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2024 (5) TMI 955 - AT - Income TaxIncome tax levied on hypothetical income - Accrual of income or not? - interest income on FDRs - hypothetical v/s real income - Division of interest income on FDRs between UP Forest Corporation and Uttarakhand Forest Corporation -Taxability of interest income in the hands of Uttarakhand Forest Corporation - FDRs purchased from the undivided fund in the undivided state of UP by the Forest Corporation - HELD THAT - As per the negotiation between two state governments, the UP forest Corporation has paid FDRs to the amount of Rs. 77.37 crores only without interest to the Assessee, the interest income on FDRs were neither crystallized nor any interest amount paid to the assessee as no final conclusion came out regarding the payment of interest income to the assessee. This is a clear case where there is no certainty reached between Chief Secretaries of respective States to arrive at the agreement regarding payment of interest. Once it is established that there is no certainty of realization of interest income for the Assessee herein, taxing the said unrealized/hypothetical interest income in the hands of the Assessee would only result in gross injustice to the Assessee . By following the ratio laid down in the case of Messrs. Shoorji Vallabhdas and Co. 1962 (3) TMI 6 - SUPREME COURT , Godhra Electricity Company Ltd. 1997 (4) TMI 4 - SUPREME COURT and Excel Industries 2013 (10) TMI 324 - SUPREME COURT we hold that the interest income has to be taxed in the instant case on receipt basis or when certainty regarding interest income is reached thereon between the Assessee and UP Forest Corporation whichever is earlier. Accordingly, we delete the additions made by the A.O. by setting aside the orders of the Ld. CIT(A) on allowing the Grounds of Appeal of the assessee.
Issues Involved:
1. Taxability of interest income claimed by the UP Forest Corporation. 2. Dispute regarding the division of assets and liabilities between UP and Uttarakhand Forest Corporations. 3. Condonation of delay in filing the appeals. 4. Hypothetical income versus real income for tax purposes. Summary: 1. Taxability of Interest Income: The primary issue was whether the interest income of Rs. 23,28,73,578/- (54% of the total interest) claimed by the UP Forest Corporation should be assessed in the hands of the assessee. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision to assess this interest income in the hands of the assessee, despite the UP Forest Corporation disputing its liability to pay even the principal amount. 2. Dispute Regarding Division of Assets and Liabilities: The division of assets and liabilities between the UP and Uttarakhand Forest Corporations was based on a notification dated 13.02.2004, which stipulated a 46:54 ratio. The UP Forest Corporation had not physically transferred the funds or interest to the assessee. The dispute led the assessee to file a writ petition for the release of funds along with interest. The High Court directed the UP Forest Corporation to release Rs. 229.55 crores to the assessee, which was further contested by both parties. 3. Condonation of Delay: There was a delay in filing the appeals, which the assessee attributed to awaiting a decision on an application u/s 154 of the Income Tax Act for clarification on income treatment. The Tribunal condoned the delay, citing the reasons provided by the assessee. 4. Hypothetical Income vs. Real Income: The Tribunal emphasized that income tax is levied on real income, not hypothetical income. Since the interest income had not been received or crystallized due to ongoing disputes, it could not be taxed. The Tribunal referred to several Supreme Court judgments, including Commissioner of Income Tax Vs. Messrs. Shoorji Vallabhdas and Co. and Godhra Electricity Company Ltd. Vs. Commissioner of Income Tax, to support this view. Conclusion: The Tribunal concluded that the interest income should be taxed on a receipt basis or when certainty regarding the interest income is reached between the assessee and the UP Forest Corporation. Consequently, the additions made by the Assessing Officer were deleted, and the appeals filed by the assessee were allowed.
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