ORDER
A. Satyanarayana, A.M.
1. This appeal filed by the assessee is against the order of the CIT(A), dt. 25th Sept., 1987, for the asst. yr. 1980-81 for which the previous year ended on 31st March, 1980.
2. In the assessment order passed under Section 143(3) of the IT Act, 1961 the ITO included Rs. 17,962 as interest accrued from the deposits with the Savings Trust, by observing as under:
“The Savings Trust
The assessee has two deposit accounts numbering I & II with the above institution and the assessee is entitled to the interest @ 5-1/2 per cent on the balance lying with the said two accounts. But the assessee for the first time did not disclose the said income in the last year with a note that the interest income is neither accrued nor received during the last year as there was practically no likelihood even to receive the payments of the deposits. But the assessee totally failed to establish and substantiate the above contention as per note by filing the certificates from the appropriate authority of the above two deposit funds to the effect that the said sums and the interest thereon will not be receivable at all. Hence, the above contentions were not proved and held as not supported by any facts and evidence in the last year. The assessee has again put the same note during the year also in the statement of computation of income attached with the return of income filed. And at the hearing stage it is admitted by the authorised representative that the facts of the case are exactly same as in the last year. In the light of the above, the contention for non-disclosing of the interest income from account. Nos. I & II with the Savings Trust as raised through the note are not supported by any facts and evidence during the year also and as such the contentions are hereby rejected and the interest income @ 5-1/2 per cent on the last year’s closing balance is included as in the past year.”
Aggrieved by the said order of the ITO, the assessee preferred an appeal before the CIT(A).
3. Before the CIT(A), the assessee’s counsel contended that the entire interest together with the investment in the Savings Trust had become bad, that the assessee was declaring interest income on the basis of certificate issued by the Savings Trust, that for the year ending 31st March, 1980, and also for the earlier year the Savings Trust did not issue any certificate to the assessee, that the affairs of the Savings Trust were the subject-matter of proceedings before the Hon’ble Calcutta High Court in suit No. 350 of 1975 and that there was no chance of recovery of the interest. The CIT(A) upheld the action of the ITO by observing as under:
“It is worth noting that the assessee had been declaring income not on the basis of receipt of interest but on the basis of the certificates of the Savings Trust. The rate of interest was known. The capital balance in the Savings Trust was also known. It is not that by mere intimation the Savings Trust credited this income. It was the agreement between the Savings Trust and the assessee in borrowing and lending money at a particular rate of interest, that gave rise to the income. Therefore, the mere fact that certificates from the Savings Trust was not received will not change the basis of accrual or non-accrual of income. On the available facts, it cannot be held that the income had not accrued to the assessee. True there is some element of uncertainty as to its realisation but as the amount is to be assessed on accrual basis the ITO correctly assessed the interest from savings.”
Aggrieved by the order of the CIT(A), the assessee filed the present appeal before the Tribunal.
4. The assessee’s counsel filed a paper book of 11 pages and also copy of letter dt. 20th March, 1980, from the assessee to the Savings Trust, and copy of the order of the CIT(A), dt. 28th June, 1989, in the assessee’s own case for the asst. yr. 1979-80. The arguments of the assessee’s counsel were to the following effect: Dalhousie Holdings Ltd. is the Indian Administrator to the Estate of Sir Edward Benthall (deceased). Dalhousie Holdings Ltd. as such Administrator had two deposits with the Savings Trust of Chartered Bank Buildings, Calcutta. The Savings Trust used to issue certificate of interest credited to the said deposit accounts. On the basis of the certificates issued by the Savings Trust the income-tax and wealth-tax returns were filed. The assessee by its letter dt. 21st March, 1980, required the Savings Trust for the issue of certificates showing the income accrued on the two deposit accounts with it. By a letter dt. 2nd May, 1980, the Savings Trust (filed at p. 62 of the paper book) regretted its inability to furnish the desired information since the Hon’ble Calcutta High Court directed the trustees of the Savings Trust to finalise the accounts and have the same audited after completion of the winding up of the Savings Trust. In such circumstances in the case of Sri D.K. Das Gupta when the WTO included the said assessee’s investment of Rs. 44,700 in the same trust, the AAC held that the said assessee’s investment in that Savings Trust should be taken at nil for the asst. yrs. 1980-81 and 1981-82. In the assessee’s own case also for the asst. yr. 1979-80 i.e., in the immediately preceding year, the CIT(A) by his order, dt. 28th June, 1989, held that it will be unjustified to include the interest income from the Savings Trust since the Savings Trust itself was no longer traceable and that it was unjustified to include Rs. 17,026 when there was no income. In that view, he allowed the appeal of the assessee for the asst, yr. 1979-80. The assessee does not maintain any books of account and so the interest should have been assessed on cash basis. In a similar manner this year also the CIT(A) should have deleted the addition of Rs. 17,962.
