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2018 (11) TMI 482 - AT - Income TaxAccrual of income - Addition of deemed interest on advance - advance so made become non recoverable - as stated by the assessee that the money so advanced could not be recovered - Held that - In the present case, it is not the case that the income has in fact accrued to the assessee. In fact, the recovery of the principal amount is in doubt. Moreover, the assessee has no where claimed as business advance, it was a simple loan on which the assessee was earning interest and offering the same for tax till A.Y. 2005-06, subsequent to it loan became bad and no interest was earned. Therefore, under the peculiarity of facts and in view of the judgement of the Hon ble Supreme Court in the case of UCO Bank Vs. CIT 1999 (5) TMI 3 - SUPREME COURT and State Bank of Indore Vs. ITO 2002 (7) TMI 90 - MADHYA PRADESH HIGH COURT and the decision of the coordinate bench in the case of S.N. Chitale 2010 (5) TMI 934 - ITAT INDORE , we direct the A.O. to delete the addition. - Decided in favour of assessee.
Issues Involved:
1. Addition of deemed interest on advance to a company. 2. Assessment of interest income on sticky loans. 3. Interpretation of tax laws regarding accrual of interest. 4. Application of legal precedents on taxation of interest income. Analysis: Issue 1: Addition of Deemed Interest on Advance The appeal was against the addition of deemed interest on an advance made to a company. The appellant argued that the addition was not based on actual income but a notional basis. It was contended that the loan was given for business purposes, and therefore, the notional income should not be taxed under section 28 of the Income Tax Act. The appellant further argued that the loan was not for business purposes, and interest had not been charged, leading to the loan becoming sticky. The appellant relied on various financial documents to support their case. Issue 2: Assessment of Interest Income on Sticky Loans The Assessing Officer (AO) had disallowed the interest on the advance made to the company, stating that it was not for business purposes. The appellant contended that the loan was given with the intention to earn interest, and any interest earned was duly offered for tax. The appellant emphasized the difference between interest-free loans and sticky loans, where recovery of the principal amount was doubtful. Legal proceedings had been initiated against the company, indicating the non-accrual of interest income. Issue 3: Interpretation of Tax Laws Regarding Accrual of Interest The appellant cited legal precedents, including the Supreme Court's decision in UCO Bank v. CIT, to support their argument that interest on sticky loans should not be taxed until realized. They highlighted the importance of distinguishing between income that has actually accrued and income that is doubtful of recovery. The appellant also referenced Accounting Standard 9 on Revenue Recognition to emphasize the uncertainty involved in assessing the ultimate collection of such income. Issue 4: Application of Legal Precedents on Taxation of Interest Income The Tribunal considered the judgments of the Supreme Court and the High Court regarding the taxation of interest on sticky loans. They noted that the appellant was not a banking company, as in the cited cases, but the principles applied were relevant. Relying on previous decisions and the specific facts of the case, the Tribunal directed the AO to delete the addition of deemed interest. The decision was based on the non-accrual of income, the doubtful recovery of the principal amount, and the absence of business purpose in the loan transaction. In conclusion, the Tribunal allowed the appeal, emphasizing the peculiar facts of the case, the legal precedents cited, and the lack of actual income accrual. The decision highlighted the importance of considering the specific circumstances of each case in determining the taxability of interest income on loans.
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