COMMISSIONER OF INCOME TAX Vs. HINDUSTHAN MOTORS LTD

JUDGEMENT

(1.) In this reference at the instance of the Revenue, the following questions have been referred by the Tribunal under Section 256(2) of the Income-tax Act, 1961 : "1. Whether, on the facts and in the circumstances of the case and in view of the fact that the resolution to forgo interest was passed after the close of the accounting year, the Tribunal was right in law in allowing the interest forgone as business expenditure in computation of the income of the assessee for the assessment year 1971-72 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that interest on the balance outstanding money advanced to its subsidiary company was not part of the real income of the assessee and was, therefore, not liable to be assessed to tax ?"

(2.) The facts as found by the Tribunal are as under : The assessee is a company and the relevant assessment year is 1971-72, The corresponding accounting year ended on March 31, 1971. The method of accounting followed was mercantile. The assessee-company is a manufacturer and dealer in motor cars, trucks, flanges, steel sheet castings, spare parts and also scrap. For the relevant assessment year, it returned a loss of Rs. 3,72,26,065. The assessment was, however, completed on a total loss of Rs. 3,36,33,197. In the course of the assessment proceedings, the Income-tax Officer noticed that the assessee-company did not charge interest for the relevant previous year on the outstanding amount of Rs. 24,24,124 due to it by its 100 per cent. subsidiary, namely, the Hindus-than Motor Corporation Ltd. It was explained to the Income-tax Officer that, owing to the difficult financial position of the subsidiary company, the board of directors decided not to charge interest in order to enable the subsidiary to tide over the financial crisis. The Income-tax Officer held that interest accrued day to day whereas the decision not to charge interest was taken by the assessee-company after the end of the relevant accounting year, i.e., long after the accrual of interest. He further held that it was only on compassionate grounds and not on considerations of commercial expediency that the assessee-company had decided not to charge interest. Thus, he estimated the amount of interest on the outstanding advance of Rs. 24,24,124 at Rs. 2,18,341 and added interest income as estimated in the relevant assessment.

(3.) On appeal, the learned Appellate Assistant Commissioner deleted the addition holding that, according to decided cases, it was not necessary in all cases that interest should be charged and that interest that was not charged for proper reasons could not be treated as accrual of income and added to the assessee's total income.