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PUNJAB & HARYANA HIGH COURT
M.R.Sharma, J.
Shiv Parkash Janakraj & Co.(P.) Ltd.
Versus
Commissioner Of Income-tax, Amritsar-i.
Income tax Reference No. 5 of 1975,
Decided On : SEPTEMBER 27, 1977
INCOME TAX - Accrual of Interest - Mercantile System of Accounting - Interest not actually paid or debited in account books - No fixed date for payment of interest - Interest not accrued on the last day of the accounting year.
Fact of the Case:
The assessee-company advanced a loan to a firm in which its directors and shareholders were interested. The loan was interest-bearing, but the assessee-company resolved not to charge interest for the assessment year in question. The Income-tax Officer added the interest to the assessee-company's income, holding that it had accrued before it was waived. The Appellate Assistant Commissioner upheld the addition, and the Tribunal confirmed it.
Finding of the Court:
The court held that the interest had not accrued to the assessee-company on the last day of the accounting year, as no interest had actually been paid or debited in the account books and no date had been fixed for payment of interest. The court relied on the Supreme Court decision in Commissioner of Income-tax v. Birla Gwalior (P.) Ltd., which held that commission receivable by a managing agent could not be said to have accrued before the managed company made up its accounts, even though the managing agent maintained its accounts on the mercantile system.
Issues: Whether the interest had accrued to the assessee-company on the last day of the accounting year, even though no interest had actually been paid or debited in the account books and no date had been fixed for payment of interest.
Ratio Decidendi: The court held that the interest had not accrued to the assessee-company on the last day of the accounting year, as no interest had actually been paid or debited in the account books and no date had been fixed for payment of interest. The court relied on the Supreme Court decision in Commissioner of Income-tax v. Birla Gwalior (P.) Ltd., which held that commission receivable by a managing agent could not be said to have accrued before the managed company made up its accounts, even though the managing agent maintained its accounts on the mercantile system.
Final Decision: The court answered the question in favor of the assessee-company and against the revenue.
M.R.SHARMA, J.
1. Since common questions of law and fact are involved in Income-tax References Nos. 93 and 94 of 1974, 5, 16, 53, 68, 109, 110 of 1975, and 3 to 6 of 1976, they are being disposed of by one judgment.
2. For facility of reference, facts giving rise to Income-tax Reference No. 5 of 1975 are briefly stated as under : At the instance of M/s. Shiv Parkash Janak Raj & Co. (P.) Ltd., Amritsar (hereinafter referred to as "the assessee-company"), the Income-tax Appellate Tribunal, vide its order dated October 7, 1974, referred the following questions of law under section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), for our opinion :
"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest for the assessment year 1971-72, had already accrued to the assessee on October 31, 1970, under the mercantile system of accountancy ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsequent relinquishment of interest by a resolution dated November 24, 1970, did not affect the tax liability of the assessee on accrual basis ?"
3. The facts on which this controversy has arisen may briefly be stated as under.
The partners of the firm known as M/s. Shiv Parkash Janak Raj & Co. (hereinafter referred to as "the firm") are shareholders of the assessee-company. The assessee-company had advanced a loan to the firm for which it charged interest to the tune of Rs. 25,048 for the assessment year 1966-67 and Rs. 25,843 for the assessment year 1967-68. By a resolution dated November 24, 1970, the assessee-company decided not to charge interest from the firm for the assessment year 1971-72, relevant to the accounting period ending on October 30, 1970. The said resolution reads as under : "The chairman informed the board that M/s. Shiv Prakash Janak Raj & Co., Bombay, which was Rs. 2,10,233.44 to the company is in a very tight position and has approached the company to waive the interest on the amount due from them for the year ended 31st October, 1970. He also informed the board that all the directors are interested in the said firm as partners. The matter was discussed by the board and it was resolved that no interest be charged from M/s. Shiv Parkash Janak Raj & Co., Bombay, on the amount due from them for the year ending 31st October, 1970."
4. The Income-tax Officer who was seized of the case observed that the loans in question were interest-bearing loans and since the assessee-company had relinquished the interest without any commercial consideration and since the directors and shareholders of the assessee-company were interested in the firm, it was a case of collusion to evade the tax liability. He therefore, added a sum of Rs. 31,565 to the income of the assessee-company under the head "Interest" at the rate of 15% per annum.
5. On appeal, the Appellant Assistant Commissioner observed that the resolution to waive the interest was passed on November 24, 1970, i.e., after the end of the accounting period and since the assessee-company after followed the mercantile system of accountancy, the interest had already accrued to the assessee before it was waived. On this basis, he upheld the addition of Rs. 18,941 to the income of the assessee-company under the head "Interest" at 9% per annum.
6. Feeling aggrieved, the assessee-company filed a second appeal before the Income-tax Appellate Tribunal which observed that even though no entries were passed in respect of the amount of interest either in the account books of the assessee-company or of the firm the loans were interest-bearing, that interest at the rate of 9% had been charged on previous occasions, that the resolution dated November 24, 1970, was passed after the expiry of the relevant accounting period, that the assessee-company followed the mercantile system of accountancy, and that the relinquishment of interest was not for commercial purpos
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