TaxTMI 
TaxTMI 
2000 (9) TMI 211
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....these years, the assessee company used to charge interest on the said advance @ 15%. In the accounting year relevant to the present assessment year, the assessee company did not charge any interest on the said advance and consequently not shown any income on this account on accrual basis. In response to a query, it has been explained in writing that on a resolution passed by the Directors in the meeting of the Board of Directors on 29-3-1983, it was resolved not to charge any interest from this year on the grounds, as mentioned in the minutes of the meeting, that Shri K. R. Patel had no source of income to pay any interest, that he served the company for a long time at a paltry remuneration and that his physical condition being not well, he had already resigned from the company with effect from 1-7-1982. It appears that by merely passing a resolution by the Directors, one of whom happens to be his son, the Directors cannot remit the interest which is due to the company on the amount of advances already made with specific condition of claiming interest and cannot deprive the company from earning the said interest. Of course, considering the financial and other difficulties of Shri K....
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.... appellant has advanced loan with the specific condition of charging interest and this is the normal practice of a business to charge interest and secondly the building on which investment has been made of the advance taken is not used for the company rather it is given on rent to the third party and there is an agreement with the third party to pay rent which means that Mr. K. R. Patel is drawing income from the property constructed by the funds of the company. Whether he actually received the amount or he may receive after litigation is immaterial because he is legally entitled to receive the rent from that building. The company who had advanced the loan to K. R. Patel is also entitled legally to charge interest on the basis of the agreement with them. Hence, the income accrued to the company and waiver of interest on the basis of a latest resolution is to be ignored as it is a colourable transaction and the ITO has rightly added the same as income accrued to the appellant. I, therefore, confirm the addition accordingly." Aggrieved by the order of the CIT(A) the assessee filed the present appeal before the Tribunal. 5. The assessee's counsel filed before us a paper-book of ....
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....293(1)(b) of the Companies Act, 1956 consent be and is hereby accorded to the Company extending the time for repayment of at least the balance principal amount of Rs. 3,32,140.98 advanced to Mr. K. R. Patel, Ex-Managing Director of the Company, by a further period of five years ending on 31-3-1988 without any interest." It was also further resolved "that the amount of interest receivable from Mr. K. R. Patel on the loans given to him for the years 1979-80 to 1982-83 amounting in all to Rs. 2,49,759.00 shall be written off in the year ending on 31-3-1984 and no further interest shall be charged on the said loan for reasons recorded in the minutes of this meeting". The loans were given to Shri Patel bearing simple interest @ 15 1/2% per annum. This can be seen from the resolution of the Board of Directors dated 7-6-1977 placed at page 38 of the paper-book. But by mistake the interest has been debited to his account on the basis of compound rate of interest. If interest were to be calculated for the assessment year 1983-84 on the balance due from him, it would be Rs. 54,487 only. The working is given at page 47 of the paper-book. The principal amount as on 1-4-1982 comes to Rs. ....
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....he present case, as can be seen from the resolution passed on 29-3-1983, extracted above, the assessee-company considered the principal amount of Rs. 3,32,141 as good and allowed Shri Patel time for payment in five years period ending 31-3-1988. In the background of these facts the cases in Ferozepur Finance (P.) Ltd.'s case and Motor Credit Co. (P.) Ltd.'s case are not applicable. In the case of Ferozepur Finance (P.) Ltd. the debtor was in huge arrear of income-tax and financial position was not sound. The assessee contended that there was no hope of recovery even of the principal amount. In the case of Motor Credit Co. (P.) Ltd. the said company had no prospect of recovering even the principal amount. The legal opinion taken by that assessee indicated that there was no prospect of recovery of any of the amount loaned by initiating legal proceedings against the debtor. In the present case, since the loans were given to Shri Patel on simple interest @ 15 1/2% per annum, the interest had accrued from 1-4-1982 to 29-3-1983. Reference may be made to the decisions in the case of CIT vs Kerala State Drugs & Pharmaceutical Ltd. (1991) 192 ITR 1 (59 Taxman 515.) (Ker.), Peter John vs CIT....
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....ued in the accounting period 1982-83 as for taxable income interest was to accrue on the end of the accounting period, but before that was given up. I record my reasons for adopting the above view. In support of my conclusion referred to above, I would rely on the decision of the Hon'ble Supreme Court (by majority) in the case of State Bank of Travancore vs CIT (1986) 158 ITR 102 (24 Taxman 337.). In the said case the assessee bank had contended that interest on "sticky" loans credited in the interest suspense account was not taxable as the same was only a notional and not real income. Sabyasachi Mukherji, J. (as Hon'ble Chief Justice then was) with whom Ranganath Misra, J. concurred rejected this contention and held that interest had already accrued and concept of real income cannot be used to make accrued income non-income simply because after the event of accrual, the assessee neither decided to treat it as a bad debt nor claimed deduction under section 36(2) of the Act. Their Lordships in the course of discussion extensively dealt with the question as to when income accrues. A large number of cases inclusive of the case of Morvi Industries Ltd. are discussed in the judgment. I ....
