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2017 (2) TMI 1535 - AT - Income TaxAccrual of income - Arbitration receipts - assessee has shown arbitration receipts in his books of accounts under the head Current liabilities and has not credited the same in the profit/loss account - As per AO arbitration receipts cannot be treated as liability till the order of Supreme Court is received against the assessee and the same receipts was accordingly treated as income of the assessee and brought to tax - HELD THAT - Where the challenge to the arbitral award ends in favour of the assessee the Revenue would be entitled to bring the same to tax. Conversely where the challenge to the arbitral award ends against the assessee the State of Rajasthan would be entitled to encash the bank guarantee and recover the amount paid to the assessee. As in the instant case the amount received by the assessee cannot be regarded as income which has accrued unless and until the proceedings relating to arbitral award attains finality. Besides that even from well-established accounting principles and accrual system of accounting as followed by the assessee where the probability of receipts in favour of the assessee is contingent on final outcome of Court s proceedings such contingent receipts have rightly been shown as liability and not reflected as taxable receipts in the profit/loss account. Similar issue was involved in AY 2004-05 wherein as held such interim arbitration receipts pending final outcome as not taxable - Decided against revenue. Accrued interest on FDRs not declared as income by the assessee - assessee has not shown the interest accrual on FDRs made for giving bank guarantee in his return of income for the year under consideration - AO computed interest @ 7% and brought the same to tax in addition to arbitration receipts - CIT-A deleted the addition - HELD THAT - CIT(A) has given a finding that the assessee has shown net interest in his profit/loss account which comprises of gross interest received including interest on FDRs and interest paid to Bank. The said finding has not been controverted before us. No infirmity in the order of ld CIT(A) in deleting the addition. Decided against revenue.
Issues Involved:
1. Deletion of addition of Rs. 91,59,305/- made by the AO on account of Arbitration receipts. 2. Deletion of addition of Rs. 7,55,642/- made by the AO on account of accrued interest on FDRs not declared as income by the assessee. Issue-wise Detailed Analysis: 1. Deletion of Addition of Rs. 91,59,305/- on Account of Arbitration Receipts: The primary issue revolves around whether the arbitration receipts amounting to Rs. 91,59,305/- should be treated as income for the assessee. The facts reveal that the arbitration awards were contested by the State of Rajasthan, and the High Court allowed the release of 50% of the awarded amount subject to a bank guarantee of an equivalent amount. The assessee recorded this amount under "Current liabilities" and did not consider it as income. The Assessing Officer (AO) argued that the arbitration receipts should be treated as income since they were received in the form of contract receipts and could not be considered a liability. The AO treated these receipts as income, asserting that even if the appeal was pending, the receipts could only be termed as a provision for contingent liability, which is not allowable under the Income Tax Act. The CIT(A) disagreed with the AO, referencing a previous decision by the Coordinate Bench for AY 2004-05, which held that such amounts were not under the absolute ownership of the assessee and should not be treated as income. The CIT(A) directed the deletion of the addition, which led to the Revenue's appeal. The ITAT upheld the CIT(A)'s decision, reiterating that the amount was conditional and subject to the final adjudication of the High Court. The ITAT referenced the Supreme Court's decision in Hindustan Housing and Land Development Trust Ltd., which established that income tax is not levied on a mere right to receive compensation; there must be an obligation to pay an ascertained amount. The ITAT concluded that the arbitration receipts were not taxable until the proceedings attained finality. 2. Deletion of Addition of Rs. 7,55,642/- on Account of Accrued Interest on FDRs: The second issue pertains to the accrued interest on Fixed Deposit Receipts (FDRs) made for obtaining a bank guarantee. The AO computed interest at 7% on Rs. 91,59,305/- and added it to the assessee's income, asserting that it was not declared. The assessee argued that the net interest of Rs. 6,23,298/- was already shown in the profit and loss account, which included gross interest received and interest paid to the bank. The CIT(A) found that the interest was indeed disclosed and treated as business income in the original assessment proceedings. The AO's addition of Rs. 7,55,642/- was thus incorrect. The ITAT confirmed the CIT(A)'s findings, noting that the assessee had already disclosed the interest received on FDRs and paid due taxes. The ITAT found no infirmity in the CIT(A)'s order and dismissed the Revenue's ground. Conclusion: The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions of Rs. 91,59,305/- on account of arbitration receipts and Rs. 7,55,642/- on account of accrued interest on FDRs. The judgment emphasized the conditional nature of the arbitration receipts and the proper disclosure of interest income by the assessee.
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