Commissioner of Income Tax vs M.P. Financial Corporation

A.R. Tiwari, J.—These two miscellaneous civil cases are heard as connected matters and are being disposed of by this common order.

Miscellaneous Civil Case No. 142 of 1993 is registered on reference from the Tribunal at the instance of the Commissioner of Income Tax, Bhopal, u/s 256(1) of the Income Tax Act, 1961 (for short the "Act"), arising out of the order dated July 3, 1990, passed by the Tribunal in ITA No. 327/Ind. of 1989 relating to the assessment year 1984-85 and consolidated order dated December 30, 1991, passed by the Tribunal in ITA No. 311/Ind. of 1988 and ITA Nos. 57 and 58/Ind. of 1990 relating to assessment years 1983-84, 1985-86 and 1986-87, respectively. The Tribunal referred the undernoted questions at the instance of the Revenue. The Tribunal also accepted the request of the assessee during consideration of the application registered as RA No. 181/Ind. of 1990 and 42 to 44/Ind. of 1992 and referred the undernoted questions at the instance of the assessee :

At the instance of the Revenue :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest accrued on the debts in which legal action for recovery was made and no recovery was at all made, was not includible in the total income of the assessee when the assessee did not debit that interest to the account of the debtor or to any account, in view of the resolution dated March 23, 1978, though the assessee had in general followed mercantile system of accounting ?"

At the instance of the assessee :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee company was not entitled to change its method of accounting from mercantile to cash system in respect of the amounts due from debtors which had become doubtful of recovery and against whom suits for recovery had been filed ?"

Briefly stated, the facts of the case are that the assessee is a financial corporation created under the State Financial Corporations Act by the Government of Madhya Pradesh. The business of the assessee is to advance finances by way of long-term loans to the industries. The assessee maintained its accounts on the mercantile system. In the absence of recoveries of certain loans, it was forced to file civil suits. On March 23, 1979, it passed a resolution not to charge accrued interest in view of the litigation and thus stopped showing artificial income. The Assessing Officer did not make addition of such interest. However, on appeal, the addition was made by the Commissioner of Income Tax (Appeals) under his power of enhancement (annexures "A-1" to "A-4" and "B-1" to "B-4"). The assessee then filed the appeal before the Tribunal. The Tribunal found that there was no debit of interest at all either to the accounts of the debtors or to any other account. The Tribunal allowed the appeal. On applications u/s 256(1) of the Act, the Tribunal stated the case and referred the aforesaid questions.

Miscellaneous Civil Case No. 596 of 1994 is registered on reference by the Tribunal at the instance of the Commissioner of Income Tax, Bhopal, u/s 256(1) of the Act arising out of the Tribunal''s consolidated order dated August 31, 1993, passed in ITA Nos. 476, 223, 41, 224 and 477/ Ind. of 1993 pertaining to assessment years 1989-90 and 1990-91. In an identical fact situation, the Tribunal stated the case and referred the undernoted questions :

Question for the assessment year 1989-90 :

" Whether, on the facts and in the circumstances 6f the case, the Tribunal was right in holding that interest accrued on the debts in which legal action for recovery was made and no recovery was at all made, was not includible in the total income of the assessee when the assessee did not debit that interest to the account of the debtor or to any account and, thus, deleted the addition of Rs. 78,92,352 ?"

Question for assessment year 1990-91 :

" Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that interest accrued on the debts in which legal action for recovery was made and no recovery was at all made, was not includible in the total income of the assessee when the assessee did not debit that interest to the account of the debtor or to any account and, thus, deleting the addition of Rs. 1,29,79,558 ?"

We have heard Shri Anand Mohan Mathur, learned senior counsel with Shri A.K. Shrivastava, for the applicant, and Shri G.M. Chaphekar, learned senior counsel with Shri S.S. Samvatsar, for the non-applicant.

Learned counsel for the applicant submitted that the Tribunal was not right in holding that interest accrued on the debts in which legal action for recovery was made and no recovery was made, was not includible in the total income of the assessee. He also submitted that the Tribunal was also not right in taking a similar view for the assessment years 1989-90 and 1990-91.