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....The High Court had taken the view that by reason of the resolution during the currency of the previous year the right of the assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of the board of directors to reduce the commission. The assessee was, therefore, held not liable on the large sum as it was only a hypothetical income which it might have earned if the old agreement, had subsisted." Their Lordships once again emphasised that the original agreement was changed during the previous year. The case of CIT vs Chamanlal Mangaldas & Co. (1960) 39 ITR 8 (SC) is then referred to. With reference to this case it is observed as under : "In that case, there was a provision for reduction of commission where profits were insufficient in the case of the managing agent. There was modification of the commission before the end of the year. The amount was given up by the managing agent. The question that arose was whether the income had accrued and what was the effect of the entries made in the books of account. It was held by this court that the agreement was an integrated and indivisible one and the managing agent's commission....
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.... accrue - whether at the end of the accounting year or upon the making up of, the accounts, in case of the entitlement of commission of the assessee in the managing agency commission and office allowance". In that case their Lordships pointed out that the Supreme Court had held that commission as per the agreement was to accrue to the assessee company only on making up of its accounts and was given up before the accounts were made and, therefore, commission did not accrue. Reference is then made to the decision of the Bombay High Court in CIT vs Confinance Ltd. (1973) 89 ITR 292, wherein their Lordships observed as under: "It was held in that case after discussing the facts that there were hardly any receipts in respect of items of interest or that the bona fides of the assessee in not charging interest were not disputed, were circumstances which were by themselves insufficient to support the conclusion that there was no real income in respect of the items of interest as none of the debts due by the several debtors was written off by the assessee and no evidence was produced to show that interest in respect of the debts was given up. The High Court, therefore, held that there wa....
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.... or at the end of the accounting year? 2. Whether in spite of resolution dated 29-3-1983 of the assessee-company validly giving up interest on loan to Shri K.R. Patel before the end of the accounting period, any interest accrued from 1-4-1982 to 29-3-1983 as a taxable income on the aforesaid loan?" THIRD MEMBER ORDER Garg, V.P. - On a difference of opinion between the Members, the following points of difference are referred by the President for my opinion : "1. Whether, on the facts and in the circumstances of the case, when the interest on loan advanced to Shri K. R. Patel accrued - from day to day ? or at the end of the accounting year? 2. Whether in spite of resolution dated 29-3-1983 of the assessee-company validly giving up interest on loan to Shri K. R. Patel before the end of the accounting period, any interest accrued from 1-4-1982 to 29-3-1983 as a taxable income on the aforesaid loan?" 2. The facts are not in dispute. The assessee has been charging interest from one Shri K. R. Patel, its Director upto assessment year 1982-83. It did not credit interest for assessment year 1983-84 because it passed a resolution not to charge the same on 29-3-1983. The res....
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....ued to the assessee it cannot be said that there was an income to the assessee which could be taxed but if it is given up after the income is accrued to the assessee it has to be taxed even if not received by the assessee. This well settled and laid down in the following decisions of the Supreme Court: (a) Morvi Industries Ltd. (b) State Bank of Travancore (c) CIT vs Shiv Prakash Janak Raj & Co. (P.) Ltd. (1996) 222 ITR 583 (88 Taxman 536). 5. The cases referred to by the Judicial Member for differing with the Accountant Member are of commission income which accrues only when accounts are made up at the end of the accounting year because it was based on the income of that year and as held by the Calcutta High Court in the case of CIT vs Hindusthan Motors Ltd. (1993) 202 ITR 839 at page 846 in the following words : "There is some distinction in the manner of accrual of interest income and the accrual of managing agency commission. The accrual of the managing agency commission depends upon the terms of the agreement. In the case of Birla Gwalior (P.) Ltd. (1973) 89 ITR 266 (SC), the date on which the commission was receivable was stipulated in the managing agency agree....
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....here was any agreement with the debtors to waive the interest during the previous year, i.e. the year of account, the claim for interest cannot be stated to have been given up so as to call for exclusion from the total income. Once the income accrues, it continues to remain as income accrued and, therefore, income assessable to tax." and in the penultimate paragraph, the Court observed as under : "It is by now well-settled that waiver or relinquishment of income after it has accrued or has become due is of no effect. In our view, the income by way of interest in the facts and circumstances of this case had already accrued from day to day and, in any event, on March 31, 1971, being the last day of the previous year relevant to the assessment year 1971-72. Therefore, the passing of resolutions subsequently on May 10, 1971 and/or on August 21, 1971, in the meeting of the board of directors of the assessee-company is of no effect." 8. Main emphasis of the Calcutta High Court in the aforesaid decision is on day to day accrual and the words "in any event, on March 31, 1971, being the last day of the previous year relevant to the assessment year 1971-72", were used because in tha....
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....ITR 923 and in the quoted portion at page 926 of that Report it was observed that right to interest under section 34 accrued on the date on which the Collector took possession. It was a right in praesenti. It recurred from day to day through out the years in between the two events, viz., dispossession and actual payment. 11. In the case of G. Padmanabha Chettiar & Sons the Madras High Court observed that on the amount due to the firm, no interest was taken credit for by the assessee through these advances were represented by promissory notes and interest accrued thereon from day to day. 12. In the other decision referred to in the order proposed by the Accountant Member in the case of S. C. Angre, though it is said that interest pertaining to period prior to 19th March, 1964 on which the additional compensation was awarded accrued in the year in which this date falls and interest pertaining to the period after 19-3-1964 is to be taxed on accrual basis in respective assessment years and in that context it was held that interest under section 34 accrues or arises at the time the possession of the land is taken and it accrues from year to year until the payment of interest is so....