2017 (6) TMI 487 - AT - Income Tax

Accrual of income - Cancellation of recovery of the interest - assessee calculated the interest on the delayed payments and served the debit notes to the allottee s for not making the payment - customers refused to pay the interest and threatened to cancel the bookings thus the company cancelled the recovery of the interest in order to realize the principal amounts under the circumstances, the company had to reverse the income by debiting the profit and loss account - Held that - Income Tax Act takes into account two points of time at which the liability to tax is attracted, the accrual of income or its receipt, but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in accounts, an entry is made about the hypothetical income which does not materialise. Where income has, infact, been received and is subsequently given up, in such circumstances it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an, entry to that effect may, in certain circumstances, have been made in the books of accounts. In the instant case the assessee raised the debit notes to the allottee s and booked the income in the books of accounts. The entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. Therefore, the addition made by the Assessing Officer was rightly deleted, which does not need any interference on our part - Decided against revenue

Summary

Issues Involved:

1. Deletion of addition of ?1,09,64,450/- made by not allowing reversal of income on account of interest charged on late payment of principal amount from customers.

Detailed Analysis:

Issue 1: Deletion of Addition of ?1,09,64,450/-

The Revenue's appeal challenges the deletion of an addition of ?1,09,64,450/- by the CIT(A). The assessee, a real estate development company, had initially booked this amount as income from interest on delayed payments from customers who had booked flats in a project. However, due to customers' refusal to pay the interest and threats to cancel bookings, the company reversed this income in the subsequent financial year by debiting the profit and loss account.

The CIT(A) deleted the addition made by the AO, relying on the principle that income tax is levied on real income, not hypothetical income. Citing the Supreme Court judgments in CIT vs. Shoorji Vallabhdas & Co. and CIT vs. Bokaro Steel Ltd., the CIT(A) emphasized that if income does not materialize, it cannot be taxed, even if an entry is made in the books.

The Tribunal upheld the CIT(A)'s decision, agreeing that the income initially booked was hypothetical as it was never realized. The Tribunal noted that the reversal of the income was due to a change in the nature of the transaction, aligning with the Supreme Court's stance that mere book-keeping entries do not constitute real income unless income has actually resulted.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of the ?1,09,64,450/- addition, as the income in question was never realized and thus not taxable. The decision was based on established legal principles regarding the taxation of real versus hypothetical income.