2015 (1) TMI 1451 - AT - Income Tax

Accrual of income - non disclosure of income from the loan advanced to Al-Haj Abdus Salam Barlaskar - HELD THAT - AO had made addition only because the assessee was following mercantile system of accounting. It is a fact that the assessee had not received any income though it was entitled to get the interest from Al-Haj Abdus Salam Barlaskar. The principle of accountancy cannot takes place the theory of real income and in the case under consideration the assessee had to write off the loan finally during the AY 2008-09. Just because, the interest was due, it cannot be always presumed same had to be taxed. The agreement in question is effective till September, 2008 only i.e., for a period of three years. In these circumstances, if the assessee was not receiving interest, then in our opinion, the addition should not have been made just because it had accrued to the assessee as per the mercantile system of accounting. In the case of Eicher Ltd. 2009 (7) TMI 43 - DELHI HIGH COURT the same principle has been propounded. - Decided in favour of assessee. Disallowance of interest expenditure - HELD THAT - FAA has not given any reason for the disallowance. As his order is non-speaking, therefore, same has to be reversed. Decided in favour of assessee.

Summary

Issues Involved:
Challenging the order of the Commissioner of Income Tax (Appeals) for three assessment years, grounds of appeal for the assessment year 2004-05 included jurisdiction of re-assessment, rejection of explanations, addition of interest income, disallowance of interest expenditure, and liability under section 234B of the Act.

Analysis:

Jurisdiction of Re-assessment:
The appellant contested the re-assessment order, arguing that it was passed without a valid notice under section 143(2) of the Act, thus lacking jurisdiction. Additionally, the appellant claimed the re-assessment was time-barred and lacked relevant material. The CIT(A) upheld the re-assessment, leading to the appeal. The Tribunal found that the AO's addition was based on the mercantile system of accounting, even though no actual income was received. Citing the principle of real income, the Tribunal reversed the CIT(A)'s decision, emphasizing that accrual does not always necessitate taxation.

Rejection of Explanations:
The appellant challenged the rejection of explanations by the AO and CIT(A) regarding the loan advanced and interest income. The AO had added interest income without substantial evidence, leading to the dispute. The Tribunal noted the lack of reasoning by the CIT(A) for disallowing the interest expenditure, thus reversing this decision in favor of the appellant.

Liability under Section 234B:
The final ground dealt with interest charged under section 234B of the Act, which was considered consequential. The Tribunal allowed this ground for statistical purposes. The Tribunal consolidated all issues for the assessment years 2005-06 and 2006-07, following the decision made for the 2004-05 assessment year, ultimately allowing the appeals filed by the assessee.

In conclusion, the Tribunal ruled in favor of the appellant, overturning the CIT(A)'s decisions on various grounds related to re-assessment jurisdiction, rejection of explanations, disallowance of interest expenditure, and interest liability under section 234B of the Act. The judgment highlighted the importance of real income principles and the need for substantial evidence in tax assessments, ultimately providing relief to the appellant in all the assessment years under consideration.