Egbert Singh, Accountant Member - (1.) THE only ground of appeal in the present departmental appeal is that the AAC erred in deleting Rs. 21,500 added by the ITO in respect of the interest on loan advanced by the assesses.
(2.) The assessee is a firm consisting of two partners having equal shares. The assessee was being assessed in the status of registered firm and the method of accounting was noted in the assessment order to be mercantile. The accounting period ended on 31-3-1980. The ITO noted in the assessment order that the assessee disclosed income from commission and interest on loans and advances to various parties. He found that the assessee advanced Rs. 1,00,000 to MPD Productions, a distributor of films on 25-4-1979 and 20-5-1979 for Rs. 75,000 and Rs. 25,000, respectively. He observed that in terms of the agreement, interest at the rate of 2 per cent was payable by the said concern to the assessee. He found that the assessee had not charged interest although the assessee's system of accounting was mercantile. The assessee explained that the money was advanced to MPD Productions, Bombay, against security of picture, 'Chambal Ki Kassam' in eastern unit at the rate of 2 per cent interest and, since the picture was not released in the eastern circuit due to bad picture, money was not realised and the , assessee did not know whether Rs. 1,00,000 would be realised at all and the interest on the loan was not credited in the account. The ITO declined to accept the statement of the assessee stating that for the simple reason the loan did not become bad by the end of the financial year and the assessee was maintaining mercantile system of accounts and there was no reason not to charge the interest in terms of the agreement. Before the ITO, copy of the pleader's notice dated 10-5-1980 was produced, by which the concerned parties were forbidden not to have any dealings with MPD Productions in respect of the release of the said picture till the loan due to the assessee together with interest were fully paid up. According to the ITO, this pleader's notice had no relevancy at all. In the circumstances, interest calculated at Rs. 21,500 was included in the assessment. The assessee preferred an appeal before the AAC contending that when the recovery of the principal amount of loan itself was in jeopardy, there was no reason to show the unreal income from interest every year. It was further stated that as the debtor was unable to pay even the principal amount, there was no question of receiving any interest from the said debtor. It was also argued before the AAC that the assessee maintained cash system of accounts in connection with the said loan transaction whereas in respect of the other incomes of the assessee, the mercantile system of accounting has been followed. According to the assessee, the assessee could employ different methods of accounting and the profit would be computed in accordance with the respective methods, while referring to the decisions in the cases of Fatehchand Chhakodilal v. CIT [1945] 13 ITR 198 (Nag.), J.K. Bankers v. CIT [1974] 94 ITR 107 (All.) and CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226 (Mad.). It was also argued that it was quite evident that in connection with the said loan, the assessee maintained cash basis of accounts and that was why when no amount of interest was received, the assessee did not show it in the accounts. It was also submitted that if the accounts were maintained on cash basis, income would be chargeable only when the same was received, referring to the decisions in the cases of CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC) and Raja Raghunandan Prasad Singh v. CIT [1933] 1 ITR 113 (PC), etc.
(3.) THE AAC considered the arguments made on behalf of the assessee. He found strong force in those arguments. THE AAC further observed that in various decisions, it had also been decided that the choice of method of accounting lies with the assessee B.C.G.A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279, 299 (Lahore). He also noted that the department was bound by the assessee's choice of method of accounting which could not be rejected merely because it gives the assessee some benefits in certain year--CIT/EPT v. Chari & Ram [1949] 17 ITR 1 (Mad.), Juggilal Kamlapat, Bankers v. CIT [1975] 101 ITR 40 (All.) and CIT v. K. Doddabasappa [1964] 54 ITR 221 (Mys.). THE AAC observed that in the instant case, there was no doubt regarding the fact that the realisation of the principal amount of the loan had become very much doubtful and the assessee and gone to the extent of taking a legal help for realisation of the principal amount and unless there was some doubt in realisation of the principal amount, it was not expected of anybody that he would go to seek legal help. He also noted that since the assessee was maintaining cash system of accounts in connection with this particular loan transaction (as is evident from the fact that the assessee stopped showing amount of interest as the same was not realisable), the AAC felt that the unrealised interest should not be treated as income of the assessee during the year under consideration. He was, therefore, of the opinion that the alleged interest of Rs. 21,500 cannot be treated as part of the taxable income of the assessee. He, however, indicated that the ITO would be free to tax the same in the year of actual receipt. Hence, this appeal before us by the revenue.;