Satish Chandra, C.J.
1. Messrs. Cosmopolitan Trading Co., the assessee, derives its income from the sale of cloth and money-lending business. On March 28, 1960, it advanced a sum of Rs. 3,00,000 to Messrs. New Bhopal Textiles Co. Ltd., carrying an interest of 7% per annum besides commission at 1/2% per mensem. It was agreed that the interest will be receivable every quarter. The assessee-company had adopted the mercantile system of accounting. Up to the assessment year 1963-64, the interest receivable by the assessee from Messrs. New Bhopal Textiles Co. Ltd., was duly shown as credited to the debtor-company's account in the assessee's books on mercantile basis.
2. For the assessment year 1964-65, the assessee did not credit the debtor's account with the receipt of any interest or commission. On enquiry by the ITO, it took up the plea that since it had not actually received interest or commission even for the year 1962, it felt that its loan was in jeopardy and hence for purposes of this transaction of loan, it adopted cash system of accounting for the assessment year 1964-65 onwards. This plea was repelled by the ITO. 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 went up in appeal but failed. It then went to the Tribunal. The Tribunal held :
'The balance-sheet of the debtor-company clearly goes to show that it was not in a position to pay interest and commission to the creditor-company.It further appears that the debtor-company was not in a position to discharge many of its liabilities which are either appearing in its balance-sheet and which are not even provided for in the balance-sheet. The accumulated losses of the debtor-company were such that it was difficult for the assessee to recoup its own loss in the near future. The capital structure of the debtor-company, the report of the board of directors and the correspondence which the debtor-company entered into with the assessee-company clearly indicated 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 income 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.'
4. On this view, the addition was deleted by the Tribunal. At the instance of the department, the following question of law was referred to this court for the assessment year 1964-65 :
'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 representing interest and commission in relation to the loan made by the assessee to the New Bhopal Textiles Co. Ltd. could not be included in the total income of the assessee for that year ?'
5. A Bench of this court in I.T.R. No. 179 of 1973, decided on 2-1-78 [CIT v. Cosmopolitan Trading Co. (reported at p. 728 supra.)] held that the AAC had found that the total debt liability was reduced from Rs. 4 lakhs odd to Rs. 3 lakhs odd during the relevant accounting year 1964-65. The debtor-company continued to send statement of accounts and admit its liability for the entire previous year. It also noticed that under the notices issued by the assessee it had been claiming interest and commission on accrual basis. The debtor-company had never refused to pay or acknowledge its liability to pay the debt or interest. It emphasised that the Tribunal had not met these outstanding facts mentioned by the AAC. This court observed that the fact that the debtor-company was heavily indebted to other companies is not a fact which was 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. In this view, this court held that theTribunal was not justified in holding that the assessee was reasonably justified in changing the system of account or in deleting the addition of Rs. 46,567 on account of interest and commission. The court answered the question accordingly.
6. The same question was agitated between the parties for the subsequent years 1965-66 and 1966-67. For these assessment years, the Tribunal has referred to us the same question, but in the following form :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that no interest or commission accrued to the assessee on the outstanding debt of Rs. 3 lakhs against the New Bhopal Textiles Co. Ltd., during the previous years relevant to the assessment years 1965-66 and 1966-67 ?'
7. For these two years, the Tribunal has followed its earlier decision and has held that the assessee was justified in changing over to cash system. The question as referred to us does not appropriately bring out the controversy between the parties. We, therefore, reframe the question as follows
'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 representing interest and commission in relation to loan made by Messrs. New Bhopal Textiles Co. Ltd. could not be included in the total income of the assessee for that year ?'
8. In substance, the controversy is whether the assessee was justified in changing the system of accounting.
9. For the assessment year 1965-66, the admitted position is that just as the assessee received certain payments during the accounting year relevant to the assessment year 1964-65, whereby the debit balance was reduced from Rs. 4,02,264 to Rs. 3,17,053, similarly in the accounting period relevant to the assessment year 1965-66, some further payments were received and the debit was reduced from Rs. 3,17,053 to 2,39,074. For this year, the position is identical to that obtaining for the year 1964-65.
10. We have heard Mr. Gulati, learned counsel for the assessee, at some length, but we have not been pursuaded to take a view different from the one which this court took while deciding the reference for the year 1964-65. We would, therefore, answer the question in the same manner for the year 1965-66 in favour of the department.
11. In relation to the assessment year 1966-67, the position is entirely different. For this year, the accounting period ended on December 31, 1965. No payments were received at all during this year. On the other hand, it is in evidence that on April 10, 1965, the debtor-company repudiated the debt. Consequently, the ultimate finding that the assessee acfed in response to the call of commercial expediency and sound business methodsin changing over to the system of accounting in so far as the commissionand interest receivable were concerned, cannot be said to suffer from anyerror of law. Consequently, from the year 1966-67, we would answer thequestion referred to us in the affirmative, in favour of the assessee andagainst the department. In yiew of the divided success, the parties willbear their own costs.