2021 (6) TMI 306 - AT - Income Tax

Accrual of income - real income theory determination - Addition on account of interest from bank - AO observed from 26AS data that the assessee had not shown interest from bank thus made the addition - HELD THAT - Where accrual of an income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax. In the case of mercantile system of accounting, an accruing income can be charged to tax only when it is likely to be received under the given circumstances. Even the principal amount of deposit made by the assessee became irrecoverable. These facts indicate that the assessee did not receive any such interest income from Rupee Co-op Bank Ltd. whose functions were banned by the RBI. When we consider the mercantile system of accounting in juxtaposition to real income theory in the facts and the circumstances of the instant case, the inescapable conclusion which follows is that the interest income cannot be included in the total income of the assessee for the year under consideration. Such an income may be appropriately charged to tax on the regularisation of the operations of the bank coupled with the possibility of receipt of income in foreseeable future. Insofar as the instant year is concerned, we hold that the interest cannot be charged to tax. The impugned order is overturned and the addition is deleted. - Decided in favour of assessee.

Summary

Issues:
Confirmation of addition of interest income from bank in the assessment year 2013-14.

Analysis:
The appeal pertains to the confirmation of the addition of interest income from a bank in the assessment year 2013-14. The assessee, a company engaged in warehouse renting, had not disclosed interest income of &8377;26,125 from a defunct bank in its return. The Assessing Officer (AO) made an addition based on 26AS data, which was upheld in the first appeal. The Revenue argued for the inclusion of the interest income based on the accrual concept of income under the mercantile system of accounting.

The Tribunal noted that the bank in question had been banned by the RBI, rendering all financial transactions impossible. The assessee confirmed during the first appellate proceedings that the interest income was not received even at that time. The Tribunal considered the real income theory and the concept of accrual of income. It emphasized that an accruing income can only be charged to tax when it is likely to be received under the given circumstances. In cases where realization of income after accrual is uncertain, the accrual gets deferred until certainty is established.

Considering the irrecoverable nature of the principal amount deposited by the assessee in the defunct bank and the complete uncertainty surrounding the realization of the interest income, the Tribunal held that the interest income of &8377;26,125 cannot be included in the total income for the assessment year 2013-14. The Tribunal overturned the impugned order and deleted the addition. The decision was based on the impossibility of realizing the interest income due to the bank's defunct status and the uncertainty surrounding its recovery.

In conclusion, the Tribunal allowed the appeal, ruling that the interest income from the defunct bank should not be charged to tax in the assessment year 2013-14. The decision was made in consideration of the mercantile system of accounting and the real income theory, emphasizing the importance of certainty in income realization for taxability.