Income-tax is levied on income, and if income does not result at all, there cannot be a tax.

Gokal Chand Mittal, J.

1. The Income-tax Appellate Tribunal (Chandigarh Bench) has referred the following question for our opinion:

" Whether, on the facts arid in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 1,24,000 made on account of accrual of interest ? "

2. The assessee used to carry on business of finance and hire purchase, but later on was ordered to be officially wound up under the orders of this court. For the assessment year 1969-70, the assessee filed a return declaring a loss of Rs. 2,60,322. During the course of assessment, the ITO noticed that there was an account in the name of Shri. B.K. Bedi showing a sum of Rs. 10,81,931 due from him as on 1st April, 1968, which was reduced to Rs. 10,17,981 as on 31st March, 1969, but no interest was charged on this account.

3. The ITO called for the explanation of the assessee for not charging any interest on the amount due from Shri B. K. Bedi. The assessees explanation was that the financial position of Shri Bedi was bad and there was no hope of recovery even of the principal amount and, therefore, it was not considered necessary to charge any interest and for that reason no interest was added to the amount due from him during the previous year. The ITO found that a sum of Rs. 1,05,000 was paid by Shri Bedi during the year in question on different dates and also obtained an advance of Rs. 29,000 on 17th June, 1968, and, therefore, it could not be said that the financial position of Shri Bedi was really bad. It was also found that the non-charging of interest on account of bad financial position of Shri Bedi was neither confirmed by the board of directors nor there was any resolution available in that regard. Since the method of accounting followed by the assessee was on mercantile basis, the ITO added interest of Rs. 1,24,000 (at the rate of 12 per cent. per annum) and computed the total income of the assessee and framed the assessment on 28th October, 1971.

4. The assessee took up the matter in appeal before the AAC of Income-tax, who by order dated 11th February, 1972, upheld the order of the ITO for making the addition of Rs. 1,24,000 in respect of interest due from Shri Bedi. The matter was taken up by the assessee in further appeal to the Income-tax Appellate Tribunal (Chandigarh Bench) which was allowed by order dated 31st October, 1974, and the addition made by the ITO in regard to Rs. 1,24,000 was deleted on the basis that the department itself did not seriously dispute the fact that the financial position of Shri Bedi was weak as it was shown to the Tribunal that he was in huge arrears of income-tax for the following three years as detailed below : Rs. 1961-6226,374 1962-6343,318 1963-641,01,481

5. The Tribunal also noticed that Shri B. K. Bedi had filed appeals before the Tribunal relating to penalties under Section 221 for non-payment of the taxes due. From all the facts and circumstances of the case, the Tribunal concluded on facts that they definitely indicate that Shri Bedis financial position was not good and it was with that knowledge that the assessee followed the method of not charging interest in cases of those debtors whose financial position was weak, which method was accepted by the Tribunal for the year 1964-65 and, therefore, no income on account of interest in Shri Bedis account should have been added in the assessees income. As regards the payments made by Shri Bedi to the assessee to the tune of Rs. 1,05,000, it was noticed that one credit of Rs. 67,000 was made on 7th June, 1968, on account of sale proceeds of Chandigarh properties and credit of Rs. 32,500 as made on 7th June, 1968, with regard to sale proceeds of other properties of the debtor and in that very account debit of Rs. 29,000 was made on the same day. It was further noticed that there was a credit of Rs. 2,275 in the debtors account on 18th June, 1978, by sale of fifteen shares of Free India Ltd. The sale of all these properti