Interest income accrues to the assessee during the relevant previous year even if it is subsequently forgone as a matter of grace, and the assessee cannot urge the argument that the interest was forgone for considerations of commercial expediency if this plea was not raised before the ITO or AAC and was negated by the Tribunal on merits.

Satish Chandra, J.

1. THE assessee-firm carries on money-lending business. It had some time back advanced a sum of Rs. 2 lakhs to Messrs. Kapoor Hosiery Factory (Pvt.) Ltd., Calcutta. In the previous year relevant to the assessment year 1969-70, a sum of Rs. 18,191 accrued as interest due on this loan. The accounting period of the debtor-company ended on January 31, each year. On January 31, 1968, it credited the account of the assessee with the aforesaid amount of interest. On February 2, 1968, the debtor-company addressed a letter to the assessee stating that the company was undergoing great difficulty and was not in a position to pay the interest. It requested the assessee to forgo the interest charges for that year. On February 8, 1968, the assessee replied :

"We appreciate your difficulty in payment of interest for the year ending January 31, 1968, in view of the continued losses suffered by your firm and considering our old relations we agree to forgo the interest amounting to Rs. 18,191.22 for the year ending January 31, 1968. Please note that it will not be possible to accommodate you in future."

2. ON receiving this reply, the debtor-company made a reverse entry adjusting the amount of interest.

The ITO rejected the plea that the interest did not accrue to the assessee as its income. He remarked that the assessee was maintaining accounts on the mercantile system and the amount had accrued as income from interest. The same view was taken by the AAC. The assessee went up in appeal to the Tribunal.

3. THE Tribunal held that on facts it was clear that the assessee-company had relinquished or forgone the payment of the interest as a matter of grace or bounty. The Tribunal further held that the assessee had never taken up the plea that the assessee had forgone the interest on grounds of commercial expediency and so it was not permissible for it to raise such a plea for the first time in second appeal. In the next place, it was held by the Tribunal that there was no evidence to show that any commercial considerations were involved. On a review of the facts and circumstances of the case, the Tribunal came to the conclusion that the relinquishment of the interest was made after it had accrued due to the assessee without it being based on any commercial considerations. The interest had actually accrued due before the debtor-company made the request that it should be relinquished. It also disallowed the claim put forward by the assessee for the first time that this amount was deductible from the income under Section 10(2)(xv) of the Act because no benefit in fact accrued to the assessee-company by forgoing the interest. The Tribunal repelled the submission that if the assessee-firm had not forgone the claim of interest, its principal amount of Rs. 2 lakhs would have been in jeopardy, as a farfetched argument. Ultimately, it was held that the claim for interest was not forgone by way of commercial expediency but as a matter of grace only. The appeal was dismissed.

4. AT the instance of the assessee, the Tribunal has referred the following questions of law for the opinion of this court:

"(1) Whether, on the facts and in the circumstances of the case, the interest income of Rs. 18,191 on the loan advanced by the assessee to Messrs. Kapoor Hosiery Factory (Private) Ltd. about twenty years back, accrued to the assessee during the previous year ?

2. If the answer to the first question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was not entitled to urge the argument that the interest was forgone for considerations of commercial expediency before it ?

3. If the answer to the second question is in the negative, then whether the Tribunal, on the facts and in the circumstances of the case, was justified in holding that the interest was forgone by the assessee not by way of commercial expediency but as a matter of grace ?"

On the findings of fa