1. By this reference under Section 256(1) of the I.T. Act, 1961, hereinafter called 'the Act', the Income-tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, in the four consecutive assessment years 1969-70 to 1972-73, the Tribunal was justified in holding that interest income accrued to the assessee on the deposits in question with the Hira Mills Ltd., Ujjain, in these assessment years ?'
2. The material facts giving rise to this reference, as set out in the statement of case, briefly are as follows : The assessee is a private limited company registered under the Companies Act. The assessee carried on the business of money-lending and ginning and pressing of cotton. The assessee had advanced an interest bearing loan to the Hira Mills Ltd., hereinafter referred to as the Mills, but in the returns filed by the assessee for the assessment years 1969-70 to 1972-73, the assessee did not include the amount of interest due from the Mills. It was contended on behalf of the assessee before the ITO that the Mills had run into losses, that its management was taken over by the Authorised Controller on 5th March, 1966, and that under the provisions of the M. P. Sahayata Upakram Vishesh Upband) Adhiniyam, 1965 (Act No. 25 of 1965), no suit for recovery of interest or loan could be filed against the Mills and, hence, the assessee had not debited the account of the Mills in its account books with any interest amount. The ITO did not accept the contention advanced on behalf of the assessee. On appeal, the AAC affirmed the order passed by the ITO. The assessee then filed an appeal before the Tribunal. The Tribunal held that the assessee followed the mercantile system of accounting, i. e., the assessee computed its income on accrual basis as opposed to receipt basis and that the financial position of the Mills or the bar placed by the provisions of Section 4(1) of the Act No. 25 of 1965 on the commencement of any legal proceeding for effecting recovery of interest would not have the effect of postponing the accrual of interest income. The Tribunal, therefore, dismissed the appeal. Hence, at the instance of the assessee, the Tribunal has referred the aforesaid question of law to this court for its opinion.
3. The short question for consideration is whether, in the circumstances of the case, interest income had accrued to the assessee. It was not disputed before us that no suit for recovery of interest could be filed at the material time against the Mills by virtue of the provisions of Section 4(1) of the Act No. 25 of 1965. The right of the assessee to recover interest from the Mills could not, therefore, be enforced. Can it be then said that interest income had accrued to the assessee? It is clear, as observed by the Supreme Court in E. D. Sassoon & Co. Ltd. v. CIT : 26ITR27(SC) , that if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later, on its being ascertained and that the basic fact is that he must have acquired a right to receive the income.
4. In Morvi Industries Ltd. v. CIT : 82ITR835(SC) , on which reliance has been placed by the Tribunal, the facts are distinguishable. In that case, income by way of managing agency commission had become due to the assessee but subsequently the amount of commission was relinquished by the assessee. It was in this context that the Supreme Court observed as follows (p. 840):
'The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount, even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income.'
5. It is thus clear that in Morvi Industries Ltd. v. CIT : 82ITR835(SC) , there was no legal bar to claim the amount of commission when it had become due. But the question for consideration in the instant case is if there is a legal bar to recover any amount, can it be said that the assessee is vested with the right to claim that amount.
6. Learned counsel for the assessee referred to the decision in CIT v. Ferozepur Finance (P.) Ltd. , and contended that if the amount of income was irrecoverable, it could not be held to have accrued. The question referred to in CIT v. Ferozepur Finance (P.) Ltd. is, however, slightly different. In that case, the Tribunal had found that the assessee followed the method of not charging interest in cases of those debtors whose financial position was weak and that that method wasaccepted by the Tribunal in the past. It was in that context that the Division Bench of the Punjab and Haryana High Court observed that even in the mercantile system of accounts, an assessee can forgo the whole or part of a debt which is irrecoverable and that the same cannot be added to the income of the assessee. In the instant case, there is no finding that the assessee had forgone any interest income on the loan advanced to the mills. The assessee could not recover the amount of interest by virtue of a legal bar prevailing during the assessment years in question. The claim of the assessee for interest against the Mills was, therefore, not enforceable.
7. Enforceability by legal process is, as observed by Paton in his book oh Jurisprudence (4th Edn., p. 286), subject to some qualifications, considered to be the sine qua non of a legal right. It is true that, in its wider sense, a legal right is one which is either enforceable or recognized, but a legal right in its strict sense is one which is an assertable claim, enforceable according to law. While considering the question as to whether or not income had accrued to an assessee, it has to be ascertained, whether the assessee is vested with the right to claim that amount, and if the claim is not legally enforceable, then the assessee, in our opinion, cannot be said to be vested with a right to claim the amount. The question of enforceability of the right to receive income is, therefore, embedded in the concept of accrual of income while considering the question of taxability of such income under the provisions of the Act. In our opinion, therefore, the interest income cannot be held to have accrued to the assessee on the facts and in the circumstances of the case.
8. Our answer to the question referred to us is, therefore, in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.