The DCIT, Circle-4, Baroda V. M/s. Motrix Investment Pvt.Ltd., Baroda

ITA 1766/AHD/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0365 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2009
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 28-05-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Deemed to accrue or arise in india; Commercial expediency; Set aside
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.1766/AHD/2009 ASSESSMENT YEAR: 2006-07 DATE OF HEARING:28.8.09 DRAFTED:15.9.09 DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4, BARODA V/S . M/S.MOTRIX INVESTDMENT PVT. LTD., M-1, VENUS APARTMENT, GROUND FLOOR, PRODUCTIVITY ROAD, ALKAPURI, BARODA, PAN NO.AABCM4266E (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI C.K.MISHRA, SR. DR RESPONDENT BY:- NONE O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-III, BARODA IN APPEAL NO.CAB/I II-57/08-09 DATED 05-03-2009. THE ASSESSMENT WAS FRAMED BY THE ITO, WARD-4(1), BA RODA U/S. 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 20-11- 2008 FOR THE ASSESSMENT YEAR 2006-07. 2. THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) DELETING THE INTEREST INCOME OF RS.89,18,025/- GIVE N TO M/S. CHANDAN METAL PRODUCTS PVT. LTD. ASSESSED BY THE ASSESSING OFFICER AS INCO ME OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING. 3. THE BRIEF FACTS ARE THAT DURING THE COURSE OF AS SESSMENT PROCEEDINGS, THE ASSESSEE WAS REQUESTED TO FURNISH THE NAME OF THE C OMPANIES TO WHICH ADVANCES ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 2 WERE GIVEN AND IN WHICH THE DIRECTORS ARE INTERESTE D PARTIES. THE SAME HAS BEEN GIVEN BY THE ASSESSEE VIDE ITS LETTER DATED 16-07-2 008 AND ALSO NOTICED THAT THE ASSESSEE HAS GIVEN ADVANCES AMOUNTING TO RS.89,18,0 25/- AS ON 31-03-2006 TO CHANDAN METAL PRODUCTS PVT. LTD. IT WAS FURTHER NO TED THAT NO INTEREST HAS BEEN CHARGED ON THIS AMOUNT. DURING THE COURSE OF ASSESS MENT PROCEEDINGS, THE ASSESSEE WAS REQUESTED TO STATE AS TO WHY INTEREST ON THIS SUM SHOULD NOT BE CHARGED. IT IS STATED BY THE ASSESSEE THAT THE FAC T OF THE CASE ARE SIMILAR TO THOSE INVOLVED IN ASSESSMENT YEARS 2000-01 TO 2005-06 AND IN THOSE YEARS, THE INTEREST CHARGED ON THE OUTSTANDING LOANS IN THE CASE OF CHA NDAN METAL PRODUCTS PVT. LTD. HAS NOT BEEN CHARGED. HOWEVER, THE CIT(A) HAS DELE TED THESE DISALLOWANCES AND REQUESTED NOT TO CHARGE ANY INTEREST ON THE LOAN OU TSTANDING IN THE CASE OF CHANDAN METAL PRODUCTS PVT. LTD. THE AO FURTHER CONSIDERED THE REPLY OF THE ASSESSEE AND THE SAME IS NOT TENABLE. IN THIS CASE, THE ASSESSEE HA S NOT CHARGED ANY INTEREST ON THE LOANS OUTSTANDING IN THE CASE OF CHANDAN METAL PROD UCTS PVT. LTD. AMOUNTING TO RS.89,18,025/- WHICH STATED BY THE ASSESSEE IN THE ASSESSMENT YEARS 2000-01 TO 2005-06 AND DISALLOWANCES MADE ON THIS ACCOUNT HAVE BEEN DELETED BY THE CIT(A). HOWEVER, THE DECISION OF CIT(A) WAS NOT ACCEPTED BY THE REVENUE AND PREFERRED APPEAL BEFORE TRIBUNAL. SINCE THE FACTS OF THE CASE IN THIS YEAR ARE SIMILAR TO THOSE INVOLVED IN ASSESSMENT YEARS 2000-01 TO 2005-06, IN TEREST ON THE LOAN GIVEN TO CHANDAN METAL PRODUCTS PVT. LTD. AMOUNT TO RS.89,18 ,025/- IS CHARGED @ 12% AND THE SAME IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE AND DISALLOWANCE COMES TO RS.10,70,163/-. 4. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE AS WE LL AS LD. DEPARTMENTAL REPRESENTATIVE FAIRLY STATED THAT THE ISSUE IS SQUA RELY COVERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.597-599/AHD/2007 DATED 25-09-2008, WHEREIN THE TRIBUNAL HAS HELD IN PARA-7 TO 11 AS UNDER:- 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD ALONG WITH THE ORDERS OF THE TAX AUTHORITIES BELOW. WE FIND THAT THE ASSESSEE HAS ADVANCED THE LOAN TO CHANDAN METAL PRODUCTS PVT. LTD. ON INTEREST. THE INTEREST HAS BEEN DULY CREDITED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT FROM AY 1996-97 UP TO AY 1999-2000. THE DETAILS OF LOANS AND ADVANCES AND INTEREST ACCRUED ARE GIVEN AS UNDER: FY IN WHICH AMOUNT INTEREST TOTAL AMOUNT ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 3 LOAN GIVEN CHARGED OUTSTANDING AT THE END OF THE FY 1995-96 5,00,000 986 5,00,986 1996-97 16,50,000 2,41,492 23,92,478 1997-98 23,25,000 4,19,196 51,36,674 1998-99 3,75,000 6,47,929 61,59,603 1999-00 3,50,000 - 65,09,603 THE LEARNED AR WAS FAIR ENOUGH TO CONCEDE THAT THE LOAN HAS BEEN RETURNED BY CHANDAN METAL PRODUCTS PVT. LTD. SUBSEQUENTLY BU T THE INTEREST WAS NOT RECOVERED. THE ASSESSEE WAS FOLLOWING MERCANTILE SY STEM OF ACCOUNTING. THE ASSESSEE HAS ADVANCED THE LOAN ON INTEREST. THERE I S NO EVIDENCE OR MATERIAL ON RECORD THAT SUBSEQUENT TO AY 1999-2000 THE ASSES SEE HAS ADVANCED FURTHER LOAN TO CHANDAN METAL PRODUCTS PVT. LTD. WI THOUT INTEREST. EVEN THERE IS NO EVIDENCE WHICH MAY PROVE THAT THE TERMS AND C ONDITIONS ABOUT CHARGING OF INTEREST HAVE BEEN AMENDED SUBSEQUENTLY. THE CON TENTION OF THE ASSESSEE IS THAT THE INTEREST HAS NOT ACCRUED TO THE ASSESSE E AS THE AMOUNT ITSELF WAS DOUBTFUL OF RECOVERY. IN OUR OPINION, NO PRUDENT MA N WILL ADVANCE FURTHER LOAN TO A PARTY IF HE FEELS THAT THE LOAN COULD NOT BE R ECOVERED. IN THIS CASE IT HAS BEEN ADMITTED BY THE LEARNED AR THAT ULTIMATELY CHA NDAN METAL PRODUCTS PVT. LTD. HAS REPAID THE LOAN DURING AY 2008-09 BUT NO I NTEREST WAS RECEIVED. IN OUR OPINION, THE LOAN ADVANCED BY THE ASSESSEE WAS NOT STICKY. 8. WE HAVE GONE THROUGH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GODHRA ELECTRICITY COMPANY LTD. V CIT 225 I TR 746. IN THIS CASE IT WAS HELD THAT INCOME-TAX IS A LEVY ON INCOME. NO DO UBT, 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, BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOKING KEEPING, THE ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALIZE. THE FACTS RELATING TO T HIS CASE ARE THAT THE GOVERNMENT OF BOMBAY GRANTED A LICENCE TO LADY SULO CHANA CHINUBHAI & CO. AUTHORIZING IT TO GENERATE AND SUPPLY ELECTRICITY T O THE CONSUMERS IN GODHRA AREA. THE ASSESSEE-COMPANY BECAME THE SUCCESSOR OF THE SAID LADY SULOCHANA CHINUBHAI & CO. THE STATE GOVERNMENT HAD FIXED THE CHARGES FOR SUPPLY OF ELECTRICITY AND MOTIVE POWER WITH EFFECT FROM 1-2-1952. AFTER THE AMENDMENT OF THE ELECTRICITY (SUPPLY) ACT, 1948, TH E ASSESSEE-COMPANY INCREASED THE CHARGES FOR MOTIVE POWER FROM 1-1-196 3 TO 35 NP PER UNIT WITH A MAXIMUM OF RS.7 PER MONTH FOR EVERY INSTALLATION AN D SUBSEQUENTLY WITH EFFECT FROM 1-7-1963 THE RATES WERE INCREASED FOR E LECTRICITY SUPPLY FOR LIGHTS AND FANS TO 70 NP PER UNIT WITH A MINIMUM OF RS.5 P ER INSTALLATION. BOTH THE INCREASES WERE CHALLENGED BY THE CONSUMERS. THE SAI D SUITS WERE DECIDED BY THE TRIAL COURT IN FAVOUR OF THE CONSUMERS BUT THE HIGH COURT HELD THAT THE ASSESSEE IS ENTITLED TO ENHANCE THE CHARGES UNILATE RALLY SUBJECT TO THE CONDITIONS PRESCRIBED IN THE SIXTH SCHEDULE TO THE SAID ACT. THE SUPREME COURT ALSO CONFIRMED THE SAME. THE ASSESSEE COULD N OT REALIZE THE ENHANCED CHARGES DUE TO THE PENDENCY OF THE SUITS. ON 26-2-1 969 AFTER THE DECISION OF THE SUPREME COURT, SOME OF THE CITIZENS OF GODHRA M ET THE MINISTER. THEREAFTER, THE UNDER SECRETARY TO THE GOVERNMENT O F GUJARAT WRITTEN A LETTER ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 4 DATED 19-3-1969 TO THE ASSESSEE SUGGESTING THE COMP ANY TO MAINTAIN THE STATUS QUO FOR THE RATES TO THE CONSUMERS. IN THE M EANTIME ANOTHER SUIT WAS FILED IN SUPREME COURT. IN THE SAID SUIT IT WAS CLA IMED THAT THE DECISION OF THIS COURT WAS ONLY OF ACADEMIC INTEREST, AS IN APRIL, 1 965, THE ASSESSEE COMPANY BEGAN TO PURCHASE IN BULK ELECTRICAL ENERGY AT10 PA ISE PER UNIT FROM THE GUJARAT ELECTRICITY BOARD AND IT HAD TO WORK MERELY AS DISTRIBUTING AGENCY AND HAD TO COLLECT THE CHARGES AND NOT GENERATE ELECTRI CAL ENERGY. AN INTERIM INJUNCTION WAS GRANTED BY THE TRIAL COURT IN THAT S UIT. THE SUIT WAS DECREED IN FAVOUR OF THE CONSUMERS BY THE CIVIL JUDGE BY THE J UDGMENT DATED 20-6-1974 AND A DECLARATION WAS GRANTED TO THE EFFECT THAT TH E ASSESSEE SHALL NOT RECOVER THE CHARGES EXCEEDING 31 NP PER UNIT FOR LI GHTS AND FANS AND 20 NP PER UNIT FOR MOTIVE POWER. WHILE THE SAID SUIT WAS PENDING BEFORE THE TRIAL COURT THE GUJARAT STATE ELECTRICITY BOARD, IN EXERC ISE OF POWER CONFERRED ON IT BY SECTION 6(1) OF THE INDIAN ELECTRICITY ACT SOUGH T TO EXERCISE ITS OPTION TO PURCHASE THE ELECTRICAL UNDERTAKING OF THE ASSESSEE BY ISSUING A NOTICE DATED 8-11-1971. THE UNDERTAKING WAS TAKEN OVER BY THE ST ATE GOVERNMENT WITH EFFECT FROM 19-11-1972. UP TO AY 1963-64 THE ASSESS EE WAS ASSESSED ON THE BASIS OF THE ACCOUNTS MAINTAINED ON MERCANTILE SYST EM. IN AYS 1964-65 TO 1967-68 THE ASSESSEE DEDUCTED TOTAL A AMOUNT OF RS. 10,87,828/- FROM THE TOTAL EARNINGS IN RESPECT OF SALE OF ELECTRICAL ENE RGY ON THE GROUND THAT THE SAID AMOUNT WAS NOT ACTUALLY RECOVERED BY IT FROM T HE CONSUMERS. THE AO IN AY 1969-70 INCLUDED A SUM OF RS.7,33,676/- ON THE G ROUND THAT THE SUIT FILED AGAINST THE ASSESSEE-COMPANY BY THE CONSUMERS WAS D ECIDED IN FAVOUR OF THE ASSESSEE-COMPANY BY THE COURT DURING THE AY 196 8-69 AND, THEREFORE, THE ASSESSEE HAS THE LEGAL RIGHT TO RECOVER THE SAID AM OUNT. THE SAID ADDITION WAS DELETED BY THE AAC AND UPHELD BY THE TRIBUNAL. SIMILARLY, IN RESPECT OF AYS 1970-71 AND 1971-72 THE ADDITIONS MADE WERE DEL ETED BY THE TRIBUNAL. THE HIGH COURT TOOK