2013 (10) TMI 1350 - HC - Income Tax

Interpretation of Income Tax Act Section 145 post-amendment rules

The judgment addressed the interpretation of Section 145 of the Income Tax Act, emphasizing the post-amendment restriction to cash or mercantile ... Deduction on account of interest on sticky loans - denial of claim being the interest doubtful of recovery and having been credited to suspense account - system of accounting - Held that:- The assessee was following the mercantile system of accountancy wherein any income accruing even though not received was subject to tax. The assessee had not claimed any amount by way of bad debts under the provisions of the Act and in such a situation, the interest accrued thereon also cannot be said to be not arising to the assessee. Moreover, the findings recorded by the Assessing Officer, CIT (A) and the Tribunal have not been shown to be erroneous or perverse in any manner. - Decided against assessee Issues:- Interpretation of Section 145 of the Income Tax Act, 1961 regarding method of accounting.- Whether interest on sticky loans is deductible when recovery is doubtful.- Applicability of judgments pre and post the amendment in Section 145 of the Act.Interpretation of Section 145:The judgment addressed the amendment in Section 145 of the Income Tax Act, emphasizing that prior to the amendment, an assessee could choose between cash, mercantile, or hybrid system of accountancy. Post-amendment, the assessee has the option to adopt either cash or mercantile system only. The Central Government is empowered to specify accounting standards for income computation under the head 'Profits and gains of business or profession' or 'Income from other sources.' The judgment highlighted the importance of following the prescribed accounting standards for accurate income computation.Deductibility of Interest on Sticky Loans:The case involved an appeal by the assessee against the denial of deduction on interest accrued on sticky loans. The assessee argued that the interest was not recoverable, citing judgments like UCO Bank v. CIT and Punjab Financial Corporation Ltd. v. CIT. The revenue contended that post-amendment in 1995, only cash or mercantile system of accounting could be followed, and the interest on loans was rightly assessed to tax. The Tribunal upheld the findings of the Assessing Officer and CIT(A), emphasizing that the recovery of interest was not proven to be doubtful by the assessee. The judgment highlighted that under the mercantile system, income accrual, even if not received, is taxable, and the assessee failed to demonstrate any error in the assessments made.Applicability of Pre-Amendment Judgments:The judgment clarified that the judgments cited by the assessee, such as UCO Bank and Punjab Financial Corporation cases, were decided before the amendment in Section 145 of the Act. Therefore, they were deemed irrelevant to the current case. Additionally, the judgment in Godhra Electricity Co. Ltd. v. CIT was deemed inapplicable due to differing factual circumstances. Ultimately, the substantial question of law was answered against the assessee, leading to the dismissal of the appeals.In conclusion, the judgment provided a detailed analysis of the issues related to the interpretation of Section 145, deductibility of interest on sticky loans, and the applicability of pre and post-amendment judgments, ultimately upholding the decisions of the lower authorities and dismissing the appeals.