TaxTMI 
TaxTMI 
2003 (3) TMI 83
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....year) 1986-87 ending with October, 1987. The assessee had advanced loan to one Tulsidas Rajivlochan (HUF) on February 25, 1983. The said loan was carrying interest at the rate of 12 per cent. per annum. Interest was paid on the said loan for some time. But after May 30, 1986, no interest was paid. There were correspondences. The debtor pleaded that it had some difficulty in the repayment and payment of the loan and the interest, respectively. It had requested the assessee to waive the arrear interest after June 30, 1986. It had agreed to repay the principal amount. By a resolution dated August 1, 1987, this suggestion was ultimately accepted by the assessee in its commercial wisdom, having regard to the commercial viability of the situation. In the said resolution, the board of the assessee had decided to waive interest after June 30, 1986, provided the debtor repays the amount of principal together with interest up to June 30, 1986, by instalments payable monthly commencing from January, 1988. It had claimed the sum of Rs. 22,16,593.55 inclusive of principal and interest accrued till June 30, 1986. Such instalment was payable before the expiry of the relevant month. In default, th....
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....IT v. Jai Hind Travels P. Ltd. [2000] 243 ITR 451 (Ker); Aspinwall and Company (Travancore) Ltd. v. CIT [1990] 184 ITR 56 (Ker); CIT v. Kerala Financial Corporation [1985] 155 ITR 228 (Ker); CIT v. Smt. M. Sarojini Devi [2001] 250 ITR 759 (AP) and CIT v. Shiv Prakash Janak Raj and Co. Pvt. Ltd. [1996] 222 ITR 583 (SC) to support his contention. We shall refer to these decisions at the appropriate stage. Mr. R.N. Bajoria, learned senior counsel assisted by Mr. J.P. Khaitan, learned counsel for the assessee, on the other hand, contended that the crux of the point is to be found within the ratio decided in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). According to him under the mercantile system of accounting, the income accures notionally when it is due to accrue and becomes chargeable to tax, but what is charged is the income. Unless there is an income no tax can be levied. Similarly, even if an income is described in any manner otherwise than an income, still, then tax cannot be avoided if there is an income in reality. The Income-tax Act had made such provisions in different sections dealing with different kinds of situations to prevent evasion of taxes. At the same ....
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....h does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." While referring to the decision in Shoorji Vallabhdas's case [1962] 46 ITR 144, the apex court in State Bank of Travancore's case [1986] 158 ITR 102 had observed that: "This decision and the use of the expression that entry was made of the 'hypothetical income' is often misunderstood in the sense that after the accrual, if the income did not materialise then on the basis of the actuality or reality of the situation, it should not be considered to be income at all." After having discussed the facts, it observed further that: "Shoorji Vallabhdas's case must be understood on the footing that because of the desire in November, 1947, the commission did not accrue at the end of the accounting year. In that sense, there was no accrual of the income. I....
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....ut that the tax is payable on the income. It is only when the accrual is prevented in the real sense the notion of real income can be brought into play. But where the income is accrued according to the accounts of the assessee and there is no indication by the assessee to treat the income as not having accrued there is no suspension of the accrual of the 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 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. Dealing with the decision in State Bank of Travancore's case [1986] 158 ITR 102, the apex court had dealt with various other decision by different High Courts. It had referred to the decision in CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom) and observed that "The Bombay High Court in CIT v. Confinance Ltd. [1973] 89 ITR 292 held that under income-tax law, receipt of income, either actual or ....
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.... The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax. In State Bank of Travancore's case [1986] 158 ITR 102 the apex court had laid down the following propositions: "(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not ready accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, ....
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.... the scope and ambit of the proposition laid down in the case of State Bank of Travancore's case [1986] 158 ITR 102 (SC). The principle that has been laid down is clear and unambiguous. It is when the debt seems to be bad, there is a question of non-accrual of interest by reason of conduct of the parties. In Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom), it was held that whether a debt has become a bad debt is an objective fact. If the finding of that question of fact is vitiated by any factor, then undoubtedly the court would consider whether the Income-tax Officer was right in coming to the conclusion that the particular debt was a bad debt. If the assessee is able to satisfy the court that the conclusion is vitiated by any gross error or refusal to take into consideration any material evidence, the court would be entitled to answer the question in favour of the assessee although there may be a clear conclusion against the assessee. It is not the question when the recovery becomes impossible, then only it would be a bad debt or that proceeding with the recovery proceeding would render it to be something other than bad debt. Its commercial viability and p....
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....t as are necessary for giving full and true effect to that method itself. Having adopted a regular method of accounting the assessee cannot be allowed to change it or depart from it for a particular year or for part of the year or in respect of particular transaction. In this country, by and large, two systems of account keeping are followed--cash and mercantile. Plainly speaking, the cash system postulates actual receipt of money for the exigibility of income-tax. Such receipt from business, profession or vocation or from other sources has to be actual in the relevant year of account. The mercantile system, on the other hand, is one where accounts are maintained on the basis of entitlement to credit and/or debit. A sum of money, as soon as it becomes payable, is taken into account without reference to actual receipt and a debit becomes admissible when liability to pay is created even though the sum of money is yet to be paid. It is settled that the income of the assessee is to be determined according to the provisions of the Act in consonance with the method of accountancy regularly employed by the assessee. The method of accounting regularly employed by the assessee helps t....
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.... words "accrues", "arises" and "is received" are three distinct terms as was distinguished in Jai Hind Travels P. Ltd.'s case [2000] 243 ITR 451 (Ker). In the said case, it was held that as soon the assessee acquires a right to receive the income, the income accrues to him, though the same may be received later. A mere claim to income without an enforceable right cannot be regarded as accrued income for the purpose of the Act. So far as the receiving of income is concerned, there cannot be any difficulty. It conveys a clear and definite meaning. The words "accrue" and "arise" are not definite in the Act, but these three expressions have been used in section 5 of the Act. The word "accrues" should be taken as synonym to arise. The word "accrue" connotes an idea of a growth or accumulation whereas the word "arise" connotes growth or accumulation with a tangible receivable shape. The decision in Aspinwall and Company (Travancore) Ltd.'s case [1990] 184 ITR 56 (Ker) is distinguishable and cannot be attracted to the facts of this case. Inasmuch as in the said case, though the interest accrued on the loan advanced to the sister concern of the assessee was not entered in the books of a....
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.... of each case to ascertain whether the debt was bad. This bad debt is to be determined on the basis of the evidence that might be on record with relation to the facts as well as the conduct of the parties as to how it was treated. If it appears that after a debt is treated to be a bad debt and then in the subsequent year the debt appears to have been recovered, then it would be treated to be deferment of income to avoid taxability in a particular year. By introducing the concept of real income, an assessee cannot be allowed to defer an income to the subsequent previous year in order to avoid taxability of the income in the relevant previous year. But filing of a suit for recovery of the amount would definitely be a factor coupled with the conduct of the parties to establish that the debt has become bad debt and requires to be recovered through a long drawn proceeding of a suit. When the assessee treats a debt to have become bad and waives the accrual of the income by omitting to enter the income in the books of account, then the concept of real income comes into play. The accounting is finalised at the end of the previous year, therefore, even if a decision is taken after the end o....