1. The only ground in the present appeal by the revenue is that the Commissioner (Appeals) erred in deleting the addition of Rs. 3,43,573 on account of interest income.
2. The ITO noted in the assessment order dated 26-3-1981 that the method of accounting followed by the assessee was mercantile and the accounting period was calendar year 1977. He mentioned that the assessee used to collect freight on behalf of the non-resident principals and as per procedure laid down in Section 10 of the Exchange Control Manual, 1971, the surplus freight, after meeting all local expenses, is permitted to be remitted by the RBI to the foreign principals. But since there was delay in obtaining the necessary permission from the RBI, the assessee used to keep the money in short-term fixed deposit and earned interest thereon. He also noted that the interest thus earned had all along been declared by the assessee as its income up to the accounting year 1976. From the accounting year 1978 onwards also, that practice has been again followed by the assessee by showing the interest income as its own. It is only for the year under consideration, being calendar year 1977, the claim was that the interest on short-term fixed deposit was not taxable in the hands of the assessee. The ITO observed that for the year under appeal, the assessee has not credited the profit and loss account with the amount of interest received from the fixed deposit. The assessee approached the RBI to get permission for crediting the bank interest to the account of the principals. There is a letter by the RBI informing the assessee that such interest could be credited to the principals' account subject to production of a certificate stating that the said amount is held for meeting the local expenses and the same expenses are included in the respective reimbursement account.
3. The ITO pointed out that from the books of account, it was seen that there was only one account in which all the amounts of the principals are credited and there was no difference in the situation which existed during the earlier years, except that during this year the amount of interest was credited to the principals' account in the books of the assessee. The ITO was of the view that as was the situation prior to the assessment year under consideration, all the expenses were debited to the principals' account and the difference between the freight and expenses could be remitted to the principals, the claim of the assessee was not accepted by the ITO. He noted that the amounts used for meeting the local expenses of the principals cannot be equated and linked up with the interest amount and, therefore, the certificate given by the RBI, in fact, was not correct and it is on the strength of this certificate that the relevant interest income was credited to the principals' account.
4. It was further stated that in January 1978, the RBI, Bombay, raised an objection that the bank interest was not available for remittance abroad and from 1978 onwards, the assessee's account was credited with bank interest from such fixed deposits in the profit and loss account.
The ITO further pointed out that the assessee has been acting as an agent for the non-resident principals and on completion of formalities under the Foreign Exchange Regulation Act, the surplus is being remitted to the non-resident principals. He pointed out that there was no stipulation of contract between the assessee and the non-resident that the interest in -come, if earned, would belong to the non-resident and is in the absence of such stipulation, the interest income in question was the income belonging to the assessee. He, therefore, included the above sum as the assessee's income.
5. The assessee preferred appeal before the Commissioner (Appeals), who noted that the assessee-company operates as an agent for three foreign shipping lines, i.e., (a) the Swedish East Asia Co. Ltd., (b) Wilh Wilhelm-sen Oslo and (c) The East Asiatic Co. Ltd., Copenhagen, for collecting freight on the vessels of the non-residents and to render accounts as well as to arrange for remittance of the surplus freight to the principals. It was noted that in the past, interest from such short-term fixed deposits was declared by the assessee as its income but for the assessment year under consideration, the procedure followed was different in view of the instruction from the RBI, as pointed out earlier. It was noted that the assessee-company was informed by the RBI that bank interest could be credited to the principals' account "subject to production of a certificate stating that the said amount is utilised for meeting the local expenses and the same expenses are included in the respective disbursement account". The Commissioner (Appeals) also noted that later on, in January 1978, the RBI raised an objection and directed the assessee-company to discontinue the practice of investing the funds of the principals in fixed deposit accounts, etc., forthwith. On receipt of this direction, the assessee reverted to the old practice of crediting the interest on short-term deposits to its own profit and loss account.
6. Before the Commissioner (Appeals), it was urged that no doubt up to the assessment year 1977-78, the interest earned on the short-term deposit had been treated by the assessee as its own income, but that by itself would not establish that the interest income actually belonged to the assessee. It was further contended that there was nothing for the department to lose since the assessments in the case of the non-resident principals have already been completed by including the respective interest incomes in their assessments and that the assessment in the hands of the non-residents was at a higher rate.
