Gokal Chand Mittal, J.
1. The Income-tax Appellate Tribunal (Chandigarh Bench) has referred the following question for our opinion:
' Whether, on the facts arid in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 1,24,000 made on account of accrual of interest '
2. The assessee used to carry on business of finance and hire purchase, but later on was ordered to be officially wound up under the orders of this court. For the assessment year 1969-70, the assessee filed a return declaring a loss of Rs. 2,60,322. During the course of assessment, the ITO noticed that there was an account in the name of Shri. B.K. Bedi showing a sum of Rs. 10,81,931 due from him as on 1st April, 1968, which was reduced to Rs. 10,17,981 as on 31st March, 1969, but no interest was charged on this account.
3. The ITO called for the explanation of the assessee for not charging any interest on the amount due from Shri B. K. Bedi. The assessee's explanation was that the financial position of Shri Bedi was bad and there was no hope of recovery even of the principal amount and, therefore, it was not considered necessary to charge any interest and for that reason no interest was added to the amount due from him during the previous year. The ITO found that a sum of Rs. 1,05,000 was paid by Shri Bedi during the year in question on different dates and also obtained an advance of Rs. 29,000 on 17th June, 1968, and, therefore, it could not be said that the financial position of Shri Bedi was really bad. It was also found that the non-charging of interest on account of bad financial position of Shri Bedi was neither confirmed by the board of directors nor there was any resolution available in that regard. Since the method of accounting followed by the assessee was on mercantile basis, the ITO added interest of Rs. 1,24,000 (at the rate of 12 per cent. per annum) and computed the total income of the assessee and framed the assessment on 28th October, 1971.
4. The assessee took up the matter in appeal before the AAC of Income-tax, who by order dated 11th February, 1972, upheld the order of the ITO for making the addition of Rs. 1,24,000 in respect of interest due from Shri Bedi. The matter was taken up by the assessee in further appeal to the Income-tax Appellate Tribunal (Chandigarh Bench) which was allowed by order dated 31st October, 1974, and the addition made by the ITO in regard to Rs. 1,24,000 was deleted on the basis that the department itself did not seriously dispute the fact that the financial position of Shri Bedi was weak as it was shown to the Tribunal that he was in huge arrears of income-tax for the following three years as detailed below :
5. The Tribunal also noticed that Shri B. K. Bedi had filed appeals before the Tribunal relating to penalties under Section 221 for non-payment of the taxes due. From all the facts and circumstances of the case, the Tribunal concluded on facts that they definitely indicate that Shri Bedi's financial position was not good and it was with that knowledge that the assessee followed the method of not charging interest in cases of those debtors whose financial position was weak, which method was accepted bythe Tribunal for the year 1964-65 and, therefore, no income on account of interest in Shri Bedi's account should have been added in the assessee's income. As regards the payments made by Shri Bedi to the assessee to the tune of Rs. 1,05,000, it was noticed that one credit of Rs. 67,000 was made on 7th June, 1968, on account of sale proceeds of Chandigarh properties and credit of Rs. 32,500 as made on 7th June, 1968, with regard to sale proceeds of other properties of the debtor and in that very account debit of Rs. 29,000 was made on the same day. It was further noticed that there was a credit of Rs. 2,275 in the debtor's account on 18th June, 1978, by sale of fifteen shares of Free India Ltd. The sale of all these properties and shares according to the Tribunal also showed that the financial position of the debtor was not sound and the ITO was in error in coming to the conclusion that by payment of about a lakh of rupees the debtor showed that his financial position was not bad.
6. The Tribunal also came to the conclusion that the disputed amount of Rs. 1,24,000 cannot be treated as the assessee's income during the year because income-tax is levied on income and if income does not result at all, there cannot be a tax. In taking this view reliance was placed on a decision of the Supreme Court in CIT v. Shoorji Vallabhdas and Co. : 46ITR144(SC) and concluded that since there was neither accrual nor receipt of income, the sum of Rs. 1,24,000 could not be considered as the assessee's income. From the aforesaid decision of the Tribunal, the Commissioner has come up in reference to this court.
7. Shri D. N. Awasthy, appearing for the revenue, has urged that the assessee was following the mercantile system of accounting and, therefore, on the outstanding amount due from Shri Bedi, the interest accrued to the assessee and the ITO was right in adding the same and the Tribunal was in error in deleting the addition. The other submission raised is that proper procedure was not followed by the assessee in taking a decision for not charging interest from Shri Bedi as there was no resolution passed by the board of directors in that respect. In support of his argument, he has placed reliance on a decision of the Bombay High Court in CIT v. Confinance Ltd. : 89ITR292(Bom) and particularly on the following observations (p. 295):
'Receipt, either actual or deemed, as such is not made by income-tax law a condition precedent to taxability. Under the head of source 'business ', what are charged are the profits and gains of the business ; and that profit and those gains do not escape tax by reason only of the fact that they are not received in the accounting year in money or the equivalent of money, or are not deemed to be so received. They are taxable, if they have arisen or accrued, or are under the Act deemed to have arisen oraccrued to the assessee in the accounting year, just as much as if they had been received or were deemed to have been received in that year.'
