Sabyasachi Mukharji, J.
1. In this reference Under Section 256(2) of the I.T. Act, 1961, the following questions have been referred to this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8,264 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 55,920 was includible in the assessment for the assessment year 1970-71, as income of the previous year ended December 31, 1969 ?'
2. This reference relates to the assessment year 1970-71. The assessee is a United Kingdom company which carries on business in India through its branches at Calcutta and Bombay. The Calcutta branch acts as the agents for various tea and steamer companies incorporated outside India, as also for other overseas principals. The Bombay branch acts as agents for Lloyds. Both the branches deal in sundry electrical and other goods. The books of account of both the branches in India are closed on 31st December. The assessment year 1970-71, with which we are concerned, was in respect of the relevant accounting year being the calendar year 1969. In the company's books of account for the year ending on December 31, 1969, the following amounts receivable as interest on advance was found credited in suspense account:
Name of the branchAmount credited in suspense a/c. as interestName of the party from whom interest was receivable Rs.
Calcutta8,264M/s. Bags & Cartons, New Delhi.Bombay55,920Speciality Papers Ltd., Bombay.
3. The assessee was following the mercantile system of accounting. The ITO treated both items of interest as the assessee's income for the assessment year 1970-71.
4. There was an appeal. The AAC upheld the addition of Rs. 8,264 but deleted the other item of Rs. 55,920. There was a further appeal both by the Revenue as well as by the assessee before the Tribunal from the said order. The Tribunal observed that the 'admitted facts' regarding the two items of interest credited to the suspense account instead of to the interest account were as follows :
'(a) Interest charged to M/s. Bags & Cartons, New Delhi:
Rs. 60,000 had been advanced by the Calcutta branch to M/s. Bags & Cartons of New Delhi, in August, 1966, on the understanding that this would be repaid with interest. The party repaid Rs. 30,000 in 1967 towards the principal and Rs. 2,500 in June, 1968, towards interest; but thereafter no payment was made by it. The assessee decided to file a suit to recover the balance of the principal of Rs. 30,000 with interest. For this purpose, it continued to charge interest but credited it to a suspense account. The amount in credit as on December 31, 1969, was Rs. 8,264. Subsequently, a compromise decree was obtained in 1972, in terms of which Rs. 30,000 was to be repaid in monthly instalments of Rs. 2,500 commencing from 1st August, 1972, but no further sum would have to be paid by the debtor, unless he defaulted in the payment for two consecutive months, in which event interest would be payable. (b) Interest charged from M/s. Speciality Papers Ltd :
The Bombay branch had advanced in 1965 Rs. 7.5 lakhs to Speciality Papers Ltd., for whom they were appointed selling agents. The interest due on this advance used to be credited to the profit & loss account of this branch, till December 31, 1967. The debtor, had not, however, paid any interest or repaid the principal, except Rs. 56,000, to this date. In this context, it was noticed from a report of the directors of Speciality Papers Ltd. for the year ended August 30, 1967, that a creditor had filed a petition before the Gujarat High Court for winding up that company. As there was no improvement in the financial position of the debtor-company, it was decided by the assessee-company that the interest due from the Speciality Papers Ltd. after December 31, 1967, would be credited to the profits & loss account only when received. After this decision the interest due for the years ended December 31, 1969, was credited to a suspense account. The amount thus credited in the books of account, relevant to the assessment year 1970-71, was Rs. 55,920.'
5. As regards the deletion of Rs. 55,920 representing the interest due from M/s. Speciality Papers Ltd., it was urged, on behalf of the Revenue, that the assessee followed the mercantile system of accounting and any income due in a particular accounting year would have to be included in the total income of the relevant assessment year irrespective of whether or not the amount due was credited to the profit & loss account or a suspense account. Reliance was placed on several decisions, attention to some of which were drawn before us. On behalf of the assessee, it was urged that the method of accounting followed by the assessee need not be an invariable one. Reliance was placed on certain observations of a decision. It was further urged that the assessee had decided to change w.e.f. January 1, 1968, its method of accounting in respect of the interest, of which recovery was doubtful, and that such interest was being credited since then to a suspense account instead of to the profit & loss account. Reference was made to a Circular issued by the Central Board of Revenue on October 6, 1952 (bearing No. 41 (V-6) D of 52, F. No. 27(44)-IT/52). It was further urged that the assessee had adopted this system from January 1, 1968, in respect of the interest which was of doubtful recovery and such adoption was in consonance or in conformity with the aforesaid circular. The said circular reads as follows :
'Interest accruing to a money-lender on loans entered in a suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee's taxable income if the ITO is satisfied that there is really little probability of the loans being repaid. It is considered desirable to extend this principle to banks, which instead of transferring the doubtful debts to a suspense account, credit the intereston such debts to that account provided the ITO is satisfied that recovery is practically improbable.'
6. It was urged, on behalf of the assessee, that in view of certain facts, which we shall enumerate hereinafter and which the Tribunal has recorded, there was an extreme unlikelihood of the loan being recovered. The Tribunal has referred to the following facts, which were placed before the Tribunal in support of this contention that there was extreme unlikelihood of the loan being recovered :
'1-12-1969.Sri A. N. Kilachand, adirector of M/s. Speciality Papers Ltd. addressed the assessee-company aletter offering to settle the outstanding loan of Rs. 11.65 lakhs on paymentof Rs. 10 lakhs in one instalment and the creditor agreeing to forgo allinterest accrued up to 31-12-1969.
5-12-1969.The assessee-companywrote to M/s. Speciality Papers Ltd. that in waiving outstanding interest,commission, etc., sufficient concession had already been made and they werenot agreeable to any further whittling down of the amount of the loan.
3-2-1971.Sri Kilachand offeredsome instalment plans for repaying the principal amount of Rs. 11.65 lakhsbut urged that the interest and commission accrued in favour of theassessee-company should be waived by it.
