Per Shri K. R. Dixit, Judicial Member - Both the above appeals arise out of the order of the Commissioner passed in exercise of his revisional powers under section 263 of the Income-tax Act, 1961 (the Act). The ITO had not added the interest on certain loans advanced by the assessee, to the income of the assessee on accrual basis. The Commissioner was of the view that this omission by the ITO was erroneous and prejudicial to the interest of the revenue and, therefore, directed him to calculate the interest, if any, on the loans on accrual basis and add the same to the total income of the assessee.
The particulars of these loans are as follows : Shortly stated, the assessees case was that there was not much hope of recovery of these loans, therefore, the interest on it should not be added to the assessees income on accrual basis. The Commissisoner has considered the relevant details regarding these loans which showed the chances of recovery. According to him it could not be said that there was no possibility of recovery of principal amounts and so the interest should be added to the assessees income on accrual basis.
2. Before us the assessees counsel has tried to show that there was harly any hope of recovery of these loans and so at least the interest amount thereon should not be added to the assessees income merely because the assessee was following mercantile system of accounting. At this stage it is necessary to give some further particulars regarding these loans. The loans to Balaji Enterprises and Subhash International were given on the security of the right 1977 and the assessee had filed suits in respect thereof. There was no recovery so far and the suits were transferred to the list of long causes in the Bombay High Court.
The assessees advocate has filed copies of letters of 1983 from the assessees solicitors stating that the suits will appear for hearing and final disposal before the Court after about five or six years and the letter regarding Balaji Enterprises also states that it normally takes eight to ten years before a suit which is transferred to the list of long causes, to appear for hearing and final disposal. He also pointed that the said films had been proved to be flops and so there was hardly and security. The loans to Smt. Saraswati R. Tanna and Bhogilal Tanna was given in 1970 and to Shri V. K. Shah and Shri Vinodchandra in 1972.
All these three loans were given on securities of immovable properties.
The suits were filed and preliminary decrees obtained. In respect of all the three loans the assessee has filed copies of letters of 1983 from the solicitors stating that the applications for certified copies of decrees had been made but they had not yet been obtained and that efforts were being made to obtain them expediciously. The principal debtor Shri V. K. Shah had become insolvent before his death and the official assignee has no assets of the insolvent in his hands. This was stated to the Commissioner by the assessee in reply to the show-cause notice.
3. The loan to Noble Engg. Works was given on a demand promisory note but without any security. The debtor had paid an amount of Rs. 5,000 on 25-9-1981 but thereafter, nothing had been received. The assessees counsel argued that the assessee was a public limited company and its conduct was clear and bona fide. Copies of accounts of the aforesaid debtors showed that the interest amount had been debited to the accounts of the various debtors were of debtors up to the end of accounting year 1979, and thereafter, it had not been so debited. The assessees advocate also pointed out that the directors report for the year ended 1982 and the resolution of the Board in 1983 showed that the assessee considered that the amounts due from the aforesaid debtors were of doubtful recovery and in view of the financial position of the said debtors and the fact that nothing had been recovered from them, nor was there any chance of recovery, the interest should not be credited to the accounts of the parties should be seen and they showed that nothing had been recovered. He submitted that the decisions relied upon the Commissioner in the case of Laxmipat Singhania v. CIT  72 291 (SC) had no application to this case. He further relied upon by the decisions in the cases of Shiv Parkash Janakraj & Co. (P.) Ltd. v.CIT v. CIT  112 ITR 872 (Punj. & Har.), CIT v. Ferozepur Finance Co. (P.) Ltd. v. CIT  124 ITR 619 (Punj. & Har.) at page 623 and CIT v. Motor Credit Co. (P.) Ltd.  127 ITR 572 (Mad.). He also argued regarding loans to Balaji Enterprises and Subhash International that the interest during the pendency of the suits is subjected to the discretion of the Court and could not be said to accrue as a matter or right, relying upon the decisions in the cases of CIT v. Naskarpara Jute Mills Co. Ltd. v. CIT  143 ITR 166 (Guj.) and the dismissal of special leave petition by the Supreme Court on this point in favour of the assessee.
4. The learned departmental repesentative on the other hand argued that the in cases relied upon by the assessees advocate, the debts were irrecoverable which was not the case here. Regarding the debtor Balaji and Subhash, he pointed out that they were firms and the liability of the partners was unlimited and it was not been shown that the debt would not be recoverable. Regarding the debts from Smt. Saraswati and Mr. Bhogilal, Shri V. K. Shah and Shri Vinodchandra, he emphasized that these were secured on immovable properties and that the prices of immovable properties had sky - rocketed and also that the decrees in respect of these debts had been obtained. He argued that the said decisions in the cases of Naskarpara Jute Mills Co. Ltd. (supra) and Sarangpur Cotton Mfg. Co. Ltd. (supra) were not applicable in view of section 34 of the Code of Civil Procedure, 1908. He further emphasized that the debts had been classified as good debts by the directors in the balance sheet till 1982. Regarding the debt from Noble Engineering Works he argued that an amount of Rs. 5,000 had been received as recently as in 1981. The assessees advocate pointed out that the interest had been waived inasmuch as the statement of accounts had been sent to the debtors not debiting the interest for the relevant periods.
5. We are now faced with a situation where although the debt might not have become bad, the claim of the assessee maintaining accounts on mercantile basis, is that the interest on these debts cannot be said to have accrued. It is to be noted that the debts have not been written off by the assessee. His plea is that the circumstances regarding these debts are such that the interest should not be regarded as having accrued thereon. The position regarding interest is that it becomes bad if the principal amount itself has become bad but it is not necessary in all cases that the principal amount should become bad. The position regarding the recoverability of principal amount may be such that at least the interest cannot be regarded as having accrued. It is necessary to appreciate that the interest amount is not regarded as having become bad but that it has not accrued. In other words there is such a zone of twilight between recoverability and complete irrecoverability for the principal amount that at least the interest thereon should not be considered as having accrued. The possibility of recovery of principal amount may such that the interest thereon would be a far cry. Accrual should be real and substantial and not illusory merely on the basis of the maintenance of accounts on mercantile basis.
6. In this background we will now examine the facts and circumstances regarding the various debts. As stated above the debts from Smt.
Saraswati Tanna, Vadilal Shah and Vinodchandra are secured debts on immovable properties and in fact decrees have been obtained in respect thereof. The letters of 1983 from the solicitors only show that there is some delay in obtaining certified copies of decrees. This is hardly any reason to conclude that the interest thereon has not accued. It has not been shown by the assessees counsel that it would be difficult to satisfy the decrees. The submission made by the learned departmental representative that value of immovable properties has greatly increased, is justified and it is not been shown that the property would not be sufficient to meet the assessees claim. In fact the letters from the solicitors show their readiness to recover the dues by getting the property sold and give no indication of any difficulty in that regard. The decrees have been obtained in 1977 and under section 34 the Court has power to award the interest from the date of decree till the payment or to such earlier date as the Court thinks fit. Under the proviso for commercial transaction the rate of interest can exceed 6 percent per annum but not the contractual rate and where there is no contractual rate, the rate at which moneys are lent or advanced by nationalized banks in relation to commercial transaction. Under Explanation II a transaction if it is connected with the industry, trade or business of the party incurring the liability. Therefore, although according to the aforesaid decision the interest may be discretionary under section 34 the decrees which have been obtained would provide for it. The periods relevant to the assessment years in quesiton would be covered by the award of interest from the date of decree. Therefore, the decree should be seen and whatever interest has been awarded therein should be considered as having accrued to the assessee and added to the income.
7. Regarding the debts from Balaji Enterprises and Subhash International however, the circumstances are quite different. The suits have been transferred to the list of long causes and as stated by the solicitors it will take a long time for the suits to reach hearing. The result there of cannot be taken for granted. Although there is security for the debts that security is also of doubtful value. The distributors have not takne delivery of the films and it is not like immovable property. Therefore, the circumstances are such that the interest on these debts cannot be said to have accrued to the assessee. Althought the debts might not be regarded as bad debts by the asessee the position regarding their recovery is such that accrual of intnerest thereon cannot be said to have any real and substantial basis.
Regarding the debt from Noble Engineering Works it is merely advanced against promisory notes. There is no security. Although it is true that the amount of Rs. 5,000 has been paid in 1981, the total amount advanced is Rs. 25,000. Therefore, it cannot be said that any substantial part of the total debt had been paid on which any real expectations can be based for the recovery of the full amount. The amount was advanced in 1975 and Rs. 5,000 had been paid only in 1981.
The fact that it has taken six years to recover one-fifth of the amount shows that there cannot be firm expectations regarding the payment of the full amount. The fact that the amount had been paid in 1981 may prevent the debt from becoming time bared but that is all. In these circumstaces it cannot be said that the interest on it has accrued to the assessee.
8. The Supreme Court decision in the case of Laxmipat Singhania (supra) on which the learned Commissioner has relied, has no application in this case because that was a case of deemed distribution of dividend under statute. This is not the case here. The question here is whether the interest had accrued at all or not. If the income is deemed to be distributed the ITO is bound to add it for the year in which it is so deemed according to the said decision. But that does not meand that if the income has not accrued relly it can be taxed.
9. The result is that regarding the debts from Smt. Sarawati Tanna, V.K. Shah and Vinodchandra the matter is restored to the ITO to verify from the decrees how much interest, if any, has been awarded by the Court and add the amount to the assessees income for the relevant assessment years. Regarding the interest on the debts from Balaji Enterprises and Subhash International and Noble Engineering Works we hold that the interest cannot be said to have accrued to the assessee.