COMMISSIONER OF INCOME-TAX VS MODI RUBBER LTD. (NO. 1) T.C. NO.55 OF 1995, DECIDED ON 16TH SEPTEMBER, 1997
1999 P T D 3563
[230 I T R 817]
[Delhi High Court (India)]
Before R. C. Lahoti and J. K. Mehra, JJ
COMMISSIONER OF INCOME-TAX
Versus
MODI RUBBER LTD. (NO. 1) T.C. No.55 of 1995, decided on 16/09/1997.
(a) Income-tax---
----Reference---Business expenditure---Disallowance---Disallowance under R.6-D whether to be made by aggregating expenditure incurred on all tours undertaken by an employee in a year---Question of law---Indian Income Tax Act, 1961, Ss. 37 & 256---Indian Income Tax Rules, 1962, R.6-D.
(b) Income-tax---
----Income---Accrual---Mercantile system of accounting---Assessee selling goods to purchaser---Price of goods not paid by purchaser and same becoming trade debt ---Assessee raising demand of interest on trade debt, issuing debit note and making corresponding entry in books---Debit notes not honoured by debtor ---Tribunal finding that liability for payment of interest not accepted by debtor---Unilateral act of assessee debiting books with amount of interest did, not amount to accrual of income-- Finding of fact---No question of law arises---Indian Income Tax Act, 1961, S.256(2).
The question, whether, the Tribunal was justified in holding that for the' purpose of applying rule 6-D of the Income Tax Rules, 1962, the disallowance should have been made by aggregating expenditure incurred on various tours undertaken by an employee in a year, is a question of law fit for reference.
CIT v. Modipon Ltd: (No.2) (.1995) 212 ITR 656 (Delhi) fol.
The assessee sold goods to the purchaser but the purchaser did not pay the price of the goods promptly and, consequently, the price of the goods became a trade debt. The assessee raised a demand of interest on such trade debt, issued a debit note to the purchaser and made a corresponding entry in the books of account maintained on the mercantile system o` accounting. However, the debit notes raised by the assessee were not honoured by the debtor and in the subsequent year the amount was written off. The Assessing Officer and the Commissioner of Income-tax (Appeals), both held, that so far as the assessment year in which the debit entry was made was concerned, the amount of interest would be treated as an income accrued and thereafter, it could be treated as a bad debt in the year in which it was written off. On further appeal, the Tribunal held that the mere unilateral act of the assessee debiting the books of account with the amount of interest, the liability for payment whereof was not accepted or agreed to by the debtor, did not amount to accrual of income to the assessee. On an application to direct a reference
Held, that the finding of the Tribunal was a finding of fact and no question of law arose for reference.
Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC) and CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) fol.
State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and Western India Oil Distributing Co. Ltd. v. CIT (1994) 206 ITR 359 (Bom.) ref.
R. D. Jolly and Ms. Premlata Barisal for Petitioner.
G. C. Sharma, Senior Advocate and Santosh Aggarwal for Respondent.
JUDGMENT
This is an application under section 256(2) of the Income Tax Act, 1961, filed by the Revenue seeking a mandamus to the Tribunal for drawing up a statement of case and referring the following two questions for the opinion of the High Court:
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing interest of Rs.40,67,364 due from Bombay Tyre International Ltd., in spite of the fact that the deduction was actually waived off by directors in 1986?"
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that for the purpose of applying rule 6-D a disallowance should have been made by aggregating expenditure incurred on various tours undertaken by an employee in a year?"
So far as question No. 1 is concerned the brief relevant facts are that the assessee had sold goods to Bombay Tyre International Ltd. The purchaser did not promptly pay the sale price. Consequently, the price of the goods become a trade debt. On such trade debt, the assessee-company raised a demand of interest, issued a debit note and made a corresponding entry in the books of account maintained in the mercantile system of accounting however, the debit notes raised by the assessee-company were not honoured by the debtor. In the subsequent year, the amount was written off. The Assessing Officer and the Commissioner of Income-tax (Appeals) both held that so far as the assessment year in which the debit entry was made is concerned, the amount of interest will be treated as an income accrued and then it could be treated as a bad debt in the year in which it was written off.
Learned counsel for the Revenue has relied on the judgment of the Supreme Court in State Bank of Travancore v. CIT (1986) 158 ITR 102 and a decision of the Bombay High Court in Western India Oil Distributing Co. Ltd. v. CIT (1994) 206 ITR 359.
Learned counsel for the assessee has submitted that the question stands concluded by two Supreme Court decisions, namely, Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 and CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144. In both the abovesaid cases, the law laid down by their Lordships is that income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, to fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books-of account.
In the case of Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), the assessee was entitled to interest at a certain rate under a managing agency agreement. A debit entry for the amount of interest was made in the books of account. However, subsequently, the rate of interest was reduced but by that time the accounting year had come to an end. Their Lordships held on a consideration of relevant facts that the interest at the reduced rate could only be treated as real income accrued to the assessee and liable to income-tax. In the opinion of their Lordships, the subsequent agreement had altered the rate of commission to such a way as to make the income, which really accrued to the assessee different from what had been entered in the books of account.
In the case at hand, the Tribunal has on an evaluation of relevant circumstances held that the mere unilateral act of the assessee debiting the books of account with the amount of interest, the liability for payment, whereof was not accepted or agreed to by the debtor, did not amount to income really accrued to the assessee. This is a finding of fact, so question No. l does not arise as a referable question of law from the order of the Tribunal. In any case, the issue having been concluded by at least two pronouncements of the Supreme Court referred to hereinabove, the question is rendered a mere academic one. No mandamus can be issued for drawing up a statement of case and calling for a reference so far as question No. 1 is concerned.
So far as question No.2 is concerned, we are satisfied that the question does arise as a referable question of law from the order of the Tribunal.
It is also pointed out by learned counsel for the Revenue that an identical question has been ordered to be referred as a question of law in CIT v. Modipon Ltd. (No.2) (1995) 212 ITR 656 (Delhi).
Accordingly, the application is partly allowed. The Tribunal is directed to draw up a statement of the case and refer question No.2 stated hereinabove, for the opinion of the High Court.
No order as to the costs.
M.B.A./3138/FCApplication partly allowed.