THE VIEW THAT THE ASSESSEE-COMP ANY HAD A LEGAL RIGHT TO RECOVERY THE ENHANCED RATES. WHEN THE MATTER WENT B EFORE THE SUPREME COURT, THE HON'BLE SUPREME COURT HAS HELD AS UNDER: 6 UNDER THE ACT INCOME CHARGED TO TAX IS THE INCOM E THAT IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN THE PREVIOUS YEAR RELEVANT TO THE YEAR FOR WHICH ASSESSMENT IS MADE OR ON THE INCOME THAT ACCR UES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA DURING SUCH YEAR . THE COMPUTATION OF SUCH INCOME IS TO BE MADE IN ACCORDANCE WITH THE METHOD OR ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT MAY BE EITHER THE CASH SYSTEM WHERE ENTRIES ARE MADE ON THE BASIS OF ACTUAL RECEIPTS AND ACTUAL OUTGOINGS OR DISBURSEMENTS OR IT MAY BE THE MERCANTILE SYSTEM WH ERE ENTRIES ARE MADE ON ACCRUAL BASIS, I.E., ACCRUAL OF THE RIGHT TO RECEIV E PAYMENT AND THE ACCRUAL OF THE LIABILITY TO DISBURSE OR PAY. IN CIT V SHOORJI VALLABHDAS & CO. (SUPRA), IT HAS BEEN LAID DOWN: INCOME-TAX IS A LEVY ON INCOME. NO DOUBT, THE INCO ME-TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABIL ITY TO TAX IS ATTRACTED, VIZ. THE ACCRUAL OF THE INCOME OR ITS RECEIPT, BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOKING KEEPING, THE ENTRY IS M ADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALIZE. ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 5 THIS PRINCIPLE IS APPLICABLE WHETHER THE ACCOUNTS A RE MAINTAINED ON CASH SYSTEM OR UNDER THE MERCANTILE SYSTEM. IF THE ACCOU NTS ARE MAINTAINED UNDER THE MERCANTILE SYSTEM WHAT HAS TO BE SEEN IS WHETHE R INCOME CAN BE SAID TO HAVE REALLY ACCRUED TO THE ASSESSEE-COMPANY. IN H M KASHIPAREKH & CO. LTD. V CIT (1960) 39 ITR 706 (BOM): TC 39R. 791, THE BOM BAY HIGH COURT HAD SAID: EVEN SO, (THE FAILURE TO PRODUCE ACCOUNT LOSSES) W E SHALL PROCEED ON THE FOOTING THAT THE ASSESSEE-COMPANY HAVING FOLLOW ED THE MERCANTILE SYSTEM OF ACCOUNT, THERE MUST HAVE BEEN ENTRIES MAD E IN ITS BOOKS IN THE ACCOUNTING YEAR IN RESPECT OF THE AMOUNT OF COM MISSION. IN OUR JUDGMENT, WE WOULD NOT BE JUSTIFIED IN ATTACHING AN Y PARTICULAR IMPORTANCE IN THIS CASE TO THE FACT THAT THE COMPAN Y FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. THEY WOULD NOT HAV E ANY PARTICULAR BEARING IN APPLYING THE PRINCIPLE OF REAL INCOME IN THE FACTS OF THIS CASE. THE SAID VIEW WAS APPROVED BY THIS COURT IN CIT V B IRLA GWALIOR (P) LTD. (SUPRA) WHERE THE ASSESSEE MAINTAINED ITS ACCOUNTS ON THE MERCANTILE SYSTEM. IN THAT CASE THIS COURT, AFTER REFERRING TO THE DECISION IN MORVI INDUSTRIES LTD. V CIT 1974 CTR (SC) 149: 1971) 82 I TR 835 (SC): TC 39R. 720, WHICH WAS ALSO A CASE WHERE THE ACCOUNTS WERE MAINTAINED ON MERCANTILE SYSTEM, HAS SAID: HENCE, IT IS CLEAR THAT THIS COURT IN MORVI INDUST RIES CASE DID EMPHASIZE THE FACT THAT THE REAL QUESTION FOR DECIS ION WAS WHETHER THE INCOME HAD REALLY ACCRUED OR NOT. IT IS NOT A HYPOT HETICAL ACCRUAL OF INCOME THAT HAS GOT TO BE TAKEN INTO CONSIDERATION BUT THE REAL ACCRUAL OF THE INCOME. IN POONA ELECTRIC SUPPLY CO. LTD. VS CIT (SUPRA), T HIS COURT HAS SAID: INCOME-TAX IS A TAX ON THE REAL