2015 (2) TMI 291 - HC - Income Tax

Interest income from housing loans given by the assessee to the seven societies - whether be treated as income accrued or received to the assessee? - assessee was following mercantile system of accounting - Held that - Chargeable interest is interest that accrued or arose in the previous year, irrespective of whether such interest was actually received. Thus, where any loan or advance is given for a certain term, for example, where a loan is given for 5 years and interest is to be computed periodically, but is actually realised in advance, at the time of disbursement of the loan/advance, there interest would become chargeable. Periodically and not at the time when it is actually realised. Similarly, if the interest is to be computed in monthly, quarterly, or yearly rests, chargeable interest would accrue at the end of the months, quarter or year, as the case may be, even though actual realization may take place at a later date. As already held that nonoperational sticky loans in respect of which mercantile actual of interest was shown in the suspense account and not the profit and loss account, would not, in law, be payable on mercantile accrual basis. Interest on such loans would have to be accounted for and paid as and when it is realised. See UCO BANK VS. CIT, WEST BENGAL-III, KOLKATA 2014 (1) TMI 86 - CALCUTTA HIGH COURT - Decided in favour of the assessee. Provisions of section 34 of the Code of Civil Procedure relied particularly in view of section 5 of the Income Tax Act, 1961 - Held that - In this case, it was not any doubtful loan and the interest has not been kept, although, the Tribunal has held, as noted herein above. . The assessee in this case was and had never decided to waive off any loan or interest, but, has filed suits and bad debts can be written-off in terms of Section 37 of the Act.- Decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the interest income from housing loans given by the assessee to the seven societies could be treated as income accrued or received by the assessee under the mercantile system of accounting.
2. Whether the Tribunal was justified in placing reliance on the provisions of Section 34 of the Code of Civil Procedure in view of Section 5 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interest Income Accrual under Mercantile System:
The appellant-revenue challenged the Tribunal's decision, which allowed the assessee's appeals against the additions made by the AO towards interest income. The AO had held that the interest income, which would accrue in the future, was taxable as the assessee was following the mercantile system. The Tribunal, however, observed that the assessee did not charge interest on loans given to certain cooperative societies due to ongoing litigation and uncertainty in recovery. The Tribunal relied on various judgments and guidelines from the Institute of Chartered Accountants (AS9) to conclude that income should only be recognized when its collection is reasonably certain. The Tribunal held that in the case of uncertain interest income from housing loans under litigation, it could not be treated as income accrued or received in the year under appeal. The High Court upheld this view, noting that the concept of real income, as laid out in the "STATE BANK OF TRAVANCORE VS. CIT" case, did not apply here since the interest was never accrued to avoid unreal inflated profits, and the amounts were treated as bad debts under Section 36(1) of the Act.

2. Reliance on Section 34 of the Code of Civil Procedure:
The appellant-revenue argued that the Tribunal erred in relying on Section 34 of the Code of Civil Procedure, especially considering Section 5 of the Income Tax Act. The Tribunal had interpreted Section 34, which deals with interest payable as adjudged by the court, to support its decision that interest income did not accrue to the assessee due to ongoing litigation. The High Court agreed with the Tribunal, stating that the provisions of Section 34 were correctly applied in the context of the case. The court distinguished the facts from the "H.P. MINERAL AND IND. DEVELOPMENT CORPORATION VS. CIT" case, where the decision to waive interest was taken after the income had already accrued. In the present case, the assessee had not waived any interest but had taken legal action to recover the loans, and the interest was not accounted for due to uncertainty in recovery.

Conclusion:
The High Court dismissed the appeals, holding that the Tribunal was justified in its findings. The interest income from housing loans under litigation could not be treated as accrued or received by the assessee under the mercantile system. The Tribunal's reliance on Section 34 of the Code of Civil Procedure was appropriate, and the appellant-revenue's arguments were not upheld. The court concluded that both questions of law were answered against the appellant-revenue and in favor of the assessee.