2015 (5) TMI 791 - HC - Income Tax

Deemed accrual of interest - Tribunal held that the interest had accrued to the assessee and hence was assessable to tax in the hands of the Appellant - Held that - The judgment Shoorji Vallabhdas & Co. (1962 (3) TMI 6 - SUPREME Court) has been recently follows in CIT V. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT where it was reiterated that income tax is levied on real income and not hypothetical income. Therefore, entries inspired by realistic prospects of their realisation cannot per se constitute the basis of a valid levy. This view finds support in the Division Bench ruling of this Court in CIT V. Goyal M G Gases (2007 (7) TMI 241 - DELHI HIGH COURT). Furthermore, this Court is of the opinion that having once accepted the assessee s explanation, with respect to the income not in fact accruing and therefore not liable to be taxed for the previous period 1998-99, the Revenue could not have in the absence of any compelling reason, treated an identical subject matter for succeeding years as it did. In view of the foregoing discussions the impugned order of the ITAT is set aside. - Decided in favour of assesse.

Summary

Issues:
1. Whether the interest accrued to the assessee is assessable to tax?
2. Whether the finding of deemed accrual of interest by the Tribunal is valid?

Analysis:
1. The case involves the assessment of interest accrued to the appellant, a joint venture company facing liquidation. The appellant had entered into a composition/settlement with a supplier, converting advances into a loan due to financial difficulties faced by the supplier. The Revenue contended that the income was deemed to have accrued in the absence of write-off for certain years. The appellant argued that the entries in the books did not amount to income liable for taxation, citing Supreme Court judgments. The appellant also highlighted an agreement with the debtor to write off dues. The Revenue, however, argued that since the entries were not reversed in the books during the relevant period, the amounts were justified to be taxed as accrued income.

2. The court referred to the judgment in Shoorji Vallabhdas & Co. and CIT V. Excel Industries Ltd., emphasizing that income tax is levied on real income, not hypothetical income. The court held that entries based on realistic prospects of realization cannot be the basis for taxation. It was noted that the Revenue had previously accepted the appellant's explanation that income did not accrue and was not taxable for a specific period. Therefore, without compelling reasons, the Revenue could not treat the same subject matter as accrued income for subsequent years. The court set aside the ITAT's order, allowing the appeal in favor of the appellant.

This detailed analysis of the judgment showcases the legal arguments presented by both parties, the application of relevant case laws, and the court's reasoning leading to the final decision in favor of the appellant.