KEWAL CHAND BAGRI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1973-74, the following question of law has been referred to this court :

(2.) The facts, shortly stated, are that the assessee derives income from interest and director's remuneration. The assessee had advanced a loan of over Rs. 2 lakhs in 1959 to his father, Sri Manik Chand Bagri, who was carrying on business in export of gunny bags. The loan amount had touched the figure of Rs. 3,45,400 in the year 1965. At the beginning of the present year, i.e., 1st January 1972, the debit balance in the account of Sri Manik Chand Bagri was Rs. 1,27,444. The assessee had charged interest in this account up to the year 1970 but from January 1, 1971, the assessee did not charge any interest in this account. In the return of income filed for the assessment year 1973-74, for which the relevant accounting period ended on December 31, 1972, the assessee had not shown any interest income received or receivable from Sri Manik Chand Bagri. In response to a query made by the Income-tax Officer as to why no interest income was shown in the assessment year 1973-74 on investment with Sri Manik Chand Bagri, the assessee through his representative's letter dated March 25, 1976, explained that the business of his father, Sri Manik Chand Bagri, had received a setback and that the said Manik Chand Bagri was not in a position to repay even the principal sum not to speak of interest and that there was an unwritten agreement and understanding between the assessee and his father, Sri Manik Chand Bagri, to the effect that his father would repay the whole amount standing to his debit as scion as possible provided no further interest would be charged from January, 1971. It was submitted by the assessee that, as a result of the understanding between the assessee arid his father, Sri Manik Chand Bagri, no interest was charged on the outstanding. The assessee also pointed out that, as per mutual agreement, Sri Manik Chand Bagri liquidated the entire loan.

(3.) In the course of the assessment proceedings, the assessee had also filed a confirmatory statement in respect of the loan transactions with the said Sri Manik Chand Bagri duly confirmed by the said debtor to show that the said debtor had also not provided for any interest in his books. However, the Income-tax Officer observed that, in view of the fact that the assessee was following the mercantile system of accounting, the interest income, whether received or not, would be taxed and, accordingly, he included a sum of Rs. 14,868 being interest at 12 per cent.