Southern Brick Works Ltd. vs Commissioner of Income Tax, Madras

Ramanujam, J.—At the instance of the assessee, the following question of law has been referred to this court under s. 256(1) of the I.T.

Act, 1961, hereinafter reference to as the Act :

Whether, on the facts and in the circumstances of the case, the charging of interest of Rs. 12,818 u/s 201(1A) of the Income Tax Act, 1961, is

justified in law ?

The assessee-company, M/s. Southern Brick Works Ltd., had taken loans from its managing agents, M/s. Southern Enterprises Private Ltd.,

and towards the said loans the interest had been credited in the assessee''s accounts on various dates as under :

Date Interest credited

Rs.

31-3-1968 27,630

31-3-1969 26,075

31-7-1969 8,075

31-3-1972 72,213

31-3-1973 26,112

31-3-1974 26,114

31-5-1974 4,701

The ITO found that the assessee had not deducted tax on the amount of interest credited on various dates mentioned above in terms of s. 194A

of the Act. Therefore, he charged interest under s. 201(1A) of the Act from the date on which the tax was deductible (August 16, 1974), to the

date on which the said tax was actually paid. The total amount of interest thus charged came to Rs. 12,818.

Aggrieved by the order of the ITO, the assessee took the matter in appeal to the AAC contending that the financial position of the assessee as

well as managing agents was in a very bad shape, that though the assessee credited the amount of interest due to the managing agents, it was done

only for the purpose of accountancy and that there was no intention to actually pay the interest as there was no money. The AAC, however, did

not accept the said contention of the assessee and upheld the order of the ITO. On further appeal, the Income Tax Appellate Tribunal also agreed

with the view taken by the authorities below and upheld their orders.

Before us the learned counsel for the assessee contends that the assessee-company was itself running at a loss continuously, that the resources

of the company were no satisfactory, that to tide over those difficulties the managing agents, M/s. Southern Enterprises P. Ltd., was advancing

monies to the assessee from time to time, that the interest payable to the managing agents was credited in the ledger only for accounting purposes,

that the credit was not intended to be utilised by the creditor, that there was no actual payment until the assessee was able to raise a loan from the

Government, that actually the assessee deducted the tax due on the amount of interest actually paid and remitted on August 16, 1977, a sum of Rs.

39,476 and that, therefore no interest was chargeable on the interest credited to the account of the managing agents in the respective years. Thus,

according to the assessee, the mere credit in the account of the managing agents of an amount which was not intended to be utilised by them would

not attract levy of interest under s. 201(1A) of the Act and that the actual payment having been made at a later date after getting financial aid from

the Government, the interest has been deducted at the time of the actual payment and paid. The learned counsel in support of the said submission

refers to the decision in Ramesh R. Saraiya Vs. Commissioner of Income Tax, Bombay City I, . In that case of the assessee held shares in a

company to which profits accrued both in India and in Pakistan. By a resolution passed at a general meeting held on October 14, 1952, a dividend

was declared but by the same resolution it was provided that half of the amount of the dividend was payable on or after October 16, 1952, and

the other half was postponed for payment within two months from the date on which the remittance from Pakistan becomes free and monies were

actually received. The company had deducted the aggregate amount of the dividends in its profit and loss account and credited the moiety

postponed for payment to the dividend account. The question arose whether the other moiety of the dividend which was credited to the dividend

account is property includible in the total income of the assessee even before the amount was received from Pakistan. The court held that the

moiety of the dividend that was postponed for payment after monies were remitted from Pakistan could not be included in the total income of the

assessee as it was neither paid nor credited within the meaning of s. 16(2) of the Indian I.T. Act, 1922, the credit must be in such form that the

dividend is unconditionally available to the member. We do not see how the said decision helps the assessee. In that case the assessee-company

credited the amounts only in the dividend account and not in the accounts of the shareholders. In addition, even in the resolution declaring dividend,

it has been specifically stated that the other moiety of the dividend will be paid within two months from the date of its receipt from Pakistan. It was

in those circumstances the Supreme Court held that the mere credit entries in the regular dividend account of the assessee cannot be taken to form

part of the dividend declared.

The learned counsel for the assessee then relied on the decision in CIT v. Nagaria Oil Mills [1954] 25 ITR 258 (Hyd), holding that crediting of

interest amounts in the accounts of the lenders could not be held to be payment within the meaning of s. 24(12) of the Hyderabad Income Tax Act

corresponding to s. 18(7) of the Indian I.T. Act, 1922. In that case the assessee-firm who maintained its accounts on the mercantile system

credited certain non-residents with interest on monies borrowed from them and this interest was allowed as a revenue deduction under s. 12(2)(iii)

of the Hyderabad Income Tax Act. The ITO held that as no tax was deducted from the interest the assessee should pay on that amount Income

Tax at the maximum rate under s. 24(12). The court held that ""payment"" in s. 24(4) of the Hyderabad Income Tax Act corresponding to s. 18(3A)

of the Indian I.T. Act, 1922, should be interpreted as meaning actual payment and, therefore, crediting of the interest amounts to the accounts of

the lenders could not be deemed to be payment within the meaning of that sub-section so as to attract the provisions of s. 24(12) of the

Hyderabad Income Tax Act. We do not see how this decision also will help the assessee. Section 18(3A) of the Indian I.T. Act, 1922,

contemplates actual payment and does not contemplate credit entry and it is for that reason the court held that the mere credit entry without actual

payment will not attract the provisions of s. 24(12) of the Hyderabad Income Tax Act.

