This set of two appeals which relate to assessment years 1979-80 and 1980-81 are filed by assessee. As both these appeals are inter-connected and involve common grounds they are taken up together and disposed of by this combined order for sake of convenience. 2. Sarabhai Chemicals (P.) Ltd., assessee (SCPL), is limited company which filed its return on 29-6-1979 declaring total income of Rs. 772 under head 'Profits and gains of business or profession' for assessment year 1979-80. For assessment year 1980-81 it filed its return on 27-6-1980 declaring loss of Rs. 17,345. ITO for reasons set out in his order determined total income for assessment year 1979-80 at Rs. 68,99,202 and that for assessment year 1980-81 at Rs. 55,70,407. It follows mercantile system of accounting and previous year for assessment year 1979-80 had ended on 30-6-1978 and that for assessment year 1980-81 on 30-6- 1979. With effect from 28-2-1977 industrial undertaking of SCPL and business activities of Sarabhai Common Services Division which was unit of Sarabhai Chemicals were taken over by Elscope (P.) Ltd. (EPL) which in turn, after short time transferred these undertakings to Ambalal Sarabhai Enterprises (P.) Ltd. (ASEPL). agreement for sale was made on 28-2-1977 and deed of assignment was executed on 28-6-1977. It was explained to ITO that income earning apparatus of company has been transferred and, therefore, only source of income with assessee was interest from Industrial Development Corporation (IDC), transfer of industrial undertaking and business of Sarabhai Chemicals Division and Sarabhai Common Services Division to EPL was effected as going concern with all assets, property, rights and benefits thereof including benefit of goodwill of said business and liabilities, duties and obligations relating to or arising out of said business. transfer of assets included transfer of entire plant and machinery, other equipments, stock-in-trade, stock-in-process, finished goods, raw and packing materials, spares and other articles, licences and quotas, formulae, processed data, information concerning industrial, scientific and commercial knowledge and all other tangible and intangible assets. consideration was determined on basis of book value of assets as on 28-2- 1977 as reduced by all current and other liabilities and provisions as on 28-2- 1977 plus amount of Rs. 10.30 crores as value of goodwill of both divisions of company. ITO made detailed enquiries in regard to aforesaid transaction. It was clarified on behalf of assessee that immovable properties of SCPL were transferred under duly executed registered document only on 2-2-1978. It was also stated that assessee had not received any interest from EPL to whom its undertaking was transferred on 28-2-1977. 3. As part of agreement of transfer of its industrial undertaking and business to EPL, latter had to make payment of purchase consideration to assessee as indicated hereinafter: (a) Rs. 49,00,000 as earnest money payable on or before 28-2-1977. (b) Rs. 4,41,00,000 to be set off, adjusted and applied for and on behalf of company to credit and pay in full uncalled capital of Rs. 90 per share on 4,90,000 equity shares of Rs. 100 each held by company in EPL. (c) Rs. 2,00,00,000 as, and when demanded by company and carrying simple interest at rate equal to rate of interest which company pays to its bankers in ordinary course of business. (d) Rs. 4,54,18,760.89 payable in eight equal annual instalments on 1st October of every year beginning from 1-10- 1979 carrying interest at 11 per cent per annum and said sum or balance thereof from time to time to remain unsecured. ITO observed that assessee was entitled to interest at rate equal to rate of interest which company paid to its bankers on Rs. 2 crores and at rate of 11 per cent on sum of Rs. 4,54,18,760. further scrutiny of balance sheet revealed that assessee had advanced sum of Rs. 7,45,000 to EPL. There were also advances of certain amounts to Ambalal Sarabhai Chemicals Ltd. balance at end of year stood at Rs. 1,84,885. assessee had also advanced sum of Rs. 33,64,294 to Shahibag Entrepreneurs (P.) Ltd.--another company of same group. ITO observed that in respect of these advances no interest was shown as received or receivable. ITO, therefore, called upon assessee to show cause as to why firstly income from immovable properties which remained to be transferred by registered deed should not be taxed under section 22 of Income-tax Act, 1961 ('the Act'), from beginning of accounting period till date of registration. Secondly, why interest on accrual basis be not taxed on amounts due from EPL as outstanding purchase consideration and on advances made to other concerns of assessee group. ITO then examined assessee's explanation in regard to above objections in detail and determined income from property at Rs. 2,69,194 as indicated in his order. As regards other point ITO observed that assessee was de facto investment company. He examined balance sheet of assessee and analysed position of assets as indicated in para 9 of his order. He then referred to account of EPL and found that no interest was charged on outstanding balance of purchase consideration. assessee's explanation was that according to revised mode of payment agreed to between assessee and EPL interest was chargeable only with effect from 1-7-1979 and as such no interest on outstanding amount for year ended 30-6-1978 was charged or chargeable. In support of this claim assessee relied on minutes of meeting of board of directors held on 30-6-1978. As regards interest due on advance of Rs. 7.45 lakhs as aforesaid, assessee's claim was that advance was made for purposes of business and such advance having been made to wholly owned subsidiary no interest was charged and that no interest was claimed by assessee as deductible from any other income. same was true of advance made to Shahibag Entrepreneurs Ltd. as also in regard to advance made to Sarabhai Chemicals Division of ASEPL. mainstay of assessee's contention was that interest cannot be taxed on hypothetical basis even though under mercantile system of accounting interest was taxable on basis of accrual. It was not general proposition of law that in each and every case where assessee followed mercantile system of accounting interest must be charged on accrual basis. There are well recognised exceptions thereto and in support of this contention various decisions were relied upon (to which we shall refer little later). ITO did not accept this contention. He held thus: " In this view of matter I hold that loan in question being interest bearing loans and since assessee-company had relinquished interest without any commercial consideration and since two companies were intrinsically related it is case of collusion to evade tax liabilities and, therefore, interest on accrual basis is taxable in hands of assessee. above observations would, mutatis mutandis, apply to interest chargeable on other advances as well. assessee was asked to give computation of interest but assessee has not given such working. interest income is, accordingly, estimated on basis of data made available. Interest is calculated at 15 per cent on product method on all advances except for part of deferred sale consideration. As regards interest on remaining part of deferred sale consideration interest is calculated at 11 per cent on Rs. 4,54,18,760 as per original agreement. " In light of above discussion ITO determined total income of assessee at Rs. 75,01,464 in draft order which was forwarded to IAC as required under provisions of section 144B of Act. 4. IAC after hearing assessee upheld finding of ITO in regard to inclusion of income from property. He, however, deleted addition of Rs. 6,02,260 in regard to estimate of interest as proposed by ITO, on outstanding advances made to various parties other than EPL as stated above. He thus directed ITO to finalise assessment with said modification. 