2018 (3) TMI 1306 - AT - Income Tax

Accrual of income - Addition on account of interest accrued on the loans advanced by the assessee - Held that - As relying on assessee s own case (2014 (12) TMI 300 - ITAT HYDERABAD and 2014 (9) TMI 317 - ITAT HYDERABAD), we hold that the notional interest on above advances cannot be charged on accrual basis and the Assessing Officer is directed to verify the interest actually received and assess the same on actual receipt basis. Accordingly, the appeal filed by the Revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition made on account of interest accrued on loans advanced by the assessee.
2. Consideration of pending appeals on identical issues in previous assessment years.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest Accrued on Loans:

The core issue in this appeal is whether the interest accrued on loans advanced by the assessee should be taxed on an accrual basis or on actual receipt. The Assessing Officer (AO) observed that the assessee did not charge interest on certain unsecured loans and had entered into agreements for charging interest at 8% per annum, which were later waived. The AO argued that since the assessee followed the mercantile system of accounting, the interest should be accrued and taxed, leading to an addition of ?1,26,86,509/-.

However, the CIT(A) deleted this addition, relying on the ITAT's earlier orders in the assessee's own case for AYs 2005-06 to 2006-07 and 2008-09 to 2011-12. The ITAT had held that interest income should be recognized based on actual collection, as per Accounting Standard 9 of ICAI, which states that revenue should not be recognized until collection when uncertainties exist regarding its determination or collectability. The CIT(A) directed the AO to verify the actual receipt of interest and tax it accordingly.

During the appeal hearing, the assessee's counsel reiterated that the issue of notional interest was covered by previous ITAT orders, which emphasized that income should be taxed based on real income and commercial realities, not on hypothetical or notional interest. The Tribunal referenced several judicial precedents, including the Supreme Court's decisions in UCO Bank vs. CIT and CIT vs. Excel Industries Ltd., which supported the view that income should only be taxed when it is certain and collectable.

The Tribunal concluded that the notional interest on the advances could not be charged on an accrual basis. The AO was directed to assess the interest on actual receipt basis, aligning with the CIT(A)'s decision.

2. Consideration of Pending Appeals on Identical Issues:

The Revenue argued that the CIT(A) erred in ignoring the fact that appeals on identical issues in the assessee's own case for AYs 2005-06 to 2007-08 were pending before the High Court. The Tribunal acknowledged this but maintained that the CIT(A) had correctly followed the ITAT's earlier orders, which were binding and applicable to the current case. The Tribunal emphasized that the facts and issues were identical to those in the previous years, and thus, the CIT(A)'s reliance on the Tribunal's earlier decisions was justified.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the addition of ?1,26,86,509/- made on account of interest accrued on loans, directing the AO to verify and tax the interest on actual receipt basis. The appeal filed by the Revenue was allowed for statistical purposes, maintaining consistency with the Tribunal's earlier rulings in the assessee's own case. The judgment emphasized the principle that income should be taxed based on real, not notional, accruals, considering the commercial realities and uncertainties in collectability.