Supreme Court of India

COMMISSIONER OF INCOME TAX, AMRITSARversusM/S SHIV PRAKASH JANAK RAJ AND CO. PVT. LTD.

Citation: 1996 INSC 1127
Decided: 30 September 1996
Disposal: Case Partly allowed
Bench: B P JEEVAN REDDY

Holding

Interest that had accrued under the mercantile system before the waiver remains taxable, and the concept of real income cannot be used to defeat the provisions of the Income Tax Act.

Summary

The assessee company had advanced a loan to a firm whose partners were also its shareholders and directors. Interest was charged on the loan in the 1966-67 and 1967-68 assessment years, establishing it as an interest‑bearing loan. For the 1968-69 assessment year the company passed a resolution before the end of its accounting year to waive interest, whereas for the 1969-70, 1970-71 and 1971-72 years the waiver resolutions were passed after the accounting year ended. The issue was whether, under the mercantile system of accounting, interest had already accrued to the assessee before the waiver and whether the concept of "real income" could be invoked to exclude the waived interest from tax. The Supreme Court held that interest had indeed accrued in the three later years and the post‑year‑end waiver did not affect tax liability, applying the principle from Morvi Industries. The Court rejected the "real income" argument as a device to defeat the statute. The appeal was allowed for the three later years and dismissed for the 1968-69 year, which was not pressed.

Issues considered

Whether interest on the loan accrued to the assessee under the mercantile system of accounting for the assessment years 1969-70, 1970-71 and 1971-72 despite the post‑year‑end waiver.
Whether the waiver of interest after the expiry of the accounting year affects the tax liability of the assessee.
Whether the doctrine of "real income" can be employed to exclude the waived interest from taxable income.

Legislation cited

Income Tax Acts. 66(2)
Income Tax Act, 1922s. 10(2)(xv)
Income Tax Act, 1961s. 145, s. 36, s. 37(1), s. 5(1)(b)

Subjects

Income TaxInterest AccrualMercantile AccountingWaiver of InterestReal Income DoctrineAssessment YearTax LiabilityAccrual Basis

Judgment

COMMISSIONER OF INCOME TAX, AMRITSAR A
v.
MIS SHIV PRAKASH JANAK RAJ AND CO. PVT. LTD.

SEPTEMBER 30, 1996

[B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.] B

Income Tax Act, 1961-Sectiqns 5(1)(b), 36, 37(1) and 145-Accrnal
of interest-Mercantile System of Accountin15Assessment Years 1968-69,
1969-70, 1970-71 and 1971- 72-Interest bearing loan advanced by assessee
Company to firm-Waiver of interest before expiry of Accounting year with C
respect to Assessment Year 1968-69 but after expiry of accounting year for the
subsequent three Assessment Years-No entries in accounts of company or
firm-Held, for later three years interest had already accrned before waiver
and concept of real income cannot be imported so as to whittle down, qualify
or defeat the provisions of the statute. D
The assessment years involved were Assessment Years 1968-69, 1969-
70, 1970-71 and 1971-72. The assessee company (respondent) had advanced
a loan to firms whose partners were also the shareholders/directors of the
assessee company. The assessee company was maintaining accounts on
mercantile basis and the accounting year adopted was the year ending 31st E
October of the year. For the accounting years relevant to the assessment

-
'
years 1966-67 and 1967-68, interest of Rs. 25,048 and Rs. 25,843 respective-
ly were charged on the loans so advanced. In respect of assessment year
1968-69, a resolution was passed by company, before the expiry of the
accounting year, on October 9, 1967 waiving charge of interest. In respect F
. of the other three assessment years, similar resolutions were passed after
) the expiry of the relevant accounting years.

The Tribunal affirmed the view of ITO and Appellate Asst. Commis-
sioner, inter-alia observing, that the relinquishment of interest, was not
for any commercial reasons and that interest had already accrued to the G
assessee before it was waived irrespective of absence of entries in the books
of the firm or of the company to this effect.

The High Court however took a contrary view following the decision
of this Court in Bir/a Gwalior case and holding that the principle in Morvi H
81
82 SUPREME COURT REPORTS [1996] SUPP. 7S.C.R.
A Industries case was not applicable.

