JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1984-85, the following question of law has been referred to this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 3,56,025 assessed as income as and by way of interest ?”
2. Briefly stated, the facts leading to this reference are that Messrs. Modest Enterprises Ltd. is the assessee and the assessment year involved is 1984-85. The Assessing Officer found that the paid up capital of the assessee-company was Rs. 24,50,000 and almost the entire capital was invested on loans bearing interest. However, no interest receipt had been accounted for on certain advances to parties. The auditor’s note showed that the assessee followed the cash system of accounting. The Assessing Officer further found that, during the year, the assessee received back a sum of Rs. 12,60,894 from Messrs. Ramnarayan Kayan and Co., to whom a sum of Rs. 23,84,400 was advanced last year and the assessee advanced fresh loans during the year to the following parties :
Name
Amount
(Rs.)
Messrs. Bhartia Commercial Co. Ltd.
7,00,000
Mrs. Renuka Goenka
1,50,000
Mahabir Prasad Bhatia
3,00,000
Subhas Properties
1,00,000
3. The Assessing Officer further found that Messrs. Ramnarayan Kayan and Co. was a proprietorship concern of Shri Sushil Kumar Kayan, one of the directors of the assessee-company. Therefore, the Assessing Officer held that the complete omission of interest income from the accounts even when a substantial portion of the loan had been repaid showed that the income of the assessee could not be properly deduced from the method of accounting followed by the assessee. Accordingly, interest estimated at 15 per cent. on the outstanding loan, i.e., Rs. 3,56,025, was included, in the assessment.
4. In appeal, the Commissioner of Income-tax (Appeals) observed that a deliberate arrangement had been made to give on loan almost the entire paid up capital to the directors and relatives without charging any interest. This would be beneficial to everybody concerned ; while no tax will be paid on interest on loans by the assessee, the other parties will take the benefit of the loan given by the assessee. Following the decision of the Supreme Court in the case of McDowell and Co. v. CTO [1985] 154 ITR 148, the Commissioner of Income-tax (Appeals) confirmed the action of the Assessing Officer.
5. Being aggrieved, the assessee brought the matter in appeal before the Appellate Tribunal. The Tribunal considered the submissions of the parties and the farts of the case. It failed to agree with the view taken by the Commissioner of Income-tax (Appeals) and allowed the assessee’s appeal with the following observations :
“9. We have perused the facts and considered the arguments. We have also gone through the judgments of the Calcutta High Court relied on and cited in support of the contention regarding the claims of the assessee. There is no dispute that the appellant company has been following the cash system of accounting regarding the interest. The appellant-company has shown the interest in the subsequent assessment year and which is accordingly assessed. The appellant-company is at liberty to manage its affairs in a manner of tax planning. If the tax planning is lawful, then it would be incorrect to allege the deliberate intention and device of the income. Though such a conduct can be inferred but inferring such a conduct cannot overrule the legal position. Therefore, we are unable to agree with the view taken by the Commissioner of Income-tax (Appeals).”
6. We have heard learned counsel appearing for the parties. There is no dispute in this case that the assessee-company had been following the cash system of accounting regarding the interest. The assessee has shown interest in the subsequent year and admittedly such interest has been assessed. It is true that the assessee received back the capital of Rs. 12,60,894 from a sister concern and advanced a fresh loan of Rs. 12,50,000 to four different parties. The assessee-company had an option to allocate the amount received back from the debtors either towards the capital or towards the interest. In this case, it was allocated towards the capital. It is not the case that the law does not permit such adjustment when the amount is received from the debtors towards the capital and the creditors also want to do so. It is only where neither the debtor nor the creditor makes any appropriation either to capital or interest, that it would be open to the Revenue to treat the payment as applicable to outstanding interest. This is the settled position of law. (see CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC)). In the instant case, the payment is not an open one and the assessee as the creditor had appropriated it to principal, leaving no room for controversy. The principle laid down by the Judicial Committee has been explained and reiterated by the Supreme Court in CIT v. T. S. PL. P. Chidambaram Chettiar [19711 80 ITR 467.
7. The fact remains that the real income has to be assessed. The assessee has maintained the cash system of accounting and has not reflected any interest in the accounts, no interest having been actually received in the year of account. The Income-tax Officer cannot, on an estimate, assess income by way of interest irrespective of the method of accounting regularly employed. As we have already indicated, the interest income has been assessed in the subsequent year. If the assessee is entitled in law to manage its affairs so that the interest income will be assessable in a particular year, it cannot be said that the income has been diverted at the source.
8. For the reasons aforesaid, we are of the view that the Tribunal came to a correct conclusion and we answer the question in this reference in the affirmative and in favour of the assessee.
Nure Alam Chowdhury, J.
9. I agree.