Western India Oil Distributing Co. Ltd. vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following two questions of law to this court at the instance of the assessee for opinion :

"(i) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,30,233 was rightly assessed as income of the assessee in the assessment year 1974-75 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 1,30,233 can be waived only in the previous year relevant business (sic) for the assessment year for the purpose of the business of the assessee, otherwise such interest is subject to tax ?"

The assessee is a company. It maintains its accounts on the mercantile system of accounting. The controversy pertains to the assessment year 1974-75, the corresponding pervious year being the accounting period ending on December 31, 1973. The assessee submitted its return of income for the above assessment year showing income of Rs. 2,08,700. In the computation of its income, the assessee claimed deduction of a sum of Rs. 1,30,233 which represented the amount of interest due to the assessee from Messrs. Hindustan Organisers Pvt. Ltd. and Messrs. Naranbhai P. Patel (I.) Pvt. Ltd. on the amounts advanced to them which were subsequently waived by the assessee. The claim of the assessee for deduction of the said amount of Rs. 1,30,233 was allowed by the Income Tax Officer.

The Commissioner of Income Tax ("the Commissioner"), on the perusal of the assessment records, found that the order of the Income Tax Officer, in so far as it related to the allowance of deduction of the above amount in the computation of income of the assessee, was erroneous and prejudicial to the interests of the Revenue. He, therefore, initiated proceedings u/s 263 of the Act for suo motu revision of the order of the Income Tax Officer. He issued a show-cause notice to the assessee and, on hearing the assessee, held that the said amount was not deductible in the computation of the income of the assessee. The stand of the Commissioner was that, in terms of the agreement, interest was due to the assessee on the amounts advanced by the assessee to the above two parties at the rate of 7 1/2 per cent. per annum and the said interest accrued year to year. For the year ended on December 31, 1973, relevant to the assessment year under consideration, the amount of accrued interest was Rs. 1,30,233. The Commissioner also held that there was no agreement not to charge interest. It was only in June, 1974, about six moths after the expiry of the accounting year, that the assessee wrote letters to the two companies informing them that, as it was in great need of money, it did not propose to allow the credit any more. Both the companies were asked either to pay the whole of the amount or to increase the rate of interest from 7 1/2 per cent. to 14 per cent. On the basis of these uncontroverted facts, the Commissioner held that the interest of Rs. 1,30,233 had accrued to the assessee on December 31, 1973, in terms of the agreement the assessee and the two borrowers and the subsequent letter by the assessee asking them to return the money or to increase the rate of interest to 14 per cent. and its ultimate decision to waive the interest and to accept the balance amount in full satisfaction of the claim did not affect the accrual of the income. While arriving at the said finding, the Commissioner relied on the decision of the Supreme Court in Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, . The Commissioner also rejected the alternate contention of the assessee that it was entitled to claim deduction on account of the amount waived by it even if the income had accrued as he was of the opinion that waiver having been effected in the next previous year, it cannot affect the computation of income of the year under consideration.

Against the order of the Commissioner, the assessee appealed to the Tribunal. The Tribunal upheld the order of the Commissioner. Hence this reference at the instance of the assessee.

Mr. S. J. Mehta, learned counsel for the assessee, submits that, in view of the waiver of interest by the assessee, there was no accrual of interest at all. Reliance is placed on the decisions of the Supreme Court in Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., , Commissioner of Income Tax, West Bengal II Vs. Birla Gwalior (P) Ltd., and the decision of the Allahabad High Court in Commissioner of Income Tax Vs. U.B.S. Publishers and Distributors, . Counsel further submits that events taking place subsequent to the end of the previous year can be taken into account for deciding whether a particular income had accrued or not. According to him, in the instant case, the subsequent agreement between the assessee and the borrowers to waive the interest had the effect of modifying the earlier agreement resulting in non-accrual of any interest to the assessee.

We have carefully considered the above submission in the light of the facts and circumstances of this case. We find that, in the present case, the following facts are undisputed :

(i) The assessee was maintaining its accounts on mercantile basis and year after year it was accounting for interest accrued on the loans to the two companies on mercantile basis. At the time of advancing the amounts to the said two companies, there was a specific agreement to the effect that interest would be charged every year on the outstanding amounts at the rate of 7.5 per cent. per annum. For the accounting year ending December 31, 1973, the interest on the outstanding amount was Rs. 1,30,233. During the whole of this year, there was no further agreement between the assessee and the borrowers not to charge interest or to waive the same. It was only on June 21, 1974, almost six moths after the expiry of the accounting year, that the assessee wrote letters to the borrowers informing them that it was in need of money and asking them to repay the entire amount or to increase the rate of interest to 14 per cent. It may be expedient to set out below the contents of the said letter :

"As you are aware, for quite a long period, the amounts due to us have remained unpaid, of course, it bears interest. However, we are in great need of money and we do not propose to allow the credit any more to you more so because, if the said amount is invested elsewhere at the available market rate of interest, the company would have earned much more than the amount that would have been earned from you. We have, therefore, to request you to kindly consider our two proposals very seriously at your earliest and oblige.

