2018 (11) TMI 1557 - HC - Income Tax

Addition made of interest receivable from Kerala State Horticultural Corporation (Horticorp) - assessee is following the mercantile system of accounting - Held that - The Board decided no material change during the year, except on two issues one of which is relevant for the consideration in this appeal. The Board had while continuing under the mercantile system, decided to provide no interest accrued on the loan to the Horticorp. Having followed the mercantile system of accounting, a decision of the Board not to show the interest receivable, would not absolve the liability, since under the mercantile system, interest is deemed to have accrued in the previous year to the assessment year.

Summary

Issues:
1. Addition of interest receivable from Kerala State Horticultural Corporation (Horticorp)
2. Disallowance of brought forward business loss as arrears of depreciation

Analysis:
1. The appellant, a Government-owned Company, raised two issues in the appeal: interest receivable from Horticorp and disallowance of brought forward business loss. The appellant did not press the second issue during arguments, focusing solely on the interest receivable matter.

2. The appellant argued that an amount of ?2 crores was given to Horticorp as per Government instructions, and despite being fully owned Government Companies, no return of principal or interest was received as per the agreement. The interest receivable was shown as ?25 lakhs on 31.03.2004 but not on 31.03.2005 due to a decision by the Board of Directors.

3. Noteworthy is that the appellant follows the mercantile system of accounting, evident from the books produced for assessment. The decision by the Board, as reflected in the Auditor's Report, indicated a change in accounting policy regarding interest accrued on the loan to Horticorp. Despite following the mercantile system, the Board chose not to show the interest receivable, which does not absolve the liability as per the system where interest is deemed to have accrued in the previous year.

4. The High Court upheld the decision of the Income Tax Appellate Tribunal, emphasizing that under the mercantile system, the interest is considered accrued in the previous year to the assessment year. The Court found no reason to interfere with the Tribunal's order and dismissed the appeal without costs.