TaxTMI 
TaxTMI 
2005 (9) TMI 249
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....eferment and rollover which had to be accepted under compulsion and finally received post-dated cheques as follows: --------------------------------------------------- Date Amount (Rs.) Remarks --------------------------------------------------- 17-9-1996 10,00,000 Encashed on 17-9-1996 10-10-1996 10,00,000 Encashed on 16-10-1996 30-11-1996 70,00,000 Request for deferment of presentation of this cheque to 2nd week of March 1997 in view of the financial constraints ....
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....ad not become sick and no reference had been made before the Board of Industrial and Financial Reconstruction (BIFR) and the company had not become insolvent. The borrower company was a listed company which shows prevailing share price was quoted at Rs. 40 for a share of Rs. 10. The delay in the legal process should not be construed to conclude that the recovery was uncertain. He noted that the change of method of accounting of treating interest income of cash basis, i.e., following a mixed method was not permissible under s. 145 of the Act and the change in the method of accounting made by the assessee was not bona fide. For this, he placed reliance on the following judgments: (i) Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) (ii) CIT vs. Annapurani Veerappan (1992) 193 ITR 426 (Mad) (iii) CIT vs. Confinance Ltd. (1973) 89 ITR 292 (Bom) (iv) Balraj Virmani vs. CIT (1974) 97 ITR 69 (All) (v) CIT vs. Tamil Nadu Industrial Investment Corpn. Ltd. (1996) 218 ITR 616 (Mad) (vi) Addl. CIT vs. Swadeshi Cloth Dealers (1991) 99 CTR (All) 66 : (1991) 187 ITR 620 (All). 6. The AO also noted that the assessee receiv....
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....rically admitted that the inter-corporate deposit of Rs. 70 lakhs was to be repaid in terms of repayment schedule as mutually agreed to by the appellant-company and after the request of PPL the appellant had no choice but go along with the renewal. It is stated in the submissions that pursuant to representations made by M/s PPL The inter-corporate deposit of Rs. 70 lakhs was renewed...'. It is further admitted in written submissions that as per the agreement the amount of Rs. 70 lakhs was to be repaid on 10th March, 1997 with interest at 27 per cent. Thus, there was an agreement entitling the appellant to interest at 27 per cent after the expiry of the ICD on 3rd April, 1996. In the notice under s. 434 of the Companies Act, dt. 2nd March, 1998 available at p. 99 of the paper book filed on 13th Sept., 2002, the counsel for the appellant specifically mentioned 'you are also liable to pay interest at 27 per cent per annum from 1st June, 1997 qua the ICD.' The winding up petition filed by the appellant, copy of which is available at pp. 104 to 136 of the paper book mentions in para 8, that M/s PPL was indebted to the petitioner for a sum of Rs. 60 lakhs being the principal amount and R....
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....8: (1999) 237 ITR 889 (SC). In the case of the appellant there was recovery during the previous year relevant to the assessment year under consideration and hence the amount cannot be treated as doubtful debt. 5.10 Under s. 5 r/w s. 28 of the Act, the liability attaches to profits which have been either received by the assessee or which have accrued to him during the year of accounting. It is well-settled that income accrues when it 'falls due', i.e., becomes legally recoverable irrespective of whether actually received or not and 'accrued income' is that income which the assessee has a legal right to receive. Reliance in this regard is placed upon Supreme Court judgments in the cases of CIT vs. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525, 531 (SC) and Morvi Industries Ltd. vs. CIT 1974 CTR (SC) 149 : (1971) 82 ITR 835, 840 (SC); admittedly, the assessee has been maintaining its accounts on mercantile basis and in terms of s. 145 does not have an option to adopt cash system for one item, i.e., interest from M/s PPL. The third proposition argued by the appellant was that the issue has to be viewed from the concept of real income and no real income had come into existe....
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....ed by the appellant. The last proposition argued by the appellant was that if it is held that the interest accrued, then the company's claim was that it had written it off because the interest was not recoverable. To elaborate this issue, the appellant stated that the following entries may be considered to have been passed: Interest recoverable Debit 100 Interest received Credit 100 5.12 The appellant on writing off of irrecoverable amount as bad debt will pass the following entry: Bad debt Debit 100 Interest recoverable Credit 100 5.13 The net effect to the profit is claimed to be nil and it is stated that the appellant had written off the amount by not passing two sets of entries explained above. 5.14 I find no merit in this alternative plea of the appellant. The appellant has not written off any bad debt and cannot claim benefit of s. 36(1)(vii) on the basis of these notional entries. In fact, the note No.8 to the notes to accounts forming part of audited balance sheet and....
