessed-company in respect of the enhanced charges for supply of electricity which were

added by the Income Tax Officer while passing the assessment orders in respect of the assessment years under consideration.

Applying the law laid down by the Supreme Court, what has to be seen in the present case is whether there was any real accrual of interest to

the assessed. Both the CIT (A) as well as the Tribunal came to the conclusion that there was no real accrual of interest. It has been noted that the

interest had not even been recorded by the assessed in its books of accounts. The assessed had also issued a notice to the parties u/s 138 of the

Negotiable Instruments Act for dishonour of cheques issued by all (except one of the debtors) followed by initiation of appropriate proceedings.

The debts were written off as bad debts and were also allowed by the Assessing Officer in subsequent years. These facts lead to the inescapable

conclusion that realisation of even the principal amount was in jeopardy and, Therefore, there cannot be said to be any real accrual of income by

way of interest. We find no fault in this view taken by the Tribunal and are of the opinion that no substantial question of law arises for our

consideration.

The appeal is dismissed.