5. For assessment year 1980-81 following his decision for assessment year 1979-80 interest of Rs. 57,17,750 on accrual basis was sought to be included in income as disclosed by assessee. ITO, thus, prepared draft order on above lines and forwarded same for approval of IAC under section 144B. IAC in light of mistake in computation reduced said amount to Rs. 55,67,715 and in substance approved addition as proposed by ITO, as accrued interest on deferred sale consideration. It may be pointed out that in coming to above conclusion, ITO rejected contention of assessee on ground that in view of new agreement made on eve of accounting year relevant to assessment year 1980-81 there was no accrual of income by way of interest. 6. Being aggrieved assessee carried matter in appeal before Commissioner (Appeals) for both years who approached controversy from slightly different angle, viz., on principle of lifting of corporate veil. In this connection he mentioned that in first place in original agreement dated 28-2-1977 there was no specific stipulation of receiving interest on unpaid sale price. Secondly, in agreement recorded within four days thereafter, i.e., on 4- 3-1977, it was stated in unambiguous terms that proposal relating to payment of interest was left out due to oversight and accident. Thus, main purpose, if not sole purpose, of agreement dated 4-3-1977 was to correct mistake of omitting to mention stipulation about interest receivable on unpaid sale price. Thirdly, above position held good, i.e., relating to charge of interest till date of assignment was made on 28-6-1977. Thus, in said deed of assignment position relating to levy of interest was reiterated. Fourthly, for period of 15 months, i.e., from 4-3-1977 to 15-6-1978 stipulation relating to levy of interest held field unchallenged. Fifthly, on 15-6- 1978, buyer company made proposal for amendment to which assessee-company ungrudgingly agreed and as result gave up interest exceeding Rs. 1.20 crores for two years under consideration. Sixthly, reason for above concession was on ground of commercial expediency in first place and offer of buyer company to furnish security in second. And lastly, business expediency which prompted assessee to give up said interest was not spelt out in fact conspicuous by its absence. These facts, Commissioner (Appeals) observed, made it abundantly clear that agreements dated 28-2-1977, 4-3-1977 and 28-6-1977 did not mention about giving up of interest on twin grounds of business expediency and furnishing of security. Commissioner (Appeals), therefore, examined question relating to security as offered by EPL in great detail and in this connection he pressed into service above-referred principle of lifting of corporate veil. Prima facie assessee's claim was that its wholly owned subsidiary was offering security for debts payable to its holding company, viz., assessee. In this connection he referred to decision of House of Lords in Solomon v. Solomon & Co. Ltd. [1897] ASC 22-51. He also relied on commentary of Palmer and Gower as also commentary of learned author A. Ramaiya in his treatise on Companies Act, 1956 styled Guide to Companies Act. He then referred to decision in case of CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) as also decision in case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) as also decision of their Lordships of Gujarat High Court in case of Wood Polymer Ltd., In re. [1977] 109 ITR 177, Imperial Chemical Industries Ltd. v. CWT [1979] 119 ITR 46 (Cal.) and M.N. Kanagasabai Chettiar v. CIT [1970] 75 ITR 672 (Mad.). These decisions, according to him, support principle of lifting of corporate veil as applicable in India. According to Commissioner (Appeals) that one of circumstances in which said principle could be applied related to transactions between subsidiary and wholly owned companies as well as taxation. Both these factors, according to Commissioner (Appeals), were present in instant case. mainstay of Commissioner (Appeals)'s findings in this regard were firstly taxable income of assessee was sought to be reduced by Rs. 1.20 crores over period of two years by granting concession in matter of payment of interest in favour of holding company by subsidiary company. In this connection he pointed out that there was sudden spurt in share capital of EPL from Rs. 10 lakhs on 30-6-1976 to Rs. 500 lakhs on 30-6-1977, i.e., fifty times in one year. Out of total increase of 490 lakhs sum of Rs. 441 lakhs was to be adjusted against purchase price of industrial company itself. In effect total price payable was Rs. 1,144 lakhs and after making adjustment of Rs. 441 lakhs as aforesaid paid-up capital would be Rs. 59 lakhs only and net purchase price would be 703 lakhs, i.e., about 12 times. There was also sudden spurt in gross assets of EPL which shot up to Rs. 3,500 lakhs from mere Rs. 35 lakhs earlier. EPL after effecting above purchase sold off entire undertaking to its wholly owned subsidiary ASEPL. He then referred to gross assets and profits of EPL like spurt in value of gross assets there was sudden spurt in profit for period ending 30-6-1977 which was reduced to negligible figure in subsequent years. These transactions, therefore, could not be styled as normal business transactions, therefore, had to be viewed with caution and circumspection. These facts alone would clearly belie assessee's submission of giving up of interest on ground of commercial expediency or business consideration. He then referred to security which was offered by EPL which was receivable by it from ASEPL and came to conclusion that there was no real consideration involved in giving up such large amount of interest which had otherwise accrued to assessee. He then referred to various decisions which were relied upon by assessee (at page 18 of his order) and observed: firstly, that in all these decisions transactions were at arms length and principle of lifting of corporate veil was not applicable, secondly giving up of income in cases cited was reasonable and realistic while in instant case such large chunk of income, i.e., Rs. 120 lakhs was sought to be given up. Thirdly, interest was forgone for valid reasons like bad financial condition of company or firm, etc., such situation was absent in instant case. Lastly, in above-cited cases there were no written agreements or in case written agreements were made there was clear stipulation about intention to charge interest, etc. These decisions according to Commissioner (Appeals), therefore, were not at all applicable. He, thus, concluded that interest was clearly receivable by assessee in accordance with agreement dated 4-3-1977 and was rightly brought to tax for assessment year 1979-80. For same reasons he upheld addition of interest for assessment year 1980-81. 