23-4-1971.The assessee-company expressed dissatisfaction at the instalments remaining unpaid.
August, 1971.The Speciality Papers Ltd. was taken over by the Jatia group.
21-12-1971.The new management wasrequested by the assessee-company to pay interest on loan up to 31-12-1967,because the interest accruing up to this stage had already suffered tax inthe assessee's hands.
31-12-1971.The entries in the suspense account relating to interest were reversed.
February, 1972.The debtor-companywanted the instalments to be reduced to Rs. 50,000 per month from Rs. 70,000.
December, 1972.The debtor-company wasasked to liquidate the sum of Rs. 12,47,423 by half-yearly payments fromJune, 1975, to June, 1976.'
7. In the aforesaid view of the matter, it was submitted, on behalf of the assessee, that the Board circular dated October 6, 1952, referred to hereinbefore, were fully applicable and reliance was placed on the decision of the Supreme Court in the case of Ellerman Lines Ltd. v. CIT : 82ITR913(SC) , in aid of the proposition that the Board's instructions could not be ignored by the authorities subordinate to it.
8. It was submitted in the alternative that the interest credited to the suspense account could not form part of the assessee's 'real income'. In support of this contention, reliance was placed on several decisions of the Supreme Court, to which our attention was drawn and to which we shall have occasion to refer. It was also urged that it was a case of waiver of interest and that such waiver have been made on the grounds of commercial expediency, and no assessee was estopped from waiving its monetary claim and if such waiver is claimed the amount waived would not be treated as income of the assessee. On behalf of the Revenue, on the other hand, it was urged that what the assessee had done w.e.f. January 1, 1968, was not a 'change in the method of accounting' but only a change of the head of account to which the interest accrued would be credited. It was pointed out that the income credited in the assessee's books--may be in suspense account--was assessable on accrual basis. As regards the Board's circular dated October 6, 1952, on which reliance had been placed by the assessee, it was contended that this circular would not hold good in view of the decision of the Supreme Court which enunciated the principle on the basis of which accrued income should be included in the income of the assessee. In this connection, reliance was also placed on several decisions, to which our attention was drawn and to which we shall also refer.
9. So far as the argument about real income was concerned, it was urged, on behalf of the Revenue, that the theory of real income as on December 31, 1969, must be that which was reflected in the accounts of the year ended on December 31, 1969, adopted in the general body meeting. It was submitted that a later account by the assessee or by the auditor could not alter the condition of the company's real income as on December 31, 1969. On the plea of waiver on the ground of commercial expediency, it was submitted that waiver could not be urged where there was no giving up. In the facts of this case it was submitted that there was no waiver of interest by the assessee as the assessee had not given up its claim of interest.
10. As far as the sum of Rs. 8,264, due as interest from M/s. Bags & Cartons Ltd., similar arguments were urged. The Tribunal, after considering the rival contentions, held that before the closing of the books of account of the relevant accounting year, the assessee had not abandoned its claim of interest on the amount advanced to the Speciality Papers Ltd. The Tribunal further observed that accordingly the amount was assessable on accrual basis. This is important because one of the contentions urged, on behalf of the assessee, before the Tribunal was that there was a change in the method of accounting. The Tribunal had not decided that contention and if there was a change, in fact as was contended, in the method of accounting, then there was no question of considering whether there was any question of applying any theory of real income. It was submitted, on behalf of the assessee, that in respect of a subsequent year, that is, for the assessment year 1972-73, in Appeal No. 3154 of 1976-77 and No. 3170 (Cal-76-77), another Bench of the Tribunal was of the view that the assessee had taken the plea before the Tribunal, in the appeal in respect of which this reference relates, that w.e.f. January 1, 1968, in respect of the interest of the aforesaid loan, it was following the cash system of accounting. The Tribunal had not, according to the subsequent Tribunal, dealt with the plea of the assessee. Therefore, the Tribunal, in the subsequent appeal, was of the view that it was free for determination whether it was a fact and also to determine the question if there was a change in the system of accounting in the years under question and there was nothing to suggest that the change was an improper change. The main question, therefore, is whether there was any contention, that the method of accounting had been changed, raised before the Tribunal in the appeal in the instant reference. The Tribunal, dealing with the contention of the learned advocate for the assessee, in its order at para. 32, noted as follows : 'He further submitted that the assessee-company had decided to change w.e.f. January 1, 1968, its method of accounting in respect of the interest which was of doubtful recovery and such interest was being credited, since then, in the suspense account in respect of the profit & loss account'. The Tribunal has observed, dealing with the question in its order, at para 38, 'on the facts of the case, we have to hold that before the closing of the books of the relevant accounting year, the assessee had not abandoned its claim of interest on the amount advanced'. Now, normally, there are two well-known systems of accounting, viz., the cash system and the accrual system. The essential elements or characteristics of these two systems of accounting are well settled in income-tax jurisprudence. In the cash system, the income is assessed on the basis of receipt and in the accrual system the income is assessed on the basis of accrual or the right to receive or the obligation to pay or discharge. It is also possible to have a mixed system of accounting which, sometimes in judicial decisions, is described as a hybrid system. It is not hybrid strictly, because it is not a mixure of two systems. It is a dual system or plural system followed for two different items, viz., for certain income to follow the cash system, for certain income to follow the mercantile system. On behalf of the Revenue, before us, it was contended that it was never the case of the assessee that it had changed either its entire system or even in respect of a particular source of income the accounting from mercantile to cash system. What was urged in the words of the learned advocate for the asses-see before the Tribunal was that 'the assessee-company had decided to change w.e.f. January 1, 1968, its method of accounting in respect of interest doubtful of recovery and such interest was being credited, since then, to the suspense account in respect of the profit & loss account'. Firstly, there is no general claim, on behalf of the assessee, that the system of its accounting in respect of its interest income was being altered but it was a particular kind of interest that was being spoken of, viz., the interest which was of doubtful recovery. Whether such an attempt--certain particular types of source or one source--could unilaterally be changed from the method of accounting usually followed by the assessee was a doubtful proposition. But, it was urged on behalf of the assessee, that in this case, the two amounts, with which we are concerned in the instant reference, were the only interests and thus the method of accounting in respect of the interests was changed. Assuming that is the position, which is not apparent or clear from the submissions urged before the Tribunal, even then the question arises whether there was any decision to change the accounting in respect of a particular source, on the assumption that the entire source of interest income was being sought to be changed from mercantile system to cash system. What was urged was an attempt to change the head of the account to which the interest would be credited ; the assessee decided to change w.e.f, January 1, 1968, the head to which interest, which was of doubtful recovery was to be credited and such interest was being credited, since then, to a suspense account. The assessee was altering its method of keeping its books and not its method of accounting as such, because crediting the interest to suspense account must presuppose the accrual of a right to that interest. Now, if the realisation of interest or the claim for the interest is being postponed until the year in which the interest is received, it cannot be said that there was any change from the mercantile to the cash system. Therefore, it was held by the Tribunal rightly that in effect there was no change in the method of accounting. There might have been a change in the method of keeping or writing its accounts. The accounts, as we have noticed and indicated before, used the expression 'amounts credited in the suspense account as interest'. Therefore, it appears to us that there was really no contention or claim, on behalf of the assessee, that there was any change in the method of accounting in respect of any particular source of income.
