2014 (6) TMI 78 - AT - Income Tax

Deletion of estimation of income from FDR Accrual of interest - Held that - CIT(A) was rightly of the view that the Visnagar Nagrik Sahakari Bank Ltd. is in liquidation as per the directions of the RBI - the chances of recovery of the principal amount of the FDR made with Visnagar Nagrik Sahakari Bank Ltd. was doubtful - When the recovery of the principal amount itself was doubtful, then, the question of recovery of interest was almost impossible thus, the assessee was justified in not accounting the interest income on accrual basis in the income for the year Relying upon CIT vs. Ferozepur Finance Pvt. Ltd. 1980 (5) TMI 29 - PUNJAB AND HARYANA High Court - assessee in earlier year also had not disclosed interest income on these FDRs which has been accepted by the Revenue assessee was right not to book interest income on the basis of accrual- thus, there was no income in form of interest on FDRs Decided against Revenue.

Summary

Issues:
Appeal against deletion of addition on account of estimation of income from FDR in Visnagar Bank for A.Y. 2007-08.

Analysis:
1. The Revenue's appeal challenged the deletion of an addition of Rs. 11,93,810 made by the Assessing Officer (A.O) on the grounds of estimating income from Fixed Deposit Receipts (FDR) in Visnagar Bank. The A.O observed that the Assessee had FDRs worth Rs. 1,90,38,100 in the bank but had not offered any interest income from these FDRs. After considering the Assessee's response, the A.O estimated interest income at 10% on the FDR amount, resulting in the addition.

2. The Assessee appealed to the Commissioner of Income Tax (CIT) who deleted the addition. The CIT observed that the Visnagar Nagrik Sahakari Bank Ltd. was in liquidation as per RBI's directions, making the recovery of the principal amount from the FDRs doubtful. Considering the circumstances, the CIT concluded that the Assessee was justified in not accounting for interest income on accrual basis, citing a decision of the Punjab and Haryana High Court as precedent.

3. The Income Tax Appellate Tribunal (ITAT) upheld the CIT's decision. The Tribunal noted that in a previous year, the Assessee had also not disclosed interest income from the same FDRs, which had been accepted by the Revenue. Given the uncertainty of recovering the principal amount, the Tribunal agreed that booking interest income on accrual basis was not appropriate, as there was no real income in the form of interest on the FDRs.

4. The Tribunal dismissed the Revenue's appeal, confirming the deletion of the addition. The decision was based on the reasoning that when the recovery of the principal amount itself was uncertain, the possibility of recovering interest was almost impossible, justifying the Assessee's non-disclosure of interest income. The order was pronounced on 23rd May 2014.