High Court Of Allahabad
CIT vs. Abbas Wazir (P) Ltd.
Section 5
Asst. Year 1978-79 & 1979-80
R.K. Agrawal & Prakash Krishna, JJ.
IT Ref. No. 113 of 1986
10th November, 2004
Counsel Appeared :
Dhananjay Awasthi, for the Revenue : Shambhoo Chopra, for the Assessee
JUDGMENT
R.K. Agrawal, J. :
The Tribunal, Allahabad, has referred the following questions of law under s. 256(1) of the IT Act, 1961, hereinafter referred to as “the Act”, for opinion to this Court for the asst. yr. 1978-79 :
“1. Whether, on the facts of the case, there was material before the Tribunal to hold that the financial position of the debtors had deteriorated and the recovery of even the principal amount had become doubtful ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 37,776 made on account of accrual of interest ?” and for the asst. yr. 1979-80 :
“1. Whether, on the facts of the case, there was material before the Tribunal to hold that the financial position of the debtors had deteriorated and the recovery of even the principal amount had become doubtful ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 31,560 (Rs. 10,500 + 21,060) made on account of accrual of interest ?”
The aforesaid questions for the two years are similar except that there is difference in the amount of interest. Briefly stated the facts giving rise to the present reference are as follows :
The present reference relates to the asst. yrs. 1978-79 and 1979-80. The respondent is a private limited company and is engaged in the manufacture and export of carpets. It had advanced loan to two firms, Carpet Traders and Bhadohi Cold Storage, on which it had charged interest in the earlier years. However, during the previous years relevant to the assessment years in question it had not charged interest from these two firms. The IAC (Asst.) in the course of the assessment proceedings added the following amounts while making the assessments : Asst. yr. 1978-79 Rs. 1,07,700. Asst. yr. 1979-80 Rs. 60,000
The addition was made on the ground that the respondent had borrowed money and had paid interest on its borrowing but had not charged interest from the aforesaid two firms in respect of the loans advanced to them. In appeal, however, the CIT(A) reduced the addition to Rs. 4,500 for the asst. yr. 1978-79 and to Rs. 10,500 for the asst. yr. 1979-80. On further appeal, the Tribunal found that the facts were not clear and hence restored the matter to the CIT(A) to be decided afresh in accordance with law. It may be mentioned here that in the asst. yr. 1978-79 addition of Rs. 4,500 was not challenged by the respondent before the Tribunal. The CIT(A) passed a fresh order in which he had held that there was an agreement for charging interest even though it was an unwritten one. He
then worked out the interest which could be added at Rs. 37,776 in the asst. yr. 1978-79 and Rs. 21,060 for the asst. yr. 1979-80. In addition, he further held that an amount of Rs. 10,500 in the asst. yr. 1979-80 was liable to be added on account of accrued interest in the account of Carpet Traders. In further appeal before the Tribunal, the Tribunal deleted the additions on the ground that the financial position of the debtors had deteriorated and recovery even of the principal amount had become doubtful.
We have heard Sri Dhananjay Awasthi, learned standing counsel for the Revenue. Sri Shambhoo Chopra, learned counsel appearing for the respondent states that he has no instruction in the matter.
Learned standing counsel for the Revenue submitted that as the respondent had borrowed money and had paid interest thereon, the AO was perfectly justified in disallowing the proportionate income on the amount of loan advanced by it to the two firms on which it had not charged any interest. He has relied upon a decision of the apex Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC).
Having heard learned counsel and after perusing the order of the Tribunal, we find that the Tribunal had recorded a categorical finding of fact that the financial position of the debtors was certainly not good. It had examined the accounts of the debtors for the two years and had found that apart from the outstanding loan advances of small amounts in cash and by cheque have been made during the assessment years in question in order to enable the debtor to clear off its taxes and its liabilities as the respondent wanted to take over this cold storage in satisfaction of its debt. In this view of the matter, the Tribunal had held that the financial position of the debtors had deteriorated to such an extent that even the recovery of the principal amount was in doubt and further that the respondent’s board of directors had considered the proposal of taking over the cold storage from Bhadohi Cold Storage in discharge of its debt. Thus, the recovery of interest was not possible.
In the case of State Bank of Travancore vs. CIT (supra), the apex Court has held that where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non- accrual. However, the apex Court in the case of UCO Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC), has held that the majority decision in State Bank of Travancore (supra) cannot be looked upon as laying down that a circular which is properly issued under s. 119 of the Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situation would not be binding on the Departmental authorities. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the P&L a/c, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. The apex Court had further given benefit of the circular issued by the CBDT and had applied it to interest accruing to a money-lender on loans entered in a suspense account because of the extreme unlikelihood of their being recovered. As already mentioned hereinbefore, the Tribunal from the evidence and material on record had found that the financial position of the debtors had deteriorated to such an extent that even the chance of the principal amount being recovered was very dim. If in these circumstances, it had not charged any interest from its debtors it cannot be said that it had not acted as a prudent businessman. Recently, this Court in IT Ref. No. 196 of 1985 [CIT vs. Dhampur Sugar Mills Ltd. (2005) 274 ITR 370 (All)], decided on 30th Sept., 2004, has held that where on account of commercial expediency and on account of continued losses suffered by the subsidiary the interest was not charged, the Tribunal was justified in deleting the amount towards interest disallowed by the AO in respect of the interest paid on borrowed funds.
In view of the foregoing discussions, we are of the considered opinion that the Tribunal has not committed any error in deleting the amount in question and the findings recorded by it are based on relevant material and evidence. Consequently, we answer the above questions referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. However, there shall be no order as to costs.
[Citation : 274 ITR 448]