11. If that is the position, then this contention of the assessee that there was a change in the method of accounting, and there being no basis that such change, was done with an improper motive and not with a bona fide intention, the interest income of these two amounts could not be deemed to have accrued or arisen in the year under question, cannot be accepted. But we need not express any opinion as to the propriety of the views expressed by the Tribunal in the subsequent decision by the subsequent Tribunal as to whether in the year under consideration before them, in those years, there was any claim of a change in the method of accounting for any particular source of income and whether the Tribunal was justified in holding that there was such a change. We are, however, unable to accept this view of the subsequent Tribunal that there was in the previous year, that is to say, in the year under appeal, in respect of which year we are concerned in this reference, there was a claim for a change in the system of accounting so far as this income from interest is concerned and such a contention was not considered by the Tribunal. If that is the position then the real questions that arise are the other two contentions urged before the Tribunal.
12. Now, before we decide or deal with the contention about the change in the method of accounting, we will refer to the several decisions to which our attention was drawn. We must first refer to the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT : 57ITR521(SC) . There, at page 529 of the decision, the Supreme Court dealt with the concept of real income and referred to the decision of the Bombay High Court in the case of H.M. Kashiparekh & Co. Ltd. v. CIT : 39ITR706(Bom) , to which we shall also refer. There the Supreme Court observed that the principle or the concept of real income had been succinctly enunciated by the Division Bench of the Bombay High Court in the aforesaid decision as follows (at p. 529. of 57 ITR):
'The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, accrued to or given up on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language'.
13. In this connection it would be proper to refer to the decision of the Bombay High Court in the case of H.M. Kashiparekh & Co. Ltd. v. CIT  38 ITR 706. There, the assessee was maintaining itsaccounts in the mercantile system and was the managing agent of a paper mill company. Under the managing agency agreement it was under a duty to forgo up to one-third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent. For the accounting year ending on March 31, 1950, the assessee had earned a commission of Rs. 1,17,644, but as a result of resolutions passed by the managed company and the assessee-company, the assessee gave up a sum of Rs. 97,000 in December, 1950. The Tribunal held that the maximum amount that the assessee was bound to forgo was only Rs. 39,215 and included the balance of the amount forgone, viz., Rs. 57,785 in its taxable income. The Tribunal, however, found that the sum of Rs. 57,785 was also given up for reasons of commercial expediency. It was held 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. It was, however, reiterated that in ascertaining the real income the fact that the assessee followed the mercantile system of accounting did not have any bearing. The accrual of the commission, the making of the accounts, the legal obligation to give up a part of the commission and the forgoing of the commission at the time of making up 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. It was further reiterated that the two rules that income-tax was annual in its structure, meaning thereby that, for computation, each year was a self-contained unit, and the other that the income to be taxed was the real income of the assessee, were not incompatible or irreconcilable and they permit for harmonious application. The principle of real income, it was reiterated by the Division Bench of the Bombay High Court, was not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of the managing agency commission was made, accrued to or given up on grounds of commercial expediency, simply because it took place some time after the close of the accounting year. In examining any transaction and situation of this nature, the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It would lay greater emphasis on the business aspect of the matter viewed as a whole when that could be done without disregarding the statutory language. The important point that the Bombay High Court emphasised in this case, in our opinion, was that in considering the concept of real income, the fact that the assessee followed the mercantile system of accounting did not have any bearing. The accrual of the commission, the making of the accounts, the legal obligation to give up a part of the commission and the forgoing of the commission at the time of making up accounts were not disjointed facts and there was a dovetailing about these which should not be ignored. Therefore, it also reiterated the principle, that simply because, after the close of the accounting year, certain income was given up even in a mercantile system of accounting, it would not disentitle the assessee to ask for the application of the concept of real income.
