2014 (7) TMI 421 - AT - Income Tax

Accrual of interest income interest was not received - doubt on receipt of income in future - Held that - the assessee did not produce any document to show that there existed the circumstances at least by the due date for filing return of income, which has lead him to come to the belief that he will not receive interest any more - the non-receipt of interest alone cannot be a criteria for not offering the same as the income of the assessee, since it has accrued to him and the accrual has also been acknowledged by the debtors - CIT(A) was justified in confirming the assessment of difference amount of interest Decided against the assessee. Interest expenses u/s 14A r.w. Rule 8D of the Act Held that - There is no discussion about the examination of the details furnished by the assessee, particularly the Capital account copy of the assessee in the firm M/s Nathalal Shivlal on which the reliance is placed by the assessee, has not been examined by CIT(A) - there is also transfer of funds to the Partnership concern from M/s Shreeji Textiles - the contention of the assessee requires critical examination - one can accept the claim of the assessee that the investment has been made out of own funds only after examination of the relevant money transactions - the AO has made the disallowance without considering the submissions of the assessee thus, the matter is to be remitted back to the AO for fresh examination.

Summary

Issues Involved:
1. Disallowance of interest expenditure u/s 14A of the Income Tax Act, 1961.
2. Assessment of undisclosed income as interest income.

Issue 1: Disallowance of Interest Expenditure u/s 14A:
The appeal challenged the disallowance of interest expenditure under section 14A of the Act. The assessee argued that the investment in a company was made from own funds, supported by bank account and capital account details. The counsel contended that the CIT(A) erred in not accepting that no borrowed funds were used. Reference was made to a previous year's order where similar disallowance was deleted. The department argued that the claim needed AO's examination, citing a High Court decision. The tribunal noted the need for a fresh examination by the AO considering the assessee's submissions and evidences.

Issue 2: Assessment of Interest Income:
Regarding the assessment of interest income, the assessee explained non-accounting of interest due to debtors' default post-August 2007. The AR argued against penalizing the assessee for non-declaration due to the debtors' actions. The department maintained that as per mercantile accounting, the accrued interest should have been declared. The tribunal observed that the assessee accepted the assessment of the difference amount conditionally. It emphasized that income assessment is not dependent on the assessee's acceptance. The tribunal upheld the CIT(A)'s decision to assess the difference amount of interest, considering the mercantile system of accounting and the accrual of interest acknowledged by the debtors.

In conclusion, the tribunal allowed the appeal for statistical purposes, directing a fresh examination of the interest expenditure disallowance issue by the AO and upholding the assessment of the difference amount of interest income.