The Judgment of the Court was delivered by

S.K Sen, J.:— In the instant reference under section 256(2) of the Income-tax Act 1961 (in short “the I.T Act”), for the assessment year 1984- 85 by the Income-tax Appellate Tribunal (“the Tribunal”) three questions arise at the instance of the Revenue and three at the instance of the assessee. The decision in the appeal before the Tribunal was in favour of the assessee. The questions at the instance of the assessee have been sought for in respect of some points on this issue only because the reference was sought for by the Department against the order of the Tribunal. The questions of law at the instance of the Department are as follows:

In respect of the order of the Commissioner of Income-tax (Appeals) dated November 3, 1987:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the accrual of interest on the loan advanced by the assessee-company to Shri Ambica Jute Mills Ltd. was not proper and in that view deleted the accrued interest of Rs. 1,15,625 for the period from June 1, 1983, to August 31, 1983, from the total income of the assessee?”

In respect of the order of the Commissioner of Income-tax (Administration) dated March 15, 1989:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the interest accrued for the period from September 1, 1983, to March 31, 1984, in respect of the loan advanced by the assessee-company to Shri Ambica Jute Mills Ltd. should not be added to its income and, therefore, the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, was not called for?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that there was no basis for passing order under section 263 of the Income-tax Act by the Commissioner of Income-tax?”

2. The questions at the instance of the assessee are as follows:

In respect of the order of the Commissioner of Income-tax (Appeals) dated March 15, 1989:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the issue raised by the Commissioner of Income-tax, had not merged in the order dated November 3, 1987, of the Commissioner of Income-tax (Appeals), Calcutta, and, as such, the Commissioner has jurisdiction under section 263 of the Act?

2. Whether the Tribunal was right in law in holding that any income from interest for the period from September 1, 1983, to March 31, 1984, accrued to the assessee and whether such finding of the Tribunal is unreasonable and perverse not being based on any material?”

In respect of the order of the Commissioner of Income-tax (Appeals) dated November 3, 1987:

“1. Whether the Tribunal was right in law in holding that any income from interest accrued to the assessee during the relevant previous year and whether such finding of the Tribunal is unreasonable and perverse not being based on any material?”

The facts, inter alia, involved in the instant reference are set out hereinafter:

3. The assessee is a wholly owned subsidiary of Kusum Products Ltd. Its main activities are to invest the funds obtained from its holding company in the financing business. The assessment year involved is 1984-85, the relevant previous year being the accounting year ended March 31, 1984. The assessee paid a sum of Rs. 23,84,375 to Shri Ambica Jute Mills Ltd. on June 2, 1983, against three hundis all dated June 1, 1983, for Rs. 10 lakhs, Rs. 10 lakhs and Rs. 5 lakhs totalling to Rs. 25 lakhs. The said hundis were co-accepted by the Punjab National Bank, Shyambazar Branch, Calcutta. The due date for payment of the said hundis was August 31, 1983. When the said hundis were presented to the Punjab National Bank on September 1, 1983, the bank refused to honour the same on the ground that they were not recorded in its books. The bank disowned the said hundis as documents executed by it. For the period up to March 31, 1984, the assessee could recover only Rs. 2,50,000 from the said Ambica Jute Mills Ltd. In view of the fact that the hundis were disowned and there was no hope of recovery of the said sum from the bank and/or the said Shri Ambica Jute Mills Ltd., the directors of the assessee passed a resolution on November 24, 1983, to the effect that no interest be charged or accounted for, on the said sum with effect from June 1, 1983, i.e, the date on which the said sum of Rs. 23,84,375 was paid against the said hundis of Rs. 25 lakhs. The assessee did not account for any interest in its books of account. In the order of assessment passed on March 9, 1987, under section 143(3) of the Act, the Income-tax Officer treated the difference between the face value of the said hundis, namely, Rs. 25 lakhs, and the sum of Rs. 23,84,375 paid by the assessee, that is Rs. 1,15,625 as its interest income. Apart from the said sum of Rs. 1,15,625, the Income-tax Officer did not add any further sum on account of interest in his order of assessment.

