2021 (2) TMI 20 - AT - Income Tax

Income accrued or received by assessee - overdue interest income - recovery of outstanding dues in lieu of unaccomplished contract with M/s Engineering Industry Commission (EIC), Ministry of Defence, Government of Ethiopia - outstanding interest due from the EIC in the form of 'Notes forming parts of account', indicating that the amount relates to overdue interest due from February 1991, which has not been accounted for in the books of account - HELD THAT - In the present case, the said overdue interest income is not accrued by the assessee or received by the assessee from the Financial Year 2002-03 and the position remained to be the same. The overdue interest is not recovered by the assessee from February 1991 and the assessee stopped recovering of overdue interest from the Financial Year 1996-97 and stopped accounting from the Financial Year 1996-97. There is uncertainty in the collection of this overdue interest. When the overdue interest partakes the character of uncertain income, it cannot be brought within the purview of taxable income, unless and until it comes to the hands of the assessee. Under mercantile system, interest income accrues with the time. In such cases, interest charged and debited to account as income as recognized under the accrual system but in cash system it is not so. In the present case, it is an overdue interest and it is not collectable from the Financial Year 1996-97 and as a prudent businessman, following AS 9 issued by ICAI the assessee has not recognized the said income. In the present case, there is no question of claiming as a Bad Debt because it is not accountable as there was uncertainty of collection. The same cannot be recognized as income accrued till it is realized by the assessee. It is not correct to say the judgment of Delhi High Court in the case of Vasisth Chai Vyapa 2010 (11) TMI 88 - DELHI HIGH COURT is not applicable. In this judgment, it considered the AS 9 along with other provisions of the Act while deleting the addition. We find no merit in the argument of DR that that judgment is not applicable. Accordingly, we do not find any infirmity in the order of CIT(A) in allowing the appeal of the assessee on this issue.

Summary

Issues involved:
1. Appeal against order passed under section 263 of the Income Tax Act, 1961.
2. Quantum additions for Assessment Years 2010-11, 2012-13, 2009-10, 2011-12.
3. Penalty levy under section 271(1)(c) for Assessment Year 2011-12.
4. Consideration of overdue interest income and taxability.

Detailed Analysis:
1. The appeal was directed against the order passed under section 263 of the Income Tax Act, 1961. The appellant had signed a contract with a government entity for supply of machinery and services, but only received partial payment. The appellant wrote off the outstanding dues in its books of account due to non-recovery. The issue was whether the overdue interest income should be taxed. The appellant argued that the income was uncertain and not accrued, relying on the real income theory. The CIT(A) allowed the appeal, considering the uncertainty of recovery. The Revenue contended that the judgment relied upon was not applicable to the case, but the Tribunal upheld the CIT(A)'s decision based on AS 9 and real income theory.

2. The quantum additions for various Assessment Years were in dispute. The Revenue challenged the non-taxation of overdue interest income accrued but not received by the assessee. The Tribunal considered the real income theory and AS 9 in determining taxability. It was held that until the income is realized, it cannot be recognized as accrued income. The Tribunal upheld the CIT(A)'s decision to delete the additions for the relevant Assessment Years.

3. The issue of penalty levy under section 271(1)(c) for Assessment Year 2011-12 was raised. Since the deletion of additions was upheld for the same year, the penalty levy was also dismissed as unnecessary. The Tribunal did not adjudicate further on this issue.

4. The consideration of overdue interest income and its taxability was a central point of contention. The Tribunal analyzed the applicability of real income theory, AS 9, and the judgment of the Delhi High Court in a similar case. It was held that until the overdue interest income is realized, it cannot be taxed. The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision to delete the additions for the relevant Assessment Years. The issue of chargeability of overdue interest from the government entity was also addressed, and the Tribunal dismissed the ground as infructuous based on the decision in another appeal.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing the importance of realizing income before taxing it and considering the uncertainty of recovery in determining taxability. The judgment highlighted the application of real income theory and accounting standards in assessing the taxability of overdue interest income.