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of <h1>Court rules interest income taxable under mercantile system, emphasizes income accrual when due