7. Being aggrieved assessee has come up in appeal before us for both years. Shri S.P. Mehta, learned counsel for assessee, at outset referred to sale made to subsidiary EPL on 28-2-1977 which was made effective from 1-3-1977. He next pointed out that supplementary agreement was entered into on 4-3-1977 in order to set right omission which was noticed qua original agreement of 28-2-1977. Thereafter there is deed of assignment under which entire undertaking was conveyed to EPL and conveyance was made on 2-2-1978. On 15-6-1978 proposal was made by EPL for modification of terms of payment (to which we shall refer to little later) which was duly accepted by board of directors of assessee-company by its resolution dated 30-6-1978 and it was in terms of these arrangements that original agreement stood revised or so to say superseded and interest which would have accrued under original agreement as modified by later agreement dated 4-3-1977 stood waived. Shri Mehta then submitted that as matter of fact vendee company, namely, EPL in its turn had transferred said undertaking along with other industrial undertakings to ASEPL on 1-7- 1977. Shri Mehta then submitted that original agreement was accepted as valid agreement and, therefore, modification to terms of original agreement must be treated as valid and operative. It was not proper, therefore, for authorities below to hold that agreement was void. It was equally not proper on part of authorities below to hold that transaction was sham one. In fact revised arrangement was made with view to conserve resources of company. No undue benefit was obtained by assessee by said waiver as in fact ultimate benefit has flown to public limited company. theory of 'lifting of veil' had no application to facts of case. In other words, according to Shri Mehta, once original agreement was accepted as genuine (that is agreement dated 28-2-1977) and supplementary agreement dated 4-3-1977 must also be held to be valid. third agreement relating to waiver of interest is not disputed as non-genuine but what is sought to be challenged is ultimate effect of such arrangements. Thus, revenue's grievance is that by making rearrangement as aforesaid in regard to payments of instalments by purchaser, vendor had given up its right to substantial amount of interest which cannot be treated as act of prudence or motivated by commercial expediency. Shri Mehta was at pains to state that entire transaction had to be seen from overall angle. When industrial undertaking valued at about more than Rs. 1,144 lakhs was sought to be transferred effect in terms of interest would also be substantial in terms of money. From overall angle it cannot be said to be so substantial as to doubt motive of assessee about desirability of transaction in question. main reason which has persuaded assessee-company to enter into revised arrangement was substantial security being offered by EPL. transactions were effectively entered into between holding company and subsidiary company and distinction between two has been well recognised and if lifting of veil principle was applied it would amount to payment to self and, therefore, effectively, from this angle no income could be said to have accrued to assessee. Therefore, judgments referred to in this connection by Commissioner (Appeals) had no application. It must be remembered, Shri Mehta argued, that assessee maintained mercantile system of accounting and income was sought to be taxed on basis of accrual or notional basis. There was no effective receipt of income. Therefore, entire question had to be approached from principle of real income as laid down by Supreme Court in case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144. Shri Mehta then referred to decision in CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) and submitted that if assessee were to so arrange its affairs to reduce its tax burden such arrangement cannot be discredited or discarded. In other words, fact that assessee has been able to make arrangement so as to reduce its tax burden should be considered as measure commercially expedient and no adverse inference was called for resulting in saddling of substantial tax liability of assessee. 8. Shri B.R. Shah, learned standing counsel, submitted that there was n o dispute about main agreement which was entered into on 28-2-1977. Thereafter supplemental agreement was entered into on 4-3-1977 under which it was decided to charge interest on unpaid purchase price in manner stipulated in agreement. This supplemental agreement was entered into with view to correct omission which had crept in original agreement. Thus, supplemental agreement was part and parcel of original agreement and was effective from same date as original agreement. deed of assignment was made on 28-6-1977 and deed of conveyance was made on 2- 2-1978. While on one hand transactions relating to transfer of undertaking were covered by above agreements there was no deed by vendee in regard to alleged waiver of interest which is said to have taken place by subsequent arrangement. letter written by vendee on 15-6- 1978 was confirmed by resolution on 30-6-1978 under which revised arrangement was said to have been made and said arrangement, according to assessee, had superseded agreements entered into by assessee as aforesaid. above letter of vendee and resolution by assessee did not amount to modification of terms of original agreement. At most same could be described as proposal and counter proposal which could not be treated as understanding at law. proposal and counter proposal as aforesaid only made unsecured debt secured one but this has resulted in waiver, according to assessee, of substantial amount of interest which had accrued to it. In other words, Shri Shah's submission was that subsequent arrangement said to have been made by assessee on proposal made by vendor did not supersede original agreement or understanding and, therefore, arrangement reached originally under two agreements dated 28-2-1977 and 4-3-1977 still held field. Therefore, contention of assessee founded on ground that there was waiver of interest had no basis at all. 9. learned standing counsel then submitted in alternative that in transactions of this type substance of matter must be looked into. Assuming for sake of arguments that later arrangement reached by assessee with vendor was effective, it amounted relinquishment or remission of interest which had already accrued to assessee and subsequent understanding was reached according to assessee on plea that vendee had offered security of debt which was hitherto unsecured. It must be remembered, Shri Shah submitted, that supplemental agreement was not novatio but designed to rectify original agreement. No new rights or obligations were created under revised arrangement which is said to have taken place by vendor's letter dated 15-6-1978 and resolution of assessee on 30-6-1978. He then referred to fact that, according to original agreement, sum of Rs. 6.55 crores was payable in eight equal instalments beginning from 1-10-1979 in respect of which charge was created b y deed of assignment dated 28-6-1977. interest would, therefore, run from 1-3-1977. interest thus having been accrued from said date, only ground on which assessee could conceivably claim relief was on ground of remission in favour of vendee based on principle of commercial expediency which prompted assessee to give up such large claim of interest. benefit said to have been received by assessee in lieu of waiver of interest was that unsecured debt had become secured. This fact was hardly sufficient to support claim of assessee on ground of commercial expediency. It must be remembered that there was close relationship between assessee and EPL, former being holding company and latter wholly owned subsidiary company. ASEPL again is subsidiary of first vendee. Now if substance of transaction was looked at in 1977 assessee vendor had transferred undertaking to EPL with subscribed capital of Rs. 10 lakhs only. net value of undertaking was Rs. 11,44,10,253. Secondly, EPL was incurring losses. That apart, originally no security was thought off advisable because EPL, as pointed out earlier, was wholly owned subsidiary company. Now if transaction was looked at from purely commercial angle, no prudent man would transfer his undertaking to company with almost negligible subscribed capital (negligible having regard to value of undertaking transferred) which was incurring losses and as pointed out by Commissioner (Appeals) except