REFORM FLOUR MILLS P LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 256(2) of the I.T. Act, 1961, we are concerned with two assessment years, being the assessment years 1968-69 and 1969-70. The assessee-company maintained its accounts for the relevant previous years ended on 31st December, 1968, and 31st December, 1969, respectively. The ITO completed the two assessments by including Rs. 1,36,170 as interest receivable from M/s. Associated Industries (Assam) Ltd. on accrual basis as the system of accounting followed by the assessee-company so long was mercantile. In this connection, it will be relevant to refer to certain portions of the assessment orders. In the assessment order for the year 1968-69 dealing with business, it was mentioned, inter alia, as follows :

(2.) Being aggrieved by the said assessment orders, the assessee preferred appeals before the AAC. It was submitted before him by the assessee that the amount of interest should be excluded as the assessee had changed the method of accounting from mercantile to cash system and, moreover, the interest not having been received for a number of years, in the past, and there being no chance of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing the interest income in the account. These contentions were, however, rejected by the AAC on the ground that the assessee-company had been following the mercantile system of accounting and the assessee could not be permitted to follow the cash system with reference to interest receivable from a particular debtor.

(3.) Being dissatisfied with the order of the AAC, the assessee preferred appeals before the Tribunal and reiterated its contention which was urged before the AAC on this aspect of the matter, The assessee also submitted a resolution dated 15th May, 1967, passed long before the close of the rele vant previous year wherein it was decided to consider the interest due from the debtor on the basis of realisation. It was, moreover, contended that as the financial condition of the debtor-company was embarrassing, it was submitted, that the management of the debtor-company had been taken over by the Govt. of India by an order dated 14th December, 1972. The assessee's contention was that it wanted to reflect its real income and not an hypothetical income and that the company being assessed to income-tax assessment in respect of interest under the head "Other sources", as it was done althroughout in the past, bad debts arising from non-realisation subsequently could not be claimed in the computation of income as there was no such provision permitting the deduction from income under "income from other sources". The revenue, on the other hand, urged before the Tribunal that the assessee-company did not forgo the interest but had simply deferred the crediting thereof and justified its stand that the inclusion of interest on the accrual basis was correct and in this con nection reliance was placed on certain decisions which the Tribunal noted. The Tribunal held against the assessee and, inter alia, observed as follows :