2017 (12) TMI 42 - AT - Income Tax

Accrual of income / real income - Non payment of lease rental by lessee to assessee - lessee asked the assessee to adjust the excess lease rentals paid by it till March 2008 towards the other months - dispute - Held that - Where there is a dispute the income would accrue and would not crystallise till the dispute is settled and therefore the same cannot be brought to tax even under the mercantile system of accounting. - Decided in favour of assessee Disallowance of interest paid by the assessee on late deposit of EPF and ESI payments - CIT-A held that these are compensatory in nature and therefore allowable under section 37(1)- Held that - The interest is paid by the assessee for late payment of PF and ESI to the Government account and therefore is only compensatory in nature and attains the nature of the payment on which the interest is paid. In fact the hon ble Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. (1993 (4) TMI 3 - SUPREME Court ) has clearly held that no disallowance under section 37(1) can be made without examining the scheme of provisions of the relevant statute. Therefore we see no reason to interfere with the order of the Commissioner of Income-tax (Appeals) on this issue also.- Decided in favour of assessee

Summary

Issues Involved:
1. Taxation of lease rentals on accrual basis versus receipt basis.
2. Allowability of revised claims based on audited accounts.
3. Allowability of delayed payments made to ESI.
4. Accrual of income in the presence of disputes.
5. Nature of interest paid on late deposit of EPF and ESI payments.

Detailed Analysis:

1. Taxation of Lease Rentals on Accrual Basis vs. Receipt Basis:
The primary issue is whether lease rentals should be taxed on an accrual basis or only when received. The assessee, a State Government undertaking, filed returns based on provisional accounts and later revised them post-audit. The Assessing Officer (AO) noted that the assessee, following the mercantile system, should have recognized lease rentals on an accrual basis. However, the assessee argued that due to disputes regarding the lease terms, rentals were recognized on a receipt basis. The Commissioner of Income-tax (Appeals) (CIT(A)) sided with the assessee, noting ongoing litigation and disputes over the lease terms. The Tribunal upheld this view, emphasizing that income cannot be taxed until it crystallizes, especially in the presence of disputes.

2. Allowability of Revised Claims Based on Audited Accounts:
The Revenue contended that the CIT(A) erred in considering the audited accounts for determining taxable income, citing section 139(9)(bb) and the Supreme Court decision in Goetze (India) Ltd. v. CIT. The Tribunal noted that the CIT(A) correctly considered the revised claims based on audited accounts, as these provided a more accurate reflection of the assessee's financial position.

3. Allowability of Delayed Payments Made to ESI:
The AO disallowed delayed payments to ESI, but the CIT(A) allowed them, referencing the Supreme Court decision in Mahalakshmi Sugar Mills Co. v. CIT. The Revenue argued that such payments are not allowable, citing Indian Aluminium Co Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, noting that the payments were compensatory and allowable under section 37(1) of the Act.

4. Accrual of Income in the Presence of Disputes:
The Tribunal examined whether income had truly accrued to the assessee given the disputes. The CIT(A) referenced several judicial precedents, including the Supreme Court's decision in Godhra Electricity Co. Ltd. v. CIT, which established that income does not accrue until disputes are resolved. The Tribunal agreed, noting that the disputes over lease terms meant that the income had not crystallized and thus could not be taxed on an accrual basis.

5. Nature of Interest Paid on Late Deposit of EPF and ESI Payments:
The AO disallowed interest paid on late deposits of EPF and ESI, considering it penal. However, the CIT(A) allowed these payments, viewing them as compensatory. The Tribunal upheld this view, referencing the Supreme Court's decision in Prakash Cotton Mills (P.) Ltd. v. CIT, which distinguished between compensatory and penal interest. The Tribunal concluded that the interest payments were compensatory and thus allowable under section 37(1).

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decisions on all issues. The order was pronounced on 27th September 2017.