4. The assessee appealed against the said order of assessment before the Commissioner of Income-tax (Appeals) (the “CIT(A)”). By an order dated November 3, 1987, the Commissioner of Income-tax (Appeals) affirmed the said order of the Income-tax Officer assessing the said sum of Rs. 1,15,625 as interest income. In his said order, the Commissioner of Income-tax (Appeals) held that since the resolution for not charging the interest was passed on November 24, 1983, i.e, subsequent to the due date of the said hundis, namely, August 31, 1983, the assessee was liable to be assessed on the said sum of Rs. 1,15,625. - According to the Commissioner of Income-tax (Appeals), since the interest had accrued on August 31, 1983, the subsequent resolution passed on. November 24, 1983, could not enable the assessee to avoid its liability for tax on such interest.

5. Against the said order of the Commissioner of Income-tax (Appeals) upholding the order of the Income-tax Officer assessing the said sum of Rs. 1,15,625 as interest income, the assessee filed an appeal before the Tribunal.

6. After the said order dated November 3, 1987, of the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax, West Bengal-II, Calcutta, (the “CIT (Admn.)”), initiated proceedings under section 263 of the Act. He passed an order on March 15, 1989, setting aside the order of assessment passed by the Income-tax Officer. By the said order, he directed the Income-tax Officer to re-examine the issue relating to the assessability of the interest and to include in the assessment the interest also for the period September 1, 1983, to March 31, 1984.

7. Against the said order of the Commissioner of Income-tax (Administration), the assessee filed another appeal before the Tribunal.

8. Both the said appeals of the assessee, namely, one against the order of the Commissioner of Income-tax (Appeals), dated November 3, 1987, upholding the assessment of Rs. 1,15,625 as interest income and the order dated March 15, 1989, of the Commissioner of Income-tax (Administration) setting aside the assessment were heard together by the Tribunal and were allowed. The Tribunal was pleased to hold that no income by way of interest of Rs. 1,15,625 or any other sum was assessable and that the order passed by the Commissioner of Income-tax (Administration) setting aside the assessment was not proper.

9. Against the said order of the Tribunal, the Department made applications under section 256(1) of the Act for reference which were rejected by the Tribunal. Thereafter in terms of the direction of this court under section 256(2) of the Act the Tribunal has referred the questions of law to this court. As the questions of law asked for by the Department were allowed, the questions sought for at the instance of the assessee in respect of certain points decided against it by the Tribunal were also referred to this court.

10. Two questions arose for consideration before the Tribunal, namely, (a) whether the Commissioner of Income-tax (Administration) had jurisdiction to initiate any proceeding's under section 263 of the Act since the order of the Income-tax Officer had merged in the order of the Commissioner of Income-tax (Appeals) and (b) whether any interest income could be notionally assessed for the period September 1, 1983, to March 31, 1984, in respect of the said dishonoured hundis.

11. The Tribunal also held that there was no merger of the order of the Income-tax Officer in the order of the Commissioner of Income-tax (Appeals) and rejected the assessee's contention on the point. It has been argued on behalf of the assessee before us that the said finding of the Tribunal is erroneous and contrary to law. The order of the Income-tax Officer merged with the order of the Commissioner of Income-tax (Appeals). The issue involved before the Income-tax Officer and the Commissioner of Income-tax (Appeals) was whether any interest in respect of the said dishonoured hundis could be assessed. The relevant portion of the order of the Commissioner of Income-tax (Appeals) referred to by learned counsel for the assessee is set out hereinbelow:

“It is an undisputed fact that the loan amount of Rs. 23,84,375 advanced on June 2, 1983, would fall due for repayment with interest on August 31, 1983. The principal amount with the accrued interest totalling in all to Rs. 25 lakhs had become due and realisable on August 31, 1983, as per the terms of the hundis dated June 1, 1983, issued by the debtor company. Thus, the interest of Rs. 1,15,625 had accrued on the due date of August 31, 1983. The income which had already accrued cannot cease to be the appellant's income by passing a resolution on November 24, 1983, subsequent to the date of accrual of August 31, 1983.”

12. It has been argued on behalf of the assessee that the effect of the order setting aside the assessment was that along with it the order of the Commissioner of Income-tax (Appeals) also fell. If the assessment itself is set aside the question of any appellate order against the same cannot survive. The relevant portion of the order of the Commissioner of Income-tax (Administration) as referred to by the learned advocate for the assessee is set out hereinbelow:

“From the foregoing, it is evident that the order of assessment as framed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. The order of assessment is, therefore, set aside with a direction to the Assessing Officer to make a fresh assessment after proper examination as referred to above. While making the fresh assessment, the Income-tax Officer will include accrued interest on the advance of Rs. 23,84,375 for period from September 1, 1983, to March 31, 1984, in the total income of the assessee-company.”

