These two appeals have been filed by revenue on 2-7-1999 against order of learned CIT (Appeals)-XXVI, New Delhi dated 22-3-1999 in case of assessee in relation to assessment order under section 143(3) for assessment year 1995-96 and another appeal filed on 4-4-2000 against order of learned CIT (Appeals)-III, New Delhi dated 14-1-2000 in case of t h e assessee in relation to assessment order under section 143(3) for assessment year 1996-97. As certain common facts and issues are involved in these two appeals, same were argued together by learned counsel for assessee and learned D.R. We are deciding these two appeals together for convenience. 2. main dispute in these appeals, which is common for both assessment years, relates to addition of Rs. 25,28,784 and Rs. 32,73,184 made by Assessing Officer respectively for assessment years 1995-96 and 1996-97 on account of lease rent. Facts of case leading to this dispute briefly r e that during course of assessment proceedings for assessment year 1995-96, learned Assessing Officer found that in computation of income chargeable to tax annexed with return of income, assessee made deduction of sum of Rs. 24,95,630. According to Assessing Officer there was no brought forward loss from earlier year and assessment for assessment year 1994-95 had been made on income of Rs. 9,14,908. He, therefore, disallowed assessee's claim of deduction of sum of Rs. 24,95,630 to income as declared by assessee. For assessment year 1996-97 learned Assessing Officer found that assessee had in computation of income chargeable to tax annexed with return of income made deduction of Rs. 28,94,974. assessee explained that it had entered into lease agreements with M/s. Mittal Tubes Pvt. Ltd. and M/s. Rinasu Steel Pvt. Ltd., New Delhi on 6- 4-1994 for leasing machinery worth Rs. 69,25,000 and Rs. 25 lakhs for period of 8 years against payment upfront of Rs. 17,71,250 and Rs. 6,25,000 by way of 25 per cent security deposit. As per agreement lease rent had to be paid monthly in advance for agreed number of instalments mentioned in agreements. Thereafter in case of M/s. Rinasu Steel Pvt. Ltd. after payment of some instalments during year under assessment, lessee stopped paying instalments on ground that there was slump in market and he showed his inability to pay balance sum of instalments and requested that entire lease amount be transferred to loan account and lease money paid by lessee along with security deposit be credited to said loan account, so as to enable assessee to make payment of balance amount in subsequent years as per availability of fund with lessee. In case of M/s. Mittal Tubes Pvt. Ltd. no instalment had been received except amount of Rs. 21,000. According to assessee in such circumstances he reversed lease rent receivable for both assessment years 1995-96 & 1996- 97 because recovery of lease rent appeared to be doubtful. assessee filed suit in Delhi High Court against M/s. Mittal Tubes Pvt. Ltd. assessee claimed that it had withdrawn entire amount of Rs. 94.25 lakhs from IDBI and same was surrendered for taxation in revised return of income for assessment year 1995-96. assessee argued that on those facts lease rental could not be brought to tax on accrual basis. For that purpose he placed reliance on judgment of Hon'ble Supreme Court in case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746. learned Assessing Officer issued summons to M/s. Mittal Tubes Pvt. Ltd. and M/s. Rinasu Steel Pvt. Ltd. summon issued to M/s. Mittal Tubes Pvt. Ltd. was received back with remark, 'left without address'. In response to summons once adjournment was sought on behalf of M/s. Rinasu Steel Pvt. Ltd. However, on next date no one appeared for M/s. Rinasu Steel Pvt. Ltd. learned Assessing Officer apprised assessee of situation and directed him to produce both parties. However, assessee did not produce parties without giving any specific reason. learned Assessing Officer found that assessee had already withdrawn amount of Rs. 94.25 lakhs from IDBI and invested sums of Rs. 69.25 lakhs and Rs. 25 lakhs in purchase of machinery given on lease to two parties concerned. assessee had already entered into lease agreements with both parties. assessee had also received 25 per cent security in accordance with terms of lease agreements. assessee had also received 12 months lease rent amounting to Rs. 4,88,552 from M/s. Rinasu S te e l Pvt. Ltd. assessee had similarly received lease rentals of Rs. 24,06,432 from M/s. Mittal Tubes Pvt. Ltd. for period of 12 months. assessee had, however, transferred entire lease amount to loan account and credited lease money received from lessees. According to learned Assessing Officer entries made by assessee in books