- (1.) ON an application under s. 256(1) of the IT Act, 1961, Tribunal has referred the following question for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest on amount advanced to M/s Citric India Ltd., Bombay as per the agreement letter dt. 27th July, 1965, had accrued to the assessee-company following the mercantile system of accounting ?"
(2.) THE assessee-company agreed to advance a sum of Rs. 20,00,000 to M/s Citric India Ltd. @ 12 per cent interest per annum, but assessee failed to advance full amount of Rs. 20,00,000, under the agreement. THE borrowing company raised an objection regarding non-fulfilment of the terms and conditions of the agreement as assessee has not advanced full amount of Rs. 20,00,000 as per agreement. It fell short of Rs. 3,00,000. THE assessee thereafter, has also advanced some more amount in the year 1967. As no interest has been received, therefore, assessee has not shown any income from the interest on the money advanced to M/s Citric India Ltd. in the asst. yr. 1973-74. Uptill 1972-73, the interest has been taxed on the basis of the accounting method followed by the assessee i.e., Mercantile System of Accounting, ITO has also noticed that the borrowing company has offered to pay interest @ 8 per cent per annum, which assessee has not accepted. Considering these facts the AO has taxed the interest income i.e., Rs. 2,08,669 on the basis of accrual as assessee has followed the mercantile system of accounting. In appeal, the CIT(A) as well as Tribunal also upheld the view taken by the AO. Heard learned counsel for the parties. Mr. Ranka, learned counsel for the assessee submits that when the assessee has not received the interest income, the hypothetical income should not be taxed. He further, submits that when assessee has not shown interest income in his books of accounts and borrowing company has also not shown the interest liability on account of interest payable by that borrowing company to the assessee, the interest income should not be taxed on the basis of accrual in this case. He placed reliance on the decision of Madras High Court in the case of CIT vs. Motor Credit. Co. (P) Ltd. (1981) 127 ITR 572 (Mad), decision of their Lordships in the case of CIT vs. Tamil Nadu Industrial Investment Corporation Ltd. (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC) and again the decision of their Lordships in the case of CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC). The facts are not in dispute that there was an agreement for advance of Rs. 20,00,000 loan to M/s Citric India Ltd. @ 12 per cent interest per annum, but the amount of Rs. 20,00,000 was not advanced. About a sum of Rs. 17,00,000 has been advanced under the agreement to M/s Citric India Ltd. There is also no dispute in the fact that assessee has followed the mercantile system of accounting. Till 1972-73, the interest has been taxed on the basis of accrual in the hands of the assessee on the amount advanced by the assessee to M/s Citric India Ltd. The arguments advanced by Mr. Ranka are almost considered by the Tribunal in para 4 of its order. Relevant decision reads as under : "We have given a careful consideration to the rival submissions. The Tribunal has already decided this issue in favour of the Revenue for the asst. yrs. 1968-69 and 1969-70 vide its order dt. September, 1976, in ITA Nos. 3915 and 3916/Jp/1974-75. The ITO had also included interest with reference to the loans to M/s Citric India Ltd., in the income of the assessee for the subsequent assessment years viz., 1970-71, 1971-72 and 1972-73. The additions made by the ITO were also upheld by the CIT(A). The assessee on appeal before the Tribunal for these assessment years argued that the decision of the Tribunal for the asst. yrs. 1968-69 and 1969-70 needed review. The same arguments were advanced for the asst. yr. 1970-71 to additions made by the ITO. The Tribunal held that terms and conditions of the agreement regarding payment of the loan were modified and the assessee made further payments subsequent to the dates originally stipulated. The Tribunal had observed that upto 15th Oct., 1969, the amount advanced by the assessee- company were at Rs. 23,36,280.49 against the stipulated amount of Rs. 20 lacs. At any rate the Tribunal held there was substantial compliance of the term of the agreement as contained in the assessee-company's letter dt. 15th July, 1965. In our order for the asst. yrs. 1970-71 to 1972-73, it is also pointed out that the assessee-company had advanced loans of Rs. 18,87,723.45 upto 21st Oct., 1970. The assessee-company has filed copies of its accounts as appearing in the books of M/s Citric India Ltd. for the period 4th Aug., 1965 to 31st March, 1975. The accounting period of the assessee for the asst. yr. 1973-74 under appeal ended on 30th June, 1972. According to the copy of account filed the balance outstanding with M/s Citric India Ltd. as on 1st April, 1972, was Rs. 17,39,165.75. Such balance as on 1st April, 1971, was also the same. In addition to these balance an amount of Rs. 1,48,567.67 on account of interest for the years 1965-66 and 1966-67 was also outstanding which was transferred to the liabilities account. Thus according to the assessee itself the amounts outstanding with the borrowing company was on 1st April, 1971 and 1st April, 1972, were at Rs. 18,87,723.42. It may not be out of place to mention that as per the report of the auditor (Sch. `C') with the audited accounts for the year ending 30th June, 1972, relevant to the asst. yr. 1973-74 the outstanding amount as on 30th June, 1972, with M/s Citric India Ltd. was at Rs. 17,07,264 whereas according to the copies of the accounts filed the liability on 1st April, 1972, was Rs. 17,39,165.75 in addition to the interest outstanding at Rs. 1,48,557.67. Even two accounts i.e., in the books of the assessee and those in the books of the borrowing company do not appear to tally. Again according to the audit note referred to earlier, the outstanding balance as on 30th June, 1971 was at Rs. 19,01,319 whereas as per copies of accounts of the assessee with M/s Citric India Ltd., the balance as on 1st April, 1971, was at Rs. 17,39,165.75 only. Here also the accounts do not appear to tally in the books of borrower and the lender companies. May be that the difference is on account of difference accounting periods followed by the two companies. Apparently as per copies of accounts of the assessee appearing in the books of M/s Citric India Ltd. as filed in the paper book, there was no transaction with M/s Citric India Ltd. after 21st Oct., 1970 and, thereafter only balance had been carried forward. If that is so there are definitely discrepancies in the account. As on 1st April, 1971, the balance as per entries in the books of account M/s Citric India Ltd. is Rs. 17,39,165.75. There is no transaction thereafter. But according to the assessee's own version the outstanding as on 30th June, 1971, were at Rs. 19,01,319. Even if the outstanding interest of Rs. 1,48,557.67 is taken into consideration, even then the outstanding balance would be at Rs. 18,87,723.42 and not Rs. 19,01,319 as mentioned in the balance sheet for the period ending 30th June, 1972. There is as such definite discrepancy in the accounts maintained by the assessee. We are drawing this inference because right from 4th Aug., 1965 to 21st Oct., 1970, all entries relating to credits and debits have been shown in the accounts. It is not known whether the assessee has taken into consideration the outstanding interest of Rs. 1,48,557.67 while mentioning the outstandings at Rs. 19,01,319 as on 30th June, 1971 and of Rs. 17,07,264 as on 30th June, 1972. As discussed above definitely there are discrepancies in the two accounts. At any rate we would like to add that because the breach of contract on the part of the assessee the borrowing company had stopped to give interest is not borne out from the records. If the borrowing company had stopped giving interest to the assessee from 1st July, 1967, there was no reason why the assessee-company should have advanced further amounts. At any rate, the terms of the agreement were substantially complied with by the assessee-company, and, therefore, it cannot be said that there was breach of the contract. There is no evidence on record that there was any modification in the terms of the agreement so as to reduce the rate of interest or not to charge any interest at all. The assessee-company has been mentioning in the audit notes year after year that no interest has been provided and not that the interest has been waived. If the assessee-company wanted to waive the interest, it could have passed a resolution for such waiver once for all, instead of mentioning in the audit note every year that no interest was provided. In our opinion, it is not a case of waiver of interest at all. We have discussed in detail in our order dt. 30th Oct., 1980, referred to supra relating to the asst. yrs. 1971-72 and 1972-73 that there was no waiver of interest. For the same reasons we hold that there was no waiver of interest. The interest, therefore, accrued to the assessee on the lending to M/s Citric India Ltd. and has rightly been included in the income of the assessee. It is not a case where the assessee could have earned interest but has not earned inasmuch as there is no evidence on record that the assessee waived interest. In the circumstances, we have no hesitation in upholding the orders of the authorities below for the asst. yr. 1973-74 also."
(3.) WHEN assessee is following the mercantile system of accounting, actual receipt of the interest is not necessary and till 1972-73 the interest has been taxed on the basis of accrual. Shri Ranka failed to satisfy this Court as when the interest has been accrued and taxed in just preceding year i.e., 1972-73, why interest has not accrued in the year in hand. Delhi High Court has recently considered the issue of accrual in the case of Saraswati Insurance Co. Ltd. vs. CIT (2001) 169 CTR (Del) 170 : (2001) 252 ITR 430 (Del) and followed the decision of their Lordships in CIT vs. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC) and Morvi Industries Ltd. vs. CIT 1974 CTR (SC) 149 : (1971) 82 ITR 835 (SC) and observed at p. 434 as under : "Income accrues when it falls due, that is to say, when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. The above being the position, we answer the question referred in the affirmative, in favour of the Revenue and against the assessee." Whether income has been accrued or not to the assessee depends on the facts of each case. In our considered view when the income of the interest has been taken as accrued and taxed in the just preceding year and there is no change in the facts and circumstances in the year in hand i.e., 1973-74, we found no infirmity in the order of the Tribunal. In the result, we answer the question in affirmative i.e., in favour of the Revenue and against the assessee. Reference so made stands disposed of accordingly. ;