13. It may be noted that the Commissioner of Income-tax (Administration) set aside the entire assessment and directed for a fresh assessment and further directed that while making the fresh assessment the interest for the period from September 1, 1983, to March 31, 1984, is to be included in such assessment. The Commissioner of Income-tax (Appeals) order was made non est by the said order of the Commissioner of Income-tax (Administration) by setting aside the assessment and directing a fresh assessment.

14. It has further been submitted on behalf of the assessee that the Commissioner of Income-tax (Administration) had no jurisdiction to go into the issue relating to the assessability of the interest which issue itself was before and decided by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) with reference to the date of resolu- tion decided the issue that interest on the due date of the dishonoured hundis, namely, August 31, 1983, had accrued before the date of such resolution and was liable to be assessed. The Tribunal erred in proceeding on the basis that since the period from September 1, 1983, had not been considered by the Income-tax Officer, there was no merger of the issue involved in the order of the Commissioner of Income-tax (Appeals). The Tribunal failed to appreciate that the issue or the subject-matter before the Commissioner of Income-tax (Appeals) was whether interest could be assessed in respect of the said dishonoured hundis and that the Commissioner of Income-tax (Appeals) powers in the appeal were coterminus with those of the Income-tax Officer and no bifurcation of the issue could be made with reference to different parts of the same accounting year or on the basis that an aspect of such issue or the subject-matter was not specifically dealt with by the Commissioner of Income-tax (Appeals) in his order. The Tribunal erroneously distinguished the decision of this court in the case of Oil India Ltd. v. CIT, [1982] 138 ITR 836. In the said case before this court also the issue related to the jurisdiction of the Commissioner of Income-tax (Administration) to revise an order of assessment under section 263 of the Act on a subject-matter which was in appeal and decided. It was held by this court that in respect of an issue or subject-matter before the appellate authority and decided by it, the Commissioner of Income-tax (Administration) could not revise the order on the basis that an aspect of the issue was not dealt with by the appellate authority and hence there was no merger of the order of the Income-tax Officer in the order of the appellate authority. In the said case the issue or the subject matter involved before the appellate authority was the rate of depreciation of a building to be taken into account and although the aspect whether depreciation should be calculated on the basis of user for 12 months or 11 months was not the specific issue before it, this court held that the merger did take place in respect of all aspects involved in the issue or the subject-matter. It has been submitted that a point which could be raised in respect of an issue or a subject-matter but not raised is deemed to be decided and cannot be reagitated. If it were not so then there would be no finality in the matter and the same issue or the subject-matter would be raised again and again on the basis that some aspect was not considered.

15. The relevant portion of the said decision in the case of Oil India Ltd., [1982] 138 ITR 836 (Cal) is set out hereinbelow (page 840):

“The first question is directed to the aspect whether after the appellate order was passed by the Appellate Assistant Commissioner or an appeal had been preferred, the Commissioner had jurisdiction in the facts and circumstances of this case under section 263 of the Act. Now, it is well settled that before an appeal before the Appellate Assistant Commissioner certain orders are appealable. It is also well settled that in an appeal preferred before the Appellate Assistant Commissioner the whole assessment is open for review by the Appellate Assistant Commissioner. He is both the appellate as well as the adjudicating authority. But his jurisdiction is limited to the appeal preferred before him. There are certain orders which are not appealable before the Appellate Assistant Commissioner but certain types of allegations can be taken up in an appeal by separate appeals. Apart from those two cases if an assessment is the subject-matter of appeal then any ground which was held in favour of the assessee can also be held against him though the appeal was preferred by the assessee. This jurisdiction of the Appellate Assistant Commissioner is indisputable. In this case the question is whether the quantum of allowance or disallowance or depreciation was the subject-matter of appeal or not. It is true that whether depreciation should be calculated on the basis of 12 months or it should be calculated on the basis of 11 months was not a specific aspect which was agitated before the Appellate Assistant Commissioner nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed five per cent, or two and half per cent, depreciation and should have directed the Income-tax Officer to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation. If that is the position, then, in our opinion, once the appeal has been preferred before the Appellate Assistant Commissioner on any aspect of the quantum of depreciation, the Commissioner cannot assume jurisdiction, otherwise an anomalous position would arise. The Income-tax Officer has been directed by the Appellate Assistant Commissioner to fix depreciation at a certain percentage, indicated by the Appellate Assistant Commissioner without any further direc: tion that it should be confined to 11 months or 12 months. But, now, if further consideration is super-imposed by the Commissioner by rectification made by the Income-tax Officer as a result of the order passed by the Commissioner under, section 263 then that would be in conflict with the direction given by the Appellate Assistant Commissioner in his appellate order. Therefore, where an appeal is preferred and the subject-matter of appeal, particularly raised, is the subject-matter before the Appellate Assistant Commissioner, then that order, in our opinion, cannot be the subject-matter of an order of revision by the Commissioner.”

