D.R.D. TATA v. INCOME TAX OFFICER
[Citation -1984-LL-0312-1]

Citation 1984-LL-0312-1
Appellant Name D.R.D. TATA
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 12/03/1984
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags method of accounting • rate of interest • accrual basis • money-lending • bad debt
Bot Summary: The only issue in this appeal is whether the assessee should be assessee i n respect of interest of Rs. 4,000 which, according to the Department, is due from a party. For the first year, the assessee received an interest of Rs. 4,000 which was shown as the income of that year. Shri Dastur, the learned counsel for the assessee, submitted that the assessee does not have money-lending business. According to the assessee's counsel, the assessee has changed his method of accounting from 1979 when he did not credit any interest. Since we find that there is no material to show that the assessee has changed the method of accounting to cash, we have to consider the next submission as to whether any income has accrued during the accounting year. Even from the assessee's right to receive interest does not necessarily follow that interest has accrued. Considering the facts of the case against the background of commercial and business realities of the situation, it will not be possible to say that the assessee is in receipt of income by way of interest.


only issue in this appeal is whether assessee should be assessee i n respect of interest of Rs. 4,000 which, according to Department, is due from party. assessee is individual. He had advanced loan of Rs. 50,000 to firm by name Shevade Camera Works on 3rd April, 1975 at 8 per cent interest. For first year, assessee received interest of Rs. 4,000 which was shown as income of that year. Thereafter, assessee did not receive any interest. In spite of that, in returns filed, assessee showed these amounts as due and was assessed. For asst. yr. 1979-80, no such income was shown. We are concerned with asst. yr. 1980-81. In this year also, no interest was shown as receivable. ITO found that assessee was maintaining his accounts on mercantile basis. He further found that assessee had not relinquished any of his rights to receive interest. He, therefore, held that interest had accrued and should be included in assessment. Against this finding, assessee appealed. AAC found that amount due has not become bad debt. As accounts were maintained on accrual basis, interest due must be included in assessment. Against this finding, assessee is on further appeal before us. Shri Dastur, learned counsel for assessee, submitted that assessee does not have money-lending business. Although there is income by way of interest amounting to Rs. 73,691 as per assessment order, it consisted mostly of income from deposits made in limited companies and friendly loans given to friends at nominal rate of interest of 2 per cent. He further submitted that income has to be assessed under 'other sources' and not as 'business income'. Even for other sources, method of accounting followed by assessee has t o be considered. He admitted that assessee had maintained books of account. But, according to him, no income had accrued during year. Relying on decision of madras High Court in case of CIT vs. Motor Credit Co. ( P ) Ltd. (1981) 127 ITR 572, he submitted that method of accounting determines only mode of computing taxable income and it does not determine issue whether any income at all has accrued. He stated that assessee had not taken action against debtor nor debtor had acknowledged any indebtedness. As alternative submission, Shri Dastur stated that fact that assessee had not credited any interest in books of account would show that he had changed over method of accounting to cash. Since nothing has been received during this accounting year under this method, no income could be brought to assessment. To query whether such change of method has been followed in respect of each of other loans, he submitted that no change had been effected by them but, according to him, each loan is separate source of income. For this purpose, he relied on decision of Supreme Court in case of CIT vs. Lady Kanchanbai (1970) 77 ITR 123. Shri Tuli, for Department, submitted that there is no evidence to show that assessee had changed method of accounting. He submitted that assessee cannot change his method according to his sweet will. He then pointed out that there is no evidence also to show that debtor has become financially weak so that it could be said that no income had accrued. We have considered facts of case. It is admitted position that assessee is maintaining books of accounts. It is also admitted position that in earlier years interest due has been credited in interest account on mercantile basis. But, according to assessee's counsel, assessee has changed his method of accounting from 1979 when he did not credit any interest. It is open for assessee to change method of accounting followed by him. But change has to be in respect of entire source of that income. He cannot pick up one item in respect of source of that income and deal with it differently from other items. This is well known principle and it has been referred to by Calcutta High Court in case of Reform Flour Mills (P) Ltd. vs. CIT (1981) 132 ITR 184. Insofar as assessee has not changed method of accounting of other items, one cannot accept sale mission that method of accounting changed into cash. Reliance had been placed on decision of Supreme Court in case of Lady Kanchanbai (supra). We do not find this case of any help in deciding issue. Supreme Court therein had pointed out that assessee could have previous year for each separate sources of income. They had quoted with approval observations of Privy Council that source means not legal concept which practical man would regard as source of income. This observation will not allow us to give to finding that each transaction of loan should be treated as separate source of income. All transactions together would constitute one source of income. Since we find that there is no material to show that assessee has changed method of accounting to cash, we have to consider next submission as to whether any income has accrued during accounting year. It is true that merely because method of accounting followed is mercantile, income should be treated as accrued. In case where debtor is quite unable to pay principle or interest, no income would accrue. As Madras High Court has laid down, whether income has accrued or not has to be seen with reference to commercial and business realities of situation in which assessee is placed and not with reference to his system of accounting. So, this would take us to issue as to whether debtor was in position to pay interest or principal back. ITO had made observation that assessee had not relinquished his right to receive interest. But that would not be conclusive. Even from assessee's right to receive interest does not necessarily follow that interest has accrued. AAC has also given finding that loan cannot be considered as bad debt for asst. yr. 1980-81. However, neither ITO nor AAC had referred to such facts which had been brought to their notice by assessee's chartered accountants in their letter dt. 22nd Feb., 1981. It has been stated therein that debtor, Shevade Camera Works was in serious financial difficulties and it had incurred losses exceeding its capital. It appears quite unlikely that assessee had claimed that no income had in fact accrued. Since their submissions in their letter had not been controverted by Department, it would appear safe to draw conclusion that position of debtor was so unsound that it would not be possible to expect any payment of interest. In this connection, it may not be necessary to say that debt had become bad. If debt had become bad, assessee would not receive either interest or principal back. In this case, it may be that assessee had hopes of getting some part of principal back. That does not mean that assessee would be able to get interest for these years. Therefore, considering facts of case against background of commercial and business realities of situation, it will not be possible to say that assessee is in receipt of income by way of interest. On these grounds, we will accept assessee's appeal. interest addition will stand deleted. *** D.R.D. TATA v. INCOME TAX OFFICER
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