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.... Rs. 1,01,000 for the period from 1st Jan., 1997 till 7th Dec., 2004 no interest can be said to accrue in the asst. yr. 1998-99 as alleged by the AO and confirmed by the CIT(A) and that interest of Rs. 1,01,000 has crystallised on 7th Dec., 2004 and, therefore, taxable in the asst. yr. 2005-06. 10. The learned counsel for the assessee submitted that because the interest as income has not accrued on doubtful and sticky advance, the assessee changed its accounting method from mercantile to cash basis which was not allowed by the AO. 11. He submitted that the AO did not recognise that the mercantile accounting method itself provided that any revenue which has significant uncertainty as to measurability or collectability, i.e., not ascertained and subject to litigation cannot be recognized. He submitted that the assessee had taken action under Negotiable Instruments Act under s. 138 and winding up petition under the Companies Act but in the opinion of the AO the delay in the legal process does not take away the accrual of income. He submitted that the logic of the AO was that interest will not accrue only after the debt becomes totally irrevocable. He submitted that the AO passed....
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....the payment was received pursuant to Court's pressure was an indication by itself that the amount was sticky and doubtful. The CIT(A) has only restricted herself to the fact that the amount due has not become bad or irrecoverable in view of the subsequent payments, therefore, not accepting the proposition of the assessee that no interest accrued because there was no valid enforceable debt, no valid agreement and that the alleged claim before the Court does not lead to accrual of income. 13. The learned counsel for the assessee further argued and submitted that the CIT(A) has referred to the decision of the Supreme Court in UCO Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC) wherein a circular has been issued by CBDT for banks who had credited the interest to interest suspense account rather than P&L a/c. The CIT(A) has tried to apply the circular here so that after consecutive three financial years of non-receipt, the interest will not be subject to tax. This circular is not applicable because it is for banking companies only; where a valid contract of loan is due; where the interest has been credited to suspense account. None of these distinguishable facts were ap....
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....nk of Travancore and not followed the same. In State Bank of Travancore the amount of interest had been credited to the interest suspense account and the Hon'ble Supreme Court relied upon this unequivocal conduct of the bank and thereby accepted that interest accrued pursuant to a valid contract. The credit to the interest account was critical. Therefore, CIT(A) has accepted that there is high improbability of recovery but is under misconception that the amount due is against a case of valid enforceable claim. The CIT(A) has also swayed by the fact that only in case the amount became totally irrecoverable interest will not accrue and held that the assessee had never pointed out that the amount was irrecoverable and, therefore, interest accrued. This is contrary to the facts because in the appeal before the Tribunal interest income did not accrue because there was no valid contract but only a claim was before the Court. The CIT(A) has accepted on p. 8 at the end of para 5.10 that there was a "claim of income" before the Court and being pursued. The claim by itself does not lead to accrual because there is no valid enforceable debt, no enforceable right to receive interest as at 31st....
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....dl. Chief Metropolitan Magistrate on 15th May, 1997 and the assessee received another Rs. 5 lakhs on 2nd Aug., 1997 and interest was received by 31st May, 1997. The balance amount of Rs. 60 lakhs remained outstanding for which the assessee filed winding up petition under the Companies Act before the Delhi High Court on 17th May, 1999. Pursuant to the direction of the High Court, the assessee received Rs. 10 lakhs on 6th Sept., 2000 and another Rs. 10 lakhs on 30th Nov., 2000. Finally, the Hon'ble Delhi High Court ordered on 7th Dec., 2004 that the balance amount of Rs. 50 lakhs was to be paid by two post-dated cheques dt. 28th Dec., 2004 and 20th Dec., 2005. The Court also ordered for payment of interest of Rs. 1,01,000 in two equal instalments for the entire period one of which was on 20th Feb., 2005 and the other on 20th March, 2005. On the basis of this it is the claim of the assessee that since the principal amount was doubtful of recovery, therefore, no interest accrued to the assessee and, therefore, the AO was not justified in including interest of Rs. 12,60,123 in the asst. yr. 2001-02 and Rs. 10,80,000 in the asst. yr. 1998-99 in the income of the assessee. The learned Aut....
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.... CBDT the interest cannot be treated as interest on a doubtful loan so as not to include the same in the income of the assessee. Further the Hon'ble Supreme Court in the State Bank of Travancore has observed that: "The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under s. 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act." 21. In the instant case, the assessee is following mercantile system of accounting for recognizing its income. For the year under appeal, the loan amount has not become bad or "sticky" or doubtful of recovery as the assessee was very much hopeful in recovering th....