2023 (10) TMI 617 - AT - Income Tax

Accrual of income - Notional Interest on FDs under Restraint Order - Treating the interest income accrued on the fixed deposits as under attachment by the orders of CBI Court - right to receive - whether Placing of prohibitory orders over the deposits has not affected the accrual of interest and as per section 5 of the Act and there is accrual of interest income in the subject assessment year? - HELD THAT - Interest income of the assessee can be recognized only when there is no uncertainty and significant scope to receive the same. Therefore in the case of assessee accrued interest on bank deposit on which prohibitory order placed by CBI Hyderabad cannot be treated as interest income of the assessee during these two assessment years until the assessee has actually received it from the bank though it was subject to TDS. This view of ours is fortified by the order of Tribunal in the case of Selvi J. Jayalalitha 2016 (9) TMI 1662 - ITAT CHENNAI Deduction of TDS u/s 194A - As held by 2021 (11) TMI 577 - KARNATAKA HIGH COURT and the Hon ble High Court vide order dated 21.9.2021 Hon ble Court that the entitlement of interest accruing on the FDs to the assessee would be dependent on the result of the pending Court/CBI proceedings and consequently till the conclusion of the said court proceedings the interest accruing on the FD cannot be considered as income for the purpose of deduction of TDS u/s 194A and directed the bank not to deduct TDS on the interest of FDs. However it cannot be treated as absolving the assessee of its liability to pay tax on the interest accruing on the FD if the petitioner becomes entitled to the same after conclusion of the court proceedings. Being so in our opinion the lower authorities has committed an error in bringing the interest accrued on FD which is subject to prohibitory order by CBI Hyderabad into tax in these assessment years under consideration and the same has to be taxed in assessment year when it was actually received by the assessee or right to receive accrued to the assessee - assessee has to pay the tax on the same on actual accrual of right to receive this impugned interest by the assessee in any assessment year and not in these assessment years. Accordingly this ground of appeal of the assessee is partly allowed. Disallowance u/s 14A - expenditure related to exempt income - assessee argued that as AO has considered certain investments though it was not exempted income yielding investment - HELD THAT - We hold that disallowance should be restricted to the amount of exempted income earned by the assessee after considering only the exempted income yielding investments so as to apply the formula contained in Rule 8D. Accordingly the issue is restored to the file of ld. AO for fresh consideration. This ground of assessee is partly allowed for statistical purposes. Computation of income u/s 115JB - As main grievance of ld. A.R. is that he has not followed the provisions of section 115JB r.w. Explanation in proper perspective and in our opinion this issue requires to be examined by ld. AO and to pass a fresh order in total conformity with the provisions of section 115JB r.w. all the explanations therein. This ground of appeal is partly allowed for statistical purposes

Issues Involved:
1. Addition of Notional Interest on FDs under Restraint Order.
2. Disallowance under Section 14A of the Income Tax Act.
3. Computation of Income under Section 115JB of the Income Tax Act.

Summary:

Issue No. 1: Addition of Notional Interest on FDs under Restraint Order
The primary issue was whether the interest income accrued on fixed deposits, which were under attachment by the orders of the CBI Court, should be treated as taxable income. The assessee argued that due to the prohibitory orders, there was no right to receive the interest, and thus, it should not be taxed. The AO disagreed, stating that the interest had accrued and was taxable under the mercantile system of accounting. The CIT(A) upheld the AO's decision, citing sections 2(24), 2(45), 4, and 5 of the Income Tax Act, and the Supreme Court decision in Morvi Industries Ltd. v. CIT. However, the Tribunal found that income accrues only when the right to receive it is vested in the assessee. Since the fixed deposits were under prohibitory orders, the right to receive interest was suspended. The Tribunal relied on several judicial precedents, including the Supreme Court's decisions in E.D. Sassoon & Co. and CIT v. Balbir Singh Maini, and concluded that the notional interest should not be taxed until the right to receive it is established. The Tribunal also noted the Karnataka High Court's interim order directing banks not to deduct TDS on such interest. Thus, the Tribunal ruled in favor of the assessee, stating that the interest income should be taxed when it is actually received or the right to receive it accrues.

Issue No. 2: Disallowance under Section 14A of the Income Tax Act
The second issue was the disallowance of Rs. 62,19,040/- under Section 14A, read with Rule 8D, related to exempt income. The assessee contended that the investments were made out of surplus funds and for strategic purposes, and thus, Section 14A should not apply. The AO and CIT(A) disagreed, citing the Supreme Court decision in Maxopp Investment Ltd. v. CIT. The Tribunal, however, noted that the AO did not record satisfaction as required before invoking Section 14A and that the disallowance should not exceed the exempt income earned. The Tribunal directed the AO to reconsider the disallowance, ensuring it does not exceed the exempt income and only includes investments that yield exempt income.

Issue No. 3: Computation of Income under Section 115JB of the Income Tax Act
The final issue was the computation of income under Section 115JB (Minimum Alternate Tax). The assessee argued that the AO incorrectly added the notional interest on fixed deposits under prohibitory orders to the book profit. The Tribunal agreed that Section 115JB is a self-contained code and directed the AO to recompute the book profit in conformity with Section 115JB, excluding the notional interest.

Conclusion:
The Tribunal ruled partly in favor of the assessee, directing the AO to exclude the notional interest from taxable income until the right to receive it is established, reconsider the disallowance under Section 14A, and recompute the book profit under Section 115JB.

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