COMMISSIONER OF INCOME TAX Vs. ANNAPURANI VEERAPPAN

JUDGEMENT

(1.) THESE tax case references relate to the same assessee, though for different assessment years and they are, therefore, dealt with together. The assessee is a money -lender and followed the mercantile system of accounting. She had advanced loans on mortgages. One such loan was advanced to one K. N. Krishnasami on a simple mortgage of agricultural lands of extent of 96 odd acres and the share of interest of the debtor in the firm, Sriram Bus Service. She had also advanced monies to one N. Chockalingam Chettiar on equitable mortgage. From the account copy extracts produced by the assessee in the course of the assessment proceedings, it is seen that, for the assessment years 1964 -65 to 1969 -70, the assessee had debited the interest accruing on the mortgages as per the system of accounting followed by her and offered the accrued interest for assessment. For the assessment year 1970 -71 up to 1973 -74, the assessee did not credit any interest. However, in the course of the assessment proceedings for the assessment year 1970 -71, the Income -tax Officer made an addition of Rs. 24,250 as accrued interest, which was also upheld by the Appellate Assistant Commissioner. There was a remit order by the Tribunal and pursuant to that, the Appellate Assistant Commissioner deleted the addition. On appeal by the Revenue before the Tribunal, the addition of Rs. 24,250 made by the Income -tax Officer was sustained by the Tribunal for the assessment year 1970 -71. Similarly, for the assessment years 1971 -72 and 1972 -73, the addition of accrued interest on the mortgages was accepted by the assessee. In the course of the assessment proceedings for the assessment year 1973 -74, the Income -tax Officer added a sum of Rs. 23,600 being the interest on the mortgage loans, as in the prior assessment years. On appeal by the assessee, the Appellate Assistant Commissioner took the view that the assessee had already been burdened during the course of the prior assessments with considerable liability and there was, therefore, no justification to include the accrued interest on the mortgage loans in the assessment and though the loans were mortgage loans, the chances of recovery had become remote. In that view of the matter, the Appellate Assistant commissioner directed the deletion of interest of Rs. 23,600. In the departmental appeal before the Tribunal it was contended that having regard to the secured nature of the loans and the system of accounting adopted by the assessee, the interest on the mortgage loans should not have been deleted. The Tribunal took the view that there was no foreseeable prospect of receipt of interest in the accounting year when there were large outstandings of principal and dismissed the appeal. In respect of the assessment year 1973 -74, under section 256(1) of the Income -tax Act, 1961 (hereinafter referred to as 'the Act'), the following question of law has been referred to this court for its opinion in T. C. No. 1167 of 1979.

(2.) IN respect of the assessment years 1974 -75 and 1975 -76, the Income -tax Officer added accrued interest in respect of the mortgage loans in sums of Rs. 29,492 and Rs. 39,615, respectively. On appeal by the assessee, the Appellate Assistant Commissioner upheld the additions for both the assessment years. The Tribunal, following its order in respect of the same assessee for the assessment year 1973 -74, deleted the addition of interest. That has given rise to T. C. Nos. 894 and 895 of 1982, where, at the instance of the Revenue, under section 256(1) of the Act, the following questions of law have been referred to this court for its opinion :

(3.) WE may first proceed to consider the questions referred in T. C. Nos. 1167 of 1979 and 894 and 895 of 1982 relating to the accrued interest on the mortgage loans. We find from the account copy produced in the course of the assessment proceedings that, consistent with the system of accounting followed by the assessee, interest on the basis of accrual had been debited up to the assessment year 1969 -70. It is not in dispute that the interest on mortgage loans, which had accrued, had also been disclosed and subjected assessment year 1970 -71 onwards, the assessee did not credit the accrued interest on the mortgage loans, as according to her realisation of the debt was doubtful. Even so, in respect of the assessment year 1970 -71, the Tribunal found that it was idle on the part of the assessee to contend that, in fact and reality, interest did not accrue as realisable income and upheld the addition of accrued interest for purposes of assessment. In respect of the assessment years 1971 -72 and 1972 -73, the accrued interest was added and the assessment had accepted the additions. In this background of assessment of the accrued interest on the mortgages till the assessment year 1972 -73, the question of assessability of the accrued interest for the assessment years 1973 -74 to 1975 -76 has to be considered. While upholding the addition of the accrued interest for purposes of assessment in respect of the assessment year 1970 -71, the Tribunal had stated that, having regard to the acceptance of the addition by the assessee for the assessment years 1971 -72 and 1972 -73, it would look incongruous, if the interest income did not accrued for the assessment year 1970 -71. However the Tribunal, while considering the same question for the assessment year 1973 -74, had stated that there was no foreseeable prospect of recovery of interest in the accounting year when the principal was outstanding and that would justify the deletion of the addition. With reference to the assessment year 1974 -75, the Tribunal had followed its earlier order in respect of the assessment year 1973 -74 forming the subject -matter of reference in T. C. No. 1167 of 1979. Likewise, for the assessment year 1975 -76, the Tribunal upheld the deletion of the addition of accrued interest in a sum of Rs. 39,615 as the debt had been written off as a bad debt in the assessment year 1974 -75, which question has been referred in T. C. No. 233 of 1990. Learned counsel for the Revenue, referring to section 5(1)(b) of the Act and the method of accounting followed by the assessee, submitted that when once accrual of interest had taken place, such accrued income cannot be rendered non -income and the difficulty of recovery would not make the accrual a non -accrual. Reliance in this connection was placed by learned counsel upon the decision in Kedarnath jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) , Morvi Industries Ltd. v. CIT : [1971]82ITR835(SC) and CIT v. Devi Films Pvt. Ltd. : [1990]182ITR200(Mad) . On the other hand, learned counsel for the assessee pointed out that the Tribunal had taken into account the long -standing nature of the mortgage loans, the irrecoverability of even the interest apart from the principal and other circumstances to conclude that, though the assessee had adopted the mercantile system of accounting, the interest on the mortgages was highly illusory and very unrealistic and had, therefore, rightly deleted the addition of interest for the assessment years in question. Reference in this connection was also made to the decision in CIT v. Motor Credit Co. P. Ltd. : [1981]127ITR572(Mad) .