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C.I.T. v. M/S H.S.G.S. Rice Mill - INCOME TAX REFERENCE No. 145 of 1989  RD-AH 1698 (14 December 2004)
Income Tax Reference No.145 of 1989
Commissioner of Income Tax, Kanpur v.
M/s Hari Shanker Gauri Shanker Rice &
Dal Mills, Kanpur
Hon'ble R.K.Agrawal, J.
Hon'ble Prakash Krishna, J.
(Delivered by R.K.Agrawal, J.)
The Income Tax Appellate Tribunal has referred the following questions of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:-
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in confirming the order of the C.I.T.(Appeals) deleting the addition of Rs.47,643/- being interest accrued to the assessee maintaining books of account on mercantile basis."
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in confirming the order of the C.I.T.(Appeals) deleting the addition of Rs.52,883/- being interest accrued to the assessee maintaining books of account on mercantile basis."
The reference relates to the Assessment Years 1980-81 and 1981-82.
The respondent assessee is a firm. One Lala Gauri Shanker owed a sum of Rs.4,33,121/- to the respondent firm. The respondent had charged interest upto the assessment year 1979-80. However, for the assessment years in question it had not charged interest on the ground that the financial position of the debtor was very bad and the likelyhood of recovery of the principal amount was also in doubt. The Assessing Authority, however, added the deemed interest @ 11% p.a. on the amount owed by Lala Gauri Shanker on the ground that the respondent was following the mercantile system of accounting. In appeal, the Commissioner of Income Tax (Appeals) deleted the addition on the ground that the respondent had not charged any interest from the debtor and there is no question of deemed income, which order has been upheld by the Tribunal.
We have heard Sri Shambhoo Chopra, learned Standing Counsel for the applicant and have perused the order of the Tribunal.
We find that the Tribunal has recorded a categorical finding that the respondent had not charged interest on the amount owed by Lala Gauri Shanker and no debit entry was made in the account of the debtor. Similarly, no entry was made in the profit and loss account. It was also found that the financial position of the debtor was very bad and the recovery of debt owed by Lala Gauri Shanker was considered to be doubtful and, therefore, the Tribunal has held that there was no accrual of interest. From the findings of fact recorded by the Tribunal, we are of the considered opinion that in the present case the theory of real income is applicable notwithstanding the fact that the respondent was following the mercantile system of accounting as the income has not been earned at all as there was no corresponding entry in the books of account and considering the week financial position of the debtor if the creditor decided not to charge any interest, it can be said that the creditor has acted as a prudent man. It is open to an to charge interest and not to charge interest on money advanced by him. Further, it is not a case where the Assessing Authority has found that the respondent assessee has diverted the fund borrowed from the bank to its relative or partners and is not charging any interest where it is paying interest on its borrowing to the bank.
We answer the questions referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.
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