16. It thus appears that the said decision of this court applies to the facts of the present case and the distinction made by the Tribunal was not correct;

17. In our view, the order of the Commissioner of Income-tax (Administration) set at naught the order passed by the Commissioner of Income-tax (Appeals) by setting aside the assessment. Further, the subject matter and/or issue before the Commissioner of Income-tax (Appeals) could not be made the subject of revision under section 263 of the Act. The submissions on behalf of the Department that it related to the period from September 1, 1983, to March 31, 1984, is not sustainable in view of the ratio laid down by this court in the case of Oil India Ltd., [1982] 138 ITR 836. Further, the Commissioner of Income-tax (Administration) had set aside the entire assessment and had directed for the entire assessment to be made afresh and there can be no manner of doubt that this interfered with and set at naught the order of the Commissioner of Income-tax (Appeals).

18. The other issue involved in respect of the said order of the Commissioner of Income-tax (Administration) is on the merits. It has been submitted on behalf of the assessee that even on the merits he could not issue any direction for treating any notional interest income for the period from September 1, 1983, to March 31, 1984. It appears that the assessee had advanced amounts against the hundis maturing on August 31, 1983. There was no loan transaction as such at any given rate of interest for any period repayable on demand. The transaction against the hundis was limited to the hundis alone and the amount was required to be paid on August 31, 1983. No rate of interest was stipulated or agreed to between the assessee and the parties to the hundis after the date of maturity of the said hundis on August 31, 1983. Since, there was no contract for giving any loan or advance after August 31, 1983 nor any interest was agreed at any specified rate, there could be no question of accrual of any income after September 1, 1983. It is for this reason that the Commissioner of Income-tax (Appeals) in his order also did not direct for inclusion of any interest from September 1, 1983, although the resolution had been passed on November 24, 1983. When there was no contract or agreement for paying any interest or giving any loan after the maturity of the hundis the question of any notional accrual of interest does not and cannot arise.

19. The judgment and decision in the case of Arianta Lal Sen v. CIT, [1992] 107 CTR 113 (Cal) relied upon by the learned advocate for the assessee may be taken note of. In the said case fixed deposits with the bank had matured in November, 1968, and February, 1969. The said fixed deposits were, however, not renewed immediately on maturity. In 1972, the said fixed deposits were renewed and the bank agreed, to pay interest with effect from November, 1968, and February, 1969, when the fixed deposits had matured. The Tribunal held that the bank interest accrued only in 1972, i.e, corresponding to the assessment year 1973-74, when the bank had agreed to pay the interest. This court was pleased to uphold the said decision of the Tribunal. The relevant portion of-. the said judgment in para. 7, at page 116, is set out below:

“We are of the opinion that the Tribunal has taken a correct view of the law. The fixed deposits that had matured on November 20, 1968, and February 21, 1969, were not renewed immediately on maturity. The bank was under no obligation to pay any interest on the matured value of these fixed deposits. Under these circumstances, there could not be any question of accrual of interest to the assessee on account of these fixed deposits after November 20, 1968, and February 21, 1969. It was only when the assessee had entered into an agreement with the bank to renew the fixed deposits with the bank, the bank agreed to pay the interest on the fixed deposits during the intervening period when the fixed deposits were not renewed. The right of getting the interest arose to the assessee as a result of the agreement between the assessee and the bank in 1972. Even though the bank agreed to pay interest with effect from November 20, 1968, and February 21, 1969, on the two fixed deposits, it cannot be said that the assessee had any right to get any interest during the period, when there was no agreement between the bank and the assessee for renewal of the fixed deposits.”

