2012 (8) TMI 18 - HC - Income Tax

Taxation on accrual of interest income - the mercantile system of accounting - Held that - The assessee received Rs.11 lakhs in the liquidation proceedings consequent on the winding up of the company on 18.03.2008 with effect from 22.04.2002. Therefore, even in respect of the debt written off in 2007, the assessee had received Rs.11 lakhs, which may not be in full quit of the amount due and payable to the assessee herein - that the assessee was following the mercantile system of accounting, hence, the accrual theory of interest income was to be assessed in the year in which it had accrued and had become due. Thus, even though the assessee had followed the mercantile system of accounting, the materials placed before the AO and before the Tribunal, do not, in any manner, advance the cause of the assessee to substantiate its contention that the accrued interest was only hypothetical income and hence, not available for taxation - against assessee.

Summary

Issues:
1. Assessment of interest income on accrual basis under Section 145 of the Income Tax Act.

Analysis:

1. The case involved a Tax Case Appeal regarding the assessment of interest income on accrual basis under Section 145 of the Income Tax Act for the assessment year 1998-99. The assessee had advanced a loan to a finance company and had not received interest beyond a certain date. The Assessing Authority held that interest income had accrued and should be recognized as income assessable for the year in question. The Commissioner of Income Tax (Appeals) initially allowed the appeal, but the Income Tax Appellate Tribunal reversed the decision, stating that interest income had accrued and should be assessed as per the mercantile system of accounting followed by the assessee.

2. The assessee contended that the Tribunal's decision contradicted established legal principles, citing previous court judgments. The Apex Court's decision in the Godhra Electricity Co. Ltd. case highlighted that income must actually result for it to be taxable, emphasizing the concept of real income. The court analyzed the probability of realization in a realistic manner to determine if income had truly accrued. The assessee's argument was that since no interest had been received post a certain date, there was no real income to be taxed.

3. The court further examined the decision in the Motor Credit Co. P. Ltd. case, where it was held that no tax liability could be imposed if there was no possibility of materializing interest income due to default. In this case, the court found that the assessee had not provided sufficient evidence to demonstrate the improbability of realizing the interest income. The court upheld the Tribunal's decision that interest income had accrued and should be assessed as per the mercantile system of accounting, rejecting the Tax Case Appeal.

4. The judgment emphasized that even under the mercantile system of accounting, the concept of real income is crucial in determining assessability. The court noted that the assessee had not taken steps to write off the amount until a later year, indicating a lack of doubt regarding the possibility of income realization. Ultimately, the court found no grounds to interfere with the Tribunal's decision, upholding the assessment of interest income on accrual basis for the relevant assessment year.