It was contended by the assessee that applying the real income
theory, no interest had really accrued or had been received by it for the 3
years viz. 1969-70, 1970-71 and 1971-72 and that, in the absence of any
entries in its books, it cannot be asked to pay tax on income which had not
B been received by it.

Allowing the appeal relating to assessment years 1969-70, 1970-
71 and 1971-72 and dismissing the appeal relating to assessment year
1968-69, this Court
c
HELD : 1. For assessment years 1966-67 and 1967-68, interest was
charged on the loan advanced which shows that the loan was an interest
bearing loan, and it is liable to tax. [85-D]

2.1 With respect to assessment year 1968-69, where the resolution
D was passed before the expiry of the accounting year, the appeal, is not
pressed and hence no finding given. [94-A]

2.2. In respect of the subsequent three assessment years it cannot be
said that interest had not accrued to the assessee. The waiver of interest
E after the expiry of relevant assessment years only meant that the assessee
was giving up money which had accrued to it. [85-F]

Morvi Industries, (1971) 82 ITR 835, followed.

C.l.T. v. Bir/a Gwalior Pvt. Ltd., (1973) 89 ITR 266, explained and
F distinguished.

Indennani Jatia v. C.l. T., (1959) 35 ITR 298; C.l. T. v. Chaman/al
Mangaldas, (1960) 39 ITR 8 and C./. T. v. Shoorji Vallabhdas & Co., (1962)
46 ITR 144, referred to.
G 3. The concept of real income cannot be employed so as to define the
provisions of the Act and Rules. There is no room nor would it be
permissible for the Court to import the concept of real income so as to
whittle down, qualify or defeat the provisions of the Act and Rules. [93-G]

H C.l. T. v. State Bank of Travancore, (1986) 158 ITR 102, applied.
CI.T. v. SHIV PRAKASH JANAK RAJ AND CO.PVT.LTD. (JEEVANREDDY,J.) 83

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1906-18 A
of 1979.

From the Judgment and Order dated 27.9.77 of the Punjab &
Haryana High Court in I.T.R. Nos. 5, 68, 93, 94/75, 53/75, 3-6 of 1976 and
16, 17, 109 and 110 of 1975.
B
J. Ramamurthy, B.S. Ahuja and S.N. Terdol for the Appellant.

G.C. Sharma, S.Rajappa and K.B. Rohtagi for the Respondents.

The Judgment of the Court was delivered by
c
B.P. JEEVAN REDDY, J. These appeals are preferred by the
Revenue against the judgment of the Punjab and Haryana High Court
answering the questions, referred at the instance of the assessee, in favour
of the assessee and against the Revenue. The questions involved in all these
appeals are common. it would be sufficient if we take the case of one of D
the assessees, Mis.Shiv Prakash Janak Raj & Co.(P) Ltd. Four assessment
years are relevant in this case, viz., Assessment Years 1968-69, 1969-70,
1970-71 and 1971-72. The two questions referred under Section 256(1) of
the Income Tax Act, 1961 are:

"(i) Whether, on the facts and in the circumstances of the case, E
the Tribunal was right in holding that the interest for the assess-
ment year 1971-72, had already accrued to the assessee on October
31, 1970, under the mercantile system of accountancy?

(ii) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that the subsequent relinquishment F
of interest by a resolution dated November 24, 1970, did not affect
the tax liability of the assessee on accrual basis?"

The partners of a firm, Mis.Shiv Prakash Janak Raj & Co. [the Firm],
are also the shareholder/directors of the assessee- company. The assessee- G
company had advanced a loan to the firm. During the accounting year
relevant to the Assessment Year 1966- 67, it charged interest in a sum of
Rs.25,048 on the loan so advanced. Similarly, for the Assessment Year
1967-68, it charged interest in a sum of Rs.25,843. For the four assessment
years concerning herein, however, the assessee adopted a different course.
[The accounting year adopted by the assessee was the year ending on 31st H
84 SUPREME COURT REPORTS (1996) SUPP. 7 S.C.R.
A October). In respectofthe Assessment Year 1968- 69 [year ending October
31, 1967], the assessee-company passed a resolution on October 9, 1967
[i.e., before the end of the accounting year) deciding not to charge interest
fi:om the firm in view of the difficult financial position of the firm. For the
next three assessment years, i.e., Assessment Years 1969-70, 1970-71, 1971-
B 72, similar resolutions were passed on February 26, 1969, March 16, 1970
and November 24, 1970 respectively. In other words, in the case of last
three assessment years, the resolution deciding not to charge interest on
the loan advanced to the firm was passed after the expiry of the relevant
accounting year. Indeed, the resolution says that the firm had approached
the assessee-company to waive the interest on the loan for each of the said
C years and that on such representation that the directors of the assessee-
company [who were also partners in the said firm] decided that no interest
shall be charged for each of the said three assessment years.

