2020 (10) TMI 1076 - AT - Income Tax

Accrual of income - Addition being notional interest income - Revenue recognition method - system of accounting - computed @17.95% on loan advanced to group concern - HELD THAT - Where the principle amount of loan/advance is doubtful of recovery interest thereon cannot be accrued and added to income even under the mercantile system of accounting. Our view is fortified from the decision in the case of CIT v. Motor Credit Co. P. Ltd. 1980 (4) TMI 64 - MADRAS HIGH COURT . Hon'ble High Court of Delhi in the case of CIT v. Goyal M.G. Gases (P) Ltd. 2007 (7) TMI 241 - DELHI HIGH COURT has held that when the realization of even the principal amount of loan was in jeopardy, there could not be any real accrual of income by way of interest, even as per the mercantile system of accounting. Thus on given set of facts there is no accrual of interest even though the assessee's following the mercantile system of accounting and the charge of notional interest by the AO/CIT(A) is bad on facts and deserves to be deleted. We direct accordingly. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of addition of notional interest income.
2. Applicability of Accounting Standard-9 (AS-9) on Revenue Recognition.
3. Accrual of income under the mercantile system of accounting.
4. Examination of factual matrix by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Notional Interest Income:
The appellant contested the addition of ?3,84,13,000/- as notional interest income computed at 17.95% on a loan of ?21.40 crores advanced to M/s. Red Fort Akbar Properties Pvt. Ltd. The CIT(A) confirmed the addition based on the appellant's adherence to the mercantile system of accounting, which mandates income recognition upon accrual. The Tribunal noted that the appellant had recognized interest income for the financial year 2012-13, but subsequent legal and financial complications led to deferral and eventual write-off of the principal amount as bad debt in F.Y. 2018-19.

2. Applicability of Accounting Standard-9 (AS-9) on Revenue Recognition:
The appellant's counsel referred to AS-9, emphasizing that revenue recognition requires reasonable certainty of ultimate collection. AS-9 states that if there is uncertainty regarding the realization of any claim, revenue recognition should be postponed until the uncertainty is resolved. The Tribunal agreed that given the ongoing litigation and remote chances of recovery, the appellant's decision not to account for the interest in the relevant year was justified under AS-9.

3. Accrual of Income under the Mercantile System of Accounting:
The Tribunal examined whether the notional interest should be accrued under the mercantile system of accounting. It cited judicial precedents, including the Hon'ble Madras High Court in CIT v. Motor Credit Co. P. Ltd. and the Hon'ble Delhi High Court in CIT v. Goyal M.G. Gases (P) Ltd., which held that income must be real and not hypothetical. The Tribunal concluded that when the principal amount's recovery is doubtful, interest cannot be accrued and added to income, even under the mercantile system.

4. Examination of Factual Matrix by the Assessing Officer (AO):
The Tribunal noted that the AO, in his remand report, relied on findings from A.Y. 2014-15 without considering the Tribunal's directive for a fresh adjudication. The Tribunal emphasized that the AO failed to appreciate the factual matrix, including the legal stalemate and remote chances of recovery, which justified the non-recognition of notional interest.

Conclusion:
The Tribunal concluded that the addition of notional interest was not justified under the accrual concept of accounting, given the factual circumstances and the mandate of AS-9. It directed the deletion of the notional interest charge by the AO/CIT(A) and allowed the appeal of the assessee. The order was pronounced on 20.08.2020.