2016 (5) TMI 1421 - AT - Income Tax

Addition of interest income which was not offered to tax - TDS u/s 194A - Held that - There is no change in the method of accounting which is mercantile system of accounting as is evident from the audit report in Form 3CA and 3CD. The assessee in fact does not have any right to receive such hypothetical income which has been shown as interest accrued but not due. As a matter of fact the liability becomes due only when it is accompanied by the corresponding liability of the other party to pay the amount and therefore in view of our findings hereinabove and facts of the present case interest which has been shown as interest accrued but not due being hypothetical income cannot be made a subject of levy of tax. It is settled issue that income accrues only when the right to receive is acquired and the right can be said to have been acquired when an enforceable debt is created in favour of the assessee. Therefore the income which has not been received and not acknowledged or which has not been acknowledged as payable to the assessee cannot be taxed. In the circumstances and facts of the case the Ld. CIT(A) is not justified in confirming the action of the Assessing Officer in taxing the income. - Decided in favour of assessee.

Summary

Issues involved:
1. Assessment of interest income not offered for tax.
2. Interpretation of provisions under section 194A of the Income Tax Act.
3. Application of mercantile system of accounting.
4. Taxability of hypothetical income.

Analysis:
1. The appeal pertains to the assessment year 2009-10 where the assessee contested the addition of interest income amounting to ?3,23,91,555/- which was not declared for taxation. The Assessing Officer treated this amount as interest income, leading to the dispute.

2. The key argument revolved around the provisions of section 194A of the Income Tax Act, which require the deduction of tax at the time of crediting or payment of interest income. The assessee maintained that since the bank neither credited nor paid the interest, no tax was deducted at the source for the interest accrued but not due, as shown in the balance sheet.

3. The assessee followed the mercantile system of accounting, as evidenced by the audit reports. It was contended that the interest shown as accrued but not due was hypothetical income, as the right to receive it had not materialized. The Tribunal emphasized that income accrues only when the right to receive is established, typically through the creation of an enforceable debt. Therefore, income that has not been received or acknowledged as payable cannot be subjected to taxation.

4. The Tribunal concluded that the interest amount in question, being hypothetical income without a corresponding enforceable right to receive, should not be taxed. The order of the Commissioner of Income Tax (Appeals) confirming the Assessing Officer's decision to tax the income was reversed, and all grounds of the assessee were allowed. The judgment highlights the importance of distinguishing between actual income and hypothetical income for tax purposes.

This detailed analysis of the judgment provides insights into the legal reasoning and interpretation of the provisions involved in the case, ultimately resulting in a favorable outcome for the assessee regarding the taxability of the interest income in question.