5. The Departmental Representative, on the other hand, relied on the orders of the lower authorities.
6. In the assessment order, the ITO has shown the method of accounting adopted by the assessee as mercantile. The assessee in its written note filed before the Tribunal at p. 1 of the paper book indicated that it was preparing returns on the basis of information received from the Savings Trust in the shape of certificates of accrual of interest income. We asked the assessee’s counsel whether there were any deposit certificates issued by the Savings Trust to the assessee who is the Administrators to the Estate of Sir Edward Benthall, deceased. The assessee’s counsel was unable to reply. The ITO has not examined the date in the deposit certificate for payment of interest and whether the interest accrued to the assessee as on 31st March, 1980. The assessee’s counsel before us contended that the assessee did not maintain any books of account. The ITO held that the assessee was following mercantile system of accounting. The assessee also admits that hitherto it was admitting the income on the basis of accrual as per certificates issued by the Savings Trust. The assessee before the ITO contended that there was practically no likelihood to receive the interest as well as the amounts of deposit also. The ITO held that the assessee failed to establish its claim about the irrecoverability of the interest and the deposited amounts. He did not question the bona fide belief of the assessee about the irrecoverability of the interest and the deposits. The Punjab & Haryana High Court in the case of CIT v. Ferozepur Finance (P) Ltd. (1980) 124 ITR 619 (P&H) held that where entries were not made on the bona fide belief that, the debt itself had become doubtful, the interest cannot be said to have accrued. The Madras High Court also in the case of CIT v. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad) took the same view that there is no question of taxing interest income when the principal money advanced by the assessee was not capable of realisation, even though the assessee adopted mercantile system of accounting in these circumstances, following the aforesaid decisions, we hold that the ITO was not justified in including the amount of Rs. 17,962 to the income of the assessee.
7. In the result, the appeal is allowed.
Vimal Gandhi, J.M.
1. The facts in this case are that the assessee-trust had deposited with a certain trust on which it was entitled to interest at a rate of 5 per cent per annum. All along the assessee did not maintain any books of account. But as per assessment order was assessed on mercantile basis in respect of interest income from the trust, For the period ending on 31st March, 1980, the assessee claimed that no interest on deposit with the trust had accrued as no certificate of accrual of interest was issued by the said trust in the relevant period. It has been further claimed that Saving Trust was no longer traceable and therefore inclusion of interest in the income was unjustified. This claim of the assessee has been rejected by the learned AO as also by the learned CIT(A). I fully agree with the view taken by the learned CIT(A). .
2. In the Case of Aeicorp (P) Ltd. v. ITO [ITA No. 617 (Cal) of 1987] I have discussed the decision (the majority view) of the Supreme Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC). In the said decision their Lordships referred to the decision of the Hon’ble Bombay High Court in CIT v. Confinance Ltd. (1973) 89 ITR 292 (Bom). It was observed that:
“Under income-tax law, receipt of income, either actual or deemed, is not a condition precedent to taxability. These were assessable if these had arisen or accrued or were deemed to have accrued or arisen under the Act. This principle would be attracted even in cases where an assessee followed the mercantile system of accounting. However, in examining any transaction or situation rather than purely theoretical or doctrinaire aspect. 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 was no giving up and these incomes were assessable. I am in respectful agreement with the conclusion of the Bombay High Court.”
(italicised by me to emphasize)
With reference to the decision of the Hon’ble Calcutta High Court in the case of James Finlay & Co. v. CIT (1982) 137 ITR 698 (Cal), their Lordships observed as under:
“That though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax.”
