Commissioner of Income Tax vs Tamilnadu Small Industries Development Corporation

Prabha Sridevan, J.—The following questions have been raised for consideration:

(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the penal interest claimed to have been waived by the assessee-company should be allowed as deduction?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in deleting the addition made on account of discrepancy in stock; which was not adjusted in the accounts, but kept in abeyance without any clarification by the asses-see as to treatment of the excess and shortage in the accounts?

The assessee is a State of Tamil Nadu undertaking. It advances loan to industries on terms and in default levies penal interest. It was claimed by the assessee that it had waived the penal interest of Rs. 8,18,810 for the assessment year 1986-87 and a sum of Rs. 27,51,127 for the assessment year 1987-88. According to the assessee, the interest received was subsequently written off and this was rejected by the Assessing Officer who added the interest to the income of the assessee. He has also added the excess stock that arose because of the discrepancy in stock, which was not accepted in accounts and kept in abeyance. Against this, an appeal was filed which was allowed. The appellate authority held in favour of the assessee.

We will first take up the second question of law. The second question of law does not really arise since we find that the Tribunal had merely directed the Assessing Officer to allow the deduction on account of shortage of stock in the year in which it is written off. This is seen from paragraph No. 8 of the order.

We find that the Tribunal has hold in the aforesaid order in the case of the assessee, a copy of which was filed by the assessee''s authorised representative at the time of hearing, that the shortage in the stock is to be allowed as a deduction in the year in which it is written off. We, therefore, following the decision of the Tribunal, cited supra, direct the Assessing Officer to allow the deduction on account of shortage of stock in the year in which it is written off.

Therefore, the question framed does not arise because that is not the tenor of the order of the Tribunal. Hence, this question is not answered, since it does not fall for consideration.

As regards the first question it is submitted by the learned Counsel for the assessee that the due to revision in terms and conditions relating to levy of penal interest as decided by the board of directors by the assessee an amount of Rs. 8,18,000 was deducted. The appellant claims that there was a decision by the board to reduce the penal interest or waive the penal interest in appropriate cases. It is the assessee''s case that they have been adopting cash system of accounting with regard to penal interest. The Assessing Officer, therefore, held that there can be no bad debt in a cash system of accounting. The Assessing Officer requested the assessee to furnish the details of the interest accrued, but no details were actually filed. The assessee furnished copy of the minutes of the board meetings which showed that, "Further resolved that every effort be taken to realise the above amounts written off." It was contended by the learned Counsel for the assessee that bad debts were actually written off pursuant to the resolution. On the other hand, learned senior standing Counsel for the Revenue submitted that this write off is only for the accounting purposes and there was no actual write off. The learned Counsel for the respondent submitted that with regard to 1986-87, the Commissioner of Income Tax (Appeals) had correctly allowed the refund granted to the debtors, i.e., a sum of Rs. 8,18,810 and this should not be interfered with.

With regard to the mode of accounting adopted, the assessee''s case has been accepted in Commissioner of Income Tax Vs. The Tamil Nadu Small Industries Development Corporation The learned Counsel for the assessee further submitted that the Commissioner of Income Tax (Appeals) ought to have allowed the refund for both years instead of doing so for 1986-87 alone.

The learned senior standing Counsel submitted that neither in 1986-87 nor in 1987-88, there is any evidence with regard to the write off or with regard to waiver of penal interest. The learned senior standing Counsel would submit that when the petitioner''s case is that, when admittedly, they are adopting cash system of accounting with regard to interest, then, the question of waiver or writing off will not arise. However, if they have actually returned any portion of the interest to the debtors during the relevant year, then that must be ascertained only by remitting the matter to the Assessing Officer.

In such circumstances, the matter is remitted to the Assessing Officer to ascertain whether the assessee refunded the penal interest to the debtors and if so, relief shall be granted in the year in which such amounts were refunded. The tax case (revision) is disposed of accordingly.