2005 (9) TMI 249 - AT - Income Tax

Issues Involved:
1. Accrual of interest income on inter-corporate deposits (ICD).
2. Determination of "sticky" or doubtful debts.
3. Change in accounting method from mercantile to cash basis.
4. Application of the concept of real income.
5. Applicability of CBDT circulars and Supreme Court judgments.

Detailed Analysis:

1. Accrual of Interest Income on Inter-Corporate Deposits (ICD):
The assessee contested that the CIT(A) erred in confirming the addition of Rs. 10,80,000 and Rs. 12,60,123 for the assessment years 1998-99 and 2001-02, respectively, on account of interest income. The assessee had given ICDs to M/s Padmani Polymers Ltd. (PPL) at 24% interest. Due to financial constraints, PPL requested deferment and issued post-dated cheques, some of which bounced. Legal actions under the Negotiable Instruments Act and a winding-up petition under the Companies Act were initiated, leading to partial recoveries and a court-ordered settlement.

2. Determination of "Sticky" or Doubtful Debts:
The AO and CIT(A) concluded that the debt was not "sticky" or doubtful, as the borrower was not insolvent and the company's shares were trading above par value. The CIT(A) emphasized that the debt had not become irrecoverable, and the assessee received interest until May 1997. The CIT(A) noted that the assessee's legal actions and subsequent recoveries indicated that the debt was not doubtful.

3. Change in Accounting Method from Mercantile to Cash Basis:
The AO rejected the assessee's change from mercantile to cash basis for recognizing interest income, citing that such a change was not permissible under Section 145 of the Act. The CIT(A) supported this view, stating that the assessee could not adopt a mixed method of accounting selectively for interest income.

4. Application of the Concept of Real Income:
The assessee argued that no real income had accrued due to the doubtful nature of the debt. The CIT(A) and the Tribunal rejected this argument, referencing Supreme Court judgments, including State Bank of Travancore vs. CIT, which held that the concept of real income could not be used to negate accrued income. The Tribunal emphasized that the mere improbability of recovery does not defeat the accrual of income.

5. Applicability of CBDT Circulars and Supreme Court Judgments:
The Tribunal considered the CBDT circulars and relevant Supreme Court judgments. The Tribunal noted that the circulars, particularly the one referenced in UCO Bank vs. CIT, were specific to banking companies and not applicable to the assessee. The Tribunal reiterated that the concept of real income could not override the provisions of the Act, and the interest income had accrued based on the mercantile system of accounting followed by the assessee.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming the addition of interest income of Rs. 10,80,000 for the assessment year 1998-99 and Rs. 12,60,123 for the assessment year 2001-02. The Tribunal dismissed the appeals, concluding that the interest income had accrued and was taxable based on the mercantile system of accounting, and the debt was not considered "sticky" or doubtful to negate the accrual of income.

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