7. The Commissioner (Appeals) found that during the calendar year 1977, the assessee had credited the accounts of the non-residents with interest income of Rs. 3,43,573, which appears to have been made on the basis of the letter dated 23-5-1977 from the RBI, as referred to by the ITO. He noted that the complication arose because later on in January 1978 the RBI changed the stand and directed the assessee not to credit the accounts of the non-residents with the interest income. The Commissioner (Appeals) observed that these facts establish that at least for the calendar year 1977, the assessee-company went out of the picture and was not liable on account of interest accrued on short-term deposits. He was of the view that in such a situation there was no question of taxing the assessee on the amount earned during the calendar year 1977 since it was not the real income of the assessee, in spite of the fact that for the other assessment years the income was treated as that of the assessee and since the facts were different and also the assessee having divested itself of such income, the inclusion of interest income was not justified. He directed that the amount should be deleted. Hence, this appeal by the revenue.
8. The grievance of the revenue is that the Commissioner (Appeals) erred on facts and in law in deleting the above addition on account of interest income from short-term deposits. It is submitted by the learned departmental representative that the interest income from the fixed deposit was, in fact, the income of the assessee and this point was not challenged by the assessee. It is stated that the' controversy arose only after January 1978. It is stated further that the assessee in the past has been showing interest income in its account and has been assessed as such. It is urged on behalf of the revenue that the assessee has the right to receive interest income from the bank and, therefore, the amount has rightly been included by the ITO as income of the assessee. It is contended that the conduct of the assessee during the previous years as well as the years subsequent to the year under appeal, would amply show that the income did not belong to any person other than the assessee itself. It is also submitted that it is immaterial what income was assessed in the hands of the non-residents, as the same is not the issue for consideration presently before us. It is urged that the assessee has got the right to receive the income and, therefore, the same has been wrongly deleted by the Commissioner (Appeals). Reference is made to the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Vijay Laxmi Trading Co. Ltd.  147 ITR 372, in which on the facts of that case it was stated that income may accrue to an assessee without the actual receipt of the same and 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.
The basic conception is that the assessee must have acquired a right to receive the income. Reliance is also placed on the decision in the case of CED v. Mohamed Habib A. Valiwalla  137 ITR 677 (Bom.), in which, inter alia, it was stated that once the sums were deposited in the firm, they became part and parcel of the capital of the firm and the donees obtained an actionable claim in exchange with the result that the donee had exchanged and converted one form of their property, i.e., money, into another form of intangible property, i.e., actionable claim. The case of the revenue is that the fund collected by the assessee on behalf of the non-residents was under the control of the assessee and that while the same was deposited in the bank, interest was earned and, therefore, the interest income was rightly assessed in the hands of the assessee. The departmental representative, therefore, urged that the order of the Commissioner (Appeals) would have to be reversed and that of the ITO may be restored.
9. The assessee's learned counsel supports the order of the Commissioner (Appeals) while stressing the same submissions and contentions made before the Commissioner (Appeals). It is stated that the deposits were made by the assessee in the name of the non-residents, as permission has to be obtained from the RBI for making remittance of the shipping freight collected by the assessee on behalf of the non-residents. Reference is made to the different papers of the paper book in order to stress the point of the assessee that in the past the assessee has been showing interest income as assessable in the hands of the assessee but it is urged that in view of changed situation, the assessee could not be said to be the owner of the interest income. In short, it is urged that the order of the Commissioner (Appeals) may be sustained.
