Case: Commissioner of Income Tax, Amritsar Vs. Shiv Prakash Janak Raj and Company Private Limited

It would be sufficient if we take the case of one of the assessees, M/s Shiv Prakash Janak Raj & Co. (P) Ltd. Four assessment years are relevant in this case, viz., Assessment Years 1968-69, 1969-70, 1970-71 and 1971-72.2. The partners of a firm, M/s Shiv Prakash Janak Raj & Co. (the Firm), are also the shareholders/directors of the assessee-company. The assessee-company had advanced a loan to the firm. During the accounting year relevant to the Assessment Year 1966-67, it charged interest in a sum of Rs 25, 048 on the loan so advanced. Similarly, for the Assessment Year 1967-68, it charged interest in a sum of Rs 25, 843. For the four assessment years concerning herein, however, the assessee adopted a different course. (The accounting year adopted by the assessee was the year ending on 31st October.) In respect of the Assessment Year 1968-69 (year ending 31-10-1967), the assessee-company passed a resolution on 9-10-1967 (i.e., before the end of the accounting year) deciding not to charge interest from the firm in view of the difficult financial position of the firm. For the next three assessment year, i.e., Assessment Years 1969-70, 1970-71 and 1971-72, similar resolutions were passed on 26-2-1969, 16-3-1970 and 24-11-1970 respectively. In other words, in the case of last three assessment years, the resolution deciding not to charge interest on the loan advanced to the firm was passed after the expiry of the relevant accounting year. Indeed the resolution says that the firm had approached the assessee-company to waive the interest on the loan for each of the said years and that on such representation that the directors of the assessee-company, (who were also partners in the said firm) decided that on interest shall be charged for each of the said three assessment years3. In the assessment proceedings relating to the said four assessment years, the Income Tax Officer took the view that inasmuch as the loans in question were interest-bearing loans and because the assessee-company had relinquished the interest without any commercial considerations and further because the directors/shareholders of the assessee-company were interested in the firm, it was a case of collusion between them to evade the tax liability. Accordingly, he added an amount towards interest calculating it at the rate of fifteen per cent per annum. On appeal, the Appellate Assistant Commissioner found that inasmuch as the resolution to waive the interest was passed after the expiry of the accounting year and further because the assessee-company was following the mercantile system of accounting, the interest must be held to have already accrued to the assessee before it was waived. He, however, reduce the rate of interest to nine per cent. With that modification, he dismissed the appeals. The assessee thereupon filed a further appeal to the Tribunal but without success. The Tribunal observed that even though to entries were made in the books of the assessee-company or of the firm with respect to receipt or payment of interest, that circumstance is of no relevance in view of the facts that the resolutions were passed after the expiry of the accounting year that the assessee was maintaining its accounts on mercantile basis and further that the relinquishment of interest was not for any commercial reasons. On reference, however, the High Court took a contrary view purporting to follow the decision of this Court in CIT v. Birla Gwalior (P) Ltd. The High Court held that in view of the said decision, the principle of earlier decision of this Court in Morvi Industries Ltd. v. CIT cannot be applied to this case5. Before we refer to the decisions of this Court, it is necessary to reiterate the basic facts of the case. For the previous two assessment years, viz., 1966-67 and 1967-68, the assessee-company did charge interest on the loan advanced by it to the firm which shows that the loan was an interest-bearing loan. The second circumstance to be noticed is that the resolution waiving interest was passed after the expiry of the relevant accounting year in the case of three subsequent assessment years, viz., Assessment Years 1969-70, 1970-71 and 1971-72. Only in the case of Assessment Year 1968-69, was the resolution passed before the expiry of the accounting year. Thirdly, the assessee-company was maintaining its accounts on mercantile basis. Yet another circumstance to be noticed is that the Tribunal has found it as a fact that the waiver was not based upon any commercial considerations. Of course, no entries were made in the accounts of the assessee-company, or for that matter in the accounts of the firm, in respect of four assessment years concerned herein, that any interest was received or paid. On these facts, it has to be held that in the case of three subsequent assessment years, the interest had accrued to the assessee notwithstanding the fact that no entries may have been made in the accounts of the assessee to that effect. The waiver of interest after the expiry of the relevant accounting year only meant that the assessee was giving up the money which had accrued to it. It cannot be said, in the circumstances, that the interest amount had not accrued to the assessee. Therefore, the Tribunal was right in taking the view it did in respect of Assessment Years 1969-70, 1970-71 and 1971-72. In the case of Assessment Year 1968-69, however, the resolution was passed before the expiry of the accounting year and though the finding of the Tribunal is that the said waiver was not actuated by any commercial considerations, yet the learned counsel for the Revenue did not press the Revenues case so far as this assessment year is concerned

Reasoning:
We are, however, concerned only with the first answer given by the High Court. In our opinion, there is no contradiction or inconsistency between the holding in this case and the holding in Morvi Industries Ltd. In this case, the important fact found was that the money became due to the assessee not at the end of the accounting year, but on the date the managed company made up its accounts. Indeed, no date was fixed in the agreement for payment of the commission and the assessee gave up its commission even before it accrued to it, i.e., before the managed company made up its account. It is for this reason, this Court held that the commission had not accrued to the assessee by or before the date it gave it up. Indeed, Hegde, J., speaking for himself and Khanna, J., specifically referred to the decision in Morvi Industries Ltd. and distinguished it on the above basis. We are, therefore, unable to agree with the High Court that by the virtue of the decision of this Court in Birla Gwalior (P) Ltd. the principle of Morvi Industries Ltd. does not apply to the present case. The facts of the present case (with respect to three assessment years, viz., 1969-70, 1970-71 and 1971-72) so squarely fall within the principle of Morvi Industries Ltd10. We respectfully agree with the propositions as well as the observations of the learned Judge with respect to the plea of real income14. We may also mention that when this case was cited before this Court in State Bank of Travancore it has been distinguished on the basis of the above fact, viz., that the agreement to give up seventy-five per cent of the commission was arrived at during the relevant previous year itself, i.e., before the close of the previous year and, therefore, what accrued to the assessee at the end of the relevant previous year was the commission at 2 1/2 per cent of the freight alone and not @ ten per cent. It cannot, therefore, be said that this case lays down any principle contrary to the one enunciated in Morvi Industries Ltd., Since the facts of the case in Chamanlal Mangaldas & Co. are identical to the facts in Shoorji Vallabhdas & Co. we do not think it necessary to refer to the facts of that case separatelyWe answer this contention by repeating the words of Sabyasachi Mukharji, J. in State Bank of Travancore which we have extracted hereinabove. The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room - nor would be permissible for the court - to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules