K.R. DIXIT, J.M.: ORDER Both above appeals arise out of order of CIT passed in exercise of his revisional powers under s. 263 of Income-tax Act, 1961 ('the Act'). ITO had not added interest on certain loans advanced by assessee, to income of assessee on accrual basis. CIT was of view that this omission by ITO was erroneous and prejudicial to interest of Revenue and, therefore, directed him to calculate interest, if any, on loans on accrual basis and add same to total income of assessee. particulars of these loans are as follows : Loan amount Name of party Rs 1. Balaji Enterprises 3,00,000 2. Smt. Saraswati R. Tanna and Mr. Bhogilal R. 25,000 Tanna 3. Shri V. K. Shah and Padmaben 1,75,000 4. Shri Vinodchandra Pandya 14,000 5. Noble Engineering Works 25,000 6. Subhash International 75,000 6,14,000 Shortly stated, assessee's case was that there was not much hope of recovery of these loans, therefore, interest on it should not be added to assessee's income on accrual basis. Commissisoner has considered relevant details regarding these loans which showed chances of recovery. According to him it could not be said that there was no possibility of recovery of principal amounts and so interest should be added to assessee's income on accrual basis. 2. Before us assessee's counsel has tried to show that there was harly any hope of recovery of these loans and so at least interest amount thereon should not be added to assessee's income merely because assessee was following mercantile system of accounting. At this stage it is necessary to give some further particulars regarding these loans. loans to Balaji Enterprises and Subhash International were given on security of right of distribution of certain firms. Both these loans were given in year 1977 and assessee had filed suits in respect thereof. There was no recovery so far and suits were transferred to list of long causes in Bombay High Court. assessee's advocate has filed copies of letters of 1983 from assessee's solicitors stating that suits will appear for hearing and final disposal before Court after about five or six years and letter regarding Balaji Enterprises also states that it normally takes eight to ten years before suit which is transferred to list of long causes, to appear for hearing and final disposal. He also pointed that said films had been proved to be flops and so there was hardly and security. loans to Smt. Saraswati R. Tanna and Bhogilal Tanna was given in 1970 and to Shri V. K. Shah and Shri Vinodchandra in 1972. All these three loans were given on securities of immovable properties. suits were filed and preliminary decrees obtained. In respect of all three loans assessee has filed copies of letters of 1983 from solicitors stating that applications for certified copies of decrees had been made but they had not yet been obtained and that efforts were being made to obtain them expediciously. principal debtor Shri V. K. Shah had become insolvent before his death and official assignee has no assets of insolvent in his hands. This was stated to CIT by assessee in reply to show-cause notice. 3. loan to Noble Engg. Works was given on demand promisory note but without any security. debtor had paid amount of Rs. 5,000 on 25th Sept., 1981 but thereafter, nothing had been received. assessee's counsel argued that assessee was public limited company and its conduct was clear and bona fide. Copies of accounts of aforesaid debtors showed that interest amount had been debited to accounts of various debtors were of debtors up to end of accounting year 1979, and thereafter, it had not been so debited. assessee's advocate also pointed out that directors report for year ended 1982 and resolution of Board in 1983 showed that assessee considered that amounts due from aforesaid debtors were of doubtful recovery and in view of financial position of said debtors and fact that nothing had been recovered from them, nor was there any chance of recovery, interest should not be credited to accounts of parties he also submitted that whatever may be classification on debts in balance sheet statement of accounts of parties should be seen and they showed that nothing had been recovered. He submitted that decisions relied upon CIT in case of Laxmipat Singhania vs. CIT (1969) 72 ITR 291 (SC) had no application to this case. He further relied upon by decisions in cases of Shiv Parkash Janakraj & Co. (P) Ltd. vs. CIT vs. CIT 1978 CTR (P&H) 102 : (1978) 112 ITR 872 (P&H), CIT vs. Ferozepur Finance Co. (P) Ltd. vs. CIT (1980) 18 CTR (P&H) 227 : (1980) 124 ITR 619 (P&H) at page 623 and CIT vs. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad). He also argued regarding loans to Balaji Enterprises and Subhash International that interest during pendency of suits is subjected to discretion of Court and could not be said to accrue as matter or right, relying upon decisions in cases of CIT vs. Naskarpara Jute Mills Co. Ltd. vs. CIT (1983)141 ITR 384 (Cal) & Sarangpur Cotton MFG Co. Ltd. vs. CIT (1982) 31 CTR (Guj) 247 : (1983) 143 ITR 166 (Guj) and dismissal of special leave petition by Supreme Court on this point in favour of assessee. 4. learned Departmental repesentative on other hand argued that in cases relied upon by assessee's advocate, debts were irrecoverable which was not case here. Regarding debtor Balaji and Subhash, he pointed out that they were firms and liability of partners was unlimited and it was not been shown that debt would not be recoverable. Regarding debts from Smt. Saraswati and Mr. Bhogilal, Shri V. K. Shah and Shri Vinodchandra, he emphasized that these were secured on immovable properties and that prices of immovable properties had skyrocketed and also that decrees in respect of these debts had been obtained. He argued that said decisions in cases of Naskarpara Jute Mills Co. Ltd. (supra) and Sarangpur Cotton Mfg. Co. Ltd. (supra) were not applicable in view of s. 34 of CPC, 1908. He further emphasized that debts had been classified as good debts by directors in balance sheet till 1982. Regarding debt from Noble Engineering Works he argued that amount of Rs. 5,000 had been received as recently as in 1981. assessee's advocate pointed out that interest had been waived inasmuch as statement of accounts had been sent to debtors not debiting interest for relevant periods. 