14. There, it has to be remembered that the managing agency had provided the relevant clause that the commission would be payable at the rate of 5% on the total proceeds of sale of all papers, cardboards, pulp and all other raw materials, and goods manufactured or produced by the company. Now, until the accounts of the managed company were made ready or prepared, the right to get the commission could not have accrued to the assessee. In the background of that context, the question of real income was invoked when the accounts for the managing agency was given up after the close of the accounting year, but before the accrual of the income in the sense before the accounts of the managed company had been made ready. It is in this context that the Division Bench of the Bombay High Court reiterated that there was a dovetailing between the several incidents, viz., the accrual of the commission, the making of the accounts, the legal obligation to give up a part of the commission, and the forgoing of the commission at the time of the making of the accounts. These were all connected facts. But the Division Bench reiterated the note of caution that the rule of real income was not to be so subordinated as to amount virtually to a negation of it, when a surrender or concession or rebate in respect of the managing agency commission was made, agreed to or given up on grounds of commercial expediency, simply because it took place some time after the close of an accounting year. In our case, it is not a question of commission nor is it a case where the accounts of the borrower had to be made in order to make the income accrue in the hands of the assessee. It is well settled that, in the concept of real income, what the assessee has not obtained, is the predominant factor and the substance of the matter had to be looked into. It is also well settled by numerous authorities, to some of which we shall refer, that whether the accrual takes place after the relevant year is not the decisive factor. The decisive factor is whether in the agreement which made the income accrue or arise, something was there which entitled the recipient or the person in whose hands the income accrued, to receive the income or to claim the income after the end of the relevant accounting period. It will also be applicable in cases where the original agreement is subsequently replaced or exchanged in view of another agreement subsequently entered into. Within these two limits normally unless the germ of subsequent conduct which brings about the income is embedded in the relevant year, the theory of real income cannot be invoked to defeat the consequence of accrual of income.
15. Reliance was placed on another decision of the Supreme Court in the case of CIT v. Birla Gwalior (P.) Ltd. : 89ITR266(SC) . There, the assessee, which was the managing agent of two companies, maintained its accounts on the mercantile system. It was entitled to an agreed managing agency commission and an office allowance from each of the managed companies. No date for payment of the commission was stipulated in the managing agency agreements. The accounting year of the assessee as well as the managed companies was the financial year. The assessee gave up the managing agency commission from both the managed companies for the assessment years 1954-55 to 1956-57, after the end of the relevant financial years but before the accounts were made up by the managed companies. It also gave up before the end of the relevant financial years its office allowance from one of the managed companies for the assessment years 1955-56 and 1956-57. The Appellate Tribunal held that the commission given up was not the assessee's real income and, further, in any case, it was given up on grounds of commercial expediency and, therefore, was an allowable deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922. It was held that as the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts and the assessee had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, it was held by the Supreme Court, therefore, the mere fact that the assessee was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. The commission given up by the assessee could not be considered to be its real income. This recital of the facts would make it clear that the facts of that case were entirely different from the facts, with which we are concerned, and do not militate against the principle, as we have indicated hereinbefore. There, the Supreme Court referred to its previous decision in the case of CIT v. Shoorji Valldbhdas & Co. : 46ITR144(SC) . Before we deal further with this decision, it may be appropriate to refer to the said decision also.
16. In the case of CIT v. Shoorji Vallabhdas & Co. : 46ITR144(SC) , the Supreme Court had to deal with an assessee-firm which was the managing agent of two shipping companies and under the managing agency agreement it was entitled to receive as commission 10 per cent. of the freight charged. Between April 1, 1947, and December 31, 1947, an amount of Rs. 1,71,885 from one company and Rs. 2,56,815 from another company became due to the assessee as commission at the rate of 10 per cent. and in the books of account of the assessee these amounts were credited to itself and debited to the managed companies. In November, 1947, the assessee desired to have the managing agency transferred to two private companies and, in this connection, agreed in December, 1948, to accept 2 1/2% as commission, and gave up 75 per cent. of its earnings. The Revenue sought to assess the amounts of Rs. 1,36,903 and Rs. 2,00,625, being the 75 per cent., which the assessee had given up, on the ground that commission at 10 per cent. had already accrued to the assessee in the year of account, and the agreement in December, 1948, after the close of the previous year, to give up a portion of that income, could not save that portion from liability to income-tax. It was held that the subsequent agreement had already altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of the income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had, in fact, received only the lesser amount in spite of the entries in the books of account, and this lesser amount alone was taxable. The Supreme Court reiterated that income-tax was a levy on income and though the I.T. Act took into account two points of time at which the liability to tax was attracted, viz., the accrual of the income or its receipt, yet the substance of the matter was the income. If income did not result at all, there could not be a tax, even though in book-keeping, an entry was made about a 'hypothetical income', which did not materialise. Where the income had, in fact, been received and was subsequently given up in such circumstances that it remained the income of the recipient, even though given up, the tax liability might be payable. Where, however, income could not be said to have resulted at all, there was 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. There, at page : 148 of the report, the Supreme Court reiterated this principle and observed that the agreements within the previous year had replaced the earlier agreements and altered the rate in such a way as to make the income different from what had been entered in the books of account. The facts, therefore, appear to be different. If there was something done during the year of the accrual or receipt to alter the very basis of the accrual of income or to alter the quantum of the accrual, then the concept of real income, where no income had been actually accrued or received by the assessee, could be invoked.
