D.K.Seth, J. - (1.) In this case the following question has since been referred to for our opinion : "Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 2,04,000 made by the Assessing Officer and confirmed and enhanced by the Commissioner of Income-tax (Appeals) to Rs. 2,69,685 on account of interests from the Hindu undivided family debtor on accrual basis."
(2.) The Assessing Officer had held that the income had accrued and, therefore, had directed the addition of Rs. 2,04,000. On appeal the Commissioner (Appeals) had confirmed the order of the Assessing Officer and found that the addition would be enhanced to Rs. 2,69,685. The learned Tribunal, however, deleted the said addition.
(3.) The relevant assessment year was 1988-89 relating to the accounting year (previous year) 1986-87 ending with October, 1987. The assessee had advanced loan to one Tulsidas Rajivlochan (HUF) on February 25, 1983. The said loan was carrying interest at the rate of 12 per cent. per annum. Interest was paid on the said loan for some time. But after May 30, 1986, no interest was paid. There were correspondences. The debtor pleaded that it had some difficulty in the repayment and payment of the loan and the interest, respectively. It had requested the assessee to waive the arrear interest after June 30, 1986. It had agreed to repay the principal amount. By a resolution dated August 1, 1987, this suggestion was ultimately accepted by the assessee in its commercial wisdom, having regard to the commercial viability of the situation. In the said resolution, the board of the assessee had decided to waive interest after June 30, 1986, provided the debtor repays the amount of principal together with interest up to June 30, 1986, by instalments payable monthly commencing from January, 1988. It had claimed the sum of Rs. 22,16,593.55 inclusive of principal and interest accrued till June 30, 1986. Such instalment was payable before the expiry of the relevant month. In default, the assessee should be entitled to claim full interest till the loan was repaid and exercise its right to recover the loan and the interest payable thereon. Pursuant to this decision, the debtor had paid three instalments for the months of January, February and March, 1988. But thereafter no instalment was paid. After having served a notice in March, 1989, the assessee had filed a suit before this court being Suit No. 301 of 1999 praying for a decree of the sum inclusive of principal and interest up to March, 1989. The said claim included a sum of Rs. 2,59,686 as interest for the period July 1, 1986, to June 30, 1987. The suit was pending on the date when the learned Tribunal had decided the matter. Till then only issues were framed. The learned Tribunal had occasion to look into the issues and record its observation that the debtor had denied the liability not only in respect of interest but also the principal. In this background the question has to be looked into as to whether the interest for the period July 1, 1986, till June 30, 1987, could be charged to tax and liable to be added to the returns submitted by the assessee. Mr. Jaydeb Saha, learned counsel for the Revenue, submitted that the concept of real income applies before the income accrues. Admittedly, the assessee was following the mercantile system of accounting. Under the said system, it is not the actual receipt but the accrual of the income, which is maintained and shown in the accounts. Admittedly, interest shown to have been accrued in the return of the earlier year ending with June 30, 1986, and was charged to tax. Admittedly, in the books of account for the period 1986-87 the accrual of income was not shown. According to Mr. Saha whether the accrual has been entered in the books of account or not is wholly immaterial. It is on the basis of the accrual of interest that the income becomes chargeable. Subsequent waiver will not enable the assessee to claim the allowance. According to him, the decisions to waive interest was taken only on August 1, 1987, namely, after the closing of the accounting of the previous year 1986-87. Unless the accrual was prevented, the income was liable to be charged. He had relied on the decisions in State Bank of Travancore v. CIT ; State Bank of Indore v. CIT ; Mercantile Bank Ltd. v. CIT [2001] 252 ITR 225 (Bom); CIT v. Jai Hind Travels P. Ltd. ; Aspinwall and Company (Travancore) Ltd. v. CIT ; CIT v. Kerala Financial Corporation ; CIT v. Smt. M. Sarojini Devi [2001] 250 ITR 759 (AP) and CIT v. Shiv Prakash Janak Raj and Co. Pvt. Ltd. to support his contention. We shall refer to these decisions at the appropriate stage.;