2021 (6) TMI 1068 - AT - Income Tax

Accrual of income - Addition on account of accrued interest on seed money loans - Hypothetical income - taxability or otherwise of the interest on the seed money advances given to the entrepreneurs which are classified as sticky advances - income should be computed either on cash or on accrual basis as per amendment w.e.f. A.Y. 1997-98 - assessee is following the mercantile system of accounting - whether since all items of accounts were maintained as per mercantile system of accounting there was no basis for accounting said accrued interest income on cash basis as section 145(1)? - HELD THAT - This issue is identical to the issue of taxability of interest on Non-performing Assets. There is no dispute that the interest had not been recognized in the books of account on sticky advances the claim is in the nature of interest on doubtful debts there is an uncertainty as to the recovery of advances as well as principal amount of the advances. The Hon ble Supreme Court in the case of UCO Bank 1999 (5) TMI 3 - SUPREME COURT held that no hypothetical income can be brought to tax. Hon ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas And Co. 1962 (3) TMI 6 - SUPREME COURT laid down the principle that what can be taxed is only a real income in respect of which the right to receive income had accrued the same principle was reiterated in the case of UCO Bank (supra). Hon ble Supreme Court again in the case of CIT vs. Vasisth Chay Vyapar 2018 (3) TMI 56 - SUPREME COURT while considering the issue in the context of taxability of interest on Nonperforming Assets held that when interest was not received and the possibility of recovery almost Nil the interest could not be treated to have accrued. Thus the issue in the present appeal is identical to the issue of taxability of interest on the non-performing assets. Therefore the ratio laid down in the above decisions clearly applicable to the facts of present case. Therefore we do not see any reason to interfere with the order of the ld. CIT(A). Accordingly the ground of appeal raised by the Revenue is dismissed.

Summary

Issues:
Taxability of accrued interest on seed money loans under the mercantile system of accounting.

Analysis:
The appeal was filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-5, Pune, for the Assessment Year 2012-13, challenging the deletion of an addition of ?435.30 lakhs made by the Assessing Officer on account of accrued interest on seed money loans. The Assessing Officer contended that the interest accrued on the seed money advances should be taxed as the respondent-assessee followed the mercantile system of accounting. However, the respondent-assessee argued that the interest on such loans was accounted for on a receipt basis due to uncertainty in recovery, as per the company's policy clearly stated in the financial statements. The issue revolved around whether the interest had accrued on the advances when following the mercantile system of accounting.

The ld. CIT(A) deleted the addition based on a decision from the ITAT, Pune Bench in the appellant's own case for the assessment year 2008-09. The Revenue, being aggrieved, appealed to the ITAT Pune. The ld. Sr. DR argued that interest on advances accrues on a yearly basis under the mercantile system, while the ld. AR relied on previous Tribunal decisions favoring the assessee. The ITAT considered the taxability of interest on seed money advances given to entrepreneurs, classified as sticky advances, under the mercantile system of accounting. The ITAT noted the uncertainty in recovery of the principal amount and interest on such advances, akin to interest on Non-performing Assets.

The ITAT cited various judicial precedents, including decisions from the Hon'ble Supreme Court and High Courts, to support its conclusion that hypothetical income cannot be taxed, and only real income, where the right to receive income has accrued, can be taxed. The ITAT emphasized that interest on sticky advances, with uncertainty in recovery, could not be treated as accrued income. The ITAT referenced judgments from Gujarat and Punjab & Haryana High Courts, which held that interest on Non-performing Assets should be taxed in the year of receipt, not on an accrual basis. The ITAT concluded that the issue was identical to the taxability of interest on non-performing assets, and thus, upheld the order of the ld. CIT(A) in favor of the assessee.

The ITAT further highlighted subsequent amendments to section 43D, providing for interest to be charged on an actual basis in specific circumstances, benefiting Cooperative Banks. The ITAT noted that the legislative amendments aimed to address unintended hardships to taxpayers, indicating a curative nature. The ITAT, relying on the decisions of various High Courts, dismissed the Revenue's appeal, affirming the non-taxability of accrued interest on seed money loans. The ITAT concluded that the judicial precedents clearly applied to the facts of the case, and there was no reason to interfere with the order of the ld. CIT(A).

In conclusion, the ITAT dismissed the appeal filed by the Revenue, upholding the deletion of the addition of accrued interest on seed money loans, based on the principles of real income recognition and the specific circumstances surrounding the advances in question.