2017 (11) TMI 966 - AT - Income Tax

Addition on interest accrued on sticky loans and advances - accrual of income - whether as assessee company follows the mercantile system of accounting and, therefore, all the incomes are mandatorily required to be included in the its total income on accrual basis? - We find that the issue involved in the present appeal is squarely covered in favour of the assessee in assessee s own case in A.Y.2000-01, 2003-04 and 2004-05 as held the assessee had not recognized the interest income on sticky loans keeping in view the mandatory guidelines of RBI in regard to NBFC. Under the mercantile system of accounting an income accrues when there is reasonable certainty for realising any receipts or revenue. Hypothetical income cannot be taken into account. In respect of sticky loans and advances, the income is recognized when interest is actually collected. Merely on the basis of accrual it cannot be recognized in the absence of any certainty of its collection. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or sticky loan. This is done by providing that nonreceipt of interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. There is no inconsistency or contradiction between the circular so issued and section 145 of the Income tax Act.- Decided against revenue

Summary

Issues:
Appeal against deletion of addition of interest accrued on sticky loans and advances.

Analysis:
The Revenue appealed against the deletion of an addition of interest accrued on sticky loans and advances by the Ld. CIT(A). The Revenue contended that under the mercantile system of accounting, all incomes must be included in the total income on an accrual basis. The Assessee had initially declared NIL income but later revised it, claiming set off of losses and income u/s. 115JB. The case underwent scrutiny, and the AR of the Assessee provided necessary details during the process. The TPO reviewed the international transactions without adverse findings. The Assessee argued that interest on sticky loans was not recognized due to RBI's Prudential Norms. The Assessee cited judicial precedents and a previous ITAT judgment in their favor. The Revenue disallowed the interest on sticky loans, adding it to the taxable income. The Ld. CIT(A) deleted the addition, partly allowing the Assessee's appeal.

The Revenue relied on the AO's order, while the Assessee's counsel supported the Ld. CIT(A)'s decision. The ITAT found the issue favorably settled in the Assessee's previous cases. Referring to a specific ITAT observation, the ITAT highlighted the importance of reasonable certainty for recognizing income under the mercantile system of accounting. The decision cited the Hon'ble Supreme Court's ruling on the treatment of interest income on sticky loans. The ITAT also noted that the Assessee had received favorable decisions in previous years and cited relevant case laws and judicial pronouncements. Consequently, the ITAT upheld the Ld. CIT(A)'s action of deleting the addition of interest accrued on sticky loans, dismissing the Revenue's appeal.

In conclusion, the ITAT affirmed the Ld. CIT(A)'s decision to delete the addition of interest accrued on sticky loans and advances, citing previous judicial precedents and case laws in favor of the Assessee. The ITAT emphasized the importance of adhering to the mercantile system of accounting and reasonable certainty in recognizing income. The Revenue's appeal was dismissed, and the Ld. CIT(A)'s order was upheld.