2017 (11) TMI 1548 - AT - Income Tax

Accrual of income - Addition on account of accrued interest income - assessee company followed mercantile system of accounting - Held that - the assessee is following the accrual system of accounting the income is accrued only on the point when it is finally to be received by the assessee with reasonable certainty and absence of certainty of receipt and recovery of the amount cannot be classified as income accrued for the purpose of charging to income tax. The Hon ble Supreme Court in case of CIT Vs. Excel Industries Ltd. (2013 (10) TMI 324 - SUPREME COURT) has observed that the probability or improbability of realization of the income by the assessee has to be considered from a realistic and practical point of view which is one test laid down by the Hon ble Apex Court in determining the income when accrued. Only a right under the agreement to receive the interest by the assessee without reasonable certainty of realization of the same cannot be brought to income tax. Hence, in view of the facts and circumstances of the case when the realization of the amount is not certain then the same cannot be charged to income tax. - Decided against revenue

Summary

Issues:
- Whether the deletion of the addition of accrued interest income by the CIT(A) was justified?
- Whether the interest income accrued but not received by the assessee should be taxed?
- Whether the recovery of principal and interest being doubtful affects the taxability of accrued interest income?

Analysis:
1. The Revenue challenged the deletion of the addition of accrued interest income by the CIT(A) for the assessment years 2010-11 to 2013-14. The AO proposed additions based on the interest accrued but not admitted by the assessee. The assessee contended that recovery of principal and interest was doubtful due to fraud by the lessor and subsequent legal actions. The CIT(A) accepted the assessee's explanation, noting dishonored cheques and uncertain recovery, and deleted the additions. The Revenue appealed against this decision.

2. The Revenue argued that the interest accrued to the assessee based on lease agreements should be taxed as real income, regardless of recovery uncertainties. The Revenue emphasized that the accrual system of accounting mandates taxing accrued interest income. The Revenue contended that the complaint under Negotiable Instrument Act did not impact the taxability of accrued interest. The AO had made additions for the differential amounts of accrued interest not admitted by the assessee.

3. The assessee's representative argued that the recovery of principal and interest was doubtful due to the lessor's fraud and subsequent legal actions. The representative contended that uncertain recovery meant the interest accrued but not received should not be taxed as income. The representative referred to Accounting Standard-9 and legal precedents to support the argument that only real income should be taxed, not notional or hypothetical income.

4. The Tribunal considered the facts, including the lease agreements, fraud by the lessor, dishonored cheques, and legal actions taken by the assessee. The Tribunal noted that the recovery of principal amount was doubtful, as evidenced by the write-off in a subsequent assessment year. The Tribunal held that uncertainty in recovery meant the accrued interest income should not be taxed until realization with reasonable certainty. Citing legal precedents, the Tribunal emphasized that only income with a realistic chance of realization should be taxed. The Tribunal upheld the CIT(A)'s decision to delete the additions.

5. In conclusion, the Tribunal dismissed all appeals by the Revenue, affirming the CIT(A)'s decision to delete the additions of accrued interest income. The Tribunal emphasized the importance of considering the certainty of income realization before taxing accrued interest, especially in cases of doubtful recovery. The judgment highlighted the need to differentiate between real income and notional income for tax purposes, ensuring fair and accurate taxation based on actual receipts.