K.S. Lodha, J.
1. The learned Income-tax Appellate Tribunal (DelhiBench 'B'), has referred the following question for answer to thiscourt:
'Whether, on the facts and in the circumstances of the case, any amount was includible in the total income of the assessee for any of the two years on account of interest accrued to the assessee in the account of M/s. Ram Gopal Laxmi Narain of Secunderabad with it ?'
2. The facts giving rise to this reference are that M/s. Vijay Laxmi Trading Co. Ltd., Pali (hereinafter called 'the assessee'), is a public limited company carrying on the business of finance. The assessment orders in question are the years 1965-66 and 1966-67, The corresponding previous years whereof are those ending on December 31, 1964, and December 31, 1965, respectively. The assessee had advanced an amount of Rs. 5 lakhs to M/s. Ram Gopal Laxmi Narain of Secunderabad (hereinafter referred to as 'the debtor') on November 23, 1951. For the year 1951, no interest was charged on this account. Thereafter, for the years 1952, 1953, 1954, 1955 and 1956, interest was duly charged on this account at the rate of 6% p.a. During this period, there were small adjustments in the amount and on December 31, 1956, a balance of Rs. 6,16,109 remained outstanding. Thereafter, no interest was charged. Some adjustments were made up to December 31, 1963, which had brought the balance to Rs. 3,74,229and this was carried forward from year to year till December 31, 1966, It appears that on December 31, 1957, the debtor had written to the assessee requesting it to exclude the amount of interest from the account as it was experiencing difficulty in the payment of the principal itself. On January 10, 1958, the directors decided not to charge any interest to this account till the principal amount was repaid. No formal resolution of the board of directors was, however, passed. It further appears that in 1961, the assessee had filed a suit against the debtor for the recovery of the amount due and a compromise was arrived at between the parties on the basis of which a decree was passed in favour of the assessee against the debtor on August 11, 1961. The decretal amount was to be paid in four annual instalments of Rs. 63,000, Rs. 2 lakhs, Rs. 2 lakhs and Rs. 58,542 respectively. The decree further provided that in default of payment of any of the instalments, the debtor was liable to pay interest @ 8% p.a. on the outstanding amount of instalment from the due date. The debtor paid a sum of Rs. 80,000 against the decree and the assessee did not charge any interest up to December 31, 1966, as stated above, nor did he charge any interest thereafter. The ITO, while assessing the assessee for the aforesaid periods, found that interest amounting to Rs. 14,588 had accrued to the assessee for the accounting year relevant to the assessment year 1965-66 and interest amounting to Rs. 26,815 had accrued to him for the assessment year 1966-67 and he brought these amounts to tax by two separate orders. The assessee went up in appeal to the AAC but failed. Thereupon, he filed an appeal to the Income-tax Appellate Tribunal and the Tribunal accepted the same and held that the interest cannot be said to have accrued to the assessee and, therefore, was not liable to tax. Aggrieved by the order of the Tribunal dated January 14, 1970, in I.T.A. Nos. 8289 and 8290 of 1968-69, the Commissioner of Income-tax requested the Tribunal to refer the matter to this court. That is how the matter has come up before us.We have heard Mr. J. P. Joshi, learned counsel for the petitioner-Department. . Nobody has appeared for the assessee.
3. It is urged by the learned counsel that the view taken by the Tribunal about the non-accruing of interest, in the facts and circumstances of the case, was wrong and that the question of law as framed by the Tribunal and 'referred to this court docs arise and it should be answered in the affirmative. His contention is that the assessee was maintaining accounts on the mercantile system and, according to that system, whenever any income accrued, it was liable to be included in the total income of the assessee for that period, that the assessee had been charging interest on the debt in question for the earlier years and, thereafter also, interest was not totally given up but its recovery was only postponed till therecovery of the principal amount, that a decree had been passed in favour of the assessee, which provided for payment of interest on default of instalments and defaults had admittedly been committed. In these circumstances, interest must be taken to have accrued to the asscssee for the relevant years. In support of his contention, he placed reliance upon Shiv Prasad Ram Sahai v. CIT : 61ITR124(All) CIT v. K.R.M.T.T. Thiagaraja Chetly & Co. : 24ITR525(SC) and E. M. Muthappa Chettiar v. ITO : 41ITR1(SC) .
