1983 (7) TMI 42 - HC - Income Tax

Interest accrued on account held by assessee includible in total income for 1965-66 & 1966-67

The High Court held that the interest accrued to the assessee in the account of M/s. Ram Gopal Laxmi Narain of Secunderabad was includible in the total ... Accrual, Income Issues Involved:1. Whether any amount was includible in the total income of the assessee for the years 1965-66 and 1966-67 on account of interest accrued to the assessee in the account of M/s. Ram Gopal Laxmi Narain of Secunderabad.Summary:Issue 1: Inclusion of Interest in Total IncomeThe assessee, M/s. Vijay Laxmi Trading Co. Ltd., a public limited company engaged in finance, had advanced Rs. 5 lakhs to M/s. Ram Gopal Laxmi Narain of Secunderabad on November 23, 1951. Initially, no interest was charged for 1951, but from 1952 to 1956, interest was charged at 6% p.a. By December 31, 1956, the outstanding balance was Rs. 6,16,109. Subsequently, no interest was charged due to the debtor's request and the directors' decision to defer interest until the principal was repaid. A decree was passed in favor of the assessee on August 11, 1961, stipulating interest at 8% p.a. on default of instalments. Despite defaults, no interest was charged up to December 31, 1966.The Income Tax Officer (ITO) included interest amounts of Rs. 14,588 for 1965-66 and Rs. 26,815 for 1966-67 in the assessee's income, which was upheld by the Appellate Assistant Commissioner (AAC). However, the Income-tax Appellate Tribunal ruled that the interest had not accrued and was not taxable. The Commissioner of Income-tax then referred the matter to the High Court.The High Court, after considering the arguments and relevant case law, including E. D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. [1953] 24 ITR 525 (SC), and Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 (All), concluded that income may accrue without actual receipt if the right to receive it exists. The court held that interest had indeed accrued to the assessee, making it includible in the total income for the relevant years, despite the debtor's poor financial condition.The court clarified that the assessee could seek relief u/s 36 or other provisions of the I.T. Act if the debt became irrecoverable. The Tribunal's reliance on the debtor's financial instability was deemed incorrect, and the court emphasized that the system of accounting (mercantile) necessitated the inclusion of accrued interest.Conclusion:The High Court answered the referred question affirmatively, stating that the interest accrued to the assessee in the account of M/s. Ram Gopal Laxmi Narain of Secunderabad was includible in the total income for the years 1965-66 and 1966-67. The court also noted that this decision does not preclude the assessee from claiming any rebate or benefit u/s 36 or other relevant provisions of the I.T. Act.