Learned counsel for the non-applicant, on the other hand, submitted that the assessee was within its right in excluding the interest from the total income when such interest was not being received by the assessee. He submitted that the resolution dated March 23, 1979, was not in conflict with law. According to him, there was no justification for showing such interest without receiving the same and without the prospect of receiving it in the near future. The assessee thus formulated the policy to stop charging interest and such policy is not illegal or illogical. Counsel further submitted that the Tribunal took the reasonable and rational view in the matter. In support of his submission, he placed reliance on Commissioner of Income Tax Vs. Uttar Pradesh Financial Corporation, , Commissioner of Income Tax Vs. U.P. Financial Corporation, , Commissioner of Income Tax Vs. Orissa State Financial Corporation, and Commissioner of Income Tax Vs. Naskarpara Jute Mills Co. Ltd., . Counsel also submitted that if the question proposed at the instance of the Revenue in Miscellaneous Civil Case No. 142 of 1993 is answered in favour of the assessee, then the assessee will not press the question referred at the instance of the assessee in this case and, as such, the question may be left unanswered as not being pressed.

Considering Section 34 of the Code of Civil Procedure, the Allahabad High Court held in Commissioner of Income Tax Vs. Uttar Pradesh Financial Corporation, that the Tribunal was right in holding that during the relevant previous year, interest did not accrue because during the whole of this period suits filed for recovery of the loans were pending and the awarding of interest for the period was within the discretion of the court which was yet to pronounce its judgment. In this case, the assessee was a financial corporation. It was held that interest cannot be held to have accrued during the pendency of the suit and, as such, was not includible in the total income.

The aforesaid decision was followed by the Allahabad High Court in Commissioner of Income Tax Vs. U.P. Financial Corporation, .

The Orissa High Court also took the same view in Commissioner of Income Tax Vs. Orissa State Financial Corporation, and held that interest did not accrue during the whole of the period during which suits were filed for the recovery of loans and awarding of interest for the period was within the discretion of the court. It was thus held that the Tribunal was right that interest was not includible in the profits of the assessee because of this position.

In Commissioner of Income Tax Vs. Naskarpara Jute Mills Co. Ltd., , the Calcutta High Court also took similar view and held that interest can accrue only on the date of decree.

In view of the aforesaid decisions of the Allahabad High Court, the Orissa High Court and the Calcutta High Court, it is clear that the Tribunal was right in taking the view that such interest was not includible in the total income of the assessee, and as such, the resolution passed by the assessee on March 23, 1979, was fault-free.

We respectfully agree with the view taken by the aforesaid High Courts. Nothing substantial is urged to take a different view in the matter. The Tribunal, thus, took the correct decision also in regard to the assessment years 1989-90 and 1990-91.

It is not disputed before us that the suits for recovery were instituted and the same were pending.

In view of the aforesaid factual and legal position, we answer the question proposed at the instance of the Revenue in Miscellaneous Civil Case No. 142 of 1993 in the affirmative, i.e., in favour of the assessee and against the Department. In view of the submission that on such answer, the question proposed in this case at the instance of the assessee need not be answered as not pressed, we accept the submission and decline to answer the question posed at the instance of the assessee. As this question was referred at the instance of the assessee, the assessee is within its right to indicate that no answer be recorded on such question. That question is, thus, left unanswered as not pressed. As regards the questions projected and proposed in Miscellaneous Civil Case No. 596 of 1994 for the assessment years 1989-90 and 1990-91, we answer the same in the affirmative, i.e., in favour of the assessee and against the Department, on the same logic as pertained to the questions proposed in Miscellaneous Civil Case No. 142 of 1993.

In the result, these two miscellaneous civil cases are decided in terms indicated above, but without any order as to costs. Counsel fee for each side in each case is, however, fixed at Rs. 750, if certified.

Retain this order in the record of Miscellaneous Civil Case No. 142 of 1995 and place its copy in the record of Miscellaneous Civil Case No. 596 of 1994.

Transmit a copy of this order to the Tribunal for further action in accordance with law, if necessary.