In the assessment proceedings relating to the said four assessment
D years, the Income Tax Officer took the view that inasmuch as the loans in
question were interest-bearing loans and because the assessee-company
had relinquished the interest without any commercial considerations and
further because the directors/shareholders of the assessee-company were
interested in the firm, it was a case of collusion between them to evade the
tax liability. Accordingly, he added an amount towards interest calculating
E it at the rate of fifteen percent per annum. On appeal, the Appellate
Assistant Commissioner found that inasmuch as the resolution to waive the
interest was passed after the expiry of the accounting year and further
because the assessee-company was following the mercantile system of
accounting, the interest must be held . to. have already accrued to the
F assessee before it was waived. He, however, reduced the rate of interest to
nine percent. With that modification, he dismissed the appeals. The asses-
see thereupon filed a further appeal to the Tribunal but without success.
The Tribunal observed that even though no entries were made in the books
of the assessee-company or of the firm with respect to receipt or payment
of interest, that circumstance itS of no relevance in view of the facts that
G the resolutions were passed after the expiry of the accounting year that the
assessee was maintaining its accounts on mercantile basis and further that
the relinquishment of interest was not for any commercial reasons. On
reference, however, the High Court took a contrary view purporting to
follow the decision of this Court in Commissioner of Income Tax, West
H Bengal-II v. Bir/a Gwalior (P) Limited, (1973) 89 I.T.R. 266. The High
C.I.T. v. SHNPRAKASHJANAKRAJ AND CO.PVT.LTD. [JEEVANREDDY,J.] 85

Court held that in view of the said decision, the principle of earlier decision A
of this Court in Morvi lndustlies Limited v. Commissioner of Income Tax
(Central), Calcutta, (1971) 82 I.T.R. 835 cannot be applied to this case.

In these appeals, it is contended by Sri J. Ramarnurthy, learned
senior advocate for the appellant Revenue, that in the facts and cir-
B
cumstances of the case, the view taken by the Tribunal was the correct one
being consistent with the decisions of this Court and that the High Court
was in error in holding to the contrary. Sri G.C. Sharma, learned counsel
for the assessee, however, sought to support the reasoning and conclusion
of the High Court.
c
Before we refer to the decision of this Court, it is necessary to
reiterate the basic facts of the case. For the previous two assessment years,
viz., 1966-67 and 1967-68, the assessee-company did charge interest on the
loan advanced by it to the firm which shows that the loan was an interest-
bearing loan. The second circumstance to be noticed is that the resolution D
waiving interest was passed after the expiry of the relevant accounting year
in the case of three subsequent assessment years, viz., Assessment Years
1969-70, 1970-71and1971-72. Only in the case of Assess~ent Year 1968-
69, was the resolution passed before the expiry of the accounting year.
Thirdly, the assessee-company was maintaining its accounts on mercantile
basis. Yet another circumstance to be noticed is that the Tribunal has E
found it as a fact that the waiver was not based upon any commercial
considerations. Of course, no entries were made in the accounts of the
assessee-company, or for that matter in the accounts of the firm, in respect
of four assessment years concerned herein, that any interest was received
or paid. On these facts, it has to be held that in the case of three subsequent F
assessment years, the interest had accrued to the assessee notwithstanding
the fact that no entries may have been made in the accounts of the assessee
to that effect. The waiver of interest after the expiry of the relevant
accounting year only meant that the assessee was giving up the money
which had accrued to it. It cannot be said, in the circumstances, that the G
interest amount had not accrued to the assessee. Therefore, the Tribunal
was right in taking the view it did in respect of Assessment Years 1969-70,
1970-71 and 1971-72. In the case of Assessment Year 1968-69, however, the
· resolution was passed before the expiry of the accounting year and though
the finding of the Tribunal is that the said waiver was not actuated by any
commercial considerations, yet the learned counsel for the Revenue did H
86 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A not press the Revenue's case so far as this assessment year is concerned.

