2017 (12) TMI 115 - AT - Income Tax

Addition of interest - accrual of interest - Inter-corporate deposits - Held that - It is not denied that the Inter-corporate deposits made by the assessee were not recoverable from the company then what to talk of interest. When the recovery of the money advanced itself is doubtful the question of accrual of interest in our opinion would not arise. Interest would have accrued to the assessee if it got enforceable right and interest would have been received by it. On the same analogy the interest in respect of the non-performing assets in the case of the bankers are not taken to be their income. Even otherwise also since the Revenue has not made any addition in the A.Y. 2010-11 and 2011-12 on the basis of these facts in respect of interest and on the principle of consistency we are of the view that it cannot be said that interest has accrued to the assessee during the year when the Inter-corporate deposits is equivalent to non-performing assets in the case of the assessee. Non-recognition of interest on loan advanced to Shri Sateesh Kumar - Held that - The borrower has taken loan by way of pledge 1, 26, 540 shares of Enzen Global Solutions Private Limited owned by him having face value of Rs. 12, 65, 400/- along with a demand promissory note and two post dated cheques of Rs. 4, 05, 00, 000/-. The assessee has recognized interest amount of Rs. 10, 19, 178/- during the F.Y 2007-08 for sixty two days but the said interest was also not recovered. The borrower did not own up the commitment. The borrowers company was performing badly. Under these circumstances also and since the recovery of the original amount itself is doubtful the interest income in our view can also not be added as income of the assessee. When the principal amount itself is a non-performing asset interest cannot be said to have accrued to the assessee. We therefore in the light of the aforesaid discussions set aside the order of the CIT(A) and delete the addition - Decided in favour of assessee.

Summary

Issues:
Sustenance of addition by the CIT(A) in respect of interest amounting to Rs. 1,05,30,822.

Analysis:
The appeal was filed against the CIT(A)'s order for A.Y. 2009-10 concerning the addition of interest income. The assessee had made intercorporate deposits and advanced a loan but did not recognize interest due to commercial reasons and the borrower's financial position. The Assessing Officer added Rs. 1,05,30,822 for non-recognition of interest income. The CIT(A) upheld the addition, leading to the appeal. The Tribunal noted the company's financial distress, non-payment of dues, and auditor's observations. It emphasized that income tax is levied on real income and questioned if income had accrued. The Tribunal referred to Accounting Standard 1, prudence, substance over form, materiality, and accrual principles to determine income recognition. It concluded that as recovery of the principal amount was doubtful, interest could not be considered accrued income.

The Tribunal also addressed the non-recognition of interest on a loan advanced to an individual. The loan was granted for specific purposes but faced repayment issues due to the borrower's company's poor performance. The Tribunal found that since the recovery of the principal amount was uncertain, interest income could not be recognized. It highlighted the analogy with non-performing assets in banking and the principle of consistency in previous assessments. Ultimately, the Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 1,05,30,822.

Therefore, the Tribunal allowed the appeal, emphasizing the lack of accrual of interest income due to the doubtful recovery of principal amounts in both cases. The judgment focused on the financial positions of the borrower entities, the application of Accounting Standards, and the principles of real income recognition for tax purposes.