B. P. Jeevan Reddy, J. - (1.) These appeals are preferred by the Revenue against the judgment of the Punjab and Haryana High Court answering the questions, referred at the instance of the assessee, in favour of the assessee and against the Revenue. The questions involved in all these appeals are common. It would be sufficient if we take the case of one of the assessees, M/s. Shiv Prakash Janak Raj and Co. (P) Ltd. Four assessment years are relevant in this case, viz., Assessment Years 1968-69, 1969-70, 1970-71 and 1971-72. The two questions referred under Section 256(1) of the Income Tax Act, 1961 are :"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest for the assessment year 1971-72, had already accrued to the assessee on October 31, 1970, under the mercantile system of accountancy (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsequent relinquishment of interest by a resolution dated November 24, 1970, did not affect the tax liability of the assessee on accrual basis -
(2.) The partners of a firm, M/s. Shiv Prakash Janak Raj and Co. [the Firm, are also the share- holders/directors of the assessee-company. The assessee-company had advanced a loan to the firm. During the accounting year relevant to the Assessment Year 1966-67, it charged interest in a sum of Rs. 25,048/- on the loan so advanced. Similarly, for the Assessment Year 1967-68 it charged interest in a sum of Rs. 25,843/-. For the four assessment years concerning herein, however, the assessee adopted a different course. [The accounting year adopted by the assessee was the year ending on 31st October 31] In respect of the Assessment Year 1968-69 [year ending October 31, 1967, the assessee-company passed a resolution on October 9, 1967 [i.e., before the end of the accounting year] deciding not to charge interest from the firm in view of the difficult financial position of the firm. For the next three assessment years, i.e., Assessment years 1969-70, 1970-71 and 1971-72, similar resolutions were passed on February 26, 1969, March 16, 1970 and November 24, 1970 respectively. In other words, in the case of last three assessment years, the resolution deciding not to charge interest on the loan advanced to the firm was passed after the expiry of the relevant accounting year, Indeed, the resolution says that the firm had approached the assessee-company to waive the interest on the loan for each of the said years and that on such representation that the directors of the assessee-company [who were also partners in the said firml decided that no interest shall be charged for each of the said three assessment years.
(3.) In the assessment proceedings relating to the said four assessment years, the Income Tax Officer took the view that inasmuch as the loans in question were interest-bearing loans and because the assessee-company had relinquished the interest without any commercial considerations and further because the directors /shareholders of the assessee-company were interested in the firm, it was a case of collusion between them to evade the tax liability. Accordingly, he added an amount towards interest calculating it at the rate of fifteen percent per annum. On appeal, the Appellate Assistant Commissioner found that inasmuch as the resolution to waive the interest was passed after the expiry of the accounting year and further because the assessee-company was following the mercantile system of accounting, the interest must be held to have already accrued to the assessee before it was waived. He, however reduced the rate of interest to nine per cent. With that modification, he dismissed the appeals. The assessee thereupon filed a further appeal to the Tribunal but without success. The Tribunal observed that even though no entries were made in the books of the assessee-company or of the firm with respect to receipt or payment of interest, that circumstance is of no relevance in view of the facts that the resolutions were passed after the expiry of the accounting year that the assessee was maintaining its accounts on mercantile business and further that the relinquishment of interest was not for any commercial reasons. On reference, howevver, the High Court took a contrary view purporting to follow the decision of this Court in Commr. of Income Tax, West Bengal-II vs. Birla Gwalior (P) Limited, (1973) 89 ITR 266. The High Court held that in view of the said decision, the principle of earlier decision of this Court in Morvi Industries Limited vs. Commr. of Income Tax (Central, Calcutta, (1971) 82 ITR 835 cannot be applied to this case.;