1982 PLP 238 (PTD)

SABYASACHI MUKHARJI, J.‑In this reference under section 256(2) of the Income‑tax Act, 1961, as directed by this Court, the following question has been referred to this Court by the Tribunal: "Whether, on the facts and in the circumstances pf the case, the Tribun4l is right in holding that Rs. 3,37,725 did not accrue by way of interest and loan advanced to Messrs Howrah Trading Company (P.) Ltd. and as such is not assessable in the year under consideration?" The present reference relates to the assessment year 1969‑

70. The assessee‑company had advanced certain loans to Messrs Howrah Trading Co. (P.) Ltd. which was a sister concern of the assessee‑company. The outstand ing loan of this year was Rs. 71,10,

000. The Income‑Tax Officer found that no interest was being shown on this loan. He further found that the assessee was following the mercantile system of accounting The Income‑Tax Officer, therefore, added Rs. 3,37,725 as interest at 4 a on the above amount of loan. The assessee went up in appeal before the Appellate Assistant Commis sioner. The Appellate Assistant Commissioner followed the reasons given in the earlier year's order and deleted the amount of Rs. 3,37,

725. In the earlier year the Appellate Assistant Commissioner had found that the assessee company bad charged interest up to April, 1966. After that date no interest was being shown in the books, as, according to the assessee‑company the recovery of the principal itself had become doubtful. A suit was instituted in the Calcutta High Court and the same was still pending before it and the debtor had denied any liability in this regard. That is the finding in respect of the year earlier to the relevant previous year of the instant reference. According to the Appellate Assistant Commissioner, the fact that a deduction had been allowed in the assessment of the debtor‑company was not relevant for assessing the same amount in the hands of the assessee‑company. Considering all the circumstances, the Appellate Assistant Commissioner held that the amount of interest had not accrued and not been received by the assessee. Being aggrieved by the aforesaid order of the Appellate Assistant Commissioner, the revenue went up in appeal before the Tribunal. The Tribunal considered the facts and, after taking into consideration the fact that the suit had been filed and other circumstances of the case, held that the original agreement between the debtor company and the assessee company had come to an end and it could not be said that the interest had accrued due to the assessee from the debtor company in the relevant assessment year. the Tribunal further held that the question whether the assessee had maintained its account on a mercantile basis or cash basis in this case would be of no consequence. The Tribunal considered that the debtor had denied its liability for payment of the loan itself. The Tribunal found that this was a very old loan and there were transactions up to 1954 and there was no transaction after 30th June, 1954. The balance outstanding on the date was Rs. 41,23,750 on which interest was being charged from year to year. The Tribunal considered that at no time the interest was actually received by the assessee. The assessee‑company in those circumstances stopped charging interest after 30th April, 1966, and the outstanding balance against the debtor company had come to Rs. 71,10,357 and after this a suit had been filed. Considering all these circumstances, the Tribunal was of the view that the debt had become doubtful as regards its recovery and it was, therefore, not required, in those circumstances, of the assessee‑company to show the interest in its account. The Tribunal held that there was no material to hold that the financial posi tion of the debtor‑company was sound arid that the interest or any part of the loan was likely to be realised by the assessee‑ company. It was pointed out that the suit was still pending and no amount had been recovered. Considering all these facts, the Tribunal upheld the order of the Appellate Assistant Commissioner. The Tribunal having refused to refer any question of law, the revenue made an application for reference to his court. As directed by this court, under section 256(2) of the Act, the Tribunal has referred the question indicated before. Before us, it was contended, firstly, that the Tribunal was in error in holding that it was for the revenue to show that the debt in question was a good debt. Learned Advocate for the revenue contended that it was for the debtor‑assesses to indicate or establish by sufficient materials that the debt in question was a bad debt. For this proposition, he relied on the observations of the Division Bench of this Court of the case of In re : Binjraj Hukamchand (I T R 1931 Cal. 683). This proposition, in our opinion, is well established and cannot be disputed. But we shall presently examine the relevancy of the proposition in the context of the facts of this case. The second contention urged on behalf of the revenue was that in a situation of this nature, that is to say, whether a particular amount should be taxed or not would depend not on the question whether the amount was received by the assesses but whether the income legally accrued in case the assesses had followed, in its dealings, as in this case, the mercantile system of accounting. For this reliance was placed on the observations of the Supreme Court in the case of C. I. T. v. Thiagarja Chetty & Co. (AIR 1972 S C 1545). This proposition again, in out opinion, cannot be disputed. But in this case, we have to bear in mind that the debtor‑company had stopped paying interest for a very long time. Indeed, prior to 1966, a suit) had been filed by. the assessee‑company against the debtor‑company for the recovery of the principal as well as the interest. The debtor‑company had denied liability. In a case, where a suit has been filed, the right to get interest for the period subsequent to the institution of the suit would depend not on the bargain between the parties but on the discretion of the Court contemplated under section 34 of the C. P. C. This proposition is also well settled. Reference in this connection may be made to the observations o the Supreme Court in the case of Sol! Pestonji Majoo v. Ganga Dhar Khemka (AIR 1969 S C 600), and reliance may be placed on the observation of the Court at pp. 603 and 604 of the report. The same proposition was reiterated again by the Supreme Court in the case of State of Madhya Pradesh v. Nathabhai Desalbhai Patel ((1972) 29 S T C 104) where the Supreme Court held that whether interest should be awarded on the amount claimed from the date of suit was within the discretion of the Court. We have further to note, as we did, that in this case in view of the facts, which we have set out hereinbefore, the Tribunal came to the categorical finding that there was no chance of interest being recovered and, therefore, the assessee was not charging interest. Whether there was accrual of interest or not should be judged from the realistic point of view. This principle has been reiterated by the Madras High Court in the case of C.

1. T. v. Motor Credit Co. P. Ltd. ((1981) 127 1 T R 572). Furthermore, in a ca where the Tribunal has made a categorical finding that the principal had become a bad debt, this principle is attracted particularly when that finding of the Tribunal was not challenged as perverse in the reference before us. In any event; we need not rest our decision solely on this aspect, in view o the other reasons mentioned hereinbefore. In the premises, in our opinion, the Tribunal was correct in coming to the conclusion, as it did, and the question must be answered in the affirmative and in favour of the assessee. In the facts and circumstances of this case, the parties will pay and bear their own costs. C. K. BANERJI ‑I agree. Question answered in the affirmative.