RAJESH BALIA, J. - (1.) : We have heard the learned counsel for the parties.
(2.) THIS appeal is directed against the order of the Tribunal, Jodhpur Bench, Jodhpur dt. 28th Aug., 2002. The Tribunal has decided three appeals for asst. yrs. 1986-87, 1987-88 and 1988-89 in relation to same assessee by a common order. THIS appeal relates to asst. yr. 1987-88. It was an appeal by the Revenue before the Tribunal. The appellant has suggested that the following substantial questions of law arise for consideration in this appeal : "1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in deleting the addition on account of interest chargeable on the debit balances of (i) M/s Jai Mangal Investment and Trading Co. and (ii) M/s Banswara Textile Mills Ltd. on the group that the debit balances were trade debts, ignoring the fact that both the companies are owned by the same group of persons and non-charging of interest is not due to their poor financial position but in fact it is waiver of interest income in favour of the sister concerns which is proved by the categorical findings given by the AO in his order ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in ignoring the fact that the assessee has been claiming interest payments to its creditors on accrual basis whereas the accounting of interest on its debts is claimed to be on `receipt basis' which is not permitted under the IT Act ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in deleting the addition on disallowance made on account of violation of provisions of s. 40A(3) of the Act treating these payments covered by the exceptional or unavoidable circumstances under r. 6DD(j) of IT Rules, 1962, when the assessee had been making transactions through bank for other purposes ? Whether, on the facts and in the circumstances of the case, the Tribunal is justified in ignoring the fact that the whole payments made by the assessee during the previous year to M/s Banswaa Textile Mills were in violation of s. 40A(3) of the IT Act and the exceptions provided in r. 6DD(j) cannot be available throughout the year and interpretation of the rule in such a manner cannot be the intention of the legislature ?" 4. Though assessee has framed four questions. These related to two claims. One whether the AO has rightly made addition on account of notional interest on the debit balances of M/s Jai Mangal Investment & Trading Co. and M/s Banswara Textile Mills Ltd. ? Interest on these accounts had not been charged in the accounts of the assessee for the accounting period relevant to the assessment year in question. The AO was of the opinion that when the assessee is maintaining his books of accounts on mercantile system, not debiting the two parties named above with the interest accrued on the debit balances cannot absolve it from inclusion of the interest which has accrued on the debit balances during the previous year relevant to the asst. yr. 1987-88 in its total taxable income. It was the opinion of the AO that both companies are managed by the same group of persons and non-charging of interest was not due to their poor financial position but it was in fact waiver of interest income in favour of the sister concerns. The question Nos. 1 and 2 referred to above relate to this issue. The second question is only an alternative stand taken by the assessee that since two debit balances represent the trading account, in ordinary course, interest would have been accounted for as and when the same is received and not on the accrual basis. The CIT(A) for the assessment year in question found in favour of the assessee by considering the fact that both the parties in whose names the debit balance were shown in books of accounts to the assessee had incurred losses and cases were pending before BIFR suggesting that both the parties have negative net worth of capital. In view thereof, the CIT(A) was of the opinion that when recovery of principal itself was in doubt, the waiver of interest can be considered to be in the interest of business and not conferring any favour by transferring profits to the debtor. This finding has been affirmed by the Tribunal.
(3.) THE Tribunal found that in the instant case, it is not disputed that barring a few exceptions, the assessee follows the mercantile system of accounting. One exception noticed was, and it is not disputed, that the assessee has been debiting interest on overdue trade debt on cash basis and further that the system has been followed by the assessee consistently. Thus, a natural corollary follows that till the amount of interest is realised, the assessee will not be charging any interest in his books of account. Generally, the basic reason to adopt the system of charging interest would depend on many factors varying from case to case. Thus, in the case before the Tribunal, indisputable the outstanding debits are trade debts, they are not advances made by the assessee to the two concerns. Also, there was nothing to show that there was a stipulation between the parties to charge interest of such debt. Further, it is also undisputed that the two concerns had gone sick and reference was pending before BIFR for the rehabilitation of the two units. It is also a fact that the assessee was not likely to recover the principal amount and accordingly there was good reason for the assessee not to charge any notional interest, on these two accounts. On these premises, the Tribunal affirmed the finding of CIT(A) deleting the addition of notional interest made by AO for the assessment year in question. In our opinion, these are all findings of fact which belie the inference drawn by AO that the assessee was not charging interest from both the companies owned by the same group of persons not because of the financial position but by way of waiver of interest income in favour of the sister concern. From the findings of the Tribunal two things are apparent. Firstly, that the assessee was regularly employing hybrid method of accounting in maintaining his books of accounts. While in most cases, the assessee is following the mercantile system of accounting viz., keeping accounts on accrual basis, irrespective of actual receipts, but in respect of trade debts, it is consistently maintaining the accounts of interest on receipt basis and debit balances in question were trade debts, were not disputed as noticed by the Tribunal. ;