2016 (7) TMI 450 - AT - Income Tax

Addition to tax interest income on accrual basis - Held that - The Assessing Officer in assessment years 2002-3 to 2004-05 has accepted the plea of the assessee that no interest income accrues with respect to the impugned deposits made with MCCL on account of its poor financial health and, therefore, in the absence of change in facts and circumstances in the instant year, the addition in this year does not survive. On this aspect of the matter, Ld. Departmental Representative has not made any argument considering the order of the Assessing Officer for assessment years 2002-03 to 2004-05. Amount written off in the books of account as not recoverable be allowed as deduction as a bad debt - Held that - Interest income accruing for assessment year 2001- 02 has been offered to tax and the debt is to be understood as comprising of not only interest, but also the principal amount of deposit/advances. In this manner, following the ratio of the judgment of the Hon ble Bombay High Court in the case of Pudumjee Pulp & Paper Mills Ltd.,(2015 (8) TMI 719 - BOMBAY HIGH COURT ) the test contained in section 36(2)(i) of the Act stands satisfied, inasmuch as, debt or part thereof has been taken into consideration for computing the profit for an earlier year. In this view of the matter, the other aspect as to whether the assessee was engaged in the business of money lending and/banking is not relevant to adjudicate the controversy. - AO directed to grant appropriate relief. - Decided in favor of assessee.

Summary

Issues Involved:
1. Taxation of hypothetical interest income.
2. Deduction for interest previously taxed.
3. Deduction for the principal amount written off as irrecoverable.
4. Classification of repair expenditure as capital or revenue.
5. Classification of software expenses as capital or revenue.
6. Allowability of expenditure under section 35D as revenue expenditure.

Detailed Analysis:

1. Taxation of Hypothetical Interest Income:
The primary issue revolves around the addition of ?15,73,952 as interest income on a deposit of ?4,35,00,000 with Mahindra Construction Company Ltd. (MCCL). The assessee argued that this interest was hypothetical since the principal amount itself was written off as irrecoverable. The Tribunal noted that for the assessment years 2002-03 to 2004-05, the Assessing Officer had accepted the assessee's plea that no interest income accrued due to MCCL's poor financial health. Given the consistency in facts, the Tribunal held that the addition of ?15,73,952 in the current year was unwarranted and ruled in favor of the assessee.

2. Deduction for Interest Previously Taxed:
The assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.

3. Deduction for Principal Amount Written Off:
The assessee sought deduction of ?4,35,00,000 written off as irrecoverable. The Tribunal examined whether the conditions of section 36(1)(vii) read with section 36(2)(i) of the Income Tax Act were met. The Tribunal referred to the Bombay High Court's judgment in the case of Pudumjee Pulp & Paper Mills Ltd., which allowed such a deduction if any part of the debt had been taken into account for computing income in earlier years. Since the interest income for the assessment year 2001-02 was offered and taxed, the Tribunal concluded that the principal amount also qualifies as a bad debt. Therefore, the Tribunal directed the Assessing Officer to allow the deduction.

4. Classification of Repair Expenditure:
The assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.

5. Classification of Software Expenses:
The assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.

6. Allowability of Expenditure under Section 35D:
The assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.

Conclusion:
The Tribunal allowed the appeal partly, ruling in favor of the assessee on the issues of hypothetical interest income and the deduction for the principal amount written off. The other grounds were dismissed as not pressed. The judgment emphasized the importance of consistency in tax treatment across assessment years and upheld the principles laid out in relevant case law.