In Mo1vi Industries Limited, the relevant facts are the following: the
assessee, which was the managing agent of its subsidiary company, main-
tained its accounts on the mercantile system. It was entitled to receive an
office allowances of Rupees one thousand per month, a commission at 12
B 1/2 percent of the net profits of the managed company and an additional
commission of 1 1/2 per cent 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
earned only commission on the sale of cloth and yarn for the two years.
C 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 Novem-
D ber 24, 1955 and July 21, 1956 respectively. By resolutions of its board of
directors dated April 4, 1955 and June 19, 1956 respectively [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
E 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. It also
rejected the assessee's claim that the amounts relinquished were allowable
under section 10(2)(xv) of the Income Tax Act, 1922. The High Court
agreed with the view taken by the Tribunal. On appeal, this Court agreed
with the view taken by the High Court and the Tribunal. It held that the
F
commission had accrued to the assessee on December 31, 1954 and
December 31, 1955 and the fact that the payment was deferred till after
the accounts had been passed in the meetings of the managed company
did not effect the accrual of the income. It was held that since the assessee
had chosen to i,rive up unilaterally the amounts accrued to it, it could not
G escape the liability to tax on those grounds. Khanna, J., speaking for the
three-Judge Bench, made the following observations which are apposite to
the issue concerned herein:

"The appellant-company admittedly was maintaining its account,
H according to the mercantile system. It is well known that the
C.I.T. v. SHIV PRAKASH JANAK RAJ AND CO. PVT. LTD. [JEEVAN REDDY, J.] 87

mercantile system of accounting differs substantially from the cash A
system of book-keeping. Under the cash system, it is only actual
cash receipts and actual cash payments that are recorded as credits
and debits; whereas under the mercantile system, credit entries are
made in respect of amounts due immediately they become legally
due and before they are actually received; similarly, the expendi-
B
ture items for which legal liability has been incurred are immedi-
ately debited even before the amounts in question are actually
disbursed. Where accounts are kept on mercantile basis, the profits
or gains are credited though they are not actually realised, and the
..... entries thus made really show nothing more than an accrual or
arising of the said profits at the material time. The same is the c
position with regard to debits made. (See Indemiani Jatia v. Com-
missioner of Income-tax, [1959) 35 I.T.R.298 =[1959) Suppl. 1
S.C.R. 45 (S.C) ............. In the present case, the amounts of income
for the two years in question were given up unilaterally after they
had accrued to the appellant-company. As such, the appellant D
could not escape the tax liability for those amounts."

The learned Judge also quoted with approval certain observations
made by Hidayatullah, J. [as he then was) in Commissioner of Income Tax
v. Shoo1ji Vallabhdas & Co., (1962) 46 I.T.R.144, which we shall refer to
presently. The ratio of this decision clearly support the Revenue's case. E

In Bir/a Gwalior (P) Ltd., the facts are the following; the respondent,
which was 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. F
No date for payment of the commission was stipulated in the managing
agency agreements. The accounting year of the respondent as well as the
managed companies was the financial year. The -respondent 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 finan- G
cial 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 respondent's real income and that since it was given
up on grounds of commercial expediency, it was an allowable deduction H
88 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A under Section 10(2) (xv) of the Indian Income Tax Act, 1922. In relation
to office allowance, the Tribunal found that the financial position of the
managed company was not sound during the relevant accounting years that
it was necessary for the respondent to give up the office allowance in order
to stabilise the finances of the managed company and because of the
B sacrifice made by the respondent the finances of the managed company
improved and as a result the respondent was able to earn more profits in
later years. On reference made under Section 66(2), the High Court opined
that (1) the commission foregone by the respondent-assessee was not its
real income. [On that basis, it declined to answer the question whether the
amounts of the commission foregone were allowable as revenue expendi-
C ture under Section 10(2)(xv) of the 1922 Act] and (2) that the office
allowance foregone was deductible as business expenditure under Section
10(2)(xv). On appeal, this Court affirmed the view taken by the High
Court. We are, however, concerned only with the first answer given by the
High Court. I,n our opinion, there is no contradiction or inconsistency
D between the holding in this case and the holding in MOJvi Industries
Limited. In this case, the important fact found was that the money became
due to the assessee not at the end of the accounting yem; but 011 the date the
managed company made up its accounts. Indeed, no date was fixed in the
agreement for payment of the commission and the assessee gave up its
commission even before it accrued to it, i.e., before the managed company
E made up its account. It is for this reason, this Court held that the commis-
sion had not accrued to the assessee by or before the date it gave it up.
Indeed, Hegde, J., speaking for himself and Khanna, J., specifically
referred to the decision in Morvi lndust1ies Limited and distinguished it on
the above basis. We are,therefore, unable to agree with the High Court that
F by virtue of the decision of this Court in Birla Gwalior (P) Ltd.,· the
principle of Morvi lndustdes Limited does not apply to the present case.
The facts of the present case [\vith respect to three assessment years, viz.,
1969-70, 1970-71and1971-72) do squarely fall within the principle ofMorvi
Industries Limited.

