2019 (11) TMI 1233 - AT - Income Tax

Accrual of interest - Non recognising interest against the advance - accrual method of accounting - HELD THAT - The undisputed facts are that the assessee is a company and following mercantile assessment of accounting. The assessee primarily relied on the copy of the letter issued by M/s. Seahorse Hospitals Limited dated 01.12.2004, wherein M/s. Seahorse Hospitals Ltd., confirmed the receipt of ₹ 1,10,00,000/- from the assessee company and also confirmed the terms of repayment of loan. Loan carried interest at the rate of 10.5% per annum. Therefore, the interest accrues and arises as on the last day of the previous year in which the assessee s accounts are closed. Once the interest is accrued, it has to be charged to tax in accordance with the method of accounting, i.e., mercantile system, employed by the assessee. The treatment between the parties or the subsequent settlement between the assessee and the other party is not affecting the chargeability of tax. Therefore, the interest accrued at the rate of 10.5% on the impugned loan for the period 01.12.2004 to 31.03.2005 is assessable during the period relevant to this assessment year and accordingly the amount levied by the AO and sustained by the appellate authority is held as in order. The assessee s corresponding plea are dismissed.

Summary

Issues:
1. Recognition of interest income on advance made to another party.
2. Applicability of accounting standards in determining income recognition.
3. Discrepancy between parties on recognition of interest income.
4. Taxability of interest income based on accrual basis.

Analysis:
1. The primary issue in this case revolves around the recognition of interest income on an advance made by the assessee to another party. The Assessing Officer observed that despite advancing a significant amount at an interest rate of 10.5%, the assessee did not recognize any interest income. The AO applied the accrual method of accounting, citing relevant court decisions, and treated the interest receivable as income, leading to the assessment. The assessee disputed this treatment, arguing that the interest was recognized on an accrual basis as per the agreement terms and accounting standards, and was recorded in the financial year 2007-08 when it became due. The CIT(A) upheld the AO's decision, prompting the assessee to appeal.

2. The disagreement between the parties stemmed from the interpretation of accounting standards and the agreement terms regarding income recognition. The appellant contended that the income accrued in the financial year 2007-08, supported by the deduction of tax at the source and subsequent payment of taxes. Conversely, the AO and CIT(A) emphasized the importance of recognizing income on an accrual basis, irrespective of the timing of actual receipt. The tribunal noted the contradiction in the appellant's argument, acknowledging the necessity of adhering to accounting standard 9 and the mercantile system of accounting for recognizing interest income.

3. The tribunal highlighted the significance of the agreement terms between the parties in determining the taxability of interest income. Despite the subsequent settlement or understanding between the parties regarding the timing of interest payment, the tribunal emphasized that once the interest accrued as per the agreement terms, it had to be charged to tax based on the mercantile system of accounting. The tribunal dismissed the appellant's plea, emphasizing the legal obligation to recognize income as per the agreement terms and accounting standards, irrespective of any subsequent arrangements.

4. Ultimately, the tribunal upheld the Assessing Officer's decision to tax the interest income on an accrual basis for the relevant assessment year. The tribunal emphasized that the interest accrued on the loan during the specified period was assessable in that assessment year, regardless of the actual receipt timing or subsequent settlements. The appeal of the assessee was dismissed, reaffirming the importance of adhering to accounting standards and recognizing income based on the accrual method, as mandated by relevant legal precedents and regulations.