- (1.) Heard learned counsel for the parties. These two income-tax appeals under Section 260A of the Income-tax Act, 1961, are being disposed of by a common judgment. The questions of law involved in these two appeals are as follows : "(i) Whether, in the facts and circumstances of the case, the receivable amount of interest which has been credited by the assessee-appellant to the account, named as 'Deferred credit interest on overdue interest bills account and debited to the account named as 'Deferred credit interest receivable account' was merely hypothetical income and not real income of the assessee-appellant and was taxable under the Income-tax Act, 1961 ? (ii) Whether, the Income-tax Appellate Tribunal erred in law in appreciating and applying the correct concept of real income (either actually received or accrued), as laid down by the Supreme Court in various cases to find out the taxability of the aforesaid amount under the Income-tax Act, 1961 ?"
(2.) These two appeals relate to the assessment years 1990-91 and 1991-92. The facts of the case as alleged by the assessee are as follows : The assessee is a company and is a wholly owned Central Government undertaking. It has been incorporated with the object of improving the economic lot of weavers by development and promotion of handloom in the country. The main activity of the assessee consists of supply of handloom inputs (i.e., yarns, dyes, chemicals, etc.), to various handloom agencies and apex societies (hereinafter called user-agencies) throughout the country at a reasonable rate. These inputs are supplied against confirmed orders. The assessee sends those orders to the producers/suppliers of inputs who directly despatch the items to the user-agencies who have placed the orders. The producers and suppliers of these inputs send their bills for the supplies to the assessee and not to the user-agencies. The assessee, in turn, draws bills against the user-agencies and sends them for payment to it (assessee). The assessee gets only a commission, either in the form of subsidy from the Central Government or from the user-agencies for the suppliers made through it. The bills are paid by the user-agencies to the assessee. There is no agreement with the user-agencies either in respect of the period within which the bills are to be paid by them or interest to be paid by them for the delay in the payment of the bills. However, there is an informal practice that the user-agencies are supposed to pay the bills within thirty seven days, though there is no agreement or stipulation between the assessee and the user-agencies for payment of interest on the amount of the bills for the period beyond thirty-seven days. However, in the bills drawn by the assessee, which are printed, it is mentioned on the back side "interest will be charged at the rate of 17.5 per cent. per annum on over due amount". The assessee has printed this note unilaterally and not on the basis of any agreement. It is to be noted that the bills do not specify the due date for payment, although there is a column to mention the due date of payment. The printed bills, which contain the aforesaid condition for payment of interest, are sent to the user-agencies without any prior stipulation or agreement for payment of the same. There is no acknowledgment or acceptance of the above printed note on the bills by the user-agencies. Many times the request for payment is wholly denied or disputed by the user-agencies.
(3.) The assessee maintains its accounts according to the mercantile system. As regards the interest, it is alleged by the assessee that it does not have any legal or customary right enforceable against its customers for recovery of interest. The assessee does not, and cannot, debit the same to the account of the user-agencies from whom it may be received on account of delay in payment. In fact, no entry is made with regard to such interest during the currency of the year. At the end of the year such interest, which is not received but the assessee thinks might be receivable from the user-agencies, is totalled. For making entries of this amount, the assessee has opened two accounts in its ledger : (1) "Deferred accrued interest" ; and (2) "Deferred accrued interest receivable". The aforesaid interest, which is not received and is only treated as receivable, is credited to the aforesaid account, namely, "Deferred accrued interest" and, according to the mercantile system of accounting, its corresponding entry is debited to the account, namely, "Deterred accrued interest receivable". The assessee makes the entries in such manner so that its accounts may not reflect non-existent income (cash or accrued) and may not give an incorrect picture of inflated profit. As regards the interest, which is received during the year, it is credited to the account under the heading "Interest from parties on overdue bills" in the profit and loss account. It becomes a taxable income of the assessee and is offered by the assessee to be taxed.;