for year during which undertaking was transferred both in preceding as well as in succeeding year there was practically no activity carried on by EPL. amount of interest foregone worked out to about Rs. 1.20 crores and for giving up this substantial claim payment of instalment was shifted and debt was said to have secured. Much has been made of conversion of unsecured debt into secured one. This submission is without force or foundation. It overlooks provisions of section 55 of Transfer of Property Act, 1882 under which charge is created for unpaid price. This would mean that in effect even if no security was offered assessee's claim was secured by charge under said provisions. taxing authorities have clearly seen through game and have found that within four months entire undertaking was transferred by EPL to ASEPL which was public limited company and majority shareholding thus was by public. Therefore, if interest payable by ASEPL was not allowed shareholders who were members of public would stand to lose. That apart transaction was on last day of year which showed that assessee having earned interest thought of device to avoid its tax liability by adopting circuitous method in form of revision of arrangement. ultimate aim, therefore, was neither to benefit subsidiary company nor ASEPL nor any worthwhile benefit accrued to assessee on ground of commercial expediency except that it tried to avoid its legitimate liability to tax on substantial amount of interest which had accrued to it. learned standing counsel then referred to decisions of authorities below and supported their orders. 10. Shri Mehta in reply pointed out that offer was designed to vary original terms of agreement which was set out in letter of 15-6-1978 and was accepted by resolution of 30-6-1978. result was that terms of original agreement stood modified to extent indicated in resolution from date of original agreement. Secondly, relinquishment of interest need not be for commercial consideration and such relinquishment was permissible in law. whole object and purpose had to be viewed from larger context and aim was to form public limited company to which other companies were also transferred. Therefore, commercial expediency test has to be appreciated from broad point of view and not from narrower point of view by applying test of quid pro quo. That apart, interest accrued on date when instalment fell due and not prior to said date and said date was beyond last day of financial year and, therefore, there was no accrual of interest. In fact, according to Shri Mehta, it was real income test which was applicable even if income is given up before it accrued, it is not income due and as such not taxable. concept of accrual of income is well known--that is to create debt in favour of another person or to create obligations enforceable at law. Both parties, viz., vendor and vendee by their mutual act had agreed to relinquish their mutual rights and obligations before end of previous year, i.e., before income actually accrued and, therefore, it was not necessary to back up relinquishment by any consideration or support same on principle of commercial expediency. 11. It may be stated that both parties have referred to certain decisions to which we shall refer to little later. 12. We have considered rival submissions. In order to appreciate controversy it is necessary in first place to set out relevant clauses of agreement which have material bearing on facts which obtain in instant case. original agreement was entered into on 28-2-1977 in which mode of payment of purchase consideration was set out as under: I. " Mode of payment: 1. sum of Rs. 49,00,000 shall be paid as and by way of deposit or earnest money forthwith upon execution of these presents. 2. vendor holds 4,90,000 equity shares in purchaser company of face value of Rs. 100 each on which sum of Rs. 10 per share has been paid. sum of Rs. 4,41,00,000 out of purchase price under this agreement shall be set off and applied by purchaser for and on behalf of, vendor to credit and pay in full balance uncalled capital to extent of Rs. 90 per share in respect of said 4,90,000 equity shares in purchaser. 3. balance of purchase price shall be paid by purchaser to vendor in 8 equal annual instalments, first of such instalments shall become due and payable on 1st October, 1979 and each subsequent instalment shall become due and payable on 1st day of October in each respective year as hereinafter provided. 12 1/2 per cent to be paid on or before 1st October, 1979. 12 1/2 per cent to be paid on or before 1st October, 1980. 12 1/2 per cent to be paid on or before 1st October, 1981. 12 1/2 per cent to be paid on or before 1st October, 1982. 12 1/2 per cent to be paid on or before 1st October, 1983. 12 1/2 per cent to be paid on or before 1st October, 1984. 12 1/2 per cent to be paid on or before 1st October, 1985. 12 1/2 per cent to be paid on or before 1st October, 1986. payment of moneys in manner aforesaid on or before stipulated dates shall be of essence of contract. Provided, however, that in case purchaser fails to pay any instalments on due date, then, in such event, notwithstanding and in addition to any other rights and remedies accruing or available to vendor, vendor shall be entitled to call upon purchaser to pay interest at such rate as is equal to rate of interest payable by vendor to its bankers in ordinary course of business from due date of payment of instalment until date of actual payment thereof. " Thereafter supplementary agreement was entered into on 4-3-1977. following paragraphs of said agreement are relevant: II. " C. It was also agreed as part of transaction for sale and transfer of undertaking and businesses aforesaid that balance of purchase price remaining outstanding from time to time shall carry simple interest at rate of 11 per cent per annum and that, if purchaser commits any default or delay in paying any instalment or instalments on due date, purchaser shall pay interest at such rate as is equal to rate of interest which vendor pays to its bankers in ordinary course of business from due date of payment of instalment until date of actual payment thereof. D. parties hereto declare, acknowledge and confirm that proposal relating to payment of interest on unpaid purchase price remaining outstanding from time to time was through oversight and accident not incorporated in principal agreement. parties hereto being same as parties to principal agreement desire expressly to incorporate and record same in said agreement for sale by executing this supplemental agreement for sale to principal agreement dated 28th February, 1977. " [Emphasis supplied] Thereafter, on 28-6-1977, three days before commencement of previous year relevant to year under appeal, detailed deed of assignment was executed under which mode of payment was indicated as under: III. "Pursuant to said agreement for sale read with supplemental agreement dated 4th March, 1977 purchaser has out of purchase price of Rs. 11,44,18,760.39 paid to vendor: (a) Rs. 49,00,000 as earnest money paid on or before 28th February, 1977. (b) Rs. 4,41,00,000 being amount set off, adjusted and applied for and on behalf of vendor to credit and pay in full uncalled capital at Rs. 90 per share on 4,90,000 equity shares of Rs. 100 each held by vendor in purchaser. (c) Rs. 2,00,00,000 as and when demanded by vendor, and will carry interest at rate as is equal to rate of interest which vendor pays to its bankers in ordinary course of business. (d) Rs. 4,54,18,760 is payable as under and will carry interest at 11 per cent per annum on amount remaining outstanding from time to time. purchaser has agreed to pay balance of purchase price, viz., Rs. 4,54,18,760.89 to vendor in eight