17. The Supreme Court also in this connection considered another decision, viz., the decision in the case of Morvi Industries Ltd. v. CIT : 82ITR835(SC) . There the assessee, which was the managing agent of its subsidiary company, had maintained its accounts on the mercantile system. It was entitled to receive an office allowance of Rs. 1,000 per month, a commission at 121/2 per cent. of the net profits of the managed company and an additional commission of 11/2% on all purchases of cotton and sales of cloth and yarn. In the accounting years ended on December 31, 1954, and December 31, 1955, the managed company suffered losses and the assessee had earned only commission on the sale of cloth and yarn for the two years. The total amounts including the office allowance which the assessee was entitled to receive were Rs. 50,719 and Rs. 13,963 for the two years. Under Clause 2(e) of the managing agency agreement, the commission was due to the assessee on December 31, 1954, and December 31, 1955, respectively, and it was payable immediately after the annual accounts of the managed company had been passed in general meetings, which were held on November 24, 1955, and July 21, 1956, respectively. By resolutions of its board of directors dated, respectively, April 4, 1955, and June 19, 1956, i.e., after the commission had become due but before it had become payable in terms of Clause 2(e), the assessee relinquished its commission on sales and office allowance because the managed company had been suffering heavy losses in the past years. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due was of no effect, and also rejected its claim that the amounts relinquished were allowable Under Section 10(2)(xv) of the Indian I.T. Act, 1922, because as a result of the relinquishment, the financial position of the managed company did not become stronger while that of the asses-see-company had become weaker and, therefore, the relinquishment was not for the benefit of assessee. On a reference, the High Court had agreed with the view taken by the Tribunal. The Supreme Court affirmed the decision of the High Court and was of the view that the commission had accrued to the assessee on December 31, 1954, and December 31, 1955, and the fact that payment was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income. Since the amounts of income for the two years were given up unilaterally by the assessee after these had accrued to it, it could not escape liability to tax on those amounts. The Supreme Court further held that since there was nothing to show that the amounts were relinquished for the purpose of the assessee's business, the assessee was not entitled to claim deduction of the amounts as business expenditure under Section 10(2)(xv) of the Indian I.T. Act, 1922. The income accrued, the Supreme Court reiterated, when it became due. The postponement of the date of payment did not affect the accrual of income. The fact that the amount of income was not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt might, in appropriate cases, be a valid ground for claiming deductions. The mercantile system of accounting differed substantially from the cash system of book-keeping. Under the cash system, it was only actual cash receipts and actual cash payments that were recorded as credits and debits, whereas, under the mercantile system, credit entries were made in respect of amounts due immediately they become legally due and before those were actually received. Similarly, an expenditure item for which legal liability had been incurred were immediately debited even before the amounts in question were actually disbursed. Where accounts were kept on the mercantile basis, the profits and gains were credited, though they were not actually realised, and the entries thus made really showed nothing more than the accrual or arising of the said profits at the material time. These two cases, viz., CIT v. Shoorji Vallabhdas & Co. Ltd. : 46ITR144(SC) and Morvi Industries Ltd. v. CIT : 82ITR835(SC) were considered by the Supreme Court in the case with which we are dealing now. The Supreme Court, after setting out the relevant passage from the decision in the case of CIT v. Shoorji Vallabhdas & Co. Ltd. : 46ITR144(SC) , referred to the decision in the case of Morvi Industries Ltd. v. CIT : 82ITR835(SC) , and observed that the real question for decision was whether the income had really accrued or not. It was not a hypothetical accrual of the income that had got to be taken into account but the real accrual of the income. If this concept of the real accrual of income in law and the principle on which the theory of accrual is based were to be taken into account, then, in the light of the facts of this case, where we are dealing with the question of interest, which had not to take into account anything to be done or happening subsequent to the closing of the year of account and the accrual was not dependent on any subsequent making up of the accounts or the company's borrowing acts, then the subsequent conduct, subsequent to the year in which income accrued, cannot, in our opinion, be of any help to the assessee. Our attention was drawn to a Bench decision of the Patna High Court in the case of CIT v. S.K.G. Sugar Ltd. : 96ITR194(Patna) , where Chief Justice Untwalia, speaking for the Patna High Court, has culled out the general principles of the accrual of liability under mercantile system of accounting. There, the assessee-company was manufacturing sugar and distillery products and had entered into an agreement with a marketing company appointing it as its selling agent. The agent company was entitled to a commission of 1 per cent. on the sales of sugar and 21/4 per cent. on the sales of distillery products. It expressly provided in the agreement that it could be determined at any time by mutual consent. The accounts of the company contained details of the commission credited to the agents every month. The previous year of the assessee was August 1, 1953, to July 31, 1954. On August 2, 1954, the assessee-company wrote to its agent that in view of the poor working results of the company, it was difficult to make payments of commission at the rates stipulated and thereupon the agent-company passed a resolution on August 11, 1954, stating that for a period commencing from September 1, 1953, it would charge only such commission, brokerage, etc., which was actually incurred by it. In August, 1954, the assessee-company had made journal entries reversing the original entries crediting the commission and in its final profit & loss account no commission was charged. On the question whether the amounts as originally credited amounting to Rs. 2,04,947 was deductible as it was included in the assessment of the agent-company, it was held that the liability incurred under the original agreement was obliterated later by the mutual consent of the parties for the purpose of commercial expediency. The remission of liability by the assessee-company and the forgoing of commission by the agent were part of the same transaction. On the variation of terms of the original agreement, the liability of the assessee-company to pay the commission became non-existent. The assessee-company, according to this decision, could not, therefore, claim it as a business expenditure. The mere recital of the facts would make it clear that the facts of that case were entirely different from the facts of the present case. Reliance was also placed on the decision of the Allahabad High Court in the case of Gappumal Kanhaiyalal v. CIT : 117ITR78(All) . There, though the case dealt with interest, it was found, as a fact, by the Division Bench of the Allahabad High Court that the relinquishing of interest was not based on commercial expediency. Therefore, the theory of real income could not be invoked in aid of the assessee. In view of that finding of fact, though the case dealt with the question of interest, in our opinion, the Revenue cannot draw much assistance from the said decision. Reliance was also placed on the decision of the Judicial Committee in the case of CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga  1 ITR 94. There, at page 100 of the report, the Judicial Committee observed as follows:
'Now it will be observed at once that the method adopted by the Income-tax Officer has the result of bringing out a sum composed in part of actual interest receipts of the assessee in the year of computation and in part of sums received in previous years and allocated by the assessee to interest in that year. The question is whether this method or combination of methods was legitimate. That it was legitimate to ascertain in the first place the actual receipts of interest in the year of computation is undoubted. Was it legitimate to add the items which the assessee in the year of computation carried to interest account out of sums received in previous years Was the officer entitled to treat these allocations as income of the year of computation ?
