2014 (4) TMI 32 - HC - Income Tax

Taxability of income Scope of section 2(24) of the Act Interest income - Whether the income of interest is virtually the income fall within the meaning of Section 2(24) of the Act Held that - The decision in Commissioner of Income Tax Vs. M/s Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT followed - income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount - Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee - the assessee had not actually received any amount of interest income but it actually accrues to the appellant within the provisions of the Act - it makes no difference whether income was actually received by the assessee in the relevant year or not. The Corporation is virtually a state owned corporation having 99.9% shares and as such a State Government Undertaking which has been constituted by the State Government to promote the cinematic activities and exhibition of popular cinemas throughout the State - in absence of any notification or instructions issued by CBDT under Section 119 of the Act, the income shall become due for the relevant assessment year and as such the same accrued to the assessee - This income was based on contractual corresponding obligation and liability to pay the interest accrued on unpaid amount of sale consideration by the purchaser to the appellant - The rate of interest is fixed - The realization/recovery of income of interest is not time barred in the relevant assessment year - The State Government is not so defunct that it may knee down before the purchasers of the property under Deferred Payment Plan there is no substance in the appeal and no substantial question of law arises for consideration Decided against Assessee.

Summary

Issues Involved:
1. Taxability of hypothetical interest income
2. Real income vs. hypothetical income under mercantile system of accounting
3. Accrual of income and its taxability

Issue-wise Detailed Analysis:

1. Taxability of Hypothetical Interest Income:
The primary issue was whether the interest income of Rs. 627,969, which was not actually received but shown as accrued, should be treated as taxable income. The ITAT had treated this interest as taxable income, stating that the taxability cannot be postponed on the ground of alleged impossibility of recovery. The court upheld this view, emphasizing that under the mercantile system of accounting, income accrues as soon as it becomes due, irrespective of its actual receipt.

2. Real Income vs. Hypothetical Income under Mercantile System of Accounting:
The appellant argued that the interest income was hypothetical and should not be taxed as it was not realized. The court referred to the Supreme Court's judgment in Commissioner of Income Tax vs. M/s Excel Industries Ltd., which established that income accrues when it becomes due and must be accompanied by a corresponding liability of the other party to pay the amount. The court concluded that the interest income had accrued to the appellant and was not hypothetical, thus making it taxable.

3. Accrual of Income and Its Taxability:
The court examined whether the interest income shown as accrued in the books of the appellant fell within the definition of income under Section 2(24) of the Income Tax Act and if it was taxable. The court noted that the appellant followed the mercantile system of accounting, where income is recognized when it becomes due. The court found that the interest income had indeed accrued to the appellant as per the agreements with the purchasers, and there was a corresponding liability on the purchasers to pay this interest. Therefore, the income was deemed to have accrued and was taxable under the Act.

Conclusion:
The court dismissed the appeal, holding that the interest income accrued to the appellant was not hypothetical but real and taxable. The court emphasized that the taxability of income cannot be postponed based on the improbability of its recovery. The court also highlighted the need for the appellant to take legal steps to recover the due amounts and suggested that the matter be considered by a bench dealing with Public Interest Litigation due to the involvement of public money and potential inaction by the state government and its officials.