G In State Bank of Travancore v. Commissioner of Income Tax, Kera/a,
(1986) 158 I.T.R. 102, the facts were the following: the appellant-Bank
maintained its accounts on the basis of mercantile system. It was charging
interest -on the loans advanced by it. Some of the loans had become "sticky",
i.e., their recovery had become extremely doubtful. The Bank, however,
H charged interest on these loans also, debiting the account of the concerned
C.I.T. v. SHIV PRAKASH JANAK RAJ AND CO. PVT. LTD. [JEEVAN REDDY, J.J 89

parties. But instead of carrying the interest amount to the profit and loss A
account, the awellant remitted the said interest amount to a separate
account called "the Interest Suspense Account". In the course of its assess-
ment, the Bank claimed that having regard to the poor financial condition
of the said debtors and the poor chances of recovery'of interest from them,
the interest amount due from them was taken to the ''Interest Suspense
B
Account" to avoid showing inflated profits by including hypothetical and
unreal income and further that the interest on su.ch sticky advanced was
not its real income and, hence, not taxable. Both the Tribunal and High
Court rejected the plea. On appeal, this Court, by majority, Sabyasachi
Mukharji and Ranganath Misra, JJ., [Tulzapurkar, J. dissenting] affirmed
the decision of the High Court. This Court held that the interest on sticky C
advances did accrue to the appellant-Bank according to the mercantile
system of accounting and that, indeed, the appellant had debited the
respective parties with interest. The appellant, however, did not choose to
treat the debt as bad debts but carried the interest amount to the "Interest
Suspense Account". Mere crediting of the said interest amount to, what it D
called the "Interest Suspense Account", without treating it as a bad debt or
irrecoverable interest, was repugnant to Section 36(1)(vii) and Section
32(3) of the Act and that the concept of real income does not help the
appellant-Bank. It was observed that the concept of real income cannot be
so read as to defeat the object and the provisions of the Act. Sabyasachi
Mukharji, J., in his opinion, discussed all the relevant cases on the subject E
including Morvi Indust1ies Limited and Bir/a Gwalior (P) Ltd. as well as the
decision of this Court in Shoorji Vallabhdas & Co. and stated the proposi-
tion emerging therefrom in the following words:

"(1) It is the income which has really accrued or arisen to the F
assessee that is taxable. Whether the income has really accrued or
arisen to the assessee must be judged in the light of the reality of
the situation. (2) The concept of real income would apply where
there has been a surrender of income which in theory may have
accrued but in the reality of the situation, no income had resulted G
because the income did not really accrue. (3) Where a debt has
become bad, deduction in compliance with the provisions of the
Act should be claimed and allowed. (4) Where the Act applies,
the concept of real income should not be so read as to defeat the
provisions of the Act. (5) If there is any diversion of income at
source under any statute or by overriding title, then there is no H
90 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A income to the assessee. (6) The conduct of the parties in treating
the income in a particular manner is material 1;vidence of the fact
whether income has accrued or not. (7) Mere improbability of
recovery, where the conduct of the assessee is unequivocal, cannot
be treated as evidence of the fact that income has not resulted or
accrued to the assessee. After debiting the debtor's account and
B not reversing that entry - but taking the interest merely in suspense
account cannot be such evidence to show that no real income has
accrued to the assessee or been treated as such by the assessee.
(8) The concept of real income is certainly applicable in judging
whether there has been income or 'not but, in every case, it must
c be applied with care and within well-recognised limits."

