Interest income waived on loans not taxable; Board resolutions key. Tribunal decision set aside.

The High Court held that the interest income waived by the assessee on loans given to debtors was not taxable as it did not accrue in real terms, supported by Board resolutions passed before the assessment year. The Tribunal's reliance on the absence of Board resolutions was deemed misplaced, and the appeal was allowed, setting aside the Tribunal's decision with no costs awarded.

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Issues Involved:

1. Whether the Tribunal was right in confirming the addition of interest, though waived by the assessee, due to the debtors' inability to pay, based on the mercantile method of accounting.
2. Whether the Tribunal's order was based on a wrong premise that there was no resolution passed by the Board of Directors for the waiver, rendering the order perverse.

Issue-Wise Detailed Analysis:

1. Addition of Interest Based on Mercantile Method of Accounting:

The assessee, an incorporated company, had waived interest on loans given to Shroff Chemicals Pvt. Ltd. and Eastern Commercial Enterprises due to the borrowers' financial difficulties. The company maintained its accounts on a mercantile basis and did not credit any interest from these borrowers from the financial year 1987-88 to the assessment year 1990-91. The assessing officer added notional interest to the assessee's income for the assessment year 1990-91, which the CIT(A) confirmed, stating that the mercantile system required interest to be added on a due basis.

The Tribunal upheld this addition, noting that the assessee continued to receive principal repayments and had not declared the debts as bad. The Tribunal also mentioned that no Board resolution was passed for waiving the interest, a point contested by the assessee.

The assessee argued that the waiver was a commercial decision to ensure the recovery of the principal amount and that no real income from interest had accrued. The Supreme Court's decisions in Commissioner of Income Tax vs. Birla Gwalior Pvt. Ltd., C.I.T. vs. Shoorji Vallabhdas & Co., and Poona Electric Supply Co. Ltd. vs. CIT were cited, emphasizing that income must result in real terms for tax liability to arise.

2. Tribunal's Order Based on Wrong Premise:

The assessee presented Board resolutions dated 15th May 1987, waiving the interest for the two borrowers, which were not considered by the Tribunal. The Tribunal's decision was partly based on the absence of such resolutions, a point the assessee sought to rectify through a Miscellaneous Application, which the Tribunal rejected.

The High Court noted that the Tribunal's rejection of the assessee's plea was primarily due to the mercantile system of accounting and the non-declaration of the debts as bad. The High Court found that the Tribunal's reliance on the absence of Board resolutions was misplaced, as the resolutions were indeed passed before the assessment year in question, and the waiver was based on commercial considerations.

Conclusion:

The High Court distinguished the present case from Commissioner of Income Tax vs. Shiv Prakash Janak Raj and Co. Pvt. Ltd., where the waiver of interest occurred after the relevant accounting year. In the present case, the resolutions were passed before the assessment year, and there was no nexus between the assessee and the borrowers, unlike in Shiv Prakash.

The High Court concluded that the interest income could not be said to have accrued to the assessee for the relevant assessment year due to the Board resolutions waiving the interest. The appeal was allowed, and the Tribunal's decision was set aside, with no order as to costs.

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