10. We have heard both the sides and have gone through the orders of the authorities below and the various papers placed before us for our consideration. We have also gone through different correspondences, copies of which have been placed in the paper book, on behalf of the assessee. From the letter dated 5-6-1974, addressed by the assessee to one of the non-residents, namely, Scandinavian Joint Service, it is seen that the interest income was credited to the account of the assessee traditionally in order to avoid tax and exchange complications, but at the same time the assessee has to make sure that the freight money would have to be remitted to the non-residents promptly on receipt of the permission of the RBI.11. Briefly speaking, the assessee collects freight on behalf of the nonresident principals and as per procedure laid down in the Exchange Control Manual, the surplus freight, after meeting local expenses, is permitted to be remitted to the non-residents. But in obtaining permission from the RBI, time was involved and during that period the assessee deposited money in short-term deposit which was encashed promptly on receipt of such permission for remittance to the non-residents. From the copies of the correspondences placed before us, it is seen that the assessee has got the liability to collect the freight on behalf of the non-residents and after meeting local expenses on behalf of the non-residents, the balance is remitted promptly on receipt of the permission from the RBI. We do not find any indication that there was any stipulation or agreement that pending receipt of RBI's permission, the assessee should deposit the funds in banks for the purpose of earning interest on account of the principals. In fact, from the letter dated 6-6-1974 addressed by the Scandinavian Joint Service to the assessee, it is seen that there was no reference to any claim of the non-resident that interest income should be on account of the non-residents. In fact, it was stressed by the non-residents that promptly on receipt of the required permission, the remittance of the freight should be made to them. In its letter dated 10-6-1974 to the Scandinavian Joint Service, the assessee has stated that in actual practice it has on several occasions in the past, encashed short-term deposits foregoing interest in order to effect remittances and that procedure would be followed. In its letter dated 10-6-1974 addressed to the RBI, the assessee has stated, amongst other things, that the freight amounts collected were credited to the current account in bank in India and the funds were placed in short deposits with the banks so that some bank interest could be earned and the assessee has been absorbing these interest amounts in its accounts. Reference is also made to the letter dated 23-5-1977 issued by the RBI, Calcutta, to the assessee, in which it has been stated that the interest earned by the assessee from short-term deposits could be credited to the accounts of the principals subject to the production' of certificate that the amount was utilised for meeting local expenses and such expenses were included in the respective disbursement account, which were to be sent periodically to the RBI. The assessee certified to the bank as required.
12. But it was only on receipt of the letter dated 4-1-1978 from the RBI that the assessee had to change the procedure. In that letter, it was stated that any interest earned on account of the principals' accounts in India was neither repatriable nor this can be utilised for the expenses of the principals in India. The assessee was further advised to discontinue the practice of investing the principals' funds in fixed deposit accounts. From the letter dated 21-3-1978 received by the assessee from the Scandinavian Joint Service, it has been decided, for the time being, that with effect from 1-1-1978, the interest earned should be transferred to the assessee's own account instead of respective 'Holding Accounts' of the non-residents. Again in this letter, there is no indication that the interest earned from fixed deposits was claimed by the non-residents to be their income which should be remitted to them. Before us copies of assessment orders of the non-residents, as assessed in India, are filed in order to stress the claim of the assessee that for the year under consideration, such interest income was assessed in the hands of those non-residents and, therefore, same income should not be assessed in the hands of the assessee. But we have to see whether such income should be assessed in the assessee's hands. In this connection, it is pertinent to refer to the decision of the Bombay High Court in the case of CIT v. Confinance Ltd.  89 ITR 292, in which it was observed that under income-tax law receipt of income either actual or deemed is not a condition precedent to taxability as they are assessable if they have arisen or accrued or deemed to have arisen or accrued to the assessee just as much as if they had been received, even if in a case where the assessee follows mercantile system of accounting. It was also observed that in examining any transaction or situation, the Court would have more regard to the reality of the situation rather than purely theoretical or doctrinaire aspect of it and greater emphasis will be laid on the business aspect of the matter viewed as a whole when that can be done without disregarding the statutory language.
