Commissioner Of Income Tax, Amritsar v. M/S Shiv Prakash Janak Raj And Co. Pvt. Ltd

COMMISSIONER OF INCOME TAX, AMRITSAR v. MIS SHIV PRAKASH JANAK RAJ AND CO. PVT. LTD. SEPTEMBER 30, 1996 [B.P. JEEV AN REDDY AND SUHAS C. SEN, JJ.] Income Tax Act, 1961-Sectiqns 5(1)(b), 36, 37(1) and 145-Accrnal of interest-Mercantile System of Accountin15Assessment Years 1968-69, 1969-70, 1970-71 and 1971- 72-Interest bearing loan advanced by assessee Company to firm-Waiver of interest before expiry of Accounting year with C respect to Assessment Year 1968-69 but after expiry of accounting year for the subsequent three Assessment Years-No entries in accounts of company or firm-Held, for later three years interest had already accrned before waiver and concept of real income cannot be imported so as to whittle down, qualify or def eat the provisions of the statute. D The assessment years involved were Assessment Years 1968-69, 1969-70, 1970-71 and 1971-72. The assessee company (respondent) had advanced a loan to firms whose partners were also the shareholders/directors of the assessee company. The assessee company was maintaining accounts on mercantile basis and the accounting year adopted was the year ending 31st E October of the year. For the accounting years relevant to the assessment years 1966-67 and 1967-68, interest of Rs. 25,048 and Rs. 25,843 respective-ly were charged on the loans so advanced. In respect of assessment year 1968-69, a resolution was passed by company, before the expiry of the accounting year, on October 9, 1967 waiving charge of interest. In respect F of the other three assessment years, similar resolutions were passed after the expiry of the relevant accounting years. The Tribunal affirmed the view of ITO and Appellate Asst. Commis-sioner, inter-alia observing, that the relinquishment of interest, was not for any commercial reasons and that interest had already accrued to the G assessee before it was waived irrespective of absence of entries in the books of the firm or of the company to this effect. The High Court however took a contrary view following the decision of this Court in Bir/a Gwalior case and holding that the principle in Morvi H SUPREME COURT REPORTS [1996] SUPP. 7S.C.R. A Industries case was not applicable. It was contended by the assessee that applying the real income theory, no interest had really accrued or had been received by it for the 3 years viz. 1969-70, 1970-71 and 1971-72 and that, in the absence of any entries in its books, it cannot be asked to pay tax on income which had not B been received by it. Allowing the appeal relating to assessment years 1969-70, 1970-71 and 1971-72 and dismissing the appeal relating to assessment year 1968-69, this Court HELD : 1. For assessment years 1966-67 and 1967-68, interest was charged on the loan advanced which shows that the loan was an interest bearing loan, and it is liable to tax. [85-D] 2.1 With respect to assessment year 1968-69, where the resolution D was passed before the expiry of the accounting year, the appeal, is not pressed and hence no finding given. [94-A] 2.2. In respect of the subsequent three assessment years it cannot be said that interest had not accrued to the assessee. The waiver of interest E after the expiry of relevant assessment years only meant that the assessee was giving up money which had accrued to it. [85-F] Morvi Industries, (1971) 82 ITR 835, followed. C.l.T. v. Bir/a Gwalior Pvt. Ltd., (1973) 89 ITR 266, explained and F distinguished. Indennani Jatia v. C.l. T., (1959) 35 ITR 298; C.l. T. v. Chaman/al Mangaldas, (1960) 39 ITR 8 and C./. T. v. Shoorji Vallabhdas & Co., (1962) 46 ITR 144, referred to. 3. The concept of real income cannot be employed so as to define the provisions of the Act and Rules. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and Rules. [93-G] C.l. T. v. State Bank of Travancore, (1986) 158 ITR 102, applied. 82 CI.T. v. SHIV PRAKASH JANAK RAJ AND CO.PVT.LTD. (JEEVANREDDY,J.) 83 CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1906-18 A of 1979. From the Judgment and Order dated 27.9.77 of the Punjab & Haryana High Court in I.T.R. Nos. 5, 68, 93, 94/75, 53/75, 3-6 of 1976 and 16, 17, 109 and 110 of 1975. J. Ramamurthy, B.S. Ahuja and S.N. Terdol for the Appellant. G.C. Sharma, S.Rajappa and K.B. Rohtagi for the Respondents. The Judgment of the Court was delivered by B.P. JEEVAN REDDY, J. These appeals are preferred by the Revenue against the judgment of the Punjab and Haryana High Court answering the questions, referred at the instance of the assessee, in favour of the assessee and against the Revenue. The questions involved in all these appeals are common. it would be sufficient if we take the case of one of D the assessees, Mis.Shiv Prakash Janak Raj & Co.(P) Ltd. Four assessment years are relevant in this case, viz., Assessment Years 1968-69, 1969-70, 1970-71 and 1971-72. The two questions referred under Section 256(1) of the Income Tax Act, 1961 are: "(i) Whether, on the facts and in the circumstances of the case, E the Tribunal was right in holding that the interest for the assess-ment year 1971-72, had already accrued to the assessee on October 31, 1970, under the mercantile system of accountancy? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsequent relinquishment of interest by a resolution dated November 24, 1970, did not affect the tax liability of the assessee on accrual basis?" The partners of a firm, Mis.Shiv Prakash Janak Raj & Co. [the Firm], are also the shareholder/directors of the assessee- company. The assessee- G company had advanced a loan to the firm. During the accounting year relevant to the Assessment Year 1966- 67, it charged interest in a sum of Rs.25,048 on the loan so advanced. Similarly, for the Assessment Year 1967-68, it charged interest in a sum of Rs.25,843. For the four assessment years concerning herein, however, the assessee adopted a different course. [The accounting year adopted by the assessee was the year ending on 31st H A October). In respectofthe Assessment Year 1968- 69 [year ending October 31, 1967], the assessee-company passed a resolution on October 9, 1967 [i.e., before the end of the accounting year) deciding not to charge interest fi:om the firm in view of the difficult financial position of the firm. For the next three assessment years, i.e., Assessment Years 1969-70, 1970-71, 1971-B 72, similar resolutions were passed on February 26, 1969, March 16, 1970 and November 24, 1970 respectively. In other words, in the case of last three assessment years, the resolution deciding not to charge interest on the loan advanced to the firm was passed after the expiry of the relevant accounting year. Indeed, the resolution says that the firm had approached the assessee-company to waive the interest on the loan for each of the said C years and that on such representation that the directors of the assessee-company [who were also partners in the said firm] decided that no interest shall be charged for each of the said three assessment years. 84 In the assessment proceedings relating to the said four assessment D years, the Income Tax Officer took the view that inasmuch as the loans in question were interest-bearing loans and because the assessee-company had relinquished the interest without any commercial considerations and further because the directors/shareholders of the assessee-company were interested in the firm, it was a case of collusion between them to evade the tax liability. Accordingly, he added an amount towards interest calculating E it at the rate of fifteen percent per annum. On appeal, the Appellate Assistant Commissioner found that inasmuch as the resolution to waive the interest was passed after the expiry of the accounting year and further because the assessee-company was following the mercantile system of accounting, the interest must be held . to. have already accrued to the F assessee before it was waived. He, however, reduced the rate of interest to nine percent. With that modification, he dismissed the appeals. The asses-see thereupon filed a further appeal to the Tribunal but without success. The Tribunal observed that even though no entries were made in the books of the assessee-company or of the firm with respect to receipt or payment of interest, that circumstance itS of no relevance in view of the facts that G the resolutions were passed after the expiry of the accounting year that the assessee was maintaining its accounts on mercantile basis and further that the relinquishment of interest was not for any commercial reasons. On reference, however, the High Court took a contrary view purporting to follow the decision of this Court in Commissioner of Income Tax, West H Bengal-II v. Bir/a Gwalior (P) Limited, (1973) 89 I.T.R. 266. The High C.I.T. v. SHNPRAKASHJANAKRAJ AND CO.PVT.LTD. [JEEVANREDDY,J.] 85 Court held that in view of the said decision, the principle of earlier decision A of this Court in Morvi lndustlies Limited v. Commissioner of Income Tax (Central), Calcutta, (1971) 82 I.T.R. 835 cannot be applied to this case. In these appeals, it is contended by Sri J. Ramarnurthy, learned senior advocate for the appellant Revenue, that in the facts and cir-cumstances of the case, the view taken by the Tribunal was the correct one being consistent with the decisions of this Court and that the High Court was in error in holding to the contrary. Sri G.C. Sharma, learned counsel for the assessee, however, sought to support the reasoning and conclusion of the High Court. Before we refer to the decision of this Court, it is necessary to reiterate the basic facts of the case. For the previous two assessment years, viz., 1966-67 and 1967-68, the assessee-company did charge interest on the loan advanced by it to the firm which shows that the loan was an interest-bearing loan. The second circumstance to be noticed is that the resolution D waiving interest was passed after the expiry of the relevant accounting year in the case of three subsequent assessment years, viz., Assessment Years 1969-70, 1970-71and1971-72. Only in the case of Assess~ent Year 1968-69, was the resolution passed before the expiry of the accounting year. Thirdly, the assessee-company was maintaining its accounts on mercantile E basis. Yet another circumstance to be noticed is that the Tribunal has found it as a fact that the waiver was not based upon any commercial considerations. Of course, no entries were made in the accounts of the assessee-company, or for that matter in the accounts of the firm, in respect of four assessment years concerned herein, that any interest was received or paid. On these facts, it has to be held that in the case of three subsequent F assessment years, the interest had accrued to the assessee notwithstanding the fact that no entries may have been made in the accounts of the assessee to that effect. The waiver of interest after the expiry of the relevant accounting year only meant that the assessee was giving up the money which had accrued to it. It cannot be said, in the circumstances, that the G interest amount had not accrued to the assessee. Therefore, the Tribunal was right in taking the view it did in respect of Assessment Years 1969-70, 1970-71 and 1971-72. In the case of Assessment Year 1968-69, however, the · resolution was passed before the expiry of the accounting year and though the finding of the Tribunal is that the said waiver was not actuated by any commercial considerations, yet the learned counsel for the Revenue did H SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R. A not press the Revenue's case so far as this assessment year is concerned. 88