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High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
JAMES FINLAY AND CO. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 60 Of 1977
Decided On : 12/22/1980
INCOME TAX - Interest credited to suspense account instead of interest account - Mercantile system of accounting - Whether interest assessable as income of previous year - Accrual of income - Real income - Change in method of accounting - Waiver of interest - Board's circular dated 6-10-1952 - Applicability.
Fact of the Case:
The assessee, a United Kingdom company, carried on business in India through its branches at Calcutta and Bombay. The Calcutta branch acted as agents for various tea and steamer companies incorporated outside India, as also for other overseas principals. The Bombay branch acted as agents for Lloyds. Both the branches dealt in sundry electrical and other goods. The books of account of both the branches in India were closed on 31st December. The assessment year 1970-71, with which the court was concerned, was in respect of the relevant accounting year being the calendar year 1969. In the company's books of account for the year ending on December 31, 1969, the following amounts receivable as interest on advance was found credited in suspense account:
Finding of the Court:
The Tribunal held that the interest credited to the suspense account instead of to the interest account was assessable on accrual basis. The assessee contended that the method of accounting followed by the assessee need not be an invariable one. The assessee further contended that the interest credited to the suspense account could not form part of the assessee's "real income". The court held that the assessee was right in contending that the method of accounting followed by the assessee need not be an invariable one and that the interest credited to the suspense account could not form part of the assessee's "real income".
Issues: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8,264 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ? Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 55,920 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ?
Ratio Decidendi: The court held that the assessee was right in contending that the method of accounting followed by the assessee need not be an invariable one and that the interest credited to the suspense account could not form part of the assessee's "real income". The court observed that the principle of real income had been succinctly enunciated by the Division Bench of the Bombay High Court in the case of H. M. Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom) as follows (at p. 529. of 57 ITR): "the principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, accrued to or given up on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language".
Final Decision: Both the questions were answered in the affirmative and in favour of the Revenue.
( 1 ) IN this reference Under Section 256 (2) of the I. T. Act, 1961, the following questions have been referred to this court :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8,264 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ?
( 2 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 55,920 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ?" 2. This reference relates to the assessment year 1970-71. The assessee is a United Kingdom company which carries on business in India through its branches at Calcutta and Bombay. The Calcutta branch acts as the agents for various tea and steamer companies incorporated outside India, as also for other overseas principals. The Bombay branch acts as agents for Lloyds. Both the branches deal in sundry electrical and other goods. The books of account of both the branches in India are closed on 31st December. The assessment year 1970-71, with which we are concerned, was in respect of the relevant accounting year being the calendar year 1969. In the company's books of account for the year ending on December 31, 1969, the following amounts receivable as interest on advance was found credited in suspense account: name of the branch Amount credited in suspense a/c. as interest Name of the party from whom interest was receivable Rs. Calcutta 8,264 M/s. Bags and Cartons, New Delhi. Bombay 55,920 Speciality Papers Ltd. , Bombay.
( 3 ) THE assessee was following the mercantile system of accounting. The ITO treated both items of interest as the assessee's income for the assessment year 1970-71.
( 4 ) THERE was an appeal. The AAC upheld the addition of Rs. 8,264 but deleted the other item of Rs. 55,920. There was a further appeal both by the Revenue as well as by the assessee before the Tribunal from the said order. The Tribunal observed that the "admitted facts" regarding the two items of interest credited to the suspense account instead of to the interest account were as follows :" (a) Interest charged to M/s. Bags and Cartons, New Delhi: rs. 60,000 had been advanced by the Calcutta branch to M/s. Bags and Cartons of New Delhi, in August, 1966, on the understanding that this would be repaid with interest. The party repaid Rs. 30,000 in 1967 towards the principal and Rs. 2,500 in June, 1968, towards interest; but thereafter no payment was made by it. The assessee decided to file a suit to recover the balance of the principal of Rs. 30,000 with interest. For this purpose, it continued to charge interest but credited it to a suspense account. The amount in credit as on December 31, 1969, was Rs. 8,264. Subsequently, a compromise decree was obtained in 1972, in terms of which Rs. 30,000 was to be repaid in monthly instalments of Rs. 2,500 commencing from 1st August, 1972, but no further sum would have to be paid by the debtor, unless he defaulted in the payment for two consecutive months, in which event interest would be payable. (b) Interest charged from M/s. Speciality Papers Ltd : the Bombay branch had advanced in 1965 Rs. 7. 5 lakhs to Speciality Papers Ltd. , for whom they were appointed selling agents. The interest due on this advance used to be credited to the profit and loss account of this branch, till December 31, 1967. The debtor, had not, however, paid any interest or repaid the principal, except Rs. 56,000, to this date. In this context, it was noticed from a report of the directors of Speciality Papers Ltd. for the year ended August 30, 1967, that a creditor had filed a petition before the Gujarat High Court for winding up that company. As there was no improvement in the financial position of the debtor-company, it was decided by the assessee-company that the interest due from the Specialit
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