2022 (4) TMI 146 - AT - Income Tax

Difference between income shown in 26AS and as shown in profit loss account - Income recognition - Method of accounting - recording the income after rendering the services - HELD THAT - Admittedly, the assessee is following mercantile system of accounting which requires to recognize and record the transactions as and when they take place. Under the Mercantile system of accounting method, the Revenue is recorded when it is actually earned, and the expenses are reported when they are actually incurred. In the present case, the services have been rendered by the assessee then the same should be accounted for in the books of accounts. Assessee has contended before the authorities below that he has been recording the income after rendering the services in the subsequent month - This contention of the assessee has nowhere been challenged by the authorities below. Accordingly, we assume that contention of the assessee is correct. Thus, it is implied that the income which has been accounted by the assessee in the month of April 2008 i.e. the year under consideration actually pertains to the month of March 2008. But no benefit has been extended by the authorities below. If the assessee has offered the income pertaining to the month of March 2009, in the subsequent month i.e. April 2009, thus if any addition is made in the current year, the same would lead to double addition which is unwanted. Thus, we are of the view that the justice would be served to the Revenue as well as assessee if the assessee is able to prove that the difference of income pointed out by the AO has been offered to tax in the subsequent year. If that be so, no addition is warranted. Assessee has not challenged the addition made by the authorities below with respect to the interest from bank Accordingly we confirm the same. Hence the ground of appeal of the assessee is partly allowed for the statistical purposes. Addition of interest on the loan bearing funds diverted for non-commercial purposes - assessee on one hand is incurring interest expenses on the borrowed fund and on the other hand the assessee has advanced money without charging any interest thus the AO worked out the proportionate amount of interest on such interest free loans and advances and added to the total income of the assessee - HELD THAT - Admittedly, the majority of the amount was advanced as loans to the parties in the earlier years except a sum of ₹ 6.25 lakhs. Undeniably, there was no disallowance was made by the revenue in the earlier year for the amount of interest attributable with respect to such loans and advances extended by the assessee. Accordingly we are of the view that, there cannot be any disallowance on account of interest expenses on the amount of loans advances which were extended in the earlier years. There was sufficient amount of fund available with the assessee to justify the interest-free loans and advances - As such we assume that, impugned amount of loans and advances ₹ 6.25 lakhs has been extended by the assessee out of interest free loans and advances. Therefore, no disallowance of interest qua to such loan advances is warranted. See TORRENT POWER LTD 2014 (6) TMI 185 - GUJARAT HIGH COURT - we hold that there cannot be any disallowance of interest expenses as alleged by the authorities below. Accordingly we set aside the finding of the learned CIT(A) and direct to the AO to delete the addition made by him - Decided in favour of assessee.

Summary

Issues Involved:
1. Difference between income reported in the return of income and in Form 26AS.
2. Disallowance of interest on interest-free loans and advances.

Issue-wise Detailed Analysis:

1. Difference between income reported in the return of income and in Form 26AS:

The first issue raised by the assessee pertains to the difference between the income reported in the return of income and the income reflected in Form 26AS. The Assessing Officer (AO) observed discrepancies amounting to ?3,15,804/- between the income declared by the assessee and the income reported in Form 26AS. The AO added this amount to the total income of the assessee. The learned Commissioner of Income Tax (Appeals) [CIT(A)] partly upheld the AO's addition, emphasizing that the appellant had claimed Tax Deducted at Source (TDS) on the amounts shown in Form 26AS, thus necessitating the inclusion of these amounts in the income for the relevant year.

The assessee contended that the differences arose because income pertaining to March 2010 was accounted for in the subsequent month, a practice consistently followed and previously accepted by the revenue. The tribunal acknowledged the assessee's mercantile system of accounting, which records revenue when earned and expenses when incurred. The tribunal noted that the authorities did not challenge the assessee's practice of recording income in the subsequent month. Therefore, it was implied that income recorded in April 2008 actually pertained to March 2008. The tribunal held that if the assessee could prove that the income difference was offered to tax in the subsequent year, no addition was warranted. However, the tribunal confirmed the addition of ?1,49,916/- related to interest from the bank, as this was not challenged by the assessee.

2. Disallowance of interest on interest-free loans and advances:

The second issue concerns the disallowance of ?10,77,000/- on account of interest on borrowed funds diverted for non-commercial purposes. The AO found that the assessee had incurred interest expenses on borrowed funds while advancing money without charging interest. The AO calculated the proportionate interest on such interest-free loans and added it to the total income. The CIT(A) partly upheld this disallowance, noting that the appellant failed to demonstrate that the interest-free loans were given out of interest-free funds. However, the CIT(A) allowed relief for an amount used to purchase a flat for housing staff.

The assessee argued that the interest-free loans were extended in earlier years, except for ?6.25 lakhs, and no disallowance was made in those years. The tribunal agreed, citing the principle of consistency and definiteness of approach by the revenue, as established in the case of CIT Vs. Sridev Enterprises. The tribunal noted that sufficient interest-free funds were available with the assessee to justify the interest-free loans and advances. Therefore, no disallowance of interest expenses was warranted. The tribunal set aside the CIT(A)'s finding and directed the AO to delete the addition.

Conclusion:

In conclusion, the tribunal partly allowed the appeal for statistical purposes. It directed the AO to verify if the income differences were offered to tax in the subsequent year and to delete the addition if proven. The tribunal also directed the deletion of the disallowance of interest expenses related to interest-free loans and advances, except for the confirmed amount of ?1,49,916/- related to bank interest. The order was pronounced on 28/02/2022 at Ahmedabad.