Law:

Section:

Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1976-77 and 1977-78 - For relevant accounting period assessee-company had not charged any interest on loans duefrom M owing to reasons that M had been ordered to be wound up by high court and that it had been declared as a relief undertaking under section 3(1) of the Kerala relief undertaking (special provisions) act 1961 - Whether in view of facts that assessee was not able to recover from M even full amount of secured loans, it could be said that there was any chance of assessee's recovering any interest amount from m to fee included in income of assessee - Held, no FACTS For the assessment years 1976-77 and 1977-78, the ITO included certain amounts being the interest which accrued on the balance amount due to the assessee from M. The assessee contended that as there was no chance of recovering the same, the amount should not be treated as income. On appeal, the Commissioner (Appeals) upheld the addition in respect of the assessment year 1976-77 but deleted the addition in respect of the assessment year 1977-78. On second appeal, the Tribunal found that there was no chance of recovering the interest on the loans advanced by the assessee and held that interest amount was not includible in the income of the assessee as it had not accrued as income at all. On reference: HELD It is observed in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC) that whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. 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 because the income did not really accrue. It is also stated that the conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. The concept of real income is certainly applicable in judging whether there has been income or not. In the instant case the Tribunal took note of the fact that the mills belonging to M had been ordered to be wound…

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