2012 (11) TMI 756 - AT - Income Tax

Addition on account of accrued interest Assessee has given loan to unrelated party - Interest at 18% was taken as accrued upto 30.6.1996 and subsequently no amount was recognized as income in the books of account Assessee contended that principal itself is doubtful for recovery, question of accounting interest as income does not arise Held that - As one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. There is uncertainty in realizing the principle itself. The principles laid down in recognizing the income equally applies to the facts of the case. For these reasons, we are of the opinion that no notional interest can be brought to tax. Appeal decides in favour of assessee

Summary

Issues Involved:
1. Addition on account of notional interest.
2. Reopening of the assessment.

Detailed Analysis of the Judgment:

1. Addition on Account of Notional Interest:
The primary issue in these appeals was the addition of Rs. 16,56,000/- as notional interest in each assessment year. The assessee, an investment company, had advanced an interest-bearing deposit of Rs. 92 lakhs to M/s Sameta Exports (P) Ltd at 18% interest. However, due to the adverse financial position of the borrower, the assessee stopped accounting for interest from 1998-99 onwards. The Assessing Officer (AO) added Rs. 16,56,000/- as accrued interest, arguing that under the mercantile system of accounting, the interest accrues to the assessee.

Before the CIT (A), the assessee contended that the borrower had requested not to charge interest due to financial difficulties, and the Board of Directors had decided not to recognize interest income as per accounting standard AS-9 on revenue recognition due to uncertainties in collection. The CIT (A) disagreed, stating there was no significant uncertainty and confirmed the addition.

The Tribunal considered the facts and the principles laid down in various case laws, emphasizing that income accrual should be based on real income and practical realizability. It was noted that the borrower had been incurring heavy losses, and the principal itself was doubtful for recovery. The Tribunal concluded that no notional interest could be brought to tax, as there was a genuine uncertainty in realizing the principal amount itself.

2. Reopening of the Assessment:
The issue of reopening the assessment was initially contested but later withdrawn by the assessee during the hearing. The assessments for the years 2001-02 to 2004-05 and 2006-07 were reopened based on the order for the assessment year 2005-06.

Conclusion:
The Tribunal allowed the appeals regarding the addition of notional interest, directing the AO to delete the interest brought to tax in the respective years. The reopening of assessments was not contested further by the assessee.

Summary:
The Tribunal ruled in favor of the assessee, stating that due to the financial instability of the borrower and the genuine uncertainty in recovering the principal amount, no notional interest should be added to the assessee's income. The principles of real income and practical realizability were upheld, and the AO was directed to delete the additions in all the assessment years in question.