2014 (6) TMI 665 - AT - Income Tax

Accrual of income - recognition of interest income on the basis of penal clause for charging of interest on account of delay in execution of contract Held that - The development agreement was still to be legally executed and approvals and clearances were pending and the construction of the residential project had not commenced, penal interest would not be charged, assessee decided to waive the same - The income can be taxed on the real income only - The liability to tax is attracted either at the time of accrual of the income or on its receipt - if the income does not result at all, then it cannot be taxed even though an entry is made in the books of account about such a hypothetical income which has not been materialized - Under the mercantile system of accounting also, there must be a debt created in favour of the assessee by somebody and until then, it cannot be said to have accrued to the assessee even under the mercantile system of accounting Relying upon Commissioner Of Income-Tax, Bombay City I Versus Messrs. Shoorji Vallabhdas And Company 1962 (3) TMI 6 - SUPREME Court - Merely because there was a penal clause for charging of interest on account of delay in getting the requisite approval and clearance, it does not ipso facto confers right upon the assessee to charge interest, unless the other party also recognises as a debt to be discharged in actual terms. The debit note raised by the assessee has been rejected / returned back to the assessee and based on this, the assessee has not recognised this income, has not been disputed by any material on record or by way of any enquiry from the said party specific on this score, then it cannot be held that the income, has accrued to the assessee in the real sense - the income cannot be said to be generated, actual or accrued, by mere entries in the accounts made by the parties - Such a hypothetical income cannot be said to have been accrued to the assessee merely because the other party has treated it as a liability thus, the interest income as taken by the AO has not accrued to the assessee and it is not liable to the taxed in the hands of the assessee Decided in favour of Assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Taxability of interest income under the head "Income from Other Sources."
3. Accrual of interest income and its recognition in the books of accounts.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the assessee was barred by a delay of 57 days. The assessee supported the application for condonation of delay with an affidavit sworn by Mr. K.T. Jithendran, Director. The reasons for the delay included the forwarding of the appellate order to the holding company's in-house tax team, the unscheduled leave of Mr. Vipul Pasad due to a family emergency, and the subsequent leave of the concerned Tax Manager. The Tribunal, after considering the submissions and hearing both parties, found that the assessee had a reasonable cause for the delay and condoned it, allowing the appeal to be disposed of on its merits.

2. Taxability of Interest Income under the Head "Income from Other Sources":
The main contention was whether the interest income of Rs. 1,98,33,263 should be taxed under "Income from Other Sources." The assessee argued that the interest did not accrue due to the waiver agreed upon with M/s. Desai & Gaikwad. The Assessing Officer added the difference of Rs. 1,98,33,263 as interest income, stating that the waiver of interest unilaterally does not absolve the assessee from recognizing the income as per the mercantile system of accounting. The Commissioner (Appeals) upheld this view, stating that the MoU did not include a clause for waiving the interest and that the other party had shown the interest liability as an expense.

3. Accrual of Interest Income and its Recognition in the Books of Accounts:
The facts revealed that the assessee entered into an MoU with M/s. Desai & Gaikwad for developing a project. The assessee advanced Rs. 7,62,30,000 to the said party, which was liable to pay interest at 10% per annum. Due to delays in obtaining necessary approvals, the assessee raised a debit note for interest, which M/s. Desai & Gaikwad rejected. Subsequently, the assessee waived the interest, recording this decision in the Board of Directors' meeting minutes. The Tribunal held that income must be taxed on a real income basis, and since the interest was waived and not recognized by the other party, it did not accrue to the assessee. The Tribunal cited Supreme Court decisions emphasizing that hypothetical income, which has not materialized, cannot be taxed. The Tribunal concluded that the interest income of Rs. 1,98,33,263 had not accrued to the assessee and was not liable to be taxed.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the order of the Commissioner (Appeals) and deleting the addition of the interest income. The alternative plea raised by the assessee became infructuous in light of the findings. The order was pronounced in the open Court on 4th June 2014.