equal annual instalments, first of such instalments shall be due and payable on 1st October, 1979 and each subsequent instalment payable on 1st day of October, in each respective year as under: Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1979 Rs, 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1980 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1981 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1982 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1983 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1984 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1985 Rs. 56,77,345 being approximately 12 1/2 per cent on or before 1-10-1986 payment of instalments together with interest at rate of 11 per cent per annum thereon in manner and on dates aforesaid shall be of essence of contracts: provided, however, that in case purchaser fails to pay any instalment on due date then in such event notwithstanding and in addition to any other rights and remedies accruing or available to vendor, vendor shall be entitled to call upon purchaser to pay interest on such instalment at such rate as is equal to rate of interest payable by vendor to its bankers in ordinary course of business from due date of payment of instalment until date of actual payment thereof. " 13. It may be noticed that pursuant to transfer of assignment and business undertaking and business of Sarabhai Chemicals and Sarabhai business undertaking and business of Sarabhai Chemicals and Sarabhai Common Services, assessee was entitled to receive sum of Rs. 1, 144.19 lakhs from EPL in manner indicated above. EPL proposed modification in terms of payment by its letter dated 15-6-1978 which was approved and accepted by appellant company. Under terms, balance of purchase consideration amounting to Rs. 6,54,10,253 is payable as follows: " (a) Rs. 1,84,10,253.49 as and when demanded by company and will not carry any interest. (b) Rs. 4,70,00,000 will be payable in five equal annual instalments, first of such instalments becoming due and payable on 1st March, 1987 and shall carry simple interest at rate of 11 per cent per annum with effect from 1st July, 1979. In respect of said sum of Rs. 470 lakhs payable EPL has offered to secure same to satisfaction of appellant company. Thus, terms of payment originally agreed to, were modified as indicated above, and revised terms of payment which provided for security became operative right from inception, i.e., from 1st March, 1977, date on which undertaking was transferred. In accordance with revised terms, no interest is chargeable o n that portion of unpaid purchase price which is payable on demand, and is chargeable on balance sum of Rs. 470 lakhs only with effect from 1st July, 1979. Consequently, appellant company did not charge any interest on balance of deferred safe consideration. " 14. crux of controversy is whether or not any interest could be said to have accrued to assessee during relevant previous year which was liable to tax in his hands. Broadly speaking assessee's contention that by subsequent arrangement with EPL there was modification in terms of payment of interest as result of which there was no accrual of income while revenue's case is that income having been accrued was liable to tax and if assessee were to claim benefit it must establish that there was commercial expediency in giving up income which had accrued to it and, therefore, no income was chargeable on accrual basis. Therefore, it is necessary to consider relevant decisions on subject which have evolved certain principles which are applicable to controversy at issue before us. We shall, therefore, proceed first to deal with those decisions on which reliance has been placed by either side before us as well as before authorities below and also such decisions which in our opinion have bearing on controversy at issue. said decisions are as follows: E.D. Sassoon & Co. Ltd v. CIT [1954] 26 ITR 27 (SC): " contract of service between U company and managing agents was entire and indivisible. remuneration or commission became due by U company to managing agents, only on completion of definite period of service and at stated periods and it was condition precedent to recovery of any wages or salary in respect thereof that service or duty should be completely performed. Such remuneration constituted debt only at end of each such period of service and no remuneration or commission was payable to managing agents for broken periods. right to receive commission would arise and income, profits or gains would accrue to managing agents only at end of calendar year which was terminaus quo for making up of accounts and ascertaining net profits earned by company. " [Emphasis supplied] Shoorji Vallabhdas & Co.'s case: " Income-tax is levy on income. Though Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt, yet substance of matter is income. If income does not result at all, there cannot be tax, even though in book-keeping, entry is made about 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. Where, however, income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though entry to that effect might, in certain circumstances, have been made in books of account. " Rungta Sons Ltd. v. CIT [1964] 54 ITR 447 (Cal.): " assessee was managing agent of several companies. For assessment year 1952-53 (the corresponding accounting year being year ended 5th July, 1951), managed companies were liable to pay managing agency remuneration and commission to assessee-company to extent of Rs. 29,000. On 16th December, 1952 shareholders of assessee-company passed resolution forgoing receipt of allowances.... Appellate Tribunal held that as intention to forgo was arrived at long after closing of accounting year, and at end of accounting year remuneration had already accrued to assessee, relinquishment would only mean diversion of profits and, therefore, could not be excluded from total income.... " Their Lordships of Calcutta High Court upholding above view of Tribunal summarised position as follows: " In instant case, unrealised income is liable to assessment of tax, not on ground of constructive receipt but on ground that it accrued during relevant accounting year which ended on 5th July, 1951. (2) mere fact that income was forgone by assessee beyond accounting year by resolutions in meetings of shareholders, cannot entitle assessee to exemption from liability to tax. It was decided, inter alia, by Supreme Court in case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) that where, however, income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though entry to that effect might in certain circumstances have been made in books of account. This decision was made on facts that there was bilateral contract between managing company and managed company during accounting year, whereby assessee disentitled itself from receiving contractual commission, which obviously did not result in income during accounting year. Such is not case here, as no reliable evidence was placed before Tribunal to show that relinquishment was done on basis of some direct negotiations between assessee and managed company, with respect to sum of Rs. 29,000 during accounting year. (3) real test is that if amount is to be taxable as income basic conception to be kept in view is that right to receive income must come into existence in relevant previous year and that income can be held to arise or accrue to assessee only when assessee obtains right to receive income. In other words if root or germ as to accretion of income was in accounting year and if such root or germ regarding accretion of income fructifies in subsequent years, account for relevant previous year may be reopened and figure subsequently ascertained may