13. In the instant case, the money on account of the freight was in the custody and control of the assessee till such time the money is remitted to the non-residents and that too after obtaining permission from the RBI. Till such time when the assessee received such permission, the assessee could not have made remittance to the non-residents, due to prohibitive provisions relating to the aspect. In this connection, it is worthwhile to refer to the ratio in the decision in the case of Nonsuch Tea Estate Ltd. v. CIT  98 ITR 189 (SC), in which on the facts of that case it was held that in view of the absolute prohibition against the appointment or reap-pointment of a managing agent before approval of the Central Government was obtained, the assessee's liability to pay the remuneration of the managing agents arose only when the Government conveyed its approval and not prior to that date. In the instant case before us, the assessee could not have remitted the money to the non-residents prior to the approval of the RBI. In other words, the money was lying under the control and custody of the assessee. The assessee may even keep the money in its coffer without depositing the money in bank. As indicated earlier, we cannot find any material to say that the non-residents have directed the assessee to deposit such money in banks in order to earn interest, while awaiting for approval of the RBI, as stated above. In fact, in the present case before us, it is seen that it was on the assessee's own initiative that the money was placed in short-term deposits on which interest is earned. Thus, the bank itself, in the instant case, is the agent of the assessee.
14. Similar situation has arisen in the case of CIT v. United Wire Ropes Ltd.  121 ITR 762 (Bom.), in which the assessee received by way of interest from amounts kept as short-term deposits with the various banks. Due to restrictions imposed by the Government on remittance of capital outside India, the assessee had to borrow large sums and pay interest thereon. The claim of the assessee was that interest paid on the borrowed amount should be allowed as deduction from the interest earned from short-term deposits. It was held in that case that the agreement between the assessee and the principal did not require any amounts to be kept in fixed deposit with the banks. It was held on the facts of that case that the receipt of interest on short-term deposit and paying of interest on borrowed funds cannot be regarded as a single composite transaction. As stated earlier, there is no material to say that there was an agreement or contract between the assessee and the nonresidents that the freight money collected by the assessee on behalf of the non-residents should be deposited in short-term deposits pending receipt of approval of the RBI. Accordingly it cannot be said that non-residents have an enforceable right to the interest received by the assessee on short-term deposits, which is the subject-matter of the present appeal before us. In the case of Sarupchand Hukamchand (P.) Ltd. v. CIT  133 ITR 295 (MP), it was held that enforceability by legal process is, subject to some qualifications, considered to be the sine qua non of a legal right and that while considering 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 cannot be said to be vested with a right to claim the amount. On the facts of the case before us, it cannot be said that the non-residents have got enforceable right to the interest income from the fixed deposits, as actually the deposits were made by the assessee from which interest is earned. From the several correspondences made between the assessee and the non-residents, it is apparent that the assessee has been treating the interest income from fixed deposits as its income and assessed it as such in the past. There is no indication from the materials available before us that the assessee has got the liability to pay the interest income to its non-residents. There is no indication either that the interest income had actually been paid to the non-residents or any debit entries have been made in the account books of the assessee.
15. In our opinion, the claim that since the interest income has been considered in the hands of the non-residents and the said sum should not be considered in the hands of the assessee, is not acceptable as conclusive. It is a common knowledge that a person who deposits sums in a bank in order to earn interest and when such interest is earned by such person, it cannot be said that the interest income belonged to somebody else. There is no material to say that it was the freight money which was deposited in the bank and not the assessee's own funds.
In fact, from the different copies of the letters placed before us, it is seen that the assessee itself has submitted that the interest income should be treated on the facts of the case as income of the assessee and that this stand has been taken by the assessee consistently in the past. We are told that in the next assessment year, the assessee has shown this income in the accounts as in the past, but for the present year under appeal the position was different due to uncertainty or confusion created by the contents of the letter received by the assessee from the RBI.16. As observed by us above, there is no material to say that the nonresidents have directed the assessee to pledge the freight money in banks as security. Thus, it cannot be said that the assessee received the amount of interest or held the freight money in a fiduciary capacity. From the copies of the correspondences and other materials available on record, it cannot be said that the relation between the assessee and the non-residents has created a fiduciary relation between the assessee and the non-residents or to make the assessee a trustee for the non-residents or for any representative.
17. We have given careful consideration to the facts and circumstances of the case along with the submissions made by both the sides. In our opinion, the interest income from short-term deposits represented the income of the assessee, which has been brought to tax as income from other sources by the ITO. In this view of the matter, the Commissioner (Appeals) erred in deleting the addition on account of interest income from the assessment of the assessee for the year under consideration.
We, accordingly, reverse the order of the Commissioner (Appeals) and restore that of the ITO.