2023 (7) TMI 1085 - AT - Income Tax

Accrual of interest expenditure / income - Disallowance u/s 36(1)(iii) - Applicability of AS-9 issued by the ICAI - CIT(A) deleted the additions - As per AO assessee was following Mercantile System of Accounting hence the interest income accrued on the advances is taxable - CIT(A) deleted the disallowance finding merit in the reasoning given by the assessee before it for the short charging of interest or noncharging of interest on the impugned advances, as there was no possibility of collecting the same since the principal amount of advance itself was overdue and not being collected, therefore the assessee had stopped charging interest on the same or was booking only the amount of interest actually received from the said party - HELD THAT - We find no merit in this contention of the Revenue since it is a self-defeating argument. AS-9, issued by the Institute of Chartered Accountants of India, which is the parent body of the Chartered Accountant professionals, guiding and governing the professionals, prescribes manner of recognition of Revenue and it categorically states that revenue can be said to be accrued only when there is certainty of collection of the same. Therefore, where there is no certainty of collection, revenue cannot be said to be accrued at all. As per the Mercantile System of Accounting also, which follows accrual method of accounting, where there is no certainty of collection of revenue, income cannot be recognized. AS-9 is for the purpose of accounting for income on mercantile basis only. Therefore, the contention of the ld. DR that AS-9 had been incorrectly applied by the ld. CIT(A), while the mercantile system should have been applied is completely contradictory contention. No infirmity in the order of the ld. CIT(A) in holding that the short charging of interest on certain loan/advances given by the assessee and also non-charging of interest on certain other loans/advances was as per the Mercantile System of Accounting; and, therefore, there was no case for making any disallowance u/s 36(1)(iii) - Appeal filed by the Revenue is accordingly dismissed.

Summary

Issues Involved:
1. Deletion of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Application of Accounting Standard (AS)-9 in accounting for income from advances.

Summary:

Issue 1: Deletion of Disallowance under Section 36(1)(iii)
The Revenue's grievance pertains to the deletion by the Commissioner of Income-tax (Appeals) [CIT(A)] of the disallowance made by the Assessing Officer (AO) of Rs. 5,72,21,840/- under Section 36(1)(iii) of the Income Tax Act, 1961. The AO noted that the assessee had taken substantial unsecured loans and claimed significant interest expenditure but had advanced loans to parties either without charging interest or at a nominal rate. The AO identified specific instances where the interest charged was significantly lower than agreed or not charged at all, leading to a disallowance of Rs. 5,72,21,840/-.

The CIT(A) deleted the disallowance, accepting the assessee's reasoning that due to financial difficulties of the borrowers, the principal amount itself was overdue, making the collection of interest uncertain. The CIT(A) found merit in the assessee's application of AS-9, which stipulates that only income certain of recovery should be recognized as revenue. The CIT(A) noted that the assessee had provided explanations for each party regarding the short charging or non-charging of interest, supporting the decision with ledger accounts and other documentation.

Issue 2: Application of Accounting Standard (AS)-9
The Revenue contended that the CIT(A) erred in applying AS-9, arguing that since the assessee followed the Mercantile System of Accounting, the entire interest income should be treated as accrued and taxable. However, the CIT(A) applied the principle from AS-9, which states that revenue should be recognized only when it is measurable and collectable with certainty. The CIT(A) found that the assessee had demonstrated that the recovery of the principal itself was uncertain, justifying the non-recognition of interest income.

The Tribunal found no merit in the Revenue's contention, highlighting that AS-9 is consistent with the Mercantile System of Accounting, which also requires certainty of collection for revenue recognition. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not dispute the facts or the interpretation of AS-9 by the CIT(A). The Tribunal concluded that the short charging and non-charging of interest were in accordance with the Mercantile System of Accounting, and there was no basis for disallowance under Section 36(1)(iii).

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance of Rs. 5,72,21,840/- under Section 36(1)(iii) and validating the application of AS-9 for accounting the interest income from advances. The order was pronounced in open court on 12/07/2023 at Ahmedabad.