5 . We are now faced with situation where although debt might not have become bad, claim of assessee maintaining accounts on mercantile basis, is that interest on these debts cannot be said to have accrued. It is to be noted that debts have not been written off by assessee. His plea is that circumstances regarding these debts are such that interest should not be regarded as having accrued thereon. position regarding interest is that it becomes bad if principal amount itself has become bad but it is not necessary in all cases that principal amount should become bad. position regarding recoverability of principal amount may be such that at least interest cannot be regarded as having accrued. It is necessary to appreciate that interest amount is not regarded as having become bad but that it has not accrued. In other words there is such zone of twilight between recoverability and complete irrecoverability for principal amount that at least interest thereon should not be considered as having accrued. possibility of recovery of principal amount may such that interest thereon would be far cry. Accrual should be real and substantial and not illusory merely on basis of maintenance of accounts on mercantile basis. 6 . In this background we will now examine facts and circumstances regarding various debts. As stated above debts from Smt. Saraswati Tanna, Vadilal Shah and Vinodchandra are secured debts on immovable properties and in fact decrees have been obtained in respect thereof. letters of 1983 from solicitors only show that there is some delay in obtaining certified copies of decrees. This is hardly any reason to conclude that interest thereon has not accrued. It has not been shown by assessee's counsel that it would be difficult to satisfy decrees. submission made by learned Departmental representative that value of immovable properties has greatly increased, is justified and it is not been shown that property would not be sufficient to meet assessee's claim. In fact letters from solicitors be sufficient to meet assessee's claim. In fact letters from solicitors show their readiness to recover dues by getting property sold and give no indication of any difficulty in that regard. decrees have been obtained in 1977 and under s. 34 Court has power to award interest from date of decree till payment or to such earlier date as Court thinks fit. Under proviso for commercial transaction rate of interest can exceed 6 per cent per annum but not contractual rate and where there is no contractual rate, rate at which moneys are lent or advanced by nationalized banks in relation to commercial transaction. Under Explanation II transaction if it is connected with industry, trade or business of party incurring liability. Therefore, although according to aforesaid decision interest may be discretionary under s. 34 decrees which have been obtained would provide for it. periods relevant to assessment years in question would be covered by award of interest from date of decree. Therefore, decree should be seen and whatever interest has been awarded therein should be considered as having accrued to assessee and added to income. 7. Regarding debts from Balaji Enterprises and Subhash International however, circumstances are quite different. suits have been transferred to list of long causes and as stated by solicitors it will take long time for suits to reach hearing. result there of cannot be taken for granted. Although there is security for debts that security is also of doubtful value. distributors have not taken delivery of films and it is not like immovable property. Therefore, circumstances are such that interest on these debts cannot be said to have accrued to assessee. Although debts might not be regarded as bad debts by asessee position regarding their recovery is such that accrual of interest thereon cannot be said to have any real and substantial basis. Regarding debt from Noble Engineering Works it is merely advanced against promisory notes. There is no security. Although it is true that amount of Rs. 5,000 has been paid in 1981, total amount advanced is Rs. 25,000. Therefore, it cannot be said that any substantial part of total debt had been paid on which any real expectations can be based for recovery of full amount. amount was advanced in 1975 and Rs. 5,000 had been paid only in 1981. fact that it has taken six years to recover one-fifth of amount shows that there cannot be firm expectations regarding payment of full amount. fact that amount had been paid in 1981 may prevent debt from becoming time bared but that is all. In these circumstaces it cannot be said that interest on it has accrued to assessee. 8. Supreme Court decision in case of Laxmipat Singhania (supra) on which learned CIT has relied, has no application in this case because that was case of deemed distribution of dividend under statute. This is not case here. question here is whether interest had accrued at all or not. If income is deemed to be distributed ITO is bound to add it for year in which it is so deemed according to said decision. But that does not mean that if income has not accrued really it can be taxed. 9. result is that regarding debts from Smt. Sarawati Tanna, V. K. Shah and Vinodchandra matter is restored to ITO to verify from decrees how much interest, if any, has been awarded by Court and add amount to assessee's income for relevant assessment years. Regarding interest on debts from Balaji Enterprises and Subhash International and Noble Engineering Works we hold that interest cannot be said to have accrued to assessee. 10. In result, appeals are partly allowed. *** VASANT INVESTMENT CORPN. LTD. v. INCOME TAX OFFICER