K.C. Singhal, J.M. - (1.) THE main issue arising out of this appeal relates to the addition of Rs. 30 lacs on account of interest on loan given to M/s Ganga Automobiles Ltd. (In short GAL).
(2.) The assessee declared income of Rs. 29,37,500 from dividend, Rs. 7,74,000 from rent of cylinders and Rs. 3,670 as other income. It was noticed by the AO that assessee had not declared interest income on loan of Rs. 1 crore advanced to M/s GAL. It was also found that assessee had filed arbitration suit against the said company for the recovery of the aforesaid amount along with interest @ 30 per cent p.a. According to the AO, the interest income had accrued to the assessee and, therefore, the sum of Rs. 30 lacs was added to the total income of the assessee. The matter was carried before the CIT(A) before whom it was submitted that originally the sum of Rs. 1 crore was given vide agreement dt. 7th Oct., 1995, for a period of 120 days. Thereafter, it was extended from time to time. The last agreement was made on 14th Feb., 1997. However, on the due date the said company defaulted in payment and such payment remained irrecoverable despite the arbitration suit filed by the assessee. If was also submitted that the assessee had received only Rs. 33,50,560 as interest in financial year 1996-97 and thereafter not even a single paisa was received or could be recovered. It was also submitted that similar issue was decided in favour of the assessee by the CIT(A) in respect of asst. yrs. 1996-97 and 1997-98 by holding that the assessee should be assessed only on the amount received by it. It was also contended that no tax could be levied on hypothetical income on the basis of theory of real income. Reliance was placed on the judgment of Punjab & Haryana High Court in the case of CIT v. Firozpur Finance Ltd. (1980) 124 ITR 619 (P&H) and the judgment of Supreme Court in the case of Godhara Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC). Accordingly, it was prayed that the addition of Rs. 30 lacs be deleted.
(3.) THE CIT(A) noted (i) that loan was given on personal guarantee of Mr. Sagar Suri and Mr. Ashwani Suri as well as Corporate guarantee of Delhi Auto & General Finance (P) Ltd. and their assets were also mentioned in the agreement; (ii) Clause 6 of the agreement dt. 14th Feb., 1997, provided penal interest of 45 per cent p.a. in case of default of payment; (iii) that assessee had claimed interest including penal interest in the arbitration suit filed by it; (iv) that AO was unware of the arbitration proceedings at the time when assessments for asst. yrs. 1996-97 and 1997-98 were made; (v) that system of accounting of the assessee was mercantile and accordingly, income was assessable on accrual basis; (vi) the amount advanced as loan was neither written off nor transferred to suspense account. In view of these facts it was held by him that the loan was fully backed by guarantee and the amount of interest was assessable on accrual basis. It was also observed by him that case law relied upon by the assessee were distinguishable on facts. Further, theory of real income could not be applied since income had actually accrued to the assessee. On the other hand, he relied on the Supreme Court judgment in the case of State Bank of Travancore v. CIT, (1990) 186 ITR 187 (SC) judgment of Allahabad High Court in the case of Addl. CIT v. Swadeshi Cloth Traders (1991) 187 ITR 620 (All) and in the case of Banaras State Bank Ltd. v. CIT, (1989) 180 ITR 231 (All) and of Calcutta High Court in the case of CIT v. Allahabad Bank (1991) 192 ITR 182 (Cal). Aggrieved by the same, the assessee is in appeal before the Tribunal.;