2016 (4) TMI 1162 - HC - Income Tax

Notional interest on debentures - whether the Tribunal was justified in holding that inspite of following a mercantile system of accounting the Respondent-Assessee was entitled not to bring the notional interest on debentures subscribed by it to tax? - Held that - Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mercantile system of accounting. Tribunal further referred to the fact that the various resolutions which were passed by the company as well as the communication exchanged between the parties would establish on facts that interest has been waived. Further on facts it holds that there is no reason to disbelieve the resolution passed by the Respondent-Assessee waiving interest. The Tribunal further adverted to the fact that subsequently M/s. Marketing & Brand Solutions (I) Pvt. Ltd. had amalgamated with the Respondent-Assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the Respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which would warrant interference by this Court on account of any finding being perverse or arbitrary. We were informed at the hearing that for the Assessment years prior to A.Y. 2007-08 no addition was sought to be made by the Revenue on account of notional interest.The view taken by the Tribunal in the impugned order is a possible view.

Summary

Issues:
Challenging order of Income Tax Appellate Tribunal regarding notional interest on debentures for Assessment Years 2007-08 and 2009-10.

Analysis:
The judgment involves two Appeals challenging the Income Tax Appellate Tribunal's order related to the Assessment Years 2007-08 and 2009-10. The primary issue for consideration was whether the Respondent-Assessee, despite following a mercantile system of accounting, was entitled not to bring the notional interest on debentures subscribed by it to tax. The Respondent had subscribed to 2% nonconvertible unsecured debentures of ?42 crores issued by a group company. A resolution was passed to waive interest on the debentures until 31st March, 2010, due to financial difficulties faced by the issuing company.

The Assessing Officer made additions to the income for both assessment years based on the notional interest on the debentures. The Commissioner of Income Tax (Appeals) upheld these orders. However, the Tribunal, in its impugned order, considered the principles of the mercantile system of accounting. It emphasized that income should only be recognized when there is certainty of receiving it, and not when it has been waived. The Tribunal referred to the guidance note on accrual of income issued by the ICAI, stating that revenue recognition should be postponed in cases where ultimate collection lacks reasonable certainty.

The Tribunal highlighted the importance of prudence and conservatism in accounting, stating that income should only be recognized when there is a reasonable degree of certainty of realization. It also noted that accounting policies should represent a true and fair view of the business's financial state. The Tribunal found no reason to disbelieve the resolution passed by the Respondent-Assessee waiving interest, especially considering the financial difficulties faced by the issuing company, which later amalgamated with the Respondent.

The High Court observed that no addition was sought for previous assessment years on account of notional interest. It concluded that the view taken by the Tribunal was a possible one and did not give rise to any substantial question of law. Therefore, both Appeals were dismissed, with no order as to costs. The judgment emphasized the importance of applying accounting principles with prudence and ensuring a true representation of the business's financial state.