1. The questions of law in this reference are as under : 'Whether, having regard to the admitted fact that the assessee's method of accounting was mercantile, the interests of Rs. 9,275 for the assessment year 1959-60 was liable to inclusion in the assessee's total income having regard to the provisions of sections of sections 10 and 13 of the Indian Income-tax Act and
2. Whether, having regard to the admitted fact that the assessee's method of accounting was mercantile, the interest of Rs. 13,033 for the assessment year 1960-61 was liable to inclusion in the assessee's total income having regard to the provisions of section 10 and 13 the Indian Income-tax Act ?'
3. The question that a rise for determination for these two years are identical. The assessee is limited company which is mainly carrying on money-lending and banking business. Its method of accounting is mercantile. For the accounting year ending March 31, 1959, in the balance-sheet of the company, the loans and advances due to the company were shown as Rs. 2,80,095.62. This was the amount due form five debtors of the company. A note was puts up at the foot of the profit and loss account to the effect that 'no credit is taken into account in respect of interest due on loans outstanding on 31st March, 1959.' The directors in their report to the shareholders stated as under : 'The directors regret that the money advanced to various persons have recommend unpaid and even the interest thereon from March 31, 1956, have not been paid by them. In view of this, the directors have resolved not to take any credit for the interest in respect of loans which are repairs in full and also in loans outstanding as on March 31, 1959. Every effort is being made by the directors to recover the principle amount of the loan as well as the interest charged up to March 31, 1956.'
4. For the accounting year ending 31st March, 1960, the amount appearing as loans due to the company was Rs. 2,72,209.66. This was the aggregate of the amounts due to the company by six debtors.
5. For both the assessment years in respect of the amount due from one of the debtors, New Prahlad Mills, interest at thereat of 6 per cent. per annum was charged and was shown in calculating the income of the company. In respect of the amounts payable by the other debtors to the company no interest whatsoever was shown for either of the two years. The Income-tax Officer, for the assessment years 1959-60, took the view that in respect of the loans and advances amounting to Rs. 2,80,095.62 the interest at the rate of 6 per cent. per annum will come to Rs. 16,806 and, after taking into account the interest charged to New Prahlad Mills, the balance of Rs. 9,275 was brought to tax as balance of interest in react of the amount due by the remaining debtors. On the same footing for the assessment year 1960-61, after taking into account the interest charged to New Prahlad Mills, the balance of the amount of Rs. 13,033 was brought to tax in react of the interest payable by the other debtors of the company. The order passed by the Income-tax Officer was confirmed by the Appellate Assistant Commissioner. It was reversed by the Tribunal. In its order, the Tribunal, pointed out that, looking at the matter form the accrued interest and mercantile method angle, it is not denied that the advances in question originated as business advances, so that if in fact interest is receivable, it is liable to inclusion whether the interest has been adjusted or not. The Tribunal, however, took the view that the records amply bore out the apprehension of the assessee that the accounts may not after all run out well and that there had been hardly any receipts at all for a number of years past.
6. It is urged on behalf of the revenue that the main business of the assessee-company was money-lending and banking business and its method of accounting was kept on mercantile system. When accounts are kept in such system, it was submitted that income is taxable when it accrues and not when it is received or realised. It was emphasised that neither the principal amount of the loan advanced nor the interest was written of as bad debt and it was not permissible to the assessee to omit the item of interest in calculating the amount of income. On the other hand, on behalf of the assessee it was contended that it cannot be disputed that there was no likelihood or recovery of interest, that in fact no interest was paid to the assessee-company or received by its for a number of years; that unless there is real income there is no accrual of income to an assessee and that where there is no real income, the revenue is not entitled to charge tax even in cases where accounts are maintained on mercantile system.
