S.N. Rotho, Accountant Member - (1.) THIS appeal has been filed by the department against the order dated 30-11-1981 of the Commissioner (Appeals), relating to the assessment year 1978-79, the previous year of which ended on 30-9-1977.
(2.) The assessee is a private limited company deriving income from resale of dyestuffs and chemicals, etc., for earning commission. During the previous year under consideration, the assessee sold some goods for and on behalf of Plastic Resins and Chemicals Ltd. In accordance with an agreement which was in force since September 1973, and became entitled to receive a commission of Rs. 53,982 from the said party. The assessee took credit of this amount in its books by debiting the amount to the aforesaid party. It filed the return before the ITO, accordingly. However, the assessee later came to know that Plastic Resins and Chemicals Ltd. was not at all in a position to pay any commission to the assessee. The assessee got this information from the balance sheet of Dhrangadhra Chemical Works Ltd. for the accounting year ending 31-3-1979. It may be stated that Dhrangadhra Chemical Works Ltd. was the holding company of Plastic Resins and Chemicals Ltd. In the aforesaid balance sheet, there was a note of the auditors to the following effect: The estimated realisable value of the fixed assets of Plastic Resins and Chemicals being lower than the amount due to secured creditors of that company, the amount due to this company from Plastic Resins and Chemicals Ltd. being unsecured loan amounting to Rs. 1,66,13,968 has been written off as bad and irrecoverable debt. Amounts due to the company from Plastic Resins and Chemicals Ltd. for supplies of materials, furnace oil and services and for arrears of interest aggregating to Rs. 1,00,31,063 was written off during 1978-79. Since the holding company of the assessee's debtor had written off a huge amount of more than Rs. 1 crore as bad and irrecoverable and as the accumulated losses of Plastic Resins and Chemicals Ltd. far exceeded its paid-up capital and reserves, the assessee came to the conclusion that the commission of Rs. 53,982 will never be receivable by it. In other words, the assessee knew that it had made a mistake in taking credit for the aforesaid commission as if it were income whereas in reality, the said commission never resulted in or materialised into income. It so happened that the assessment for the assessment year 1978-79 was still open. Hence, the assessee filed a revised return on 13-11-1980 claiming that the commission of Rs. 53,982 was erroneously taken into account as income, and that the same never resulted in any income, and, hence, claiming that the said amount should be excluded from the income of the assessee. The ITO did not accept the claim of the assessee on the ground that the commission under consideration had already become receivable according to the mercantile system of accounting followed by the assessee, and that the assessee had actually taken credit of the same in its books of account. According to the ITO, even if the said commission is finally proved to be not receivable, it had still to be included in the income of the assessee. In this view of the matter, he taxed the sum of Rs. 53,982. The assessee appealed to the Commissioner (Appeals) and contended that the action of the ITO was not justified. It was urged that the holding company of the assessee's debtor had recognised the hopeless financial position of Plastic Resins and Chemicals Ltd. and had written off a huge amount of more than Rs. 1 crore, and so, the question of the assessee ever realising the sum of Rs. 53,982 never arose at all. Reliance was placed on the decision in the case of CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.). In that case, it was held that income cannot be said to have accrued merely on the ground that the assessee had been following the mercantile system of accounting, or merely because the assessee makes a debit entry to that effect. If no income has materialised, there cannot be a liability to tax on a hypothetical income. Reliance was also placed on the decision in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC), wherein it has been held that only the real income and not hypothetical income is liable to tax under the Act. The Commissioner (Appeals) considered the above contentions. He agreed with the assessee that there was absolutely no chance of recovery of the commission under consideration, and no amount was, in fact, recovered till the date of order, namely, 30-11-1981. Respectfully following the decision in the case of Motor Credit Co. (P.) Ltd. (supra), he held that no real income has resulted out of the mere entries made by the assessee in its books of account, or from the mere system of accounting followed by the assessee. Hence, he directed the ITO to delete the sum of Rs. 53,982.
(3.) AGGRIEVED by the above decision of the Commissioner (Appeals), the department is in appeal before us. Shri M.N. Nambiar, the learned representative for the department, urged before us that the learned Commissioner (Appeals) erred in his decision. He stated that the commission under consideration had already accrued, due to the assessee, during the year under consideration and the same had been duly taken into account in the assessee's books. If they are subsequently found to be irrecoverable, then the proper course for the assessee was to write off the amount as bad debt and claim the same as such in a subsequent year. He pointed out that the assessee had, in fact, written off this amount in the assessment year 1980-81, and claimed it as bad debt in that year. He also stated that the ITO has, however, disallowed the assessee's claim for deducting the bad debt in the assessment year 1980-81, on the ground that it was premature. It appears that the matter rested there, because the Commissioner (Appeals) had allowed the claim of the assessee during the assessment year 1978-79, which is now before us. The point made out by Shri Nambiar is that once the income is accrued, it has to be taxed irrespective of the fact whether the said amount was found to be receivable or not at a later date. He relied on the decision in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC). He further referred to the decision in the case of CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.) and urged that subsequent events could not undo the earlier accrual of income. Referring to the decision of Motor Credit Co. (P.) Ltd.'s case (supra), relied on by the Commissioner (Appeals), Shri Nambiar stated that the facts in that case were different inasmuch as there was no credit in the books of the assessee. Hence, he urged that the decision of the Commissioner (Appeals) deserved to be vacated and that of the ITO deserved to be restored.;