INCOME, I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. IN THAT CASE THE COURT HAS APPROVED THE FOLLOWING P RINCIPLE LAID DOWN BY THE BOMBAY HIGH COURT IN H M KASHIPAREKH & CO. LTD. VS CIT (SUPRA): THE PRINCIPLE OF REAL INCOME IS NOT TO BE SUBORDIN ATED AS TO AMOUNT VIRTUALLY TO A NEGATION OF IT WHEN A SURRENDER OR C ONCESSION OR REBATE IN RESPECT OF MANAGING AGENCY COMMISSION IS MADE, AGRE ED TO OR GIVEN ON GROUNDS OF COMMERCIAL EXPEDIENCY, SIMPLY BECAUSE IT TAKES PLACE SOME TIME AFTER THE CLOSE OF AN ACCOUNTING YEAR. IN EXAMINING ANY TRANSACTION AND SITUATION OF THIS NATURE THE COURT WOULD HAVE MORE REGARD TO THE REALITY AND SPECIALITY OF THE SITUATI ON RATHER THAN THE PURELY THEORETICAL OR DOCTRINAIRE ASPECT OF IT. IT WILL LA Y GREATER EMPHASIS ON THE BUSINESS ASPECT OF THE MATTER VIEWED AS A WHOLE WHE N THAT CAN BE DONE WITHOUT DISREGARDING STATUTORY LANGUAGE. ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 6 IN STATE BANK OF TRAVANCORE VS CIT (SUPRA), AFTER C ONSIDERING THE VARIOUS DECISIONS OF THIS COURT, SABYASACHI MUKHARJI J. (AS THE LEARNED CHIEF JUSTICE THEN WAS) HAS SAID: AN ACCEPTABLE FORMULA OF CO-RELATING THE NOTION OF REAL INCOME IN CONJUNCTION WITH THE METHOD OF ACCOUNTING FOR THE P URPOSE OF THE COMPUTATION OF INCOME FOR THE PURPOSE OF TAXATION I S DIFFICULT TO EVOLVE. BESIDES, ANY STRAIT-JACKET FORMULA IS BOUND TO CREA TE PROBLEMS IN ITS APPLICATION TO EVERY SITUATION; IT MUST DEPEND UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE. WHEN AND HOW DOES AN IN COME ACCRUE AND WHAT ARE THE CONSEQUENCES THAT FOLLOW FROM ACCR UAL OF INCOME IS WELL-SETTLED. THE ACCRUAL MUST BE REAL TAKING INTO ACCOUNT THE ACTUALITY OF THE SITUATION. WHETHER AN ACCRUAL HAS TAKEN PLAC E OR NOT MUST, IN APPROPRIATE CASES, BE JUDGED ON THE PRINCIPLES OF R EAL INCOME THEORY. AFTER ACCRUAL, NON-CHARGING OF TAX ON THE SAME BECA USE OF CERTAIN CONDUCT BASED ON THE IPSE DIXIT OF A PARTICULAR ASS ESSEE CANNOT BE ACCEPTED. IN DETERMINING THE QUESTION WHETHER IT IS HYPOTHETICAL INCOME OR WHETHER REAL INCOME HAS MATERIALIZED OR NOT, VAR IOUS FACTORS WILL HAVE TO BE TAKEN INTO ACCOUNT. IT WOULD BE DIFFICUL T AND IMPROPER TO EXTEND THE CONCEPT OF REAL INCOME TO ALL CASES DEPE NDING UPON THE IPSE DIXIT OF THE ASSESSEE WHICH WOULD THEN BECOME A VAL UE JUDGMENT ONLY. WHAT HAS REALLY ACCRUED TO THE ASSESSEE HAS TO BE F OUND OUT AND WHAT HAS ACCRUED MUST BE CONSIDERED FROM THE POINT OF VI EW OF REAL INCOME TAKING THE PROBABILITY OR IMPROBABILITY OF REALIZAT ION IN A REALISTIC MANNER AND DOVETAILING OF THESE FACTORS TOGETHER BUT ONCE THE ACCRUAL TAKES PLACE, ON THE CONDUCT OF THE PARTIES SUBSEQUENT TO THE YEAR OF CLOSING AN INCOME WHICH HAS ACCRUED CANNOT BE MADE NO INCO ME. 7. IF THE MATTER IS EXAMINED IN THE LIGHT OF THE A FORESAID PRINCIPLES LAID DOWN BY THIS COURT, IT MUST BE HELD THAT EVEN THOUGH THE ASSESSEE-COMPANY WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND H AD MADE ENTRIES IN THE BOOKS REGARDING CHARGES FOR THE SUPPLY MADE TO THE CONSUMERS, NO REAL INCOME HAD ACCRUED TO THE ASSESSEE-COMPANY IN RESPE CT OF THOSE ENHANCED CHARGES IN