In this case we are concerned with s. 194A of the Act. Section 194A uses the expression ""at the time of the credit of such income to the

account of payee or at the time of the payment thereof, in cash or by the issue of a cheque or draft or by any other mode whichever is earlier.

Therefore, if there has been a credit of the interest to the account of the creditor, that can be taken into account for the purpose of s. 194A.

Therefore, at the time of the credit of the interest to the account of the managing agents the liability to deduct tax on the amount of interest arises as

per s. 194A and consequently the liability to pay the tax to be deducted also arises. We are not inclined to agree with the contention of the learned

counsel for the assessee that the liability to deduct tax from the interest and to pay the same to the Revenue arises only on actual payment of

interest and not on the date when the amount is credited to the creditors account. The said contention of the assessee overlooks the provision in s.

194A which clearly indicates that the liability to deduct the tax arises at the time the credit is made in the account of the payee or at the time of the

actual payment thereof in cash or by the issue of a cheque or draft or in any other mode, whichever is earlier. Here, though the actual payment in

cash was at a later point of time, there has been a credit entry in favour of the creditor in the accounts of the assessee and, therefore, the occasion

for deducting tax has occurred earlier.

The learned counsel for the assessee then contends that the book entires are of no consequence in tax matters and, therefore, it is only the actual

payment of interest that should be taken into account. We do not see how we can ignore the provision in s. 194A which provides that making

credit entires in favour of the creditor in relation to interest is one of the modes of payment of interest. Reference has been made by the learned

counsel for the assessee to the decisions in Commissioner of Income Tax, Bombay North Vs. Chamanlal Mangaldas and Co., and H.M.

Kashiparekh and Co., Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, , in support of his contention that mere

credit entries cannot be taken to be conclusive. In the first case the Supreme Court has held in a case where the managing agency agreement

provided for a commission of 3 1/2% on the sale proceeds of all cotton yarn and cloth manufactured and sold by the company but the company

every six months, that the agreement was an integrated and indivisible whole, that the managing agent''s commission was only determinable and

accrued when the year was over, that the crediting of the commission in the books of the managing company every six months can only be taken as

an interim arrangement and that the amount which accrued and which the managing agents had the right to receive was not affected by the manner

in which the entry was made and, therefore, the amount credited every six months as an interim arrangement was not taxable merely on the basis of

the credit entries. We do not see how the principle laid down in that case will apply to the facts of this case. There the credit entires had been

made before the commission actually accrued to the managing agents while in this case the amount of interest had already become due and the

credit entires have been made only on the basis of such accrued liability.

In the second case, the assessee had maintained accounts in the mercantile system and was the managing agent of a paper company. Under the

managing agency agreement it was under a duty of forgo up to 1/3rd pay a dividend of six per cent. Without reference to the said clauses, credit

entry had been made for the entire commission earned. When the Revenue brought the entire amount credited as commission to the managing

agents as income, the assessee contended that it has subsequently forgone 1/3rd of its commission as provided in the managing agency agreement,

and, therefore, it is only the balance that could be brought to charge. In those circumstances the Bombay High Court held that it was the real

income of the assessee-company that was liable to tax and that the real income could not be arrived at without taking into account the amount

forgone by the assessee and that in ascertaining the real income the fact that the assessee followed the mercantile system of accounting did not have

any bearing and that though the amount of commission has been credited in the accounts, the real income has to be determined after taking into

account the amount forgone by the assessee. The facts of this case entirely different from the facts of the case before of this case also are entirely

difference between the income credited in the books of account and the real income which the assessee got after forgoing a portion of the

commission and it is for that reason the court held that it is the real income that should be taken into account and not the amount as shown credited

in the accounts. On the facts before us there is no room for applying the nation of real income.

Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., , is a case where, by a subsequent agreement, the rate of

commission payable to the managing agent stood altered in such a way as to make the income which really accrued to the assessee under the

original agreement different from what has been entered in the books of account. The question arose as to whether the account of commission

credited in the books of account to the managing agent or whether the amount of commission reduced by the subsequent agreement should be

taken as the basis for taxation. The Supreme Court held that if the assessee has in fact received only a lesser amount in spite of the entires in the

account books, then the lower amount alone was taxable. In the course of the judgment, the learned judges of the Supreme Court pointed out

(P.148) :

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. Where income has, in fact, been received

and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable.

Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry

to that effect might, in certain circumstances, have been made in the books of account.

The principle of the above decision also will not apply to the facts of this case. In the case before the Supreme Court there was a difference

between the amount credited in the books of accounts and the amount actually paid to be taken into account for tax purposes. But there is no such

variation or difference in the case before us. The amount actually accrued as interest and credited in the books of account in favour of the creditor

as income had been paid at a later date when the assessee-company came to possess sufficient funds by borrowals from other sources. Therefore,

there is not difference between the interest actually pad at a later date and the interest credited earlier as having accrued. Thus, in our view, the

Tribunal is right in holding that interest is payable under s. 201A of the I.T. Act, 1961, in this case.

The result is, the question referred is answered in the affirmative and against the assessee. The assessee will pay the costs of the Revenue.

Counsel''s fee Rs. 500.

Learned counsel for the assessee makes an oral application for grant of leave to appeal to the Supreme Court against the judgment just now

pronounced. However, having regard to the fact that this decision is a fit case for the grant of leave. The oral request for grant of leave is,

therefore, rejected.