2021 (10) TMI 1204 - AT - Income Tax

Accrual of income - Addition account of accrued interest on seed money loans - classification of sticky advances - whether there was no basis for accounting said accrued interest income on cash basis as section 145(1)? - HELD THAT - Admittedly, the respondent-assessee is following the mercantile system of accounting. It is the policy of the respondent-assessee company to account for the interest on such loans under seed money assistance scheme on receipt basis following the uncertainty of the recovery, realization of the interest. This policy is clearly stated in Clause (5) of Note No.23 read with 36 of Notes to Accounts forming part of Audited Financial Statements. Thus, material on record clearly indicates that there is uncertainty as to the recovery of the principal amount and interest on such advances. Therefore, the issue that comes up for our consideration is that whether can it be said that the interest had accrued on such advances when the assessee is following mercantile system of accounting. As decided in own case WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LIMITED 2021 (6) TMI 1068 - ITAT PUNE we do not find any merit in the grounds of appeal raised by the Revenue. Accordingly, the appeal filed by the Revenue stands dismissed.

Summary

Issues:
1. Taxability of accrued interest on seed money loans under the mercantile system of accounting.

Analysis:
The appeal involved a dispute regarding the tax treatment of accrued interest on seed money loans under the mercantile system of accounting for the Assessment Year 2013-14. The Revenue challenged the deletion of an addition of ?412.93 lakhs made by the Assessing Officer on the grounds that the interest had accrued to the assessee and should be taxed. The appellant, an autonomous body promoting industrialization in Maharashtra, maintained that the interest on such loans was accounted for on a receipt basis due to uncertainty in recovery. The Assessing Officer disagreed and added the accrued interest to the total income. The ld. CIT(A) deleted the addition based on a prior decision by the ITAT, Pune Bench in the appellant's favor for earlier years.

The key contention revolved around whether the interest on seed money advances, classified as sticky advances, had accrued to the assessee following the mercantile system of accounting. The respondent-assessee's policy was to account for interest on such loans on a receipt basis due to recovery uncertainty, as explicitly stated in their financial statements. The Tribunal noted that similar issues had been addressed in previous cases, including the taxability of interest on non-performing assets, where the principle of taxing only real income was emphasized. Citing relevant judgments, including decisions by the Supreme Court and High Courts, the Tribunal concluded that no hypothetical income could be taxed, especially when the possibility of recovery was minimal.

The Tribunal highlighted the consistency in judicial decisions regarding the tax treatment of interest on non-performing assets, affirming that the issue in the present appeal aligned with the principles established in those cases. Referring to judgments by various High Courts, the Tribunal found no reason to interfere with the ld. CIT(A)'s order, ultimately dismissing the Revenue's appeal. The Tribunal emphasized the importance of following established legal precedents and principles in determining the taxability of accrued interest, particularly in cases involving uncertainty in recovery.

In conclusion, the Tribunal upheld the decision of the ld. CIT(A) to delete the addition of accrued interest on seed money loans, emphasizing the application of consistent legal principles and precedents in determining the tax treatment of such income. The appeal filed by the Revenue was dismissed, affirming the position that taxing hypothetical income without a real right to receive it was not justified under the mercantile system of accounting.

Order pronounced on October 26, 2021.