TaxTMI 
TaxTMI 
2003 (12) TMI 46
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....i) Whether, the Income-tax Appellate Tribunal erred in law in appreciating and applying the correct concept of real income (either actually received or accrued), as laid down by the Supreme Court in various cases to find out the taxability of the aforesaid amount under the Income-tax Act, 1961?" These two appeals relate to the assessment years 1990-91 and 1991-92. The facts of the case as alleged by the assessee are as follows: The assessee is a company and is a wholly owned Central Government undertaking. It has been incorporated with the object of improving the economic lot of weavers by development and promotion of handloom in the country. The main activity of the assessee consists of supply of handloom inputs (i.e., yarns, dyes, chemicals, etc.), to various handloom agencies and apex societies (hereinafter called user-agencies) throughout the country at a reasonable rate. These inputs are supplied against confirmed orders. The assessee sends those orders to the producers/suppliers of inputs who directly despatch the items to the user-agencies who have placed the orders. The producers and suppliers of these inputs send their bills for the supplies to the assessee and not t....
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....aforesaid interest, which is not received and is only treated as receivable, is credited to the aforesaid account, namely, "Deferred accrued interest" and, according to the mercantile system of accounting, its corresponding entry is debited to the account, namely, "Deferred accrued interest receivable". The assessee makes the entries in such manner so that its accounts may not reflect non-existent income (cash or accrued) and may not give an incorrect picture of inflated profit. As regards the interest, which is received during the year, it is credited to the account under the heading "Interest from parties on overdue bills" in the profit and loss account. It becomes a taxable income of the assessee and is offered by the assessee to be taxed. The assessee credited an amount of Rs. 1,69,14,552 to the account of "Deferred accrued interest" in the assessment year 1990-91. Similarly, an amount of Rs. 1,97,39,358 was credited to the same account in the assessment year 1991-92. These amounts were not included by the assessee in its taxable income because they were neither real nor accrued income of those assessment years. As regards as the amount of interest actually received in the t....
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....986] 158 ITR 102. It is well settled that income cannot be generated, actual or accrued, by mere entries in the accounts of the assessee. Further, income cannot be said to be generated merely because the assessee has not written off the amount of interest, which was not forthcoming. The decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), which has been relied upon by the Tribunal has not been followed and has not been treated to be the correct enunciation of law in the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 and UCO Bank v. CIT [1999] 237 ITR 889,900. The case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) has also been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC). In our opinion, the case of the assessee is directly covered by the judgment of the Supreme Court in the case of Godhra Electricity Co.Ltd. v. CIT [1997] 225 ITR 746 in which the Supreme Court referred to its earlier decision in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, 148 in which it was observed " 'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account tw....
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.... v. CIT [1967] 66 ITR 159 (SC) and CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), etc. When one refers to the right of an assessee to receive an income so as to make it taxable, it necessarily means a right enforceable under law. If the claim is not legally enforceable the assessee cannot be said to be vested with a right to claim the amount The enforceability of the right to receive the income is therefore, in our opinion, embedded in the concept of accrual of the income vide Sarupchand Hukamchand Pvt. Ltd. v. CIT [1982] 133 ITR 295 (MP) and E.D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), etc. In the present case the assessee itself has not treated the amount of interest to be due from any of the user-agencies as a debt or a legal claim. There was neither any agreement nor customary practice in support of that claim. In our opinion, the amount of interest did not constitute a debt due to the assessee. The assessee did not debit the account of any of the user-agencies with the interest, which has been treated by the Tribunal as the income of the assessee. The Tribunal has not held that the assessee had a legally claimable right against the user-agencies in regard ....
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....ve been cumulatively credited to the "Deferred accrued interest" account. A Division Bench of this court in Income-tax Application No. 30 of 2000 (CIT v. Sahara Investment India Ltd. [2004] 266 ITR 641 decided on November 18, 2003), has held following several decisions of the Supreme Court that mere entries in the account books are not determinative of the true character of the transactions. The Division Bench followed the decisions of the Supreme Court in CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746. Learned counsel for the Department has contended that in 1989 there was an amendment in the Companies Act, 1956, and thereafter all the companies are liable to maintain accounts on mercantile basis only. Hence, he submitted that the assessee cannot claim to maintain the transactions relating to interest on cash basis. It is well settled that before an amount can be taxed there must be an income, and when there is no income at all then it can neither be taxed on mercantile basis nor on cash basis. In our opinion there was no income at all in the present case, and mere entry regarding interest would not make it an incom....
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....nly when the assessee agreed to make the payment, and not earlier. In Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33 (All), there was a dispute about the contractual amount payable by the assessee. It was held that the amount paid could be included in the income only in the assessment year in which the dispute was settled. Before a credit or debit entry can legitimately be made in the accounts it must be shown that a certain enforceable liability has accrued or arisen. Such liability must be one that has been ascertained and is capable of being enforced by the person in whose favour the debit has been raised. The mercantile system can never be stretched to embrace all sorts of provisional, notional or contingent payments, which an assessee thinks he might ultimately be entitled to receive, or called upon to pay. It is well settled that anticipated losses and contingent liabilities cannot be claimed under the mercantile system of accounting. The liability must be definite and real vide New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 (All) and CIT v. Tata Chemicals Ltd. [1986] 162 ITR 556 (Bom), etc. Thus, even under the mercantile system of accounting, it is not left....