2019 (4) TMI 268 - AT - Income Tax

Addition of differential interest income - Interest as per Form 26AS Interest as per books - normal computation of income and to the book profits computed u/s. 115JB - HELD THAT - Admittedly neither the assessee nor the AO had called for details of interest credited by the banks from the respective banks nor did they ascertain the methodology adopted by the bank for accounting for accrued interest. Since both the banks and assessee are following mercantile system of accounting, the interest accrued on the Fixed Deposits should tally, i.e., should be of same figure, only if uniform method of calculating accrued interest is followed by the assessee and the banks. As submitted by AR, if there is difference in methodology, there bound to be difference between the interest income calculated by the assessee and that credited to account of the Fixed Deposits by the bank. A.R rightly submitted that the said difference would get neutralized upon maturity of fixed deposit. Though the provisions of Section 37BA provide for giving credit for TDS only in the assessment year for which such income is assessable, the said provisions also provide for spreading of TDS credit, i.e., giving credit of TDS amount over the years during which the relevant income is offered. In the interest income, according to the assessee, the difference in interest income has arisen due to the difference in the methodology followed for accounting for interest income. Hence, it is not a case of understating interest income, which would warrant making additions. Accordingly, if the methodology adopted by the assessee and the bank for providing accrued interest differs, then, it will be difficult to implement the provisions of Section 37BA as it cannot be said that the methodology adopted by the bank alone is correct one. As stated that the assessee is consistently following same methodology for accounting for accrued interest and the relevant computations are also certified by the statutory auditors. It is not the case of the AO that the assessee has kept unaccounted deposits with banks. In this kind of situation, if the AO is satisfied with the computation of accrued interest income made by assessee, then the explanations of the assessee may be accepted in order to settle the matter. We are holding so for the reason that the difference, if any, would get neutralized upon maturity of fixed deposit and further the assessee is consistently following same method over the years, whose computations are verified by the statutory auditors. Accordingly, AO may be directed to examine the computation made by the assessee for accounting of accrued interest and if he is satisfied that the same methodology is followed over the years, then the AO may restrict the addition being the net amount of difference of interest income over FYs. 2009-10 to 2013-14 and this, in our view, will put this issue at rest. - Appeal of assessee is treated as allowed for statistical purposes.

Summary

Issues:
Challenging addition to interest income due to difference between Form 26AS and declared income.

Analysis:
The appellant, engaged in asset reconstruction, challenged the addition made by the Ld. CIT(A) to interest income due to a variance between interest income in Form 26AS and that declared. The AO observed a discrepancy of ?51,57,949 in the interest income. The appellant claimed to follow the Mercantile System of Accounting, accounting for interest on fixed deposits on a time basis. The appellant argued that differences in interest income arise due to unknown bank methodologies. The AO added the difference to the total income and book profits u/s. 115JB. The Ld. CIT(A) upheld this decision, prompting the appeal.

The appellant and AO did not seek details from banks regarding interest credits, leading to uncertainty about the variance. The appellant's representative argued that interest accrual is verified by auditors and follows accepted principles. The representative highlighted potential differences in bank and appellant methodologies, affecting interest income calculations. The Ld. AR emphasized that discrepancies neutralize upon fixed deposit maturity. The Ld. DR supported the AO's decision based on Rule 37BA and the Act.

The Tribunal noted the absence of bank details and differing methodologies, likely causing the interest income variance. The Tribunal acknowledged that if methodologies differ, interest income calculations would not align. The Tribunal highlighted the spreading of TDS credit over relevant income-offering years. As the discrepancy stemmed from methodology differences, not understating income, the Tribunal suggested accepting the appellant's consistent methodology, verified by auditors. The Tribunal directed the AO to review the appellant's accrued interest computation, potentially limiting the addition to ?1,18,734, the net difference over FYs 2009-10 to 2013-14, to resolve the matter.

In conclusion, the Tribunal allowed the appellant's appeal for statistical purposes, setting aside the Ld. CIT(A)'s order and remanding the issue to the AO for reevaluation based on the discussion.