2025 (1) TMI 272 - AT - Income Tax

Income recognition - mercantile system of accounting - interest income liable to be taxed on accrual basis or not? - CIT(a) deleting the addition and accepting the income of the assessee as per its audited annual report ignoring the assessee is following the mercantile system of accounting - HELD THAT - RGPPL and KLNG has settled the loan as per the one time settlement scheme (OTS) pursuant to the Hon ble NCLAT order and the assessee has received part of the principal and interest component even before the settlement was effected. CIT(A) has accepted the assessee s contentions that it has not received any principal or interest subsequent to the settlement of loan post the order of Hon ble NCLAT. CIT(A) held that AO s contentions that the assessee has not followed a consistent method for revenue recognition is also negated for the reason that due to the uncertainty that prevailed because of the Hon ble NCLAT proceeding in the case of RGPPL, application of AS-9 is justified where the revenue recognition is based on the actual interest received during the year under consideration which is NIL during the impugned year. To corroborate further the assessee being a government entity is subjected to statutory audit by Comptroller and Auditor General of India (CAG) along with supplementary audit which has approved the revenue recognition adopted by the assessee in considering AS-9 to be appropriate in case of uncertainties arising subsequent to preparation of the balance sheet. Assessee relied on the decision of M/s. MMTC Ltd. 2024 (2) TMI 785 - ITAT DELHI to substantiate that Accounting Standard AS-9 on revenue recognition issued by ICAI in case of uncertainty is most appropriate. It is also pertinent to point out that the ld. AO has also not brought on record any fact to establish that the assessee has received the impugned amount during the year under consideration in his remand report. The revenue has nothing to controvert assessee s contentions. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in law by deleting the addition of Rs. 140,49,65,231/- and accepting the income of the assessee as per its audited annual report, without considering the mercantile system of accounting followed by the assessee.

2. Whether the CIT(A) erred in law in deleting the addition without appreciating that the interest income was liable to be taxed on an accrual basis in accordance with the mercantile system of accounting adopted by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Addition by CIT(A)

Relevant Legal Framework and Precedents:

The legal framework involves the Income Tax Act, 1961, particularly the provisions related to income recognition and the mercantile system of accounting. The Accounting Standard (AS) 9 on revenue recognition is also relevant, as it addresses the recognition of income in situations of uncertainty.

Court's Interpretation and Reasoning:

The Tribunal considered the CIT(A)'s reasoning that the assessee, a special purpose vehicle, was set up for a specific purpose and had not undertaken any other activity. The CIT(A) found that the assessee had not received any principal or interest subsequent to the settlement of the loan post the NCLAT order. The CIT(A) accepted the assessee's explanation for not filing the original income tax return and recognized the revenue based on the actual interest received during the year, which was nil.

Key Evidence and Findings:

The CIT(A) relied on the bank statements, the NCLAT order, and the audited financial statements to conclude that the assessee did not receive the impugned amount during the year. The bank statements showed nil receipts from RGPPL, contradicting the Form 26AS which indicated a payment of Rs. 140,24,25,867/-. The CIT(A) also noted that the revenue recognition method was approved by the Comptroller and Auditor General of India (CAG).

Application of Law to Facts:

The CIT(A) applied AS-9 to justify the revenue recognition based on actual receipt due to uncertainty arising from the NCLAT proceedings. The CIT(A) concluded that the assessee's revenue recognition was consistent with AS-9, given the uncertainty in collection.

Treatment of Competing Arguments:

The Tribunal noted the Revenue's argument that the assessee did not follow a consistent method for revenue recognition. However, the Tribunal found that the CIT(A) had adequately addressed this by considering the uncertainty involved and the subsequent NCLAT order.

Conclusions:

The Tribunal upheld the CIT(A)'s decision to delete the addition, finding no infirmity in the CIT(A)'s order.

Issue 2: Accrual Basis of Interest Income

Relevant Legal Framework and Precedents:

The issue concerns the application of the mercantile system of accounting, which requires income to be recognized on an accrual basis. However, AS-9 allows for revenue recognition to be postponed in cases of uncertainty.

Court's Interpretation and Reasoning:

The Tribunal agreed with the CIT(A) that the uncertainty surrounding the collection of interest justified the application of AS-9. The CIT(A) found that the assessee had recognized revenue based on actual receipts due to the uncertainty in collection, which was resolved by the NCLAT order.

Key Evidence and Findings:

The Tribunal noted the CIT(A)'s reliance on the NCLAT order, which settled the loan and interest components, and the bank statements showing nil receipts during the year.

Application of Law to Facts:

The Tribunal found that the CIT(A) correctly applied AS-9 in recognizing revenue based on actual receipts, given the uncertainty in collection.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's argument regarding the accrual basis but found that the CIT(A) had adequately addressed the issue by applying AS-9 due to the uncertainty involved.

Conclusions:

The Tribunal upheld the CIT(A)'s decision, agreeing that the interest income was not liable to be taxed on an accrual basis due to the uncertainty in collection.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"In view of the NCLAT settlement order and the bank statement submitted by the appellant, it is seen that the amount mentioned in Form 26AS, which forms the basis of the AO's addition, was not actually received by the appellant during the year."

Core Principles Established:

The Tribunal established that in cases of uncertainty, revenue recognition should be based on actual receipts, as per AS-9. The Tribunal also emphasized the importance of considering the specific circumstances and purpose of the assessee, particularly when it is a special purpose vehicle.

Final Determinations on Each Issue:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition and accept the income as per the assessee's audited annual report.

Cross-References Between Related Points:

The Tribunal's conclusions are consistent across the assessment years 2014-15 to 2017-18, as the findings in ITA No. 2580/Mum/2024 for A.Y. 2014-15 apply mutatis mutandis to the other appeals.

Order Pronouncement:

The Tribunal dismissed all the appeals filed by the Revenue, with the order pronounced in the open court on 28.11.2024.