1994 (11) TMI 6 - HC - Income Tax

High Court decision deems 'sticky' loan interest taxable under mercantile accounting system for assessment years 1972-75.

Commissioner Of Income-Tax Versus Tamil Nadu Industrial Investment Corporation Limited (No. 1)

The High Court ruled against the assessee in a case involving the inclusion of income credited in the suspense interest account for assessment years ... Accrual Of Income, Mercantile System Issues:1. Inclusion of income credited in the suspense interest account for assessment years 1972-73, 1973-74, and 1974-75.2. Acceptance of the method of accounting for interest in the suspense account with reference to sticky loans.3. Deletion of interest, commitment charges, and guarantee commission on accrual basis for assessment year 1974-75.Analysis:For the assessment years 1972-73 and 1973-74, the issue revolved around the inclusion of income credited in the suspense interest account by the assessee. The assessee, a State undertaking, followed the mercantile system of accounting and credited amounts to the suspense interest account for 'sticky' loans where recovery was doubtful. The Income-tax Officer contended that under the mercantile system, this amount should be included as interest income. However, the Appellate Assistant Commissioner and subsequently the Tribunal supported the assessee's method, considering it consistent with recognized practices and not contradictory to the mercantile system. The Tribunal directed verification of each sticky loan to determine recoverability, leading to a remittance back to the Income-tax Officer for further assessment.In the assessment year 1974-75, the Income-tax Officer sought to tax accrued interest, commitment charges, and guarantee commission. The Appellate Assistant Commissioner, following previous orders, ruled in favor of the assessee, leading to an appeal by the Revenue. The Tribunal, aligning with its prior decisions, remitted the assessment back to the Income-tax Officer for reevaluation. The High Court referenced Supreme Court and previous decisions, emphasizing that interest accrued on 'sticky' loans under the mercantile system of accounting is taxable income. The Court held that the Tribunal's decision to remit the issue for further verification was incorrect. Additionally, the Court cited precedents where interest, commitment charges, and guarantee commission were deemed includible in the total income of the assessee, thus ruling against the assessee in these matters.In conclusion, the High Court answered the referred questions against the assessee, affirming the taxability of interest accrued on sticky loans and related charges. The Court highlighted the consistency with previous decisions and statutory provisions. The judgment underscored the importance of adhering to the mercantile system of accounting principles in determining tax liabilities, emphasizing the real income concept and statutory compliance.