2008 (1) TMI 263 - HC - Income Tax

Interest on temporary loans to subsidiary companies assessability - taxability is attracted not only when income was actually received but also when it accrued - decision to waive off loan or interest should be taken on the basis of commercial expediency and should be taken before the end of the accounting year - In this case the decision to waive off the loan was taken at a much later stage i.e. after the income had already accrued - hence interest are assessable on accrual basis

Summary

Issues:
Interpretation of Income-tax Act - Addition of interest on accrual basis.

Analysis:
The case involved a question of law under section 256(2) of the Income-tax Act, 1961, regarding the addition of interest of Rs. 15 lakhs on accrual basis. The assessee, a Government-owned Corporation, had advanced temporary loans to its subsidiary companies and claimed that the interest was waived off by a board resolution after the closing of the accounting period. The Assessing Officer, Commissioner of Income-tax (Appeals), and the Appellate Tribunal held that since the interest accrued before the resolution, it was assessable in the hands of the assessee due to following the mercantile system of accounting.

The court referred to various precedents to establish the principles governing the taxation of income. In CIT v. Shoorji Vallabhdas and Co., it was emphasized that income must actually accrue for it to be taxable, even if not received, and the concept of real income should not be used to defeat tax provisions. Similarly, in State Bank of Travancore v. CIT, the Supreme Court highlighted that the reality of income accrual must be considered, and the conduct of parties in treating income is crucial evidence. Additionally, in CIT v. Shiv Prakash Janak Raj and Co. P. Ltd., it was held that the decision to waive off interest must precede its accrual to be valid for tax purposes.

The court further discussed the applicability of Section 36 of the Income-tax Act, emphasizing that deductions for bad debts must be in compliance with the Act's provisions. It concluded that the decision to waive off interest should have been made before the income accrued, and once income had accrued, the concept of real income cannot be used to circumvent tax laws. Therefore, the Tribunal's decision to uphold the addition of interest on accrual basis was deemed correct, ruling in favor of the Revenue and against the assessee.

This comprehensive analysis of the judgment highlights the legal principles applied, precedents cited, and the court's reasoning in deciding the issue related to the addition of interest on accrual basis under the Income-tax Act, 1961.