To the argument of real income pressed with great persistence in that
case, the learned Judge responded in the following words:

"We were invited to abandon legal fundamentalism. With a prob-
D lem like the present one, it is better to adhere to the basic
fundamentals of the law with clarity and consistency than to be
carried away by common clinches. The concept of real income
certainly is a well-accepted one and must be applied in appropriate
cases but with circumspection and must not be called in aid to
E defeat and fundamental principles of the law of income- tax as
developed."

We respectfully agree with the propositions as well as the observa-
tions of the learned Judge with respect to the plea of real income.
F
We may now deal with the decision in Shoorji Vallabhdas & Co.,
relied upon strongly by Sri Sharma, learned counsel for the respondent-as-
sessee. The assessee-firm was the managing agent of two shipping com-
panies. Under the managing agency agreement, the assessee was entitled
to receive as commission ten percent of the freight charged. Between April
G 1, 1947 and December 31, 1947, a sum of Rs. 1,71,885 from one company
and Rs. 2,56,815 from the other company became due to the assessee as
commission at the aforesaid rate of ten percent. In the books of account ·--
of the assessee, these amounts were credited to itself and debited to the
managing companies. But what happened even before December 31, 1947
H is of relevance. In November 1947, the assessee desired to have the
C.I.T. v. SHIV PRAKASH JANAK RAJ AND CO. PVf. Lm. [JEEVANREDDY, J.) 91

managing agency transferred to two private limited companies, Shoorji A
Vallabhdas Limited and Pratapsinh Limited, floated by the assessee-firm.
Certain shareholders of the managed companies objected to the rate of
commission and suggested that the commission should be either ten per-
cent of the profits of the managed companies or 2V2 percent of the freight
receipt. The board of directors of the Malabar Steamship Company agreed · B
with the said suggestion and invited the assessee-firm to reduce its manag-
ing commission to 2112 percent of the freight for that year as well as for the
future years. The assessee accepted the said offer and agreed to voluntarily
reduce its managing agency commission both in respect of that year as well
as for the future years to 2V2 percent of the total fright. A similar procedure
was followed in the case of other managed company [New Dholera Steam- c
ships Limited]. On this basis, both the managed companies appointed the
two private limited companies aforesaid as their managing agents at their
extra-ordinary meeting held on December 30, 1947 - the appointment was
to take effect from January 1, 1948. Subsequently, at the annual general
meetings of the two managed companies held in December, 1948, the D
commission was reduced from ten percent of the freight to 2112 percent as
already agreed. The assessee accordingly gave up seventy five per.cent of
its earnings during the aforesaid year of account [April 1, 1947 to Decem-
ber 1, 1947] and disclosed only the remaining twenty five percent amount
as its income in its assessment proceedings. The Income Tax Officer and E
the Appellate Assistant Commissioner held that the commission amount
@ ten percent of the freight had already accrued to the assessee during
the previous year ending on March 31, 1948 and since the assessee had
given up seventy five percent of the said amount after such accrual, the
whole of the commission amount, which was actually credited in the books
of the assessee, is includible in its income. On appeal, there was a dif- F
ference of opinion between the two members of the Tribunal. On reference
to the President, he held that even though the actual reduction took place
after the year of account was over, there was in fact an agreement to reduce
the commission even during the currency of the accounting year and hence,
it cannot be said that the larger the income [@ ten percent] had accrued G
to the assessee-firm. Accordingly, the assessee's appeal was allowed by the
Tribunal. Thereupon, the following two questions were referred to the
High Court under Section 66, viz.:

"(1) Whether the two sums of Rs. 1,36,903 and Rs. 2,00,625 are H
92 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A income of the 'previous year' ended March 31, 1948?

(2) Hthe answer to the first question is in the affirmative, whether
they represent an item of expenditure permissible under the
provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922,
in computing the assessee' s income of that 'previous year' from its
B managing agency business?"