VIEW OF THE FACT THAT SOON AFTER THE ASS ESSEE-COMPANY DECIDED TO ENHANCE THE RATES IN 1963 REPRESENTATIVE SUITS (CIV IL SUITS NOS.152 OF 1963 AND 50 OF 1964) WERE FILED BY THE CONSUMERS WHICH W ERE DECREED BY THE TRIAL COURT AND WHICH DECREE WAS AFFIRMED BY THE APPELLAT E COURT AND THE LEARNED SINGLE JUDGE OF THE HIGH COURT AND IT IS ONLY ON 8 TH DEC., 1968 THAT THE LETTERS PATENT APPEALS FILED BY THE ASSESSEE-COMPANY WERE A LLOWED BY THE DIVISION BENCH OF THE HIGH COURT AND THE SAID SUITS WERE DIS MISSED. BUT APPEALS WERE FILED AGAINST THE SAID JUDGMENT BY THE CONSUMERS IN THIS COURT AND THE SAME WERE DISMISSED BY THE JUDGMENT OF THIS COURT DT.26 TH FEB., 1969. SHORTLY THEREAFTER, ON 19 TH MARCH, 1969, THE UNDER SECRETARY TO THE GOVERNMENT OF GUJARAT WROTE A LETTER ADVISING THE ASSESSEE-COMPAN Y TO MAINTAIN THE STATUS QUO FOR THE RATES TO THE CONSUMERS FOR AT LEAST SIX MONTHS AND THE CHIEF ELECTRICAL INSPECTOR WAS DIRECTED TO GO THROUGH THE ACCOUNTS OF THE ASSESSEE- COMPANY FROM YEAR TO YEAR AND TO REPORT TO THE GOVE RNMENT ABOUT THE ACTUAL POSITION ABOUT THE REASONABLE RETURNS EARNED BY THE ASSESSEE-COMPANY. ON 16 TH MAY, 1969 ANOTHER REPRESENTATIVE SUIT (SUIT NO.118 OF 1969) WAS FILED BY THE CONSUMERS WHEREIN INTERIM INJUNCTION WAS GRANTE D BY THE COURT AND WHICH WAS FINALLY DECREED IN FAVOUR OF THE CONSUMERS ON 2 3 RD JUNE, 1974. IT WOULD ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 7 THUS APPEAR THAT AFTER THE DECISION WAS TAKEN BY TH E ASSESSEE-COMPANY TO ENHANCE THE CHARGES IT WAS NOT ABLE TO REALIZE THE ENHANCED CHARGES ON ACCOUNT OF PENDENCY OF THE EARLIER REPRESENTATIVE S UITS OF THE CONSUMERS FOLLOWED BY THE LETTER OF THE UNDER SECRETARY TO TH E GOVERNMENT OF GUJARAT AND THE SUBSEQUENT SUIT OF THE CONSUMERS AND DURING THE PENDENCY OF THE SUBSEQUENT SUIT THE MANAGEMENT OF THE UNDERTAKING O F THE ASSESSEE- COMPANY WAS TAKEN OVER BY THE GOVERNMENT OF GUJARAT UNDER THE DEFENCE OF INDIA RULES, 1971 AND THE UNDERTAKING WAS SUBSEQUEN TLY TRANSFERRED TO THE GUJARAT STATE ELECTRICITY BOARD. IT IS NO DOUBT TRUE THAT THE LETTER ADDRESSED BY TH E UNDER SECRETARY TO THE GOVERNMENT OF GUJARAT TO THE ASSESSEE-COMPANY HAD N O LEGALLY BINDING EFFECT BUT ONE HAS TO LOOK AT THINGS FROM PRACTICAL POINT OF VIEW. [SEE: R B JODHA MAL KUTHIALA VS CIT (SUPRA)]. THE ASSESSEE-COMPANY , BEING A LICENSEE, COULD NOT IGNORE THE DIRECTION OF THE STATE GOVERNMENT WH ICH WAS COUCHED IN THE FORM OF AN ADVICE, WHEREBY THE ASSESSEE-COMPANY WAS ASKED TO MAINTAIN THE STATUS QUO FOR AT LEAST SIX MONTHS AND NOT TO TAKE STEPS TO RECOVER THE DUES TOWARDS ENHANCED CHARGES FROM THE CONSUMERS DURING THIS PERIOD. BEFORE THE EXPIRY OF THE PERIOD OF SIX MONTHS THE SUBSEQUENT S UIT HAD BEEN FILED BY THE CONSUMERS AND DURING THE PENDENCY OF THE SAID SUIT THE UNDERTAKING OF THE ASSESSEE-COMPANY WAS TAKEN OVER BY THE GOVERNMENT O F GUJARAT UNDER THE DEFENCE OF INDIA RULES, 1971 AND SUBSEQUENTLY IT WA S TRANSFERRED TO THE GUJARAT STATE ELECTRICITY BOARD AND, AS A RESULT, T HE ASSESSEE-COMPANY WAS NOT IN A POSITION TO TAKE STEPS TO RECOVER THE ENHA NCED CHARGES. 