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Issues Involved:
1. Addition of Rs. 2,40,000 on account of interest income on debentures. Summary: Issue 1: Addition of Rs. 2,40,000 on account of interest income on debentures The assessee, a company engaged in manufacturing components for car air conditioners, filed a return declaring a total loss of Rs. 37,05,627. The auditors noted that "Revenue arising out of interest on debentures of Rs. 20,00,000 of a private limited company is not recognized as income as there is significant uncertainty of collectibility." The Assessing Officer (AO) added Rs. 2,40,000 as interest income on debentures, stating that the interest income had accrued to the assessee and was chargeable to tax as per the mercantile system of accounting. The assessee contended that the interest income was not recognized due to the financial crisis of M/s. PAL Enterprises (P.) Ltd., the issuer of the debentures, and relied on Accounting Standard-9 issued by ICAI and the decision of the Hon'ble Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102. The CIT(A) upheld the AO's decision, stating that the right to receive interest existed and the financial position of M/s. PAL Enterprises could not be a ground for not providing interest. On appeal, the Tribunal considered the relevant judicial pronouncements and the minutes of the Board meeting of the assessee-company held on 30-6-2001, which indicated that the company decided not to provide for the interest income due to the financial crisis of M/s. PAL Enterprises and accepted their request to treat the investment as interest-free. The Tribunal held that the right to receive interest was waived by the assessee-company, and there was no real income to be taxed on an accrual basis. Consequently, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 2,40,000. In conclusion, the appeal of the assessee was allowed.
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