(italicised by me to emphasize)
It is thus clear that difficulties in realising interest in the accounting year or bona fides of the assessee in not charging interest and insufficient to support the conclusion that interest income did not accrue, In the case in hand, admittedly, the assessee was assessed in respect of interest income for the period ending on 31st March, 1978. There is no claim of giving up of interest. It is further not claimed that Savings Trust on the relevant period did not possess sufficient funds to pay principal or the interest to the assessee. It is only claimed that the assessee-trust is not traceable, But this is not correct. The Hon’ble Calcutta High Court in suit No. 350 of 1975 had appointed ad hoc Board of Trustees to manage the affairs of the Savings Trust. As per letter, dt. 2nd May, 1980, members of the above Board had written to the assessee as under :
“Please refer to your letter No. DB/BK/BA/1108, dt. 21st March, 1980, and the visit of your Mr. A. Bose to us in the above connection.
We confirm to have informed Mr. A. Bose that the ad hoc trustees of the Savings Trust have been directed by the Hon’ble High Court at Calcutta to finalise the accounts and to have the same audited after the completion of the winding up of the Savings Trust.
In the premises, we regret our liability to furnish to you the desired information.”
Thus, even after the close of the accounting year on 31st March, 1980, the Savings Trust is available in Chartered Bank Building. It is, therefore, difficult to accept that Savings Trust’s whereabouts are not known. Now, simply because the Savings Trust did not complete the books of account of 1979-80 in the relevant period it cannot be said that interest on deposit as per the agreed term did not accrue. No variation of original agreement has been pleaded or proved. The case in hand, in my view, is fully covered by the decision of their Lordships of the Supreme Court and the two decisions of the High Court referred to above.
The decision of the AAC in the case of Shri B.K. Gupta refers to some valuation of shares and is therefore of no avail. The alleged order for the asst. yr. 1979-80 referred to by the representative of the assessee is not traceable on record. It is also not relied upon in the order of the learned AM. For the above reasons I am inclined to sustain the addition of accrued interest. In my view the assessee’s appeal should be dismissed.
REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961
As there is a difference of opinion between the Members, we refer the following question to the President under Section 255(4) of the IT Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed on the interest of Rs. 17,962?”
V. Dongzathang, President
1. The following point of difference was referred to me under Section 255(4) of the IT Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed on the interest of Rs. 17,962?”
2. The facts are fully brought on record by the learned Members. The assessee, M/s Dalhousie Holdings Ltd., is an Indian Administrator to the estate of Sir Edward Benthall (deceased). The assessee maintains two deposit accounts numbering I and II. The closing balance as per the last year in Account No. I was Rs. 1,50,804. In account No. II, last year’s closing balance was Rs. 1,75,729. As per terms of the deposit with the Savings Trust, the assessee was entitled to the interest @ 5-1/2 per cent on the balance lying in the two accounts. The assessee, however, did not disclose the said interest income receivable from the Savings Trust. It was explained before the AO that there was no chance of receiving interest from the two deposits as the deposit itself is in jeopardy. The AO, however, did not accept the plea on, the reasoning that on the basis of the terms of the deposit, the assessee was entitled to a fixed interest of 5-1/2 per cent and the balance lying in account Nos. I and II are clearly ascertainable. Since the assessee has been maintaining its accounts on mercantile basis, it was held by him that the income has accrued and, therefore, it is liable to be assessed during the year. He, therefore, computed interest income from account No. I at Rs. 8,294 and from account No. II at Rs. 9,668, making a total of Rs. 17,962.
3. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT(A), it was argued before the learned CIT(A) that the entire investment in the Savings Trust had become bad and that there being no chance of even recovering the capital amount, there was no way of declaring the interest Income. Since the Savings Trust also did not issue any certificate in regard to the interest income receivable, it was not possible for the assessee to disclose the income. It was further submitted that the affairs of the Savings Trust were the subject-matter of proceedings before the Hon’ble Calcutta High Court in suit No. 350 of 1975 and, therefore, there was no chance of recovery of the interest. The learned CIT(A), however, did not accept the plea and upheld the order of the AO.