8 THE HIGH COURT HAS OBSERVED THAT THE SUBSEQUENT S UIT THAT WAS FILED ON 16 TH MAY,1969 RELATED TO RECOVERY OF ENHANCED CHARGES F OR THE PERIOD SUBSEQUENT TO 31 ST MARCH, 1969 AND NOT PRIOR THERETO. WE HAVE, HOWEVE R, PERUSED THE JUDGMENT OF THE JOINT JUDGE (JUNIOR DIV ISION), GODHRA DT.20 TH JUNE, 1974 IN THE SAID SUIT WHICH WAS ANNEXED AS AN NEXURE D TO THE STATEMENT OF THE CASE. THE SAID JUDGMENT DOES NOT S HOW THAT THE SUIT WAS CONFINED TO THE PERIOD SUBSEQUENT TO 31 ST MARCH, 1969. ON THE OTHER HAND, IT SHOWS THAT THE PLAINTIFFS IN THAT SUIT WERE CHALLEN GING THE ENHANCEMENT IN CHARGES MADE IN 1963 AND HAD SOUGHT A DECLARATION T HAT THE ASSESSEE- COMPANY WAS NOT ENTITLED TO RECOVER MORE THAN 31 PA ISE PER UNIT FOR LIGHT AND FANS AND 20 PAISE PER UNIT FOR MOTIVE POWER AND THE TRIAL COURT, WHILE DECREEING THE SAID SUIT HAD GIVEN A DECLARATION IN THESE TERMS. THE SAID DECLARATION IS NOT CONFINED TO THE PERIOD SUBSEQUEN T TO 31 ST MARCH, 1969. 9. THE QUESTION WHETHER THERE WAS REAL ACCRUAL OF I NCOME TO THE ASSESSEE-COMPANY IN RESPECT OF THE ENHANCED CHARGES FOR SUPPLY OF ELECTRICITY HAS TO BE CONSIDERED BY TAKING THE PROB ABILITY OR IMPROBABILITY OF REALIZATION IN A REALISTIC MANNER. IF THE MATTER IS CONSIDERED IN THIS LIGHT, IT IS NOT POSSIBLE TO HOLD THAT THERE WAS REAL ACCRUAL OF INC OME TO THE ASSESSEE- COMPANY IN RESPECT OF THE ENHANCED CHARGES FOR SUPP LY OF ELECTRICITY WHICH WERE ADDED BY THE ITO WHILE PASSING THE ASSESSMENT ORDERS IN RESPECT OF THE ASSESSMENT YEARS UNDER CONSIDERATION. THE AAC WAS R IGHT IN DELETING THE SAID ADDITION MADE BY THE ITO AND THE TRIBUNAL HAD RIGHTLY HELD THAT THE CLAIM AT THE INCREASED RATES AS MADE BY THE ASSESSEE-COMP ANY ON THE BASIS OF WHICH NECESSARY ENTRIES WERE MADE REPRESENTED ONLY HYPOTHETICAL INCOME ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 8 AND THE IMPUGNED AMOUNTS AS BROUGHT TO TAX BY THE I TO DID NOT REPRESENT THE INCOME WHICH HAD REALLY ACCRUED TO THE ASSESSEE-COM PANY DURING THE RELEVANT PREVIOUS YEARS. THE HIGH COURT, IN OUR OPI NION WAS IN ERROR IN UPSETTING THE SAID VIEW OF THE TRIBUNAL. 10. IN THE RESULT, THE APPEALS ARE ALLOWED, THE IMP UGNED JUDGMENT OF THE HIGH COURT IS SET ASIDE AND THE QUESTIONS REFERRED BY THE TRIBUNAL FOR OPINION ARE ANSWERED IN FAVOUR OF THE ASSESSEE-COMPANY AND AGAINST THE REVENUE. BUT IN THE CIRCUMSTANCES, THERE WILL BE NO ORDER AS TO COSTS. IN OUR OPINION, THE SAID JUDGMENT WILL NOT ASSIST T HE ASSESSEE AS IN THAT CASE THE INCOME HAS NOT ACCRUED TO THE ASSESSEE. THE DIR ECTIONS OF THE STATE GOVERNMENT WERE BINDING ON THE ASSESSEE AND BEFORE THE EXPIRY OF THE TIME DURING WHICH THE DIRECTIONS WERE ISSUED, THE SUIT W AS FILED AND THE REAL INCOME COULD NOT ACCRUE TO THE ASSESSEE. IN THE CASE BEFOR E US THERE IS NO EVIDENCE ON RECORD THAT THE ACCRUAL OF INTEREST WAS DISPUTAB LE OR THERE WAS DISPUTE BETWEEN THE ASSESSEE AND THE PARTY TO WHOM THE LOAN WAS ADVANCED. THE ASSESSEE FURTHER ADVANCED THE MONEY WHICH ALSO PROV ES THAT THE LOAN HAS NOT BECOME STICKY. 