4. Having given our careful consideration to- the contentions of the learned counsel for the Department, we find considerable force in these contentions. Before referring to the authorities relied upon by the learned counsel, we would like to refer to E. D. Sassoon & Co. Ltd. v. CIT : 26ITR27(SC) decided by their Lordships of the Supreme Court wherein the term 'accrued' was considered after referring to a large number of Indian and English authorities. Their Lordships observed as under (p. 51):
'It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. 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. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody.'
5. Their Lordships further observed as under (p. 51):
'Unless and until there is created in favour of the assessee a debt clue by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.'
6. Now, applying this principle to the present case, it clearly appears that interest had accrued to the assessee and thus the income from interest must be deemed to have been liable to inclusion in his total income. From the facts stated above, it is clear that there was an agreement for charging interest and interest had been charged for the years 1952 to 1956. Thereafter, of course, no interest was charged in the account but it may be on account of the request of the debtor and its partial acceptance by the assessee to the effect that interest would not be charged in this account till the principal amount was repaid. Thus, the interest was not totally given up, thereafter a suit for recovery of the amount was filed against the debtor and was decreed in favour of the assessee on August 11, 1961, and the decree clearly authorised the assessee to charge interest in case of default of payment of instalments. Admittedly, defaults in payment of the instalments had been made and, therefore, interest became chargeable. Further, according to the finding of all the authorities below, thesystem of accounting adopted by the assessee was the mercantile system, according to which the interest had to be included in the arnount as soon as it became due. Reference in this connection may be made to CIT v. K. R. M. T. T. Thiagaraja Chetty & Co. : 24ITR525(SC) wherein their Lordships of the Supreme Court observed that, in a case where the method of accounting was on the mercantile basis, merely because the agent of a limited company who was entitled to a commission which had accrued, requested the company not to credit such commission to the account of the assessee but to get it carried to the suspense account by a resolution of the directors, it would not make the commission which had accrued any the less the income of the assessee, as the system of accounting followed was mercantile system and the commission had accrued. Following this authority the Allahabad High Court in Shiv Prasad Ram Sahai v. CIT : 61ITR124(All) observed as under (p. 130):
'In the absence of any direct authority but on first principles it is clear that, once the assessee has adopted the mercantile system of accounting, there is no alternative for the Income-tax Officer but to compute the assessee's income on that system, i.e., on the accrual and not on the receipt basis.'
7. They further observed as under (p. 130):
'It would be open to the assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purposes of income-fax, to say that he will not debit the interest which may have accrued as a debt in its accounts for any reason whatsoever. This is the very evil on account of which Section 13 in the Act of 1922 was brought on the statute book. If the assessee could at any moment of time say that he will not debit the interest because of some reason or other, then it would open the floodgates of evasion.'
