2016 (10) TMI 928 - HC - Income Tax

Accrual of income - inclusion of interest income - Held that - We find that the order of Assessment records that the suit between the parties is with regard to recovery of property. Therefore, there is no suit in respect of the loan given by the Appellant or interest thereon. There is nothing on record to indicate that the borrower had refused to pay either the interest or return the loan. Therefore, on facts, there has been an accrual of interest and following the mercantile system of accounting, the same is real income, liable to tax. In the above view, the fact that all the authorities have come to a finding of fact that income has accrued and nothing was provided by the Appellant before the authorities to establish the impossibility of the recovery of interest from the parties to whom loan was advanced, the orders could not be faulted.

Summary

Issues:
Challenging common order of Income Tax Appellate Tribunal regarding inclusion of interest amount in income under mercantile system of accounting.

Analysis:
The appeals filed under Section 260A of the Income Tax Act challenge a common order passed by the Income Tax Appellate Tribunal related to Assessment Years 2003-04 to 2006-07. The central question raised by the Revenue in all appeals is whether the Tribunal erred in concluding that the Appellant was liable to include interest amount, even without income accrual, based on following a mercantile accounting system. The Appellant had advanced loans to family members without receiving interest payments, leading to the Assessing Officer adding accrued interest to the Appellant's income. The Appellant challenged these orders before the Commissioner of Income Tax (Appeals) but was unsuccessful, leading to appeals to the Tribunal.

The Tribunal's impugned order upheld the inclusion of interest income, noting the absence of evidence showing repayment claims from borrowers. The Appellant argued against this decision, emphasizing the dispute and reliance on legal precedents like the Madras High Court case CIT v/s. Motor Credit Co.P.Ltd., 127 ITR 572, and the Supreme Court case CIT v/s. Messrs Shoorji Vallabhdas and Co., 46 ITR 144. However, the Court found that the suit between parties concerned property recovery, not the loan or interest, and no evidence indicated borrower refusal to repay. Therefore, interest had accrued, constituting real income under the mercantile system, and was taxable.

The Court emphasized that all authorities had confirmed the income accrual, and the absence of evidence proving impossibility of interest recovery meant the orders were valid. It distinguished the Madras High Court case where illusory interest was involved, unlike the present case where interest was receivable. Similarly, the Supreme Court case differed as no income had accrued or been received there. Consequently, the Court deemed the Appellant's legal precedents inapplicable due to factual distinctions, emphasizing the finding of fact regarding income accrual. As a result, the appeals were dismissed, with no costs awarded.