2010 (1) TMI 746 - HC - Income Tax

Accrual of Interest on loans - Real income or not - Accrual of income u/s 5 - Prima facie adjustment u/s 143(1) - held that - If the assessee had not chosen to write off the amount lent to the other company and as long it is shown as outstanding amount and with an agreement to receive interest at 21 per cent per annum as the outstanding amount accrual of interest on adopting the mercantile system of accounting is inevitable. - Accrual of income should definitely be brought to tax in terms of s. 5 of the Act. - When such is the legal position there was no choice for the assessing authority but to add back this amount as part of the income though the assessee might have claimed this as not a real income or on any other basis. - The assessing authority was bound to reject the claim of the assessee that a sum of Rs.74.75 lakhs did not constitute income for the reason that it was not real income etc. - Decided in favor of revenue.

Summary

Issues:
1. Whether the Tribunal was right in deleting the adjustment made by the AO pertaining to interest accrued on inter-corporate loans?
2. Whether the AO is entitled to make a prima facie adjustment with regard to an item of income taken credit for in the PandL a/c by the assessee but excluded from the computation of income?

Analysis:

Issue 1:
The appeal was filed by the Revenue under the IT Act against the Tribunal's order deleting the adjustment made by the AO regarding interest accrued on inter-corporate loans. The assessee, a public limited company, had shown interest on a loan as income accrued but later reduced it due to doubts about the borrower's financial health. The AO, under s. 143(1)(a) of the Act, informed the assessee that reducing this interest income was impermissible. The Tribunal, accepting the real income theory, ruled in favor of the assessee, leading to the Revenue's appeal. The High Court held that the interest accrued should be considered income under the mercantile system of accounting, rejecting the Tribunal's decision and restoring the assessing authority's order.

Issue 2:
The second issue revolved around whether the AO could make adjustments to income items claimed in the PandL a/c but excluded from income computation. The Tribunal's decision to delete the adjustment was challenged by the Revenue. The High Court examined the statutory provisions of s. 143(1)(a) and emphasized the requirement to pay additional tax on the actual tax due. The Court concluded that the interest amount should be treated as income, regardless of the borrower's ability to repay, and rejected the assessee's argument of the amount not constituting real income. The Tribunal's decision was deemed erroneous, and the assessing authority's order was upheld.

In summary, the High Court ruled in favor of the Revenue, setting aside the Tribunal's decision and affirming the assessing authority's order. The Court emphasized the accrual of income under the mercantile system of accounting and the statutory provisions governing additional tax liabilities. The judgment clarified the legal position on income adjustments and upheld the authority's obligation to follow statutory provisions despite any contrary theories proposed by the assessee.