4. Still aggrieved, the assessee took up the matter in appeal before the Tribunal. The teamed AM agreed with the assessee and held that the AO was not justified in including the amount of Rs. 17,962 to the income of the assessee, by observing as follows :
“6. In the assessment order, the ITO has shown the method of accounting adopted by the assessee as mercantile. The assessee in its written note filed before the Tribunal at p. 1 of the paper book indicated that it was preparing returns on the basis of information received from the Savings Trust in the shape of certificates of accrual of interest income. We asked the assessee’s counsel whether there were any deposit certificates issued by the Savings Trust to the assessee who is the Administrators to the Estate of Sir Edward Benthall, deceased. The assessee’s counsel was unable to reply. The ITO has not examined the date in the deposit certificate for payment, of interest and whether the interest accrued to the assessee as on 31st March, 1980. The assessee’s counsel before us contended that the assessee did not maintain any books of account. The ITO held that the assessee was following mercantile system of accounting. The assessee also admits that hitherto it was admitting the income on the basis of accrual as per certificates issued by the Savings Trust. The assessee before the ITO contended that there was practically no likelihood to receive the interest as well as the amounts of deposit also. The ITO held that the assessee failed to establish its claim about the irrecoverability of the interest and the deposited amounts. He did not question the bona fide belief of the assessee about the irrecoverability of the interest and the deposits. The Punjab & Haryana High Court in the case of CIT v. Ferozepur Finance (P) Ltd. (1980) 124 ITR 619 (P&H) held that where entries were not made on the bona fide belief that the debt itself had become doubtful, the interest cannot be said to have accrued. The Madras High Court also in the case of CIT v. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad) took the same view that there is no question of taxing interest income when the principal money advanced by the assessee was not capable of realization even though the assessee adopted mercantile system of accounting. In these circumstances, following the aforesaid decisions, we hold that the ITO was not justified in including the amount of Rs. 17,962 to the income of the assessee.”
5. The learned JM, however, sustained the addition of accrued interest observing as follows :
“2. In the case of Aeicorp (P) Ltd. v. ITO [ITA No. 617 (Cal) 87) I have discussed the decision (the majority view) of the Supreme Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC). In the said decision their Lordships referred to the decision of the Hon’ble Bombay High Court in CIT v. Confinance Ltd. (1973) 89 ITR 292 (Bom). It was observed that :
Under IT law, receipt of income, either actual or deemed, is not a condition precedent to taxability. These were assessable if these had arisen or accrued or were deemed to have accrued or arisen under the Act. This principle would be attracted even in cases where an assessee followed the mercantile system of accounting. However, in examining any transaction or situation rather than purely theoretical or doctrinaire aspect. 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 was no giving up and these incomes were assessable. I am in respectful agreement with the conclusion of the Bombay High Court.
(italicised by me to emphasize)
With reference to the decision of the Hon’ble Calcutta High Court in the case of James Finlay & Co. v. CIT (supra), their Lordships observed as under :
That though there was difficulty in realizing the interest in the year of account, there was no material to show that there was any agreement with the debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax.
It is thus clear that difficulties in realizing interest in the accounting year or bona fides of the assessee in not charging interest and insufficient to support the conclusion that interest income did not accrue. In the case in hand, admittedly, the assessee was assessed in respect of interest income for the period ending on 31st March, 1978. There is no claim of giving up of interest. It is further not claimed that Savings Trust on the relevant period did not possess sufficient funds to pay principal or the interest to the assessee. It is only claimed that the assessee-trust is not traceable. But this is not correct. The Hon’ble Calcutta High Court in suit No. 350 of 1975 had appointed ad hoc Board of Trustees to manage the affairs of the Savings Trust. As per letter dt. 2nd May, 1980, members of the above Board had written to the assessee as under:
Please refer to your letter No. DB/BK/BA/1108, dt. 21st March, 1980, and the visit of your Mr. A. Bose to us in the above connection. We confirm to have informed Mr. A. Bose that the ad hoc trustees of the Savings Trust have been directed by the Hon’ble High Court at Calcutta to finalise the accounts and to have the same audited after the completion of the winding up of the Savings Trust.
In the premises, we regret our liability to furnish to you the desired information.
Thus, even after the close of the accounting year on 31st March, 1980, the Savings Trust is available in Chartered Bank Building. It is, therefore, difficult to accept that Savings Trust’s whereabouts are not known. Now, simply because the Savings Trust did not complete the books of account of 1979-80 in the relevant period it cannot be said that interest on deposit as per the agreed term did not accrue. No variation of original agreement has been pleaded or proved. The case in hand, in my view, is fully covered by the decision of their Lordships of the Supreme Court and the two decisions of the High Court referred to above.
The decision of the AAC in the case of Shri B.K. Gupta refers to some valuation of shares and is, therefore, of no avail. The alleged order for the asst. yr. 1979-80 referred to by the representative of the assessee is not traceable on record. It is also not relied upon in the order of the learned AM. For the above reasons I am inclined to sustain the addition of accrued interest. In my view the assessee’s appeal should be dismissed.”