be inserted in place of original figure for purpose of assessability to tax. " Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC): " Income accrues when it becomes due. postponement of date of payment does not affect accrual of income. fact that amount of income is not subsequently received by assessee would not also detract from or efface accrual of income, although non-receipt may, in appropriate cases, be valid ground for claiming deductions. mercantile system of accounting differs substantially from cash system of book-keeping. Under cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received. Similarly, expenditure items for which legal liability has been incurred are immediately debited even before amounts in question are actually disbursed. Where accounts are kept on mercantile basis, profits or gains are credited though they are not actually realised, and entries thus made really show nothing more than accrual or arising of said profits at material time. " CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC): " ...As managing agency commission receivable could have been ascertained only after managed company had made up its accounts and respondent had given up commission even before managed company made up its accounts, and no date had been fixed in agreement for payment of commission, mere fact that respondent was maintaining its accounts on mercantile system did not lead to conclusion that commission had accrued to it by end of relevant accounting year. commission given up by respondent could not be considered to be its real income..... " Shiv Parkash Janakraj & Co. (P.) Ltd. v. CIT [1978] 112 ITR 872 (Punj. & Har.): " ...That no interest had actually been paid to assessee-company nor had it made any debit entries in its account books. No date was fixed in agreement of loan regarding payment of interest. Even if assessee- company had adopted mercantile system of accounting, it cannot be said that income from interest had actually accrued to it on October 31, 1970. " In rendering above decision their Lordships considered decisions in Morvi Industries Ltd.'s case and Birla Gwalior (P.) Ltd.'s case. CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. & Har.) "Income-tax is levied on income, whether accounts are maintained on mercantile system or on cash basis. If income does not result at all, there cannot be levy of tax. Even if entry of hypothetical income is made in books of account, where income does not result at all as there is neither accrual nor receipt of income, no tax can be levied." CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.): " regular mode of accounting determines only mode of computing taxable income and point of time at which tax liability is attracted. It cannot determine or affect range of taxable income or ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely o n ground that assessee had been following mercantile system of accounting. Even if assessee makes debit entry to that effect, still no income can be said to have accrued to assessee. If no income has income can be said to have accrued to assessee. If no income has materialised, there can be no liability to tax on hypothetical income. It is not hypothetical accrual of income based on mercantile system of accounting followed by assessee that has to be taken into account, but what should be considered is whether income has really materialised or resulted to assessee. question whether real income has materialised to assessee has to be considered with reference to commercial and business realities of situation in which assessee has been placed and not with reference to his system of accounting. " James Finlay & Co. v. CIT [1982] 137 ITR 698 (Cal.): In above decision after considering decisions in Shoorji Vallabhdas & Co.'s case and Morvi Industries Ltd.'s case it is observed: " ...If this concept of real accrual of income in law and principle on which theory of accrual is based were to be taken into account, then, in light of facts of this case, where we are dealing with question of interest, which had not to take into account anything to be done or happening subsequent to closing of year of account and accrual was not dependent on any subsequent making up of accounts or company's borrowing acts, then subsequent conduct, subsequent to year in which income accrued, cannot, in our opinion, be of any help to assessee.... real principle seems to be that root or germ as to accretion of income must be in accounting year and if such root or germ fructifies in subsequent years, that can be taken into account and not otherwise. Now, applying same principle to facts and circumstances of this case, if it could be demonstrated that right of giving up, which stopped accrual in year of income which had been laid or planted in year of account, then subsequent giving up might help assessee in theory of real income.... 15. broad analysis of above decisions reveals that said decisions fall into two distinct categories. first category relates to those set of decisions in which income is given up before end of accounting year with result that income is not said to accrue during accounting year and as consequence is not found exigible to tax. second category relates to set of decisions in which income is given up after end of accounting year, i.e., in subsequent accounting year. That is to say after accrual and in these circumstances it is held that such giving up of income must be supported by commercial expediency. In other words in cases relating to first category concept of real income comes into play and even if entries are made in books of account it is held that mere make up of entries to connote hypothetical income is not exigible to tax-Shoorji Vallabhdas & Co.'s case. same proposition is reiterated in case of Birla Gwalior (P.) Ltd. In second category of cases where giving up of income is not backed by commercial expediency, it is held that income is exigible to tax on basis of accrual. In this connection it is necessary to mention important fact concerning cases relating to first category. Most of cases relate to giving up of managing agency commission. Now managing agency commission is based on percentage of profits and as profits come into existence only at end of accounting year as corollary managing agency commission cannot but accrue at end of accounting year. Therefore, if such commission is given up during accounting year income is held not to accrue or there is no accrual of income and consequently no liability to tax. It is also held that managing agency commission cannot accrue for broken period. There are cases which relate to charging of interest on notional basis when assessee maintains books of account on mercantile system of accounting. In these cases it is held mainly on facts that as recovery of original amount advanced is found to be doubtful, giving up of interest is held to be on ground of commercial expediency and, therefore, income relating to interest is not subjected to charge. 16. It is in light of these principles that we have to examine facts of case before us. However, before we proceed to embark on this aspect of matter it is necessary in our opinion to refer to proposal made by EPL and consequential resolution made by assessee-company which, according to assessee, was instrumental in revising original agreement relating to levy of interest on unpaid purchase price. resolution was made by assessee consequent upon proposal made by EPL which for sake of convenience is out hereunder: " letter No. Elscope/MC dated 15th June, 1978 received from Elscope (P.) Ltd. setting out therein revised mode of payment was placed on table. " Resolved that, in respect of unpaid purchase price of Rs. 6,54,253.49 due, owing and payable by Elscope (P.) Ltd. to company for transfer and assignment of industrial undertaking and business of Sarabhai Chemicals Division and business of Sarabhai Common Services Division as going concerns by company to said Elscope (P.) Ltd., company both hereby approve, accept and adopt following revised mode of payment as contained in letter No. Elscope/MC dated 15th June, 1978 received from Elscope (P.) Ltd. (a) Rs. 1,84,10,253.49 as and when demanded by company and will not carry any interest. (b) Rs. 4,70,00,000.00 will be payable in five equal annual instalments, first of such instalments becoming due and payable on 1st March, 1987, provided that Elscope (P.) Ltd. shall have option to repay said sum on 1st March, 1991 and shall carry simple interest at 11 per cent per annum with effect from 1st July, 1979, and said amount will be secured to satisfaction of company. " above resolution which was made at end of accounting year is sort of watershed which divides controversy relating to accrual of interest for respective years under appeal. Both sides we may say have tried to use above resolution as talisman to canvass their respective stands. assessee's case is broadly that as result of said resolution original arrangement to levy interest on unpaid purchase price is said to have been superseded resulting in no accrual of income for assessment years 1979-80 s well as 1980-81. revenue on other hand has contended that above resolution was not effective one and did not result in modification of original agreement as result income continued to accrue not only for assessment year 1979-80 but also for assessment year 1980-81. In other words, said resolution, according to stand taken by learned standing counsel, was inoperative and as such not enforceable at law at all. authorities below, we may point out, have proceeded on footing that though there was right to recover interest on unpaid purchase price there was relinquishment of such right without consideration, so far as assessment year 1980-81 was concerned. With result that such relinquishment of right which was without consideration was void and as such income from interest continued to accrue till end of previous year relevant to assessment year 1980-81. Thus, it is necessary to queer pitch on this issue before we proceed further in matter. submission made by learned standing counsel, as we have pointed out earlier, was that resolution was in nature of counter proposal and as such not enforceable at law. EPL had made offer under its letter referred to above for modification of terms of agreement by re-scheduling instalments and by offering security and this proposal was in our opinion approved, accepted and adopted by assessee-company. It was submitted on behalf of revenue that resolution authorised one of directors of company to communicate decision of board to EPL and to take necessary steps to give effect to resolution. Nothing was brought on record to show that this part of resolution was complied with result that resolution remained unimplemented. We are unable to accept this proposition. minutes of meeting of board of directors of assessee-company form part of record and it is not case that these minutes do not represent position indicated therein. It must, therefore, be held that minutes and resolution were made in normal course of assessee's business and was effective in law. subsequent part of resolution authorising director merely indicates consequential action to be taken to follow up decision and, therefore, it is not possible to accept submission that resolution was ineffective. In fact, no doubt has been cast on above resolution by authorities below. Of course, inference have been drawn against assessee as to effect of resolution but that is different matter. resolution, therefore, represents decision between two parties inter se and must be held to be effective from 30-6-1978. 17. This brings us to consider mainstay of submission canvassed on behalf of assessee as to whether or not this resolution had retrospective effect nullifying or superseding earlier agreement. So far as this aspect of matter is concerned material which we shall presently refer suggest that assessee's claim in this regard cannot be accepted. In first place, assessee entered into agreement on 28-2-1977 for sale of undertaking to EPL. Thereafter supplemental agreement was made on 4-3-1977 under which it was decided to charge interest on unpaid purchase price and supplemental agreement was entered into as there was oversight or accident in not incorporating condition for levy of interest in original agreement and supplemental agreement was to form part and parcel of principal agreement dated 28-2-1977. Therefore, principal agreement as well as supplemental agreement form part of same agreement by virtue of condition set out in supplemental agreement which we have referred to earlier. As consequence of this supplemental agreement right or obligation was created in favour of assessee for recovering interest on unpaid purchase price. In this connection we refer to observations of Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42. " words 'accrue' and 'arise' are used to contradistinguish word 'receive'. Income is said to be received when it reaches assessee; when right to receive income vested in assessee, it is said to accrue or arise. Income becomes taxable on footing of accrual only after right of taxpayer to income accrues or arises, and in case of agreement which makes profits receivable at or on happening of contingency, fact that profits are result of transactions spread over period which covers period preceding happening of that contingency would not make receipt liable to be paid to persons other than those who are entitled to receive it on date on which it is actually received or became receivable. In gross receipts of business day after day or from transaction to transaction lies embedded or dormant profit or loss. On such dormant profit or loss undoubtedly taxable profits, if any, of business will be computed, but dormant profits cannot be equated to profits charged to tax under sections 3 and 4 of Indian Income-tax Act, 1922. concept of accrual of profits of business involves their determination by method of accounting at end of accounting year or any shorter period determined by law. 'Profits' do not accrue from day to day or even from month to month and have to be ascertained by comparison of assets at two stated points. Unless right to profits comes into existence there is no accrual of profits and destination of profits must be determined by title thereto on day on which they arise. " Thus, income is said to have 'accrued' or 'arisen' when right to receive said income becomes vested in assessee. Income becomes taxable on basis of accrual when right of assessee to income accrues or arises. In instant case, income from interest on unpaid purchase price was vested right created under supplemental agreement, as consequence income from interest could be said to be accrued or arisen to assessee during relevant accounting year. In this connection it is pertinent to note that while supplemental agreement forms part of original agreement, there is no indication in resolution to suggest that revised mode of payment was effective from any date prior to 30-6-1978. Therefore, this is not case where income though given up during year could not be said to accrue as was case in managing agency commission, determination of which was based on accrual of profits. accrual of interest commenced from beginning of accounting year as interest accrues from day to day. Now only ground on which assessee could canvass its claim for excluding said income from chargeability is ground based on commercial expediency. There is no material to persuade us to reach conclusion that income from interest was given up on ground of commercial expediency. only ground which was placed before us was that unpaid purchase price which was unsecured had become secured under revised mode of payment. This aspect of matter does not carry matter anywhere. It has to be remembered that EPL was subsidiary of assessee- company. entire shareholdings of EPL have been owned and controlled by assessee. On other hand, security which is offered in terms of secured debentures of ASEPL to whom undertaking has been transferred by EPL is again subsidiary of EPL. Therefore, offering of secured debentures to cover unpaid purchase price would not give some added commercial to cover unpaid purchase price would not give some added commercial benefit to assessee who was otherwise secured in lieu of peculiar position which it held vis-a-vis two companies. principle of commercial expediency connotes accrual of benefit directly or indirectly to assessee in course of carrying on of its business. benefit must match right which is sought to be given up. When substantial portion of income which had accrued to assessee by its own act and action is sought to be given up corresponding benefit which accrues to it must be equal if not more and sizable also. There is nothing to indicate that benefit accruing to assessee has outweighed right which it was giving up. In cases referred to earlier managing agency commission was given up due to losses or small profits with view to benefit company or not to cast undue financial burden on managed companies. Interest was sought to be given up because of shaky position of debtors when recovery of principal was in doubt it would have been futile exercise to burden debtor with notional accrual of interest which would put recovery of principal sum into jeopardy. Therefore, concept of commercial expediency must be examined from standpoint of trader who gives up his right in better interest of company and as pointed out earlier there is nothing to show that this test has been fulfilled in instant case. Therefore, inevitable conclusion which can be reached in this regard is that so far as assessment year 1979-80 is concerned there was accrual of interest as result of supplemental agreement as aforesaid and, therefore, interest was rightly brought to tax on accrual basis by authorities below. In this view of matter, therefore, we do not consider it necessary to go into question about lifting of veil theory dwelt upon by Commissioner (Appeals). In our opinion, question could be resolved by applying first principle which is well settled in regard to concept of accrual of income and principle of real income. We, accordingly, decline to interfere with decisions of authorities below so far as this ground is concerned. 18. Now we turn to assessment year 1980-81. As pointed out earlier previous year had commenced on 1-7-1978 and had ended on 30-6-1979. resolution of board of directors referred to above had already come into operation and question, therefore, is whether addition as made by ITO and retained by Commissioner (Appeals) was justified. In this connection we may briefly refer to reasons set out by ITO in support of his decision to bring to tax impugned amount as accrued interest on deferred sale consideration. According to ITO, part of unpaid sale consideration was payable by purchaser in eight equal instalments on 1st of October, every year beginning from 1-10-1979 with interest at 11 per cent per annum, for said sum or balance thereof from time to time. As per agreement (referred to in course of assessment year 1979-80) unpaid consideration to extent of Rs. 2 crores was to be paid on demand and interest at rate charged by bankers was payable thereon. revised agreement was entered into effective from 1-7-1979 and it was claimed, therefore, that no interest was payable on outstanding amount for period prior to 1-7-1979. claim in this regard was made for assessment years 1979-80 as well as 1980-81. claim relating to assessment year 1979-80 is already considered by us in earlier paragraphs. Thus, according to ITO, so far as assessment year 1980-81 was concerned same reasons which led him to bring to tax income from interest on unpaid purchase price were applicable for year under appeal also. distinction sought to be made as result of resolution, in opinion of ITO, did not make any difference. In first place modification in original agreement was made with view to avoid income-tax. Secondly, mere passing of resolution by board of directors had no effect as nothing was shown to substantiate claim that interest was not charged on ground of commercial expediency. Thirdly, security clause did not exist in original agreement and had no effect at all, vis-a-vis, giving up of such large amount of interest. Relying, therefore, on his decision for earlier year, viz., 1979-80 ITO proposed addition of Rs. 57,17,750 as accrued interest on deferred sale consideration and submitted matter to IAC under provisions of section 144B. IAC after giving hearing to assessee came to conclusion that addition was justified. According to IAC, there was relinquishment of right to receive interest and as said relinquishment was without consideration and, therefore, agreement was void under section 25 of Indian Contract Act, 1872. reliance placed by assessee on section 63 of Indian Contract Act had no effect at all and was not applicable. Thus he concluded that assessee had right to receive interest from date of sale of industrial undertaking and interest, therefore, was chargeable on accrual basis. Reissued directions, accordingly, which were incorporated in final order as made by ITO. It may be stated that calculation error was noticed in amount of interest proposed for addition by ITO which was corrected as result of which amount of interest brought to tax in final order was determined at Rs. 55,67,750. 19. matter was carried in appeal before Commissioner (Appeals) who, following his decision for assessment year 1979-80, upheld said addition. 20. assessee is in appeal before us. submissions which were placed before us are already set out earlier while dealing with appeal relating to assessment year 1979-80 and, therefore, same are not restated here. I n our view there is material distinction between facts obtained in earlier year and in assessment year 1980-81. material difference is caused by resolution which was made by board of directors under which terms of original agreements stood modified. As result of said resolution, in our opinion, no income could be said to have accrued to assessee as interest would start accruing from 1-7-1979, i.e., after end of accounting year. Secondly, since there was no accrual of income at all, there was neither any right created nor any enforceable obligation qua vendor and vendee and, therefore, question of relinquishment of any right did not arise at all. It is only when income accrues, i.e., debt is created that relinquishment of right or debt would arise but when there is no income at all question of relinquishment as pointed out above is out of question. That apart reduction of tax liability is consequence of modified arrangement. It is well settled that taxability of income does not depend on ground of morality. If income accrues same is chargeable to tax. If it does not accrue for whatever reasons same is not made chargeable irrespective of motive or benefit which may result in process. Therefore, so far as assessment year 1980-81 is concerned, inclusion of amount of interest as aforesaid, in our opinion, was not justified. We, accordingly, delete said addition. 21 to 26. [These paras are not reproduced here as they involve minor issues.] *** SARABHAI CHEMICALS (P) LTD. v. INCOME TAX OFFICER