2023 (11) TMI 926 - AT - Income Tax

Accrual of income - Revenue recognition - accrued interest on the ICDs - Whether entry is made about a 'hypothetical income', which does not materialise? - AO has been dealt with based on the mercantile system of accounting followed by the assessee in respect of ICDs and regular business activities - main thrust of the assessee is on this that the assessee is not following dual accounting system and all its accounting including the accounting of interest on ICDs was under the mercantile accounting system - HELD THAT - There is no dispute in respect of the accrual of the interest and that assessee had followed mercantile system of accounting for the ICDs. Further the Ld.AO has not questioned that the ICDs was not made in the regular course of the business. It is a settled position that the levy of income tax on the income is directed either on the accrual or on its receipt. See Shoorji Vallabhdas Co 1962 (3) TMI 6 - SUPREME COURT As observed by Coordinate Bench for the preceding assessment years 2018 (12) TMI 278 - ITAT BANGALORE verification needs to be carried out whether the interest is income has arisen or accrued in the present facts. Further the assessee also will have to establish that the interest has become irrecoverable before its accrual. In the event the assessee is able to establish the above fact, the interest income cannot be notionally brought to tax. On the contrary, if the assessee is establishing that the amount has become irrecoverable after accrual, then the same will have to be considered in the year of accrual and appropriate deduction will have to be computed as per section 36(1)(vii) in any years afterwards by writing of its same in its books of account. With the above directions and respectfully following the view taken by this Tribunal in assessee s own case, we remit the issue back to the Ld.AO to verify the interest on ICDs based on the real income theory observed by this Tribunal in para 23 herein above.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Accrual of interest income on Inter Corporate Deposits (ICDs).
3. System of accounting for interest on ICDs.
4. Applicability of the Supreme Court judgment in Pr. CIT 6 vs. Khyati Realtors Pvt. Ltd.

Summary:

1. Delay in Filing the Appeal:
The appellant sought condonation for a 2-day delay in filing the appeal, attributing it to being out of station for business commitments. The Tribunal, referencing the Supreme Court's liberal approach in Collector Land Acquisition Vs. Mst. Katiji & Ors., condoned the delay, finding no malafide intent.

2. Accrual of Interest Income on ICDs:
The Assessing Officer (AO) added accrued interest on ICDs to the assessee's income, noting that it was not reflected in the Profit & Loss account. The AO rejected the assessee's claim that the interest was not accrued, stating that the assessee did not follow the mercantile system for ICDs. The AO disallowed the claim of bad debt, asserting that the assessee did not disclose the interest in the P&L account in any year.

3. System of Accounting for Interest on ICDs:
The CIT(A) upheld the AO's decision, stating that the assessee did not provide sufficient details regarding the ICDs and their litigation status. The CIT(A) relied on the Supreme Court's decision in Pr. CIT 6 vs. Khyati Realtors Pvt. Ltd., which dealt with capital expenditure and bad debt provisions. The Tribunal noted that the assessee followed the mercantile system for overall business but allegedly used a cash basis for ICDs. The Tribunal remanded the issue back to the AO to verify whether the interest income had indeed accrued or was irrecoverable before accrual.

4. Applicability of Supreme Court Judgment:
The Tribunal found that the CIT(A) incorrectly applied the Supreme Court's judgment in Pr. CIT 6 vs. Khyati Realtors Pvt. Ltd. to the assessee's case. The Tribunal emphasized that the issue was whether the interest income on ICDs had accrued or was irrecoverable before accrual, which required factual verification.

Conclusion:
The Tribunal remanded the case back to the AO, directing a fresh examination of whether the interest income on ICDs had accrued based on the real income theory. The appeal was allowed for statistical purposes.