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2016 (12) TMI 1771 - AT - Income TaxAccrual of income - income recognition - recognizing the notional interest income on outstanding debts when the interest is the subject matter of a decree before the Court - Addition on account of interest accrued on outstanding debt - assessee acquired the right of suit as per assignment deed and was entitled to recover the debt along with interest and cost of suit as per the deed of assignment of right - interest on debt which was receivable by Bank of Baroda, was now receivable to the assessee and as the assessee is following the mercantile system of accounting the assessee was required to offer interest income on debts on accrual basis - HELD THAT - There is no dispute on the facts about the assessee acquiring the debts from the Bank of Baroda for a sum of ₹ 84,97,400/- with the borrowed funds, the loan creditors have not paid interest income to either bank or to the assessee, assessee has not recognised the income for all the assessment years under consideration etc. The legal issue i.e. to be decided on the right to recover the interest income by the assessee during the pendency of suit in Bombay City Civil Court. As examined the interpretation of the said section and the relevant explanation is already incorporated in the above paras of this order. We have considered the cited judgment of the Hon‟ble jurisdictional High Court in the case of Maharashtra State Financial Corporation Ltd 2005 (7) TMI 80 - BOMBAY HIGH COURT . Also considered the reasoning given by the CIT (A) in paras 4.1.4 and 4.1.5 of his order. Considering the above, we are of the opinion, the conclusion drawn by the CIT (A) is fair and reasonable and it does not call for any interference. Accordingly, relevant grounds raised by the Revenue in all the four appeals are dismissed. Disallowance u/s 14A - as per CIT- A disallowance need to be limited to the dividend i.e. exempted income - HELD THAT - CIT (A) discussed the issue at length and decided the issue. Therefore, in our view, the order of the CIT (A) is fair and reasonable and it does not call for any interference. Accordingly, relevant ground raised by the Revenue dismissed.
Issues Involved:
1. Dismissal of appeals due to low tax effect. 2. Recognition of notional interest income on outstanding debts. 3. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: 1. Dismissal of Appeals Due to Low Tax Effect: The judgment addresses 14 appeals, with 7 filed by the Revenue and 7 cross objections by the assessee. The appeals pertain to assessment years 2001-02 to 2005-06, 2009-10, and 2010-11. The initial three appeals (AYs 2001-02, 2002-03, and 2003-04) were dismissed due to low tax effect, as per CBDT Circular No.21/2015. The tax effects for these years were ?8,75,097/-, ?8,63,990/-, and ?9,23,553/- respectively. The cross objections corresponding to these appeals were also dismissed on the same grounds. 2. Recognition of Notional Interest Income on Outstanding Debts: The core issue in the remaining appeals (AYs 2004-05, 2005-06, 2009-10, and 2010-11) was whether the assessee should recognize notional interest income on outstanding debts purchased from the Bank of Baroda. The Revenue argued that the assessee should recognize interest income on an accrual basis as per the mercantile system of accounting. The assessee contended that under Section 34 of the CPC, interest accrues only after a court decree. The CIT (A) agreed with the assessee, stating that interest income should not be recognized until the court decree is finalized. This decision was based on the fact that the suit for recovery of debts was still pending, and thus, the right to recover interest had not yet accrued. The Tribunal upheld the CIT (A)'s decision, citing relevant case law, including judgments from the Bombay High Court and other High Courts, which supported the view that interest does not accrue until a court decree is passed. 3. Disallowance Under Section 14A of the Income Tax Act: The Revenue also contested the CIT (A)'s decision to restrict disallowance under Section 14A to the extent of dividend income. The CIT (A) had limited the disallowance to the amount of exempted dividend income, as the shares were held as stock-in-trade and the income from trading was taxable. For AY 2009-10, the CIT (A) upheld the assessee's self-disallowance of ?65,091/-. For AY 2010-11, the AO's disallowance of ?16,057/- was confirmed as it was less than the dividend income. The Tribunal found the CIT (A)'s reasoning fair and reasonable, thus dismissing the Revenue's appeals on this ground as well. Conclusion: All seven appeals filed by the Revenue and the seven cross objections filed by the assessee were dismissed. The Tribunal upheld the CIT (A)'s decisions regarding the non-recognition of notional interest income and the restricted disallowance under Section 14A. The judgment emphasized that interest income should only be recognized post-decree and that disallowance under Section 14A should be limited to the amount of exempted income.
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