Real accrual of income and business-linked colony expenses determined tax treatment in favour of the assessee.

Income on mercantile basis is taxable only when it has really accrued in a commercial sense, so interest on loans to sick subsidiary companies was not brought to tax where recovery was doubtful and real accrual was absent. Power and fuel expenditure relating to an employees' residential colony was treated as allowable business expenditure because it was incurred to meet a business obligation connected with staff housing and amenities, and non-recovery from employees did not change its character. The Revenue's appeal therefore failed on both grounds, and the appellate relief was sustained.

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Issues: (i) Whether interest on loans advanced to the assessee's subsidiary companies could be brought to tax on accrual basis despite the subsidiaries being sick and recovery being doubtful. (ii) Whether power and fuel expenditure attributable to the residential colony of employees was allowable as business expenditure.

Issue (i): Whether interest on loans advanced to the assessee's subsidiary companies could be brought to tax on accrual basis despite the subsidiaries being sick and recovery being doubtful.

Analysis: The interest claim was examined on the touchstone of real accrual of income. Even where accounts are maintained on mercantile basis, income can be taxed only if it has really accrued and not as a hypothetical or notional figure. In view of the sick status of the subsidiaries, the absence of recovery and the commercial uncertainty surrounding realisation, the interest could not be treated as having genuinely accrued to the assessee.

Conclusion: The addition on account of accrued interest was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether power and fuel expenditure attributable to the residential colony of employees was allowable as business expenditure.

Analysis: The expenditure related to power supply and common facilities in the employees' residential colony, which formed part of the assessee's business obligation in maintaining staff housing and associated amenities. Mere non-recovery of such expenditure from employees, or non-taxation in their hands, did not convert the expenditure into a non-business outlay.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on both grounds, and the assessment relief granted by the appellate authority was sustained.

Ratio Decidendi: Income on mercantile basis is taxable only when it has really accrued in a commercial sense, and expenditure incurred to discharge a business obligation connected with employee residential facilities remains allowable as business expenditure.

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