The High Court agreed with the view taken by the President of the
Tribunal and answered the first question in the negative, i.e., in favour of
the assessee and against the Revenue. It declined to express any opinion
C on the second question. This Court affirmed the·approach adopted by the
President of the Tribunal and the High Court. It pointed out:

"Here too, the agreements within the previous year 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
D account. A mere book-keeping entry cannot be income, unless
income has actually resulted, and in the present case, by the change
of the terms the income which accrued and was received consisted
of the lesser amounts and n.ot the larger. This was not a gift by the
assessee firm to the managed companies. The reduction was a part
of the agreement entered into by the assessee firm to secure a
E
long-term managing agency arrangement for the two companies
which it had floated."

Hidayatullah, J., speaking for himself and J.C. Shah, J., observed that
the facts of the case before them was identical to the facts of the case in
F Commissioner of Income Tax v. Chamanlal Mangaldas & Co., (1960) 39
l.T .R. 8 and that the principle of the said decision squarely applied to the
facts of the case before them. In the course of the judgment, the learned
Judge observed:

"Income-tax is a levy on income. No doubt, the Income-tax Act
G takes into account two points of time at which the liability to tax
is attracted, viz., the accrual of the income or its receipt; but the
substance of the matter is the income. If income does not result
at all, there cannot be a tax, even though in book-keeping, an entry
is made about a 'hypothetical income', which does not materialise.
H Where income has, in fact, been received and is subsequently given
C.LT. v. smv PRAKASH JANAK RAT AND co. rvr. LTD. [JEEVAN REDDY, J.) 93

up in such circumstances that it remains the income of the A
recipient, even though given up, the tax may be payable. Where,
however, the income can be said not to have resulted at all, there
is obviously neither accrual nor receipt of income, even though an
entry to that effect migh~, in certain circumstances, have been made
in the books of account. This is exactly what has happened in this
B
case, as it happened in the Bombay case Commissioner of Income-
tax v. Chamanlal Mangaldas & Co., (1956) 29 I.T.R.987, which was
approved by this court."

We may also mention that when this case was cited before this Court
in State Bank of Travancore, it has.been distinguished on the basis of the C
above fact, viz., that the agreement to give up seventy five percent of the
commission was arrived at during the relevant previous year itself, i.e.,
before the close of the previous year and, therefore, what accrued to the
assessee at the end of the relevant previous year was the commission at 2
1/2 percent of the freight alone and not @ ten percent. It cannot, therefore, D
be said that this case lays down any principle contrary to the one enun-
ciated in Morvi Industries Limited. Since the facts of the case in Chamanla/
Mangaldas & Co. are identical to the facts in Shoorji Va/labhdas & Co., we
do not think it necessary to refer to the facts of that case separately.

Sri G.C. Sharma submitted that applying the real income theory, it E
must be held that no interest had really accrued to or received by the
assessee for the said three assessment years [1969-70, 1970-71 and 1971-72]
and that indeed, no such entries were made in the account books of the
assessee. He submitted that, as a fact, no income was received and that the
assessee cannot be asked to pay tax on income which it had not received. p
We answer this contention by repeating the words of Sabyasachi Mukharji,
J. in State Bank of Travancore, which we have extracted hereinabove. The
concept of real income cannot be employed so as to defeat the provisions
of the Act and the Rules. Where the provisions of the Act and the Rules
apply, it is only those provisions which must be applied and followed. There
is no room - nor would be permissible for the court - to import the concept G
of real income so as the whittle down, qualify or defeat the provisions of
the Act and the Rules.

For the above reasons, the appeals relating to Assessment Years
1969-70, 1970-71 and 1971-72 [in the case of Shiv Prakash Janak Raj & Co.] H
94 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A are allowed and the appeal relating to Assessment Year 1968-69 [in the
case of Shiv Prakash Janak Raj & Co.] is dismissed as not pressed. For the
same reasons, the other appeals are allowed. The judgment of the High
Court in all these matters [except with respect to the Assessment Year
1968-69 in the case of Shiv Prakash Janak Raj & Co.] is set aside. The
B questions referred to are answered in favour of the Revenue and against
the assessee [except in the appeal relating to Assessment Year 1968-69 in
the case of Shiv Prakash Janak Raj & Co.].

There shall be no order as to costs.

R.D. Allowing Appeals relating to Assessment
Years 1969-70, 1970-71 and 1971-72
and dismissing the appeal relating to
Assessment year 1968-69.

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