Satish Chandra, J.
1. Messrs, Cosmopolitan Trading Co., the assessee, derives its income from the sale of cloth and money-lending business. On March 25, 1960, it advanced a sum of Rs. 3 lakhs to Messrs. New Bhopal Textile Co. Ltd., on an interest of 7% per annum besides commission at the rate of 1/2% per annum. It was agreed that the interest and commission will be receivable by the assessee every quarter. The company adopted the mercantile system of accounting. Up to the assessment year 1963-64, the interest receivable from the debtor-company was shown in the assessee's books on mercantile basis.
2. For the assessment year 1964-65, the assessee did not show the receipt of any interest and commission on the footing that it had not received interest or commission even in the year 1962, much less during the period of accounting which was October 26, 1962, to November 14, 1963. The assessee took up the case that for purposes of this transaction of loan it adopted cash system of accounting for the assessment year 1964-65 onwards. The ITO, however, rejected the claim of the assessee. He held that there was no justifiable reason for changing the accounting system. He calculated the interest and commission due from the company at Rs. 46,567 and included the same in the assessee's income.
3. The assessee appealed. After a discussion of the facts and circumstances, the AAC observed:
' From the above discussion the following facts emerge :
(i) The appellant had advanced a sum of Rs. 3,00,000 to Messrs. New Bhopal Textile Company on March 25, 1960, and entitled to an interest at the rate of 7% per annum plus a commission of 1/2% per annum.
(ii) That the interest and commission due from the Bhopal company was shown by the appellant on mercantile basis for the assessment years up to and including the assessment year 1963-64 and was also assessed to tax accordingly.
(iii) That the account of Messrs. New Bhopal Textile Company in the appellant's books showed an opening debit balance of Rs. 4,02,264 while the closing debit balance stood at Rs. 3,17,053. The debit due from the Bhopal company was thus considerably reduced during the previous year relevant to the present assessment.
(iv) That the appellant continued to receive statements of commission and interest due from the Bhopal party and according to its registered notice to the Bhopal party dated March 15, 1965, the last of such statements was dated March 31, 1963. In this connection, it might be noted that the previous year of the appellant was October 26, 1962, to November 14, 1963.
(v) That the statements of account sent by the appellant with the notices dated March 18, 1963, and March 15, 1965, clearly show that the appellant has been claiming the interest and commission from the Bhopal company on accrual basis. It is, therefore, obvious that the appellant haskept alive the contract and its rights therein and there has been no change in the original agreement on the basis of which interest and commission were due from the Bhopal company.
(vi) The liability to pay interest and commission was not denied by the Bhopal company till at least April JO, 1965, i.e., long after the end of the previous year relevant to the present assessment.'
4. The AAC relied upon a decision of this court in Shiv Prasad Ram Sahai v. CIT : 61ITR124(All) . This court had emphasized that once the assessee has chosen the mercantile system for a transaction and has regularly employed that system, it was not open to him unilaterally at any time during the subsequent accounting year to change that system. It was further held that it was not open to the assessee to keep alive the contract and his rights thereunder but, for the purpose of income-tax, to say that he would not debit in his accounts the interest which has accrued. He upheld the action of the ITO and dismissed the appeal.
5. The assessee went up to the Tribunal. The Tribunal held :
'A look at the balance-sheet of the debtor-company clearly goes to show that it was not in a position to pay the interest and commission to the assessee. It further appears that the debtor-company was not in a position to discharge many of its liabilities which are appearing in its balance-sheet, and which are not even provided for in the balance-sheet. The accumulated losses of the debtor-company are so exorbitant that it was not possible to recoup them in the near future. Moreover, the capital structure of the debtor-company, the report of the board of directors of the debtor-company and the correspondence which the assessee-company entered into with the debtor-company clearly indicate that what to say of interest and commission even the principal amount of loan was in jeopardy. In this view of the matter, a prudent businessman as the assessee is, would not unnecessarily inflate its profits by showing fictitious incomes in the year under consideration. The assessee acted in response to the call of commercial expediency and sound business methods in changing over to the cash system of accounting in the year under consideration in so far as the interest and commission income receivable from the debtor-company were concerned. The interest and commission as and when received by the assessee would be duly reflected in the books of account and naturally will be brought to tax as income.'
6. On this view, the addition was deleted by the Tribunal.
7. At the instance of the department, the following question of law has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 46,567 represent-ing interest and commission in relation to the loan made by the assessee to the New Bhopal Textile Co. Ltd., could not be included in the total income of the assessee for that year ?'
8. The facts relied upon by the AAC, namely, that the total debt liability was reduced from Rs. 4 lakhs and odd to Rs. 3 lakhs and odd relevant to the assessment year in question coupled with the fact that the debtor-company continued to send statement of accounts and admit its liability for the entire period covered by the previous year relevant to the assessment year in question coupled with the powerful fact that the appellant had in its notices dated March 18, 1963, as well as March 15, 1965, been claiming interest and commission on accrual basis prove that it could not possibly be held that the debtor-company had refused to pay or declined to acknowledge its liability in that behalf. The correspondence referred to by the Tribunal appears to be the correspondence which was entered into after the period when the relevant previous year had ended. That correspondence was not relevant or material for disposing of the questions here. The Tribunal has not met or dealt with the outstanding facts mentioned by us above. The fact that the debtor-company was heavily indebted to other companies are not facts which are very material in comparison to the accepted position that the same debtor-company had, in fact, paid a sum of Rs. 1 lakh to the assessee-company during the previous year relevant to the assessment year 1963-64.
9. We are hence not satisfied that the Tribunal was justified in holding that the assessee had any reasonable justification for changing the system of accounting and in deleting the addition of Rs. 46,567, on account of interest and commission due from the New Bhopal Textile Co. Ltd., Kanpur. The reference is answered accordingly in the negative, in favour of the department and against the assessee. As no one has appeared on behalf of the assessee, there will be no order as to costs. The fee for the learned counsel for the department is assessed at Rs. 200.