Where an assessee keeps his books on a cash basis disclosed to the Revenue authorities and the officer accepts that basis, it is clear that the calculation must be based on actual receipts in the year of computation. Here, however, the assessee kept his books on a hybrid system and it was his practice to enter sums as he received them in a deposit register not made available to the Revenue authorities, without discriminating between interest and capital payments, and then subsequently to allocate and treat as income certain portions of these sums which he attributed to interest. What the officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it (see per Lord Dunedin in delivering the judgment of the Board in Commissioner of Taxes v. Melbourne Trust Ltd.  AC 1001, The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sums received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee in treating them as income of the year in which the assessee himself first thought fit so to regard them. Their Lordships see nothing contrary to principle in the computation of an assessee's total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous years which have been held in suspense and no part of which has previously been returned as income. Their Lordships do not find that the Income-tax Officer in the present case has acted in any way illegally in computing the profits of the transactions in question for the year 1332 Fasli by taking into account both actual receipts of interest in that year and sums treated by the assessee in that year as receipts of interest by their transference to the interest register from what for this purpose may be regarded as a suspense account.'
18. Reliance was also placed on the case of E.D. Sassoon & Co. Ltd. v. CIT : 26ITR27(SC) . The Supreme Court was dealing with a company, where S was the managing agent of U company. Under the managing agency agreement, the S company were entitled to receive as their remuneration subject to certain minimum commission of certain percentage per annum on the annual net profits of the U company which was due to them on 31st March of every year. On December 1, 1943, S company assigned to A their office as managing agents and all their rights and benefits under the managing agency agreement and the consideration received by them was transferred by them to the capital reserve account. The accounts of the managing agency commission payable to the managing agents for the calendar year 1943, were made up in 1944 and paid to A in 1944. The question was whether in the assessment year 1944-45, A was liable to pay tax on the accrual basis on the whole of the commission or whether the tax was payable by A and S company on proper apportionment being made between them of the amount received by A. It was held by the majority view that in the facts and circumstances of the case the managing agency commission was not liable to be apportioned between S and Accompany in proportion to the services rendered as managing agents by each one of them but A was liable to pay tax on the whole agreement. There, at page 34 of the report, the court had referred to the clause, being Clause 2(d), which provided that the commission under the said clause was due to them yearly on 31st of March in each and every year during the continuance of the agreement and it was payable immediately after the annual accounts of the company had been passed by the shareholders. The court then referred to the facts and observed that until and unless the accounting year of the company had gone by and the managing agent had served the company as their agents for the whole or full period, no part of the managing agency commission which was payable per year in the manner aforesaid could become due to them and the performance of the service for the year was a condition precedent to the managing agents being entitled to any part of the remuneration or commission for the accounting year of the company. The managing agency agreement, therefore, was an entire and indivisible contract stipulating the payment of remuneration or commission per year and enjoined upon the managing agents the duty and obligation of rendering services to the company for the whole year by way of a condition precedent to their earning any remuneration or commission for the particular accounting year. The court then referred to the observations of the decisions to which their attention was drawn and also referred to the decision in the case of IRC v. Gardner Mountain and D'Ambrumenil Ltd.  29 TC 69, Reliance was placed in this connection on the observations of Lord Wright at page 94 of the report.
19. Reliance was also placed on a Bench decision of this court in the case of Rungta Sons Ltd. v. CIT : 54ITR447(Cal) , where dealing with the theory of the germ being embedded in the year of account by virtue of which subsequent conduct the income accrued to be given up on which many English decisions were placed before their Lordships of the Calcutta High Court. Their Lordships, at page 459 of the report, observed as follows:
'The instant case, however, may be considered from another point of view as urged by Mr. S. Mukherji. He has submitted that in all the English decisions referred to us, the root or germ as to accretion of income was in ihe accounting year and if such a root or germ fructifies in the subsequent years that could be taken into account and not otherwise. This argument which appears to be correct has in its support the principle discussed in art. 261 at page 147 of Halsbury's Laws of England, third edition, volume 20. It runs as follows ;
'Where accounts may be reopened : Closely allied to the question of the year in which receipts are to be brought in or expenses allowed is the question of reopening trading accounts. It is now established that trading accounts for a year or period may be reopened and amended. For example, where a transaction included in the accounts for any year or period whether as a receipt or an expense is not settled in amount during the said year or period, and is subsequently settled at a figure different from that shown in the accounts, the accounts may be reopened and the figure subsequently ascertained inserted in place of the original figure, and the balance of profit as so revised will form the basis for assessment to income-tax. In certain cases trade receipts have been related back to the period in which goods were delivered or services rendered as a result of which money became payable, or deductions for trade expenses have been subsequently disallowed or reduced in amount. In other instances accounts have not been reopened.' The principle as quoted above does not militate against the legal principles involved in the instant case, although it appears to us that the English cases laying down the general rule that receipt is the sole test of taxability and income which has accrued, but has not been received, cannot be brought to charge, and, secondly, that it is the income of the year of receipt and not of the year when it arises or accrues, would be misleading under the Income-tax Act, which contains provisions which are not to be found in the English statutes (vide the observations in the case of CIT v. Singari Bai : 13ITR224(All) ).'
20. The real principle seems to be that the root or the germ as to accretion of income must be in the accounting year and if such root or germ fructifies in the subsequent years, that can be taken into account and not otherwise. Now, applying the same principle to the facts and circumstances of this case, if it could be demonstrated that the right of giving up, which stopped the accrual in the year of income which had been laid or planted in the year of account, then the subsequent giving up might help the assessee in the theory of real income. Therefore, it is necessary to examine the question whether in the facts and circumstances of this case such a situation arose.