20. The learned advocate for the assessee has further relied upon the judgment and decision of the Patna High Court in the case of Chhabirani Agro Industrial Enterprises Ltd. v. CIT, [1991] 191 ITR 226. At page 232 of the Reports, the Patna High Court held as under:

“So far as question No. 2 is concerned, it is a matter of record as noticed by the Tribunal itself that the period of deposit of Rs. 5 lakhs with the Bank of Baroda was not certain. Since the rate of interest payable on the bank deposits was dependent on the period of deposit, the quantum of interest which can be said to have accrued on the said deposit was not ascertainable during the periods under consideration. In this view of the matter, there was no occasion on the part of the assessee-company to include the supposed quantum of accrued interest in its income. It was open to the assessee-company to treat the entire amount of interest as income of the year during which it was computed and paid. The Tribunal has erred in holding that the Income-tax Officer had rightly added the alleged accrued interest as income of the periods in question on a hypothetical and proportionate basis.”

21. It, therefore, appears that even on the merits the order of the Commissioner of Income-tax (Administration) for seeking to notionally assess the interest for the period after maturity of the hundis is contrary to the law as laid down by this court and settled in the aforesaid decisions. It is not in dispute that there is no contract for giving any loan at any rate of interest after maturity of the hundis. The question of including any interest notionally does not and cannot arise.

22. In our view, both the questions sought for by the Department against the order of the Tribunal relating to the order of the Commissioner of Income-tax (Administration) under section 263 of the Act in paragraph 14 hereof (see p. 596 supra) should be answered in the affirmative and in favour of the assessee;

23. The other part of the reference relates to the assessment of the sum of Rs. 1,15,625 and the sum of Rs. 23,84,375 paid by the assessee against such hundis. The Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer for assessing the said sum as the assessee's income only on the ground that the resolution of its board of directors had been passed on November 24, 1983, i.e, after the alleged accrual of the said sum on August 31, 1983, on maturity of the hundis.

24. It has been submitted on behalf of the assessee that the Tribunal correctly held that no real income accrued to the assessee in respect of the said sum of Rs. 1,15,625 and rightly deleted the said addition. It has further been submitted on behalf of the assessee that the decision of the Supreme Court in the case of State Bank Of Travancore v. Commissioner Of Income Tax, Kerala , [1986] 158 ITR 102, on which reliance had been placed, on behalf of the Department instead of supporting its case fully supports the case of the assessee.

25. It has further been submitted on behalf of the assessee that the main contention of the Department has been that since the assessee was following the mercantile system of accounting, the said sum of Rs. 1,15,625 had to be included in its income irrespective of the facts. It has been further submitted that the said contention is not correct and is contrary to the law laid down by the Supreme Court in the said case of State Bank of Travancore, [1986] 158 ITR 102 and the other decisions of this court.

26. Mr. Bajoria, learned advocate for the assessee, has further contended that no hypothetical or theoretical income can be brought to tax. The income must accrue in the real sense. Merely because theoretically in accordance with the mercantile system of accounting, the income can be said to accrue, no tax can be levied on such basis. The reality of the situation and the facts cannot be ignored.

27. From the facts of the instant case that the document itself which gives rise to the said sum of Rs. 1,15,625 was disowned as non est by the Punjab National Bank. The bank contended that the said hundis were not accepted by it and that those were not recorded in its records and the purported acceptance on its behalf as appearing on the hundis was void and of no effect. When the document itself is questioned and avoided by the party as void, namely, the bank in the instant case, the question of accrual of any income with reference thereto cannot arise. In these circumstances, there is no real income which arises to the assessee. Shri Ambica Jute Mills being the drawer of the hundis is a company, which has gone into liquidation and has no substance. It was only the acceptance of the hundis by the bank which was the basic foundation of the hundis and the bank had to pay on maturity. But for the acceptance by the bank as shown in the hundi documents, the assessee would not have advanced any money. When the bank disputed its acceptance of the hundi documents as void and fraudulent, there could be no accrual of any real income or even any income theoretically on the basis of such disputed documents.

28. It appears that no income has in fact accrued in the real sense of the term which could be assessed to tax. In this connection, the decision of the Supreme Court in the case of State Bank Of Travancore v. Commissioner Of Income Tax, Kerala , [1986] 158 ITR 102 may be taken note of. It has been urged on behalf of the Revenue department relying upon the said decision that the principles of and/or concept of real income was no longer valid and the mere fact that the assessee followed the mercantile system of accounting would lead to taxation of income on accrued basis. The said contention of the Revenue department, however, does not appear to be correct. The Supreme Court took note of all the earlier decisions on the issue and those of the different High Courts at page 155 of the Reports as follows:

“As a result of the aforesaid discussion, the following propositions emerge:

(1) It is the income which has really accrued or arisen to the 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 because the income did not really accrue. (2) 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 income to the assessee. (6) 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. (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 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 be applied with care and within well-recognised limits.”

