COMMISSIONER OF INCOME TAX Vs. BANSWARA FABRICS LTD

JUDGEMENT

(1.) : We have heard the learned counsel for the parties.

(2.) THIS appeal is directed against the order of the Tribunal, Jodhpur Bench, Jodhpur dt. 28th Aug., 2002. The Tribunal has decided three appeals for asst. yrs. 1986-87, 1987-88 and 1988-89 in relation to same assessee by a common order. THIS appeal relates to asst. yr. 1987-88. It was an appeal by the Revenue before the Tribunal.

(3.) THE Tribunal found that in the instant case, it is not disputed that barring a few exceptions, the assessee follows the mercantile system of accounting. One exception noticed was, and it is not disputed, that the assessee has been debiting interest on overdue trade debt on cash basis and further that the system has been followed by the assessee consistently. Thus, a natural corollary follows that till the amount of interest is realised, the assessee will not be charging any interest in his books of account. Generally, the basic reason to adopt the system of charging interest would depend on many factors varying from case to case. Thus, in the case before the Tribunal, indisputable the outstanding debits are trade debts, they are not advances made by the assessee to the two concerns. Also, there was nothing to show that there was a stipulation between the parties to charge interest of such debt. Further, it is also undisputed that the two concerns had gone sick and reference was pending before BIFR for the rehabilitation of the two units. It is also a fact that the assessee was not likely to recover the principal amount and accordingly there was good reason for the assessee not to charge any notional interest, on these two accounts. On these premises, the Tribunal affirmed the finding of CIT(A) deleting the addition of notional interest made by AO for the assessment year in question.