8. Reference may also be made to E. M. Muthappa Chettiar's case : 41ITR1(AP) wherein their Lordships of the Supreme Court have observed as under (p. 9):
'Before leaving the question of the validity of this order of assessment dated March 31, 1951, a minor point was made to which it is necessary to advert. The business income of the managing agency of Muthappa & Co. was computed at Rs. 1,02,219 for the first chargeable accounting period, viz., the calendar year 1942, and at Rs. 6,387 for the broken period January 1, 1943, to March 4, 1943. These figures which were the same as those in the assessment for income-tax were based on the remuneration to which the firm became entitled on its managing agency agreement with Saroja Mills Ltd. and with which amount: the latter debited itself in itsaccounts. The company, however, did not disburse this remuneration in cash, but this would make no difference to the tax liability of the firm, since the firm's accounts were made on the mercantile basis. The mills raised a dispute that the managing agents had not fulfilled certain obligations undertaken, by them in regard to the extension of the mills by increasing the spindleage, by reason of which default they claimed to have suffered a loss of income and for that reason carried the amount of their cross-claim for damages to a suspense account, instead of crediting the entire amount of managing agency remuneration to the firm. The sum of which immediate payment was thus withheld was Rs. 89,137. At the time of the income-tax assessment for the corresponding period, Thygarajan Chettiar, who as the managing partner of the firm participated in these proceedings had urged, the contention that as the mills had withheld remuneration to the extent of Rs. 89 thousand odd and had not credited that amount to the managing agents, the sum could not be treated as the income of the firm for the assessment year. This objection was overruled on the ground that the mills had never disputed that the entire amount of Rs. one lakh odd was due by them to the firm and in fact had claimed to deduct that entire sum as part of their business expenditure. The sum of Rs. one lakh odd was, therefore, held to have accrued to the firm as its income and that this remained unaffected by the existence of the cross-claim. The -contention which was repelled by the Income-tax Officer was addressed to us as a ground for disputing the inclusion of the Rs. 89 thousand odd as the income of the firm in its excess profits tax assessment. We see no substance in the point urged. Learned counsel referred us to the decision of this coxirt in Commissioner of Income-tax v. K. R. M. T. T. Thiagaraja Chetty & Co. : 24ITR525(SC) and to the observations at p. 529. We consider that the decision far from supporting the appellant is really against him.'
9. In this view of the matter, there is no room for doubt that the interest for the two relevant years referred to above had accrued to the assessee and it was includible in his total income. The learned Tribunal appears to have read something which was not there in the decision of their Lordships of the Supreme Court in E. D. Sassoon & Co. Ltd.'s case : 26ITR27(SC) . They have observed as under :
'This right to receive income must be a real and enforceable right against a sound and solvent debtor and the debt must be a good recoverable debt. Where there is no such right or where the right is against a patently unsound debtor or where there are no reasonable chances of recovery, it was not possible to say that there was a right to receive any amount or that a debt in favour of the assessee was created.'
10. In our opinion, the fact that the financial position of the debtor was not at all sound and there was no reasonable chance of the recovery of the debt within a foreseeable future, was quite extraneous to the consideration of the income, or the total income of the assessee for the relevant period. If the debt was not recoverable, the assessee could have recourse to Section 36 of the I.T. Act or having entered the debt as his income, if, at a future time, it was found that the debt could not be recovered, he could claim rebate in that respect under the various provisions the I.T. Act but so far as the computation of the total income of the assessee goes, the fact that the debt did not appear to be realisable, could not be taken into consideration. The learned Tribunal has further observed that the position that the interest could not be said to have accrued, had been accepted by the Department for the years 1959-60, 1960-61 and 1961-62, even then, in our opinion, this can be no reason to hold that as a matter of fact the income by way of interest had not accrued to the assessee for the relevant year. If the decision in the earlier orders was not correct, it does not mean that that mistake should be continued for all times to come. In view of the authorities referred to above, the clear position of law appears to be that in the system adopted by the assessee and the facts referred to above, it undoubtedly appears that the income by way of interest had accrued to the assessee. Then the learned Member of the Tribunal have referred to the decree which provided for payment of interest on default of instalments but then again relying upon the poor financial position of the debtor and despite the clear terms of the decree, came to the conclusion that interest could not be deemed to have accrued to the assessee. We are unable to subscribe to this view.
11. According to what has been stated above, we are of the opinion that the following answer should be furnished to the question referred to us :
'On the facts and in the circumstances of the case, the amount on account of interest which accrued to the assessee in the account of M/s. Ram Gopal Laxmi Narain of Secunderabad was includible in the total income of the assessee for the aforesaid two years.'
12. It may, however, be made clear that this answer would not debar the assessee from claiming any rebate or benefit under Section 36 or any other provisions of the I.T. Act to which he may be entitled. Let the answer be sent to the Tribunal.