29. It thus appears that the Supreme Court in the said decision reiterated the principles of real income and it was emphasized that the conduct of the assessee which was reflected in making entries in the books of account are evidence of whether such income accrued or not. The distinguishing feature of the aforesaid case, i.e, State Bank of Travancore, [1986] 158 ITR 102 (SC), is that the bank debited the amount of interest to the account of the debtors but instead of crediting it in the profit and loss account as interest income, took it into balance-sheet in the suspense account. This conduct of the bank in the said case clearly showed that it had treated the interest income as having accrued to it. In the instant case, the assessee has not debited to the debtor any interest. No entry in the books were at all made. Its board of directors in fact resolved not to do so considering the facts and circumstances. In the said case, the Supreme Court even held that if an entry was made and reversed that conduct would have been sufficient evidence of the real circumstances.

30. The same principles have been reiterated by this court in the case of Sri Kewal Chand Bagri v. CIT, [1990] 183 ITR 207 and in the case of Commissioner Of Income-Tax v. Eastern Investments Ltd., [1995] 213 ITR 334 (Cal). The relevant portion of the above judgment, i.e, Sri Kewal Chand Bagri's case, [1990] 183 ITR 207 (Cal) is set out hereinbelow (page 209):

“The mercantile system of accounting is relevant only to determine the point of time at which tax liability is attracted and whether the income has accrued or not. It cannot be relied on to determine whether the income has, in fact, resulted or materialised in favour of the assessee. It is true that the assessee has been maintaining his accounts on the basis of the mercantile system of accounting. The interest income may have accrued according to the mercantile system. In our view, this issue has to be viewed in the context of commercial and business realities of the situation. Reference may be made to the decision of the Supreme Court in Poona Electric Supply Co. Ltd.… v. Commissioner Of Income-Tax…., [1965] 57 ITR 521, where the Supreme Court observed (page 529):

‘The principal of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature, the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language’.”

31. The relevant portion of the above judgment, i.e, Eastern Investments Ltd.'s case, [1995] 213 ITR 334 (Cal) is set out hereinbelow (page 340):

“Even assuming that the assessee had any right to claim interest after the aforesaid two debtor-companies were taken over by the concerned Government because the assessee maintains accounts on mercantile basis, the notional income by way of interest from debentures should not be included in the assessment. It is not and cannot be the real income of the assessee. The claim of the assessee against the aforesaid two debtor- companies could have only been considered after the higher categories of claims were satisfied. In one of the cases, that is to say, Bird and Co., it has been intimated that nothing would be payable by the Commissioner of Payments to the assessee. For the foregoing reasons, in our view, the Tribunal came to the correct conclusion that no part of the interest on debentures should be included in the assessment.”

32. It is thus clear on a perusal of the aforesaid decisions that the principles of real income have not been overruled by the Supreme Court in the case of State Bank Of Travancore v. Commissioner Of Income Tax, Kerala , [1986] 158 ITR 102 and the income cannot be assessed only because an assessee is following the mercantile system of accounting and theoretically or notionally income accrues. In the case of State Bank of Travancore, [1986] 158 ITR 102 (SC) the conduct of the bank in debiting the interest to the account of the debtor and even not reversing such debit was considered for treating the income as accrued. In the instant case, as stated, the evidence clearly establishes that income did not accrue as the assessee did not make any entry at all for it in the accounts. Considering all the aspects of the matter the questions before us are answered in the manner hereunder. Question No. 1 raised at the instance of the Department in respect of the order of the Commissioner of Income-tax (Appeals) dated November 3, 1997, is answered in the affirmative and against the Revenue and in favour of the assessee. Similarly, questions Nos. 1 and 2 in respect of the order of the Commissioner of Income-tax (Administration) dated March 15, 1989, are answered in the affirmative and in favour of the assessee and against the Revenue. Questions Nos. 1 and 2 raised at the instance of the assessee in respect of the order of the Commissioner of Income-tax (Administration) dated March 15, 1989, are answered in the negative and in favour of the assessee and against the Revenue. Similarly, the first part of question No. 1 raised at the instance of the assessee in respect of the order of the Commissioner of Income-tax (Appeals) dated November 3, 1987, is answered in the negative and in favour of the assessee and against the Revenue and the second part of question No. 1 in the affirmative and in favour of the assessee and against the Revenue.

Bijitendra Mohan Mitra, J.:— I agree.