Pay off the whole of the amount immediately, or 2. Increase the rate of interest to 14 per cent."

A bare reading of the above letter makes it clear that, even on the date of writing of this letter on June 21, 1974, according to the assessee itself, the outstanding amount "bears interest". There is nothing to show that this letter was written with a view to recover the amount from the borrowers in view of their bad or precarious financial condition or that they were asked to refund the amount even without interest as contended before us. It is a simple letter asking refund of the money or higher rate of interest with a clear and categorical statement that "it bears interest", of course, at the rate of 7 1/2 per cent.

(ii) The borrowers never wrote to the assessee that they were agreeable to refund the entire amount in one single instalment provided the assessee agreed not to charge any interest included in the above debt and also for the current period up to the date of payment.

(iii) It may also be pertinent to mention that the borrower paid in one lump sum the entire amount of about 14,00,000. The above fact clearly goes to show that negotiations between the assessee and the borrowers, at the most, were in regard to the recovery of the amount in the next assessment year. The assessee wanted to recover the amount to get better dividend by investing the amount elsewhere. It is in that light only that the borrowers were asked, if they so liked, instead of returning the amount, to raise the rate of interest from 7 1/2 per cent. to 14 per cent. per annum.

This correspondence between the assessee and the borrowers and the ultimate acceptance by the assessee of the lesser amount than the amount due to it cannot in any manner affect the accrual of the interest in the year ending on December 31, 1973.

The concept of "accrual" is a well-known concept in Income Tax law. It is also a well-known concept in accounting. Section 5 of the Income Tax Act provides for levy of Income Tax on income accruing to an assessee. Evidently, in the instant case, the interest income amounting to Rs. 1,30,233 accrued to the assessee during the previous year which ended on December 31, 1973. The only question that arises is whether the subsequent conduct of the assessee in the instant case in waiving the interest did have the effect of making the accrual of income "non-income".

The contention of the assessee is that subsequent conduct is always material and relevant in considering the question of accrual. A number of decisions were referred to in this connection. We have carefully considered all these decisions. The first decision on the point appears to be the decision of the Supreme Court in Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., . This was a case of giving up of commission which had accrued to the assessee. The Supreme Court held that the giving up of the commission did not affect the accrual of the amount. It was held (at page 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."

In Commissioner of Income Tax, West Bengal II Vs. Birla Gwalior (P) Ltd., , the Supreme Court had again an occasion to consider the question of accrual and the effect of subsequent events thereon. In the above case, the Supreme Court made a distinction between "real income" and "hypothetical income" and stated that it is the real accrual of the income that has to be taken into consideration and not a hypothetical accrual of income. All these decisions were discussed at length by the Supreme Court in State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, . Sabyasachi Mukharji J. (as he then was), speaking for the majority, observed (at page 154) :

"Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of the real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made ''no income''."

It was, however, made clear (at page 154) :

"The extension of such a value judgment to such a filed is pregnant with the possibility of misuse and should be treated with caution; otherwise one would be on sticky ground. One should proceed cautiously and not fall a prey to the shifting sands of time."

The court also gave the following note of caution against too wide an application of the real income concept (at page 155) :

"We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of Income Tax as developed."

The above decision of the Supreme Court is a clear answer to the submissions of learned counsel for the assessee. In the instant case, the facts are so clear and glaring that it is difficult to hold or even to contend that there was no accrual. The interest undoubtedly accrued to the assessee on December 31, 1973. The only contention of the assessee is that the subsequent conduct altered the accrual that had taken place on December 31, 1973. Our answer, in the words of Sabyasachi Mukharji J., is : "On the conduct of the parties in the present case subsequent to the year of closing the income of interest which had accrued cannot be made ''no income''."

In view of the above decision of the Supreme Court, we do not think it necessary to discuss the decision of the Allahabad High Court in Commissioner of Income Tax Vs. U.B.S. Publishers and Distributors, . Moreover, that decision has no bearing on the controversy in the case before us.

In view of the foregoing discussion, we are of the clear opinion that the sum of Rs. 1,30,233 was rightly assessed as income of the assessee for the assessment year 1974-75 and the waiver of the same in the subsequent year did not alter the character of income which had already accrued to the assessee during the accounting year under consideration. The first question referred to us is, therefore answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

Having regard to the facts and circumstances of the case, the second question is also answered in the affirmative and in favour of the Revenue.

In the circumstances of the case, we make no order as to costs.