9. WE HAVE ALSO GONE THROUGH THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE OF (1999) UCO BANK V CIT 237 ITR 889 (SC). HEAD NOTE OF THIS CASE MENTION AS UNDER: INCOME ACCRUAL OF INCOME METHOD OF ACCOUNTING BANKS FINANCIAL INSTITUTIONS INTEREST ON STICK Y ADVANCES NOT BROUGHT TO PROFIT AND LOSS ACCOUNT B UT TAKEN TO SEPARATE SUSPENSE ACCOUNT ACCEPTED MODE OF TREATMENT OF NOTIONAL INCOME IN ACCOUNTING PRACTIC E IS FOR PROPER DETERMINATION OF INCOME IN TERMS OF SECT ION 145 CIRCULAR OF CBDT PERMITTING SUCH INTEREST TO BE E XCLUDED FROM INCOME IF FOR THREE YEARS SUCH INTEREST IS NOT ACTUALLY RECEIVED THEREAFTER INTEREST WILL BE ADD ED AS INCOME ONLY WHEN ACTUALLY RECEIVED INCOME-TAX ACT , 1961. SS. 119,145. IN THIS CASE, THE ISSUE RELATES TO THE ACCRUAL OF I NTEREST ON THE STICKY ADVANCES. WE HAVE ALREADY HELD IN THE CASE OF THE ASSESSEE TH AT THE ADVANCES WERE NOT THE STICKY ONE. IN THAT CASE, THERE WAS A CIRCULAR OF THE CBDT PERMITTING THE INTEREST ON THE STICKY ADVANCES TO BE EXCLUDED FROM THE INCOME IF FOR THREE YEARS SUCH INTEREST IS NOT ACTUALLY RECEIVED. THE C ASE OF THE ASSESSEE IS NOT SO. IN THE CASE OF THE ASSESSEE, RATHER THE INTERES T HAS ACCRUED AS PER THE TERMS AND CONDITIONS FOLLOWED IN THE EARLIER YEAR. 10. WE HAVE ALSO GONE THROUGH THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE VS CIT (1986) 158 ITR 102 (SC). AT PAGE 120, THE HON'BLE SUPREME COURT HAS HELD AS UND ER: WHERE INTEREST HAS NOT BEEN PAID, IT IS SOMETIMES LEFT OUT OF ACCOUNT ALTOGETHER. THIS PREVENTS THE POSSIBILITY OF IRRECO VERABLE INTEREST BEING CREDITED TO REVENUE, AND DISTRIBUTED AS PROFIT. ON THE OTHER HAND, THIS TREATMENT DOES ITA NO.1766/AHD/2009 A.Y. 2006-07 DCIT CIR-4, BARODA V. M/S. MOTRIX INVESTMENT P . LTD. PAGE 9 NOT RECORD THE ACTUAL STATE OF THE LOAN ACCOUNT, AN D IN THE CASE OF BANKS AND OTHER CONCERNS WHOSE BUSINESS IT IS TO ADVANCE MONE Y, IT IS USEFUL TO FIND THE INTEREST IS REGULARLY CHARGED UP, BUT WHEN ITS RECO VERY IS DOUBTFUL, THE AMOUNT THEREOF IS EITHER FULLY PROVIDED AGAINST OR TAKEN T O THE CREDIT OF AN INTEREST SUSPENSE ACCOUNT AND CARRIED FORWARD AND NOT TREATE D AS PROFIT UNTIL ACTUALLY RECEIVED. THERE IS NO EVIDENCE ON RECORD THAT THE PRINCIPAL A MOUNT WAS DOUBTFUL OF THE RECOVERY AND, THEREFORE, WE ARE OF THE VIEW THAT TH E INTEREST HAS ACCRUED DURING THE YEAR IN ACCORDANCE WITH THE MERCANTILE S YSTEM OF ACCOUNTING AND ACCORDINGLY WE SET-ASIDE THE ORDER OF THE CIT(A). W E MAY MENTION FOR THE SAKE OF BREVITY THAT THE ASSESSEE IS FREE TO CLAIM THE INTEREST AS DEDUCTION U/S 36(1)(VII) IN THE YEAR IN WHICH IT HAS BECOME BAD P ROVIDED IT MAY COMPLY WITH ALL THE CONDITIONS STATED THEREIN, IN ACCORDANCE WI TH LAW. 11. IN THE RESULT, ALL THE THREE APPEALS STAND ALLO WED. RESPECTFULLY, FOLLOWING THE DECISION OF THIS TRIBUN AL AS THE FACTS ARE EXACTLY IDENTICAL WE ALLOW THE APPEAL OF THE REVENUE. THIS ISSUE OF T HE REVENUES APPEAL IS ALLOWED. 5. IN THE RESULT, REVENUES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 09/10/2009 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 09/10/2009 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-III, BARODA 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD