Income-tax---

----Income---Accounting---Accrual of income---Time of accrual---Mercantile system of accounting---Interest on advance---No evidence that debt had become bad or that claim to interest had been renounced---Interest which had accrued in accounting year was assessable---Indian Income Tax Act, 1961.

The assessee-company agreed to advance a sum of Rs.20 lakh to C and an agreement in this regard was executed on July 27, 1965. The amounts were to be advanced in instalments of Rs.10 lakh from February, 1966, and the loan was to carry interest at 12 percent. per annum. The assessee-company advanced loans amounting to Rs.15.37 lakh as on June 30, 1969. R's.15.39 lakh as on June 30, 1970 and Rs.17.39 lakh as on June 30,1971. The interest amount on these loans amounting to Rs.1,81,000 for the assessment year 1970-71, Rs.2,08,864 for the assessment year 1971-72, and Rs.2,28,156 for the assessment year 1973-74, were not shown by the assessee-company as its income. The assessee was following the mercantile system of accounting. The Income Tax Officer came to the conclusion that there was no renouncement of the claim to interest receivable and the assessee-company all along insisted upon interest at the rate of 12 percent. and since the assessee had adopted the mercantile system of accounting, it was not open to him to omit showing the accrued interest in its books. The Tribunal found that there was no evidence as to what the terms with regard to interest had been. The contention of the assessee that the principal debt had become bad was negatived since further loans were given by the assessee-company and it was observed that no prudent businessman was likely to advance the amount to a company from which the recovery became doubtful. The Tribunal held that the interest had accrued and was assessable. On a reference:

Held, that it was not disputed that the assessee was maintaining its accounts according to the mercantile system. It was also not disputed that interest was payable at 12 percent. on its advances to C. The assessee had acquired a right to receive the interest and, therefore, the income had accrued, and was assessable in the assessment years 1970-71 to 1972-73.

Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC) ref.

G.S. Bapna for the Commissioner.

JUDGMENT

V.K. SINGHAL, J.---The Income-tax Appellate Tribunal has referred the following question of law arising out of its order in respect of the years 1970-71 to 1972-73:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest on the amount advanced to Messrs Citric India Ltd., Bombay, as per the agreement letter dated July 27, 1965, had accrued to the assessee-company following the mercantile system of accounting?"

The brief facts of the case are that the assessee-company agreed to advance a sum of Rs.20 lakh to Messrs Citric India Ltd. and an agreement in this regard was executed on July 27, 1965. The amounts were to be advanced in instalments of Rs.10 lakh from February, 1966, and the loan was to carry interest at 12 percent. per annum. The assessee-company advanced loans amounting to Rs.15.37 lakh as on June 30, 1969, Rs.15.39 lakh as on June 30, 1970 and Rs.17.39 lakh as on June 30, 1971. The interest amount on these loans amounting to Rs.1,81,000 for the assessment year 1970-71 Rs.2,08,864 for the assessment year 1971-72, and Rs.2,28,156. for the assessment year 1973-74, were not shown by the assessee-company as its income. The assessee is following the mercantile system of accounting. The Income Tax Officer required the assessee to produce the original agreement which was not produced in spite of opportunity being given and the letters received from Messrs Citric India Ltd. were filed from which it came to the knowledge of the Income Tax Officer that the debtor-Company has made an effort for paying interest at the rate of 8 percent. per annum which was not accepted by the assessee-Company. The Income Tax Officer came to the conclusion that there was no renouncement of the claim to interest receivable and the assessee? company all along insisted upon the interest at the rate of 12 percent. Since the assessee has adopted the mercantile system of accounting, it was not open to him to omit providing for the accrued interest. It was also observed that, if the interest amount has become a bad debt, then the assessee would be entitled to claim the bad debt at the appropriate time. The interest amount was added to the income of the assessee.

An appeal was preferred against the order of the assessing authority where it was submitted that the principal amount itself was doubtful of recovery and, therefore, interest was not provided in the books of account. The Appellate Assistant Commissioner came to the conclusion that it is not disputed that on the loan interest was agreed to be charged at the rate of 12 percent. and the assessee was following the mercantile system of accounting. No evidence was produced to show that the agreement for charging the interest at 12 percent. was modified at any subsequent date. The contention of the assessee that the principal amount itself has become doubtful of recovery was also not relied upon since further loans were advanced by the assessee to the debtor-company. The Appellate Assistant Commissioner relied upon the decision in Morvi Industries Ltd. v. CIT (1971) 82 ITR 835, wherein the apex Court held that: "The income accrues when it becomes due." The postponement of the date of payment does not affect the accrual of income because it has a bearing only in so far as the time of payment is concerned. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability on the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. It was further held that, where the accounts are kept on the mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The appeal was dismissed.

Against the above order, the matter was challenged before the Income-tax Appellate Tribunal and the Tribunal came to the conclusion that, in accordance with the letter dated July 27, 1965, written by Messrs Citric India Ltd. to the assessee, the loan amount has to carry interest at the rate of 12 percent. per annum. It was also found that the assessee-Company is following the mercantile system of accounting and there is no evidence in the agreement that the terms with regard to the interest have been modified later on. The contention of the assessee that the principal amount has itself become doubtful was negative since further loans were given by the assessee-Company and it was observed that no prudent businessman is likely to advance amounts to a company from which the recovery becomes doubtful. Relying upon the decision in Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC), referred to above, it was held that non-receipt of interest by the assessee does not detract from the fact that it had accrued to the assessee and the appeal was dismissed.

' We have considered the arguments. A charge has been created under section 5 on the accrual of income as well as on the receipt of income. The assessee-company is maintaining its accounts according to the mercantile system, and this has not been disputed. It is also not disputed that, in accordance with the letter produced by the assessee, the interest accrued and to be paid by the debtor-company was 12 percent. per annum. The assessee has not produced the original copy of the agreement for reasons best known to it in spite of opportunity being given by the Income Tax Officer. The assessee has acquired a right to receive the interest and, therefore, the income has accrued.- The right which has accrued in favour of the assessee is an enforceable right. An income may accrue without the actual receipt of the same, if a right has accrued to receive the said income by the assessee. Debitum in praesenti, solvendum in futuro. Once an income has accrued in a particular year it would be excluded from the computation of the total income of other years. In these circumstances, we are of the view that the Income Tax Appellate Tribunal was justified in coming to the conclusion that .the interest on the amount advanced to Messrs Citric India Ltd. has accrued to the assessee-Company which was following the mercantile system of accounting.

The reference is accordingly answered in favour of the Revenue and against the assessee. No order as to costs.

M.BA./227/???????????????????????????????????????????????????????????????????????????? Reference answered.