21. Reliance was placed on a decision of this court in the case of Rungta Sons P. Ltd. v. CIT : 62ITR468(Cal) . There, the assessee was a private limited company managing five other companies as managing agents and also doing other businesses. Under the managing agency agreement, the assessee was entitled to receive from the managed companies (i) an office allowance of Rs. 500 per month commencing from the date of incorporation, and (ii) a commission of 10% of the net yearly profits of the company, provided that, in case of absence or inadequacy of profits, a minimum payment of Rs. 6,000 for a whole year should be made on this account by the managed companies to the assessee in lieu of the commission aforesaid. By a resolution dated July 5, 1953, the assessee-company relinquished its rights to receive the managing agency commission and allowances in respect of four of these companies. Similarly, by a resolution dated September 30, 1953, the assessee gave up office allowance and the minimum commission of Rs. 6,000 in respect of the fifth company. For the accounting year which ended on July 11, 1953, the total sum payable to the assessee as office allowance and minimum commission in respect of the aforesaid five companies amounted to Rs. 42,000 and the ITO included the whole amount of Rs. 42,000 in the total income of the assessee on the ground that the sum had already accrued to the assessee and subsequent relinquishment of the income had no effect so far as the incidence of tax was concerned. The Appellate Tribunal allowed the appeal of the assessee, holding that in respect of the first four companies, the assessee was entitled to deduction of the managing agency commission and rejected the contentions of the assessee in respect of the fifth company. It was held by this court that since the managing agency agreement clearly provided that the agency company would be entitled to receive an office allowance of Rs. 500 per month and a commission of 10% of the net yearly profits and the proviso with regard to minimum applied only to the commission of 10% of the profits, it could not be said that the assessee was entitled to office allowance only at the end of the year. The office allowance payable by the said four companies accrued at the end of every month and, as such, the relinquishment of such allowance on July 5, 1953 could not entitle the assessee to claim deduction of the office allowance which had accrued. As the accounting period expired on July 11, 1953, and the date of the resolution relinquishing the office allowance was July 5, 1953, the assessee was entitled to claim deduction of the office allowance for the last month only. This court further held that the managing agency commission and office allowance received by the assessee-company from the fifth company was income of the assessee-company for the assessment year 1954-55 even though it was surrendered by the assessee- company, as the resolution surrendering the commission and allowance was passed only after the end of the accounting year.
22. Reliance was placed on the observations of the court at page 473 of the report, where this court reiterated the observations of the Supreme Court (CIT v. Shoorji Vallabhdas & Co. : 46ITR144(SC) ) relating to the Malabar Steamship Co. Ltd. referred to hereinbefore. This case does not carry the position any further.
23. Our attention was also drawn to the decision of the Madras High Court in the case of K.R. Kothandaraman v. CIT  62 ITR 348 and reliance was placed on the observations of the court at page 355 of the report. There, the court reiterated that in a situation of this nature, though book entries were not necessarily conclusive and it could not invariably be said that an income resulted from such entries of credit, in the present context, the entries in the folio page relating to the assessee in the books of the company did result in the accrual of a salary from month to month for the period in question and even if the resolution in that case was to be read as having the effect of denying the salary during the period of nine months to the assessee or if it was to be taken that the assessee had waived the accrued remuneration, such denial, withdrawal or waiver occurred subsequent to the assessment year, and it would, therefore, be totally ineffective in the computation of the income for the assessment year which would be liable to tax under Section 7.
24. Reliance was placed on the observations of the Punjab and Haryana High Court in the case of Shiv Parkash Janakraj & Co (P.) Ltd. v. CIT . There, the partners of a firm were shareholders of the assessee-company. The assessee-company had advanced a loan to the firm for which it charged interest. By a resolution dated November 24, 1970, the assessee-company decided not to charge interest from the firm for the assessment year 1971-72, relevant to the accounting period ending on October 30, 1970. The ITO held that the loans in question were interest-bearing loans and since the assessee-company had relinquished the interest without any commercial consideration and since the directors and shareholders of the assessee-company were interested in the firm, it was a case of collusion to evade the tax liability and, therefore, added a sum of Rs. 31,565 to the income of the assessee-company under the head 'interest' at the rate of 15 per cent. per annum. On appeal, the AAC held that the resolution to waive the interest was passed on November 24, 1970, i.e., after the end of the accounting period, and since the assessee-company followed the mercantile system of accountancy, the interest had already accrued to the assessee-company before it was waived and upheld the addition of Rs. 18,941 to the income of the assessee-company under the head 'interest' at 9 per cent. per annum.
25. On second appeal, the I.T. Appellate Tribunal upheld the order of the AAC. On a reference, the assessee-company contended that income-tax could be levied only if the income accrued or was received in the case of interest-bearing loans, that there was no bar against a lender of money forgoing interest at any time, that the agreement under which the loan was advanced was not reduced into writing and as such there was no fixed date for the payment of interest, that neither the interest had in fact been paid to the assessee-company nor had it made the relevant entries in its account books and that merely because the assessee-company adopted the mercantile system of accounting, it could not be burdened with the tax liability. It was held that no interest had actually been paid to the assessee-company nor had it made any debit entries in its account books. No date was fixed in the agreement of loan regarding the payment of interest. Even if the assessee-company had adopted the mercantile system of accounting, it could not be said that an income from interest had actually accrued to it on October 31, 1970. The facts of that case were entirely different from the facts with which we are concerned in the instant case.
26. In this connection, reliance was placed on the decision of the Bombay High Court in the case of CIT v. Confinance Ltd. : 89ITR292(Bom) . There, the Division Bench of the Bombay High Court observed that under income-tax law, receipt of income, either actual or deemed, was not a condition precedent to taxability. Under the head 'Business' what were charged were the profits and gains of the business and the profits and gains would not escape tax by reason only of the fact that they were not received in the accounting year in money or the equivalent of money or were not deemed to be so received. They were assessable if they had arisen or accrued or were under the Act deemed to have arisen or accrued 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, This principle would be attracted even in cases where an assessee followed the mercantile system of accounting. However, in examining any transaction or situation, the court would have more regard to the reality of the situation rather than the purely theoretical or doctrinaire aspect of it and greater emphasis would be laid on the business aspect of the matter viewed as a whole when that could be done without disregarding the statutory language. There, the assessee was a limited company carrying on money-lending and banking business. It followed the mercantile system of accounting. For the accounting year ending March 31, 1959, the company stated that no credit was taken in its balance-sheet in respect of interest on several loans advanced by it as the interest payment had remained unpaid from March 31, 1956. For the assessment year 1959-60, interest in respect of amounts due by debtors amounting to Rs. 9,275 was brought to tax and similarly for 1960-61 an amount of Rs. 13,033 was brought to tax. The order of the ITO was reversed by the Appellate Tribunal which took the view that the records showed that there had hardly been any receipts of interest for a number of years past. On a reference, the High Court held that the fact that there were hardly any receipts in respect of items of interest or that the bona fides of the assessee in not charging interest was not disputed, were circumstances which were by themselves insufficient to support the conclusion that there was no real income in respect of items of interest as none of the debts due by the several debtors was written off by the assessee and no evidence was produced to show that interest in respect of the debts was given up. The interest amount of Rs. 9,275 was, therefore, properly included in the total income of the assessee for the assessment year 1959-60 and the amount of Rs. 13,033 was properly included in the total income of the assessee for the assessment year 1960-61.
27. The principles enunciated above are quite apposite to the facts and circumstances of the instant case before us. In this case also there has been no agreement giving up the interest. The interest was not given up before the right to get the interest accrued in the relevant year. On the other hand, interest was given up long after the accrual, though the bona fides or the commercial expediency of giving up the interest was there. In fact, there was no clear assertion on the part of the assessee to give up the interest. What was done was that interest that had accrued was credited in a suspense account. The assessee was very much keeping alive the claim for interest. In this connection, learned advocate for the assessee, strongly emphasized, as we have mentioned before, that there was a contention raised before the Tribunal that the method of accounting had been changed. We have set out hereinbefore what was the contention. The contention was not that the method of accounting in respect of interest was changed. The main contention was that the amount of these debts which were considered to be irrecoverable in the year were for the time being kept in the suspense account. Such an alteration in the book-keeping could not be termed as a 'change in the method of accounting'. Learned advocate for the assessee emphasized that, whether there has been any change in the method of accounting or not, was a question of fact. If it was so, the Tribunal in the background of the facts placed before it and in the light of the submission made before it, though not categorically, but quite clearly, has held that such a system of accounting which was advanced on behalf of the assessee was not a claim for a change in the method of accounting.
28. In this connection, reliance may be placed on the decision of the Bombay High Court in the case of Sarupchand v. CIT : 4ITR420(Bom) . There, Beaumont C.J. of the Bombay High Court observed that an asscssee was entitled to change the method of accounting regularly employed by him. What he must alter, however, was his regular method, that is to say, he must abandon what up to that time had been his regular method, and start a new regular method and not merely a new method for a casual period. This is precisely what the assessee had sought to urge, that the method of accounting was changed of debt which was considered doubtful of realisation and that also not in the light of the agreement reached with the debtor and that after the interest had accrued in the relevant year and long thereafter. It is true that whether the question of the regular method of accounting has been changed or not is a question of fact. In this case, under the head 'Interest' there was no claim, as we have been able to gather from the contentions raised before the Tribunal, that there was a change of method of accounting. Reference in this connection was made to the decision in the case of Shiv Parkash Janakraj & Co. Pvt. Ltd. v. CIT . However, we may incidentally refer to the decision of the Punjab & Haryana High Court in the case of CIT v. Ferozepur Finance Pvt. Ltd. , where the court reiterated the principle that in the mercantile system of accounting, an assessee could forgo the whole or part of the debt which was irrecoverable and the same could not be added. Here, there was no question of forgoing any part of the interest claimed.
29. On the question of the Tribunal not deciding this contention urged in support of its claim that there was a change in the method of accounting, learned advocate for the assessee submitted that we should either remit the case to the Tribunal in view of the finding of the Tribunal in the subsequent case or ask the Tribunal to make a supplementary statement of case. In this connection reliance was placed on the observations of the Supreme Court in the case of Raghunath Prasad Poddar v. : 90ITR140(SC) , the observations of the Supreme Court in the case of CIT v. Greaves Cotton & Co. Ltd. : 68ITR200(SC) , to the decision of the Supreme Court in the case of CIT v. Indian Molasses Co. Pvt. Ltd. : 78ITR474(SC) , to the decision of the Gujarat High Court in the case of CIT v. Harivadan Tribhovandas : 106ITR494(Guj) . In this case, as we have held that there was no contention at all that there was, in respect of a particular source, a change in the method of accounting, it was not necessary, in our opinion, for the Tribunal to find anything more than what it did. In view of the fact that there was no agreement replacing the claim for the interest under which the interest accrued in the year of account and the fact that the interest was purported to be not realised or kept in the suspense account long after the expiry of the accounting year, though there was some trouble in the year of account of realisation, in correspondence the germ or root had been not transplanted under which there might be either a fresh agreement waiving interest or any clause for keeping it in the suspense account during the year of account, in our opinion, the aforesaid conduct could not prevent the accrual of income. As there was really no claim of the waiver of interest at all, in our opinion, the Tribunal was right in coming to the conclusion which it had arrived at in this matter. Both the questions, therefore, must be answered in the affirmative and in favour of the Revenue.
30. The parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
31. I agree.