7. Section 13 of the Act provides that income, profits and gains shall be computed for the purposes of section 10 and 12 in accordance with the methods of accounting regularly employed by the assessee. Relying upon the Full Bench decision of the Allahabad High Court in Commissioner of Income-tax v. Shrimati Singari Bai 1, it was urged that where an assessee, who carries on a money-lending business and keeps the accounts according to the mercantile accountancy system, the Income-tax Officer for the purpose of section 10 of the Act is entitled and bound under section 13 to compute the profits and gains of the assessee in accordance with the method of accounting notwithstanding that, as a result of such computation, profits, and gains of the assessee's business would or might, subject to allowances proper to be made under the Act, become a chargeable to income-tax without having been actually received, or deemed by the Act to have been received by the assessee. The Full Beach has laid down in this case that under the mercantile accountancy system the net profit or loss is calculated after taking into account all the income and the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. In other word the profit computed under this system is the profits actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. After analyzing the provisions of sections, 3,4, 6, 10 and 13, the Full Bench points out that the charge of income-tax is in accordance with and subject to the provisions of the Income-tax Act, a charge on all income, profits and gains of the assessee of the years by reference to which it is to be calculated. The income, profits and gains of an assessee are taxable, subject always to the provision of the Act, from whatever source they are derived, whether as a matter or origin or of geography, provided they accrue or arise to or are received by the assessee in British India, or are deemed to accuse or arise or to be received. Receipt, either actual or deemed, as such is not made by income-tax law conditions precedent to taxability. Under the head of source 'business' what are charged are the profits and trains of the business; and that profit and those gains do not escape tax by reason only of the f act that they are not received in the accounting year in money or the equivalent of money, or are not deemed to be so received. They are taxable, if they have arisen or accrued, or are under the Act, deemed to have arisen or accrued to the assessee in the accounting year, just as must as if they had been received or were deemed to have been received in that year.
8. A similar view has been taken by the Bombay High Court in Ramkumar Kedarnath v. Commissioner of Income-tax 1.
9. The argument of Mr. Kaka, on behalf of the assessee, however, was that as admittedly the records produced by the assessee before the authorities showed a real apprehension on the part of the assessee that the amount of interest may not after all turn out well, profit was not likely to have accrued, that in fact no interest was paid for a number of years past, and that the bona files of the assessee in not charging interest were not disputed. In view of these factors, it was submitted that there was no real income for the accounting years that was liable to tax. Before the income can be taxed, it was submitted that the accrual must be real and not hypothetical. Reliance was placed upon a decision of this court in H. M. kashiparekh & Co. Ltd. v. Commissioner of Income-tax 2. In that case the assessee which maintained its accounts in the mercantile system was the managing agent of a paper mill company. Under the managing agency agreement it was under a duty to forgo up to one-third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent. For the accounting years ending March 31, 1950, the assessee earned a commission of Rs. 1,17,644 but as a result of resolution passed by the managed company and the assessee-company the assessee gave up a Sum of Rs. 97,000 in December, 1950. The Appellate Tribunal held that the maximum amount the assessee was bound to forgo was only Rs. 39,215 and included the balance of the amount forgone, viz. Rs. 57,785, in the taxable income. The Tribunal, however found that the sum of Rs. 57,785 was also given up for reason of commercial expediency. Upon a reference to this court, this court took the view that it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. In ascertaining the real income the fact that the assessee followed the mercantile system of accounting did not have any bearing. The accrual of the commission, the making of the accounts the legal obligation to give up part of the commission, and the forgoing of the commission at the time of the making of the accounts were nor disjointed facts; there was a dovetailing about them which could not be ignored. According to the High Court the real income of the assessee was Rs. 27,644 and the amount of Rs. 97,000 forgone by the assessee could not be included in the real income of the assessee for the accounting year. At page 722 the High Court pointed out that the principle of real income would be attracted even in case an assessee followed the mercantile system of account. It was emphasised in this case that in examining any transaction or situation, the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. The court will lay grater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statuary language.
10. If regard be had to the facts found, can be said that the assess ee company had no real income in respect of two items for the two asseement years. It is true that during the past few years, there were hardly any receipts in respect of time of interest. As the statement of case shows that even the bona fide of the assessee-company in not charging interest were not disputed. These circumstances by themselves are insufficient to come to the conclusion that there was no real income in respect of the items of interest added to the income. None of the debuts due by the several debtors are written of as bad debts. No evidence was produced before the revenue to show that interest in respect of these items was even given up. When such is the position, it will not be possible to take the view that no real income accrued to the assessee during the relevant accounting years simply because he did not recover the same or release it.
11. Our answer to both the questions referred to us is in the affirmative. The assessee will pay the costs of the revenue of the reference.