of account subsequently could not be accepted because assessee was maintaining accounts on mercantile system of accounting and lease rentals had already accrued to assessee for these years. Moreover assessee could not convert lease agreements into loan agreements unilaterally without filing any documentary evidence that lessee had made such request. Moreover lessee was not entitled to make such request after having paid lease instalments. assessee had filed suit for recovery against M/s. Mittal Tubes Pvt. Ltd. but from that it did not follow that lease rentals had not accrued to assessee. Here also assessee was maintaining his accounts on mercantile basis. If amounts of lease rent subsequently became irrecoverable, assessee could take recourse to provisions of section 36(1)(vii) and claim bad debts. assessee was not entitled to outright hold that lease rent was not receivable. Moreover assessee was not entitled to write off lease rentals, as matter was sub-judice before Hon'ble Delhi High Court. 3. According to learned Assessing Officer contention of assessee that he had surrendered amount of Rs. 94.25 lakhs withdrawn from IDBI as income had no effect on taxability of lease rentals on accrual basis. assessee was required in any case to disclose withdrawal of Rs. 94.25 lakhs as his income if same had not been utilized for specified purpose. As far as lease agreements were concerned same had been lawfully entered into. 4. learned Assessing Officer also held view that judgment of Hon'ble Supreme Court in case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 did not apply to facts of case. assessee had already entered into lease agreements with both parties and lease rentals had accrued in accordance with those agreements. These amounts were assessable o n accrual basis because assessee was maintaining mercantile system of accounting. Unlike Godhra Electricity Co., it was not case of merely passing book entries in respect of income not earned. According to learned Assessing Officer assessee could stop accrual of income only if he had surrendered or relinquished same before accrual. He placed reliance for that surrendered or relinquished same before accrual. He placed reliance for that on judgments of Hon'ble Supreme Court and Privy Council as enumerated in assessment order. Subsequent events were not material once item of income was caught in mischief of provisions of Income-tax Act. For that proposition, learned Assessing Officer placed reliance on judgment in case of Nizam's Guaranteed State Railway Co. Ltd. 2 Tax Cases 584. learned Assessing Officer also placed reliance on judgment of Hon'ble Patna High Court in case of Indian Copper Corporation Ltd. and judgments in T.N.K. Govindarajulu Chetty v. CIT [1973] 87 ITR 22 (Mad.) and CIT v. T.N.K. Govindarajulu [1987] 165 ITR 231 (SC). 5. During course of hearing of appeal for assessment year 1995-96 before learned CIT (Appeals), assessee contended that after lessees M/s. Rinasu Steel Pvt. Ltd. and M/s. Mittal Tubes Ltd. ceased making payment of instalments, assessee came to know that neither of two lessees had purchased machineries in question for which drafts had been given to them in name of suppliers suggested by them to assessee. In such view of matter, assessee took steps to reverse lease rent that had been provided for in books of account on accrual basis and return of income was revised for reason that recovery of lease rent appeared to be doubtful. assessee also filed suit in Delhi High Court against M/s. Mittal Tubes Pvt. Ltd. assessee had in past claimed deduction under section 32AB o f Act on deposits made with IDBI from time to time. assessee had withdrawn entire amount of Rs. 94.25 lakhs from IDBI for purchasing machinery in relation to transactions in question. deduction claimed was surrendered for taxation during assessment year 1995-96. Accordingly lease rental recorded in books of account was not liable to be taxed. learned Assessing Officer opposed these contentions of assessee. He pointed out that assessee had been following mercantile system of accounting and lease rent had accrued to assessee as per agreements between parties. In these circumstances assessee could not reverse accrual of income. In support of these contentions learned Assessing Officer relied upon following judgments:- CIT v. Harivallabhdas Kalidas & Co. [1960] 39 ITR 1 (SC) T.N.K. Govindrajulu Chetty v. CIT [1973] 87 ITR 22 (Mad.) Based on these judgments Assessing Officer argued that subsequent events could not be taken into account. learned CIT (Appeals), however, found force in argument of assessee based on judgment in case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). He relied upon following observations:- 'Income-tax is levy on income. No doubt, Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt but 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 materialize.' 6. learned CIT (Appeals) agreed with assessee that hypothetical income cannot be added to income of assessee. Accordingly he directed deletion of addition of Rs. 25,28,784 for assessment year 1995-96. 7. During course of appeal for assessment year 1996-97 assessee reiterated same arguments. learned CIT (Appeals) noted that his predecessor had already deleted similar addition in relation to assessment year 1995-96. Respectfully following order of CIT (Appeals) for assessment year 1995-96, learned CIT (Appeals) directed deletion of sum of Rs. 32,75,184 in that behalf for assessment year 1996-97. Aggrieved by these two orders revenue is in appeal before us. 8. During course of hearing before us learned DR argued that it w s not in dispute that assessee was following mercantile system of accounting. concept of real income could not be applied to income that had already accrued but subsequently could not be recovered from debtor. There was nothing in this case to show that income did not accrue to assessee as per agreements. If debtors declined to make payment, that had nothing to do with accrual of income. In present case assessee was required to be assessed on accrual basis in accordance with mercantile principle. Non-recoverability of amount could at best lead to suitable claim from assessee for deduction of bad debt in year in which debt is found to have become bad and irrecoverable. In support of his arguments learned DR placed reliance on judgment of Hon'ble Supreme Court in case of K.C.P. Ltd. v. CIT [2000] 245 ITR 421. 9. learned counsel for assessee pointed out that lease commenced in case of M/s. Mittal Tubes Pvt. Ltd. on 1-7-1994 and in case of M/s. Rinasu Steel Pvt. Ltd. on 1-6-1994. While both parties paid lease rent for relevant period relating to assessment year 1995-96 and Rinasu paid some more instalments relating to assessment year 1996-97; M/s. Mittal Tubes Pvt. Ltd. did not pay any of instalments for assessment year 1996-97. Eventually M/s. Rinasu Steel Pvt. Ltd. also having made payment of 12 instalments regretted its inability to pay any further amounts. M/s. Rinasu Steel also requested assessee to transfer lease account into loan account. In case of M/s. Mittal Tubes Pvt. Ltd. party had given post dated cheques of lease rent amounting to Rs. 2,00,536 per month for period from 1-6-1994 to 1-5-1997. However, assessee did not present these cheques because party had not submitted to assessee receipt for purchase of machinery. Under agreement lessee was supposed to take direct delivery of machinery from suppliers. As lessee failed to do so, lease agreement did not come into operation. assessee, therefore, approached lessee for refund of loan amount. Subsequently assessee realizing foul play presented six cheques dated 1-12-1996 to 1-5-1997 each for Rs. 2,00,536 that had become effective. However, all those cheques were dishonoured. Thereupon assessee filed suit against M/s. Mittal Tubes Pvt. Ltd. learned counsel for assessee argued that on facts of case real income principle was required to be applied. In present case assessee was defrauded. In support of these contentions learned counsel placed considerable reliance on judgment in case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). 10. In his rejoinder learned DR argued that judgment in case of Godhra Electricity Co. Ltd. (supra) was not at all applicable. In case before us assessee never relinquished his rights under lease agreements. assessee was also pursuing legal remedy against lessees. assessee's assessee was also pursuing legal remedy against lessees. assessee's was not case of mere book entry but contract entered into for valuable consideration. In case of Rinasu Steel Pvt. Ltd., assessee did not even file suit for recovery. 11. We have carefully considered rival submissions. There are two well known methods of accounting popularly known as mercantile system of accounting and cash system of accounting. Under former income as well as expenditure is recognized and accounted for on accrual basis i.e., point of time when right to receive or obligation to pay arises irrespective of fact whether or not money is actually received or disbursed at that point of time. Under cash system of accounting income as well as expenditure is not recognized and accounted for till such time money is actually received or paid. Under mercantile system of accounting treatment of income cannot be postponed on ground of non-receipt of money. If, however, despite reasonable lapse of time and reasonable efforts accrued income is not received, provisions of bad debt entitle assessee to claim deduction on account of bad debt. Thus, in sense income is reversed subsequently by way of write off on account of bad debt. Similarly where expenditure claimed in assessment year is found to be not payable subsequently, there are certain provisions in Act for assessment of benefit arising to assessee on account of remission or cessation of liability. ordinary rule of computation of income is as aforestated. In some judgments courts have made exception based on 'Real Income' principle. It is important to remember here that real income principle comes into play in exceptional circumstances where subsequently it transpires that there was never any right to receive income or there was no likelihood of enforcement of such right, if any. Real income cannot be pressed into service for reason only that income could not be subsequently recovered. These aspects are abundantly clear from detailed discussion in judgment of Hon'ble Supreme Court in case of State Bank of Travancore v. CIT [1986] 158 ITR 102. In that case assessee- bank sought to deduct certain amounts representing interest on sticky advances. Hon'ble Court after considering series of earlier judgments of Hon'ble Apex Court and other High Courts on subject-matter observed as under:- 'The concept of reality of income and actuality of situation are relevant factors which go to making up of accrual of income but once accrual takes place and income accrues, same cannot be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC).' Hon'ble Apex Court further observed:- 'It would be difficult and improper to extend concept of real income to all cases depending upon ipse dixit of assessee which would then become value judgment only. What has really accrued to assessee has to be found out and what has accrued must be considered from point of view of r e l income taking probability or improbability of realisation in realistic manner and dovetailing of these factors together but once accrual takes place, on conduct of parties subsequent to year of closing income which has accrued cannot be made 'no income'. extension of such value judgment to such field is pregnant with possibility of misuse and should be treated with caution; otherwise one would be on sticky grounds. One should proceed cautiously and not fall prey to shifting sands of time. As result of aforesaid discussion, following propositions emerge: (1) It is income which has really accrued or arisen to assessee that is taxable. Whether income has really accrued or arisen to assessee must be judged in light of reality of situation. (2) concept of real income would apply where there has been surrender of income which in theory may have accrued but in reality of situation, no income had resulted because income did not really accrue. (3) Where debt has become bad, deduction in compliance with provisions of Act should be claimed and allowed. (4) Where Act applies, concept of real income should not be so read as to defeat provisions of Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to assessee. (6) conduct of parties in treating income in particular manner is material evidence of fact whether income has accrued or not. (7) Mere improbability of recovery, where conduct of assessee is unequivocal, cannot be treated as evidence of fact that income has not resulted or accrued to assessee. After debiting debtor's account and not reversing that entry but taking interest merely in suspense account cannot be such evidence to show that no real income has accrued to assessee or been treated as such by assessee. (8) concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well recognised limits. We were invited to abandon legal fundamentalism. With problem like present one, it is better to adhere to basic fundamentals of law with clarity and consistency than to be carried away by common cliches. concept of real income certainly is well accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat fundamental principles of law of income-tax as developed.' Ranganath Mishra, J. (As he then was) concurred with above quoted legal principle laid down by Sabyasachi Mukerjee, J. and observed: 'In regard to answer proposed for first question, I have bestowed m y careful consideration and I am in agreement with reasonings and conclusions reached by my learned brother, Mukharji, J. I am of view that section 36(2) of Income-tax Act covers entire field regarding deduction for bad debt. Though concept of 'real income' is well recognised one, it cannot be introduced as outlet of income from TAXMAN's net for assessment on plea that though shown in account books as having accrued, same became bad debt and was not earned at all. It is well- settled that citizen is entitled to benefit of every ambiguity in taxing statute but where law is clear, considerations of hardship, injustice or anomaly do not afford justification for exempting income from taxation [see Mapp v. Oram [1969] 3 All ER 215, 222 (HL)].' 12. During course of hearing before us learned counsel for assessee argued that in subsequent judgment of Hon'ble Supreme Court in case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, judgment of Hon'ble Supreme Court in case of State Bank of Travancore (supra) was d u l y considered and real income principle was applied. We have carefully considered this argument. We find that facts of case of Godhra Electricity Co. Ltd. (supra) are poles apart from facts of case before us. In that case Godhra Electricity Co. Ltd. (supra) had unilaterally enhanced unit rates for electricity supplied. That was point of dispute between company and associations formed by consumers. lower courts affirmed contention of consumers that electricity company could not unilaterally increase rates. It is true that eventually Hon'ble Gujarat High Court approved decision of electricity company but due to aflux of time entire factual matrix had changed. In case before us there are bilateral agreements between assessee and both lessees. agreements have been acted upon, inasmuch as assessee handed over drafts of agreed amounts to lessees favouring suppliers of machinery nominated by lessees. lessees also deposited with assessee upfront payments agreed upon by way of security deposit for leased assets. Both lessees did pay lease rent for period relevant to assessment year 1995-96. It is not possible on facts scenario of case before us to hold view that lease rent amounts did not accrue at all. As to surrender of right to receive, assessee before us had instead gone to court in litigation. assessee cannot seek to enforce right to receive before court of law and at same time argue that there is in reality no accrual of income. In case of Rinasu Steel Pvt. Ltd., assessee has not filed suit for recovery and no particular material has been relied upon by assessee. Even plea was taken before learned CIT (Appeals) for first time that lessees had purchased no machinery at all but no evidence/material placed on record. On these facts we see no support to case of assessee from judgment of Apex Court in case of Godhra Electricity Co. Ltd. (supra), which is based on speciality of facts of that case. 13. During course of proceedings before authorities below assessee has pleaded that entire withdrawal from IDBI had been added back t o income declared by assessee. It appears that in past assessee had claimed certain deductions under section 32AB. At any rate, surrender of withdrawal from IDBI does not affect accrual of income to assessee in relation to its agreements with lessees. assessee shall, however, be at liberty to approach Assessing Officer if any adjustment in this behalf is required, for which learned Assessing Officer is directed to allow assessee reasonable opportunity and to make appropriate modification of assessed income. Subject to these remarks, we reverse order of learned CIT (Appeals) and restore addition as made by Assessing Officer for both assessment years. Accordingly revenue's ground of appeal No. 5 for assessment year 1995-96 and ground No. 2 for assessment year 1996-97 are allowed. 14. Grounds of appeal Nos. 3 and 4 in revenue's appeal for assessment year 1995-96 and ground of appeal No. 1 in revenue's appeal for assessment year 1996-97 are directed against deletion of addition of Rs. 1,60,000 and R s . 1,04,983 respectively made by Assessing Officer on ground of unaccounted sale of TV sets and other items. Facts of case leading to this dispute briefly are that as per audit report for assessment year 1995-96 learned Assessing Officer found that assessee had written off 3 colour TV sets, 29 black & white TV sets and other items in eastern zone branches during year of value of Rs. 1,60,000. learned Assessing Officer asked assessee to explain why these amounts should not be added back to declared income as sale outside books of account. As assessee made no reply, learned Assessing Officer added back this amount to income declared by assessee. Similarly, for assessment year 1996-97, as per audit report six colour TV sets; 15 black & white TV sets and 6 audio sets of value of Rs. 1,04,983 were written off during year. During course of assessment proceedings assessee explained that these articles were damaged beyond repairs and lying useless in eastern zone branches. learned Assessing Officer noted that during year assessee had similarly written off 703 wooden cabinets for which Destruction Certificates had been obtained from Excise authorities. No such destruction certi-ficates had been obtained by assessee in relation to items in question. Even otherwise assessee had failed to produce any documentary evidence regarding write off of these articles. learned Assessing Officer, therefore, held that write off was nothing but sale of sets outside books of account. He, therefore, added sum of Rs. 1,04,983 declared by assessee for assessment year 1996-97. 15. On assessee's appeal for assessment year 1995-96 learned CIT (Appeals) considered detailed explanation given by assessee. assessee explained as to how items in question had become unsaleable. learned CIT (Appeals), therefore, deleted addition of Rs. 1,60,000 made b y Assessing Officer. Similarly, for assessment year 1996-97 learned CIT (Appeals) held that assessee had maintained regular books of account, i n which write off of TV sets and audio systems was properly recorded. branches where these articles were written off has intimated Head Office and amounts were written off by assessee in normal manner. He, therefore, allowed assessee's claim of deduction for sum of Rs. 1,04,983. 16. On consideration of matter we are of view that learned CIT (Appeals) has considered explanations from assessee in detail that were not furnished before Assessing Officer. Moreover assessee has not explained as to what was done of written off stock and whether any salvage value was realized. We, therefore, restore this issue for both years to file of learned Assessing Officer for decision afresh after allowing assessee reasonable opportunity of being heard in matter. 17. We are now left with grounds of appeal Nos. 1 and 2 of revenue in relation to assessment year 1995-96 whereby learned Assessing Officer has made lump sum addition of Rs. 10 lakhs to trading results declared by assessee. Facts of case in relation to this addition briefly are that learned Assessing Officer found that assessee had shown sales of Rs. 8,18,65,164 as against sales of Rs. 12,12,57,790 in immediately preceding assessment year. learned Assessing Officer asked assessee as to why gross profit rate, as disclosed in earlier assessment year, should not be applied. He also asked assessee to work out element of excise duty pertaining to closing stock. He also asked assessee to furnish details of unavailed MODVAT credit. According to learned Assessing Officer assessee did not furnish these particulars. assessee did not furnish details of monthly sale and purchase and produce stock register also. assessee was asked to furnish details of material consumed, manufacturing expenses etc. According to learned Assessing Officer those details were furnished only in part. As assessee was, in opinion of Assessing Officer, non- cooperative and reluctant to produce books of account, following reasons given in detail for assessment year 1994-95, learned Assessing Officer made addition of Rs. 10 lakhs. 18. During course of hearing before learned CIT (Appeals), assessee furnished detailed reasons for fall in gross profit rate. assessee also explained that closing stock was valued at cost or net realizable value, whichever was lower. It was also submitted that unavailed of MODVAT credit could not be added to valuation of closing stock. learned CIT (Appeals) noticed that GP rate disclosed by assessee in past was not uniform and same had been fluctuating. He, therefore, held that there was no case for making addition to income declared by assessee on account of low gross profit. 19. During course of hearing before us learned DR argued that assessee had not kept proper records and, therefore, Assessing Officer had rightly made addition to declared trading results. assessee explained that its business was declining. There was lock out of factory on 31-10- 1994 and with that assessee's manufacturing activity came to end. Thereafter assessee was carrying out only sale of existing stock by way of winding up operation. These factors were duly appreciated by learned CIT (Appeals) while deleting addition of Rs. 10 lakhs. On consideration of matter, we are of view that assessee has given cogent explanation for decline in GP rate. addition to declared trading results cannot be made even if books of account are not properly maintained, as long as trading results disclosed by assessee are properly explained. In this view of matter, we do not see any reasons to interfere in impugned order of learned CIT (Appeals) in this behalf. 20. In result, for statistical purposes, revenue's appeal for assessment year 1995-96 shall be treated as partly allowed and shall be treated as allowed for assessment year 1996-97. *** JOINT COMMISSIONER OF INCOME TAX v. VIDEO ELECTRONICS LTD.