8. On the other hand, the counsel for the assessee has urged that right from the year 1963-64, the assessee had not charged interest from a debtor whose financial position was weak. The ITO had included a sum of Rs. 11,541 as income from interest from a debtor, but on appeal to the Tribunal the addition was deleted on the finding that the financial position of the debtor was weak. Since the Tribunal had already accepted such a position with regard to the assessee, on that very basis no interest was charged from Shri Bedi when the principal sum of more than Rs. 10,00,000 was due from him, the recovery of which was not possible due to his bad financial position. Since this method was being followed by the assessee it was not necessary to pass a specific resolution nor to have a confirmation of the board of directors. As regards the financial position of Shri Bedi it is urged that it is proved on the record that by sale of all immovable properties and shares he was able to make a payment of Rs. 1,00,000 to the assessee and that there was no other asset available for payment of the balance amount due to the assessee or to pay off the arrears of income-tax for the years 1961-62 to 1963-64 due to non-payment of which penalties were being imposed on him. It is further urged on behalf of the assessee that the decision of the Bombay High Court in CIT v. Confinance Ltd, : 89ITR292(Bom) , relied upon by Shri Awasthy, does not lay down the correct law and runs directly counter to the two Supreme Court decisions and two earlier decisions of the Bombay High Court which are as follows :
1. Shoorji Vallabhadas' case : 46ITR144(SC) decided by the SupremeCourt. 2. CIT v. Chamanlal Mangaldas & Co. : 39ITR8(SC) decided bythe Supreme Court. 3. CIT v. Shoorji Vallabhdas & Co. : 36ITR25(Bom) decided by the Bombay High Court. 4. H.M. Kashiparekh & Co. Ltd, v. CIT : 39ITR706(Bom) .
9. After hearing the counsel for the parties we find that there is merit in the contentions raised by the counsel for the assessee.
10. In Shoorji's case : 46ITR144(SC) , the learned judges of the Supreme Court have held as follows :
'Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a ' hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all,there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.'
11. A reading of the aforesaid passage clearly shows that income-tax is levied on income, whether mercantile system of accountancy is maintained or on cash basis. If income does not result at all, there cannot be levy of tax. It was further held that even if an entry of hypothetical income is made in the books of account, but if the income does not result at all, when there is neither accrual nor receipt of income, no tax can be levied.
12. A similar view was taken by the Supreme Court in Chamanlal Mangaldas & Co.'s case : 39ITR8(SC) . The following guidelines were laid down which deserve to be reproduced :
' (i) that the agreement was one integrated and indivisible whole and that the managing agent's commission was only determinable and accrued when the year was over ;
(ii) that the fact that the amounts of commission were credited in the books of the managed company every six months only meant that as an interim arrangement the accounts of all sales were made up at the end of six months also. But this did not affect the construction of the clause containing the terms for payment of commission nor the reduction made therein as a result of the modified arrangement. The amount which arose or accrued and which the managing agent had the right to receive was not affected by the manner in which the entry was made;
(iii) that the managing agent was entitled to receive as commission only the sum of Rs. 4,11,875 and that amount alone accrued to the managing agent; the amount of Rs. 1,00,000 was not taxable.'
13. The points laid down by the Supreme Court clearly support the case of the assessee that unless income accrued there can be no tax liability. On the facts of that case, at the end of six months, the full commission was entered in the books of account, but on the close of the year it was reduced by a sum of Rs. 1,00,000 and the revision of income by Rs. 1,00,000 was held not to have accrued to the assessee and the same was not added as income.
14. The decision of the Bombay High Court in Shoorji Vallabhdas & Co.'s case : 36ITR25(Bom) was upheld by the Supreme Court in : 46ITR144(SC) and, therefore, need not be adverted to in detail. The other decision of the Bombay High Court in H.M. Kashiparekh & Co. Ltd.'s case : 39ITR706(Bom) held as follows (headnote):
' That it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. In ascertaining the real income the fact that the assessee followed themercantile system of accounting did not have any bearing. The accrual of the commission, the making of the accounts, the legal obligation to give up part of the commission, and the forgoing of the commission at the time of the making of the accounts were not disjointed facts : there was a dovetailing about them which could not be ignored. The real income of the assessee was Rs. 27,644 and the amount of Rs. 97,000 forgone by the assessee could not be included in the real income of the assessee for the accounting year.'
15. In the aforesaid case, the assessee was following the mercantile system of accounting and yet it was held that it was the real income of the assessee for the accounting year that was liable to tax and the real income could not be arrived at without taking into consideration the amount forgone by the assessee.
16. From a reading of all the four decisions relied upon by the assessee, we come to the firm conclusion that even in mercantile system of accounts an assessee can forgo the whole or part of a debt, which is irrecoverable and the same cannot be added to the income of the assessee. On the facts of this case, it is clearly established that a sum of more than Rs. 10 lakhs was due from Shri B.K. Bedi which was not possible for the assessee to recover from him and, therefore, the assessee was justified in not charging interest thereon and the interest was rightly forgone by it. Therefore, the Tribunal is right in deleting the addition of Rs. 1,24,000 which was added by the ITO as interest during the accounting year on the amount due from Shri Bedi.
17. In the view we have taken above, it is patent that the decision of the Bombay High Court in Confinance Ltd.'s case : 89ITR292(Bom) clearly runs counter to the Supreme Court decisions and earlier decisions of the Bombay High Court and does not lay down the correct law and we dissent from the same. None of the Supreme Court decisions referred to by us was brought to the notice of the learned judges deciding that case. The decision of the Bombay High Court in H.M. Kashiparekh & Co. Ltd.'s case : 39ITR706(Bom) was noticed, but in spite of that, a different view was taken by them.
18. For the reasons recorded above, we answer the question in the affirmative, in favour of the assessee and against the revenue, but make no order as to costs.
B.S. Dhillon, J.
19. I agree.