6. On this difference of opinion, the matter was referred to me for decision. At the hearing, none appeared on behalf of the assessee. Shri Kai Sang, the learned senior Departmental Representative appeared for the Revenue and submitted that the learned JM correctly appreciated the nature of the income and applying the relevant case laws including the decisions of the jurisdictional High Court has confirmed the addition. Since the terms of the deposits are clear including the rate of interest and the amount lying at the credit of the assessee in account No. I and No. II, there is no denying the fact that the interest income has accrued on the basis of mercantile system of accounting regularly followed by the assessee. It is, therefore, submitted that the order of the learned JM is liable to be upheld as the correct view.
7. I have carefully considered the submissions in the light of the material on record. From the facts on record and the decisions of the Bench placed before me, it is seen that the question referred to me should have been more specific. The specific question should read as under:
“Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed on the interest of Rs. 17,962 during the asst. yr. 1980-81?”
8. From the details on record, there is no denying the fact that the assessee has two deposit accounts No. I and No. II. As per last year account, there were balances to the tune of Rs. 1,50,804 in account No. I and Rs. 1,75,729 in account No. II. Normally, the assessee should be entitled to interest @ 5-1/2 per cent on these balances remaining in the accounts. However, there are crucial developments affecting the source of income. On the basis of the information on record, it is seen that the Savings Trust, in which the assessee is having the deposits, is under liquidation and the Hon’ble High Court of Calcutta has appointed a Board of Trustees to administer the trust. As per the letter, dt, 2nd May, 1980, of the trustees of the Savings Trust to M/s Orr, Dignam & Co., the Solicitors of the assessee (A copy is placed at p. 6 of the paper book), it is seen that the Savings Trust has been directed by the Hon’ble High Court at Calcutta to finalise the accounts and to have the same audited after the completion of the winding up of the Savings Trust.
9. The previous year of the assessee is the year ending on 31st March, 1980. From the letter referred to above, dt. 2nd May, 1980, it is evident that the winding up of the Savings Trust was not yet completed and, therefore, the accounts of the Savings Trust were not finalized and were not audited, In such a case, the question of accrual of interest income and the amount of interest income can only be ascertainable after the accounts were finalized and audited. In these circumstances, it cannot be said that the interest income has accrued on 31st March, 1980. Until the income of the Savings Trust itself is determined including the interest income payable to the assessee and the same is credited to the account of the assessee, it will not be proper to say that interest income has accrued merely on the basis of the terms of the agreement. As rightly pointed out by the assessee before the AO and the CIT(A), the recovery of the capital itself is in jeopardy and the realization of the capital including interest can only be determined after the winding up process is completed and the accounts are finalized and audited by the auditors. Though it will not be right to say that the assessee is not liable to be taxed on the interest income of Rs. 17,962, it will definitely be correct to say that the assessee is not liable to be taxed on the interest income of Rs. 17,962 during the present assessment year.
10. The above view taken by me is indirectly supported by the provisions of Section 194A, i.e., deduction of tax on interest other than interest on securities, which provides that any person who is responsible for paying to a resident any income by way of interest other than income (by way of interest on securities), shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
11. Further, the Explanation to the above section provides as follows :
“Explanation.–For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any, other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”
12. Harmonious reading of the provisions of the Act clearly provides that interest income can be assessed on accrual basis or on receipt basis. However, the point of incidence of tax has been made at the time of credit to any account or on actual payment basis. In the light of the above, it will not be possible in the instant case of the assessee to assess the income merely on the basis of the terms of agreement without ascertaining the income receivable from the Savings Trust, whose accounts have not yet been finalized. I, therefore, concur with the learned AM.
13. The orders passed in this case may be placed before the Bench for passing consequential order in accordance with majority view.
Pramod Kumar, A.M.
1. On a difference of opinion between the Members constituting this Bench, when the appeal originally came up for hearing, following point of difference was referred under Section 255(4) of the IT Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed on the interest of Rs. 17,962?”
2. Hon’ble President, acting as Third Member in this matter, has concurred with the view of the learned AM that the assessee deserves to succeed in the appeal. In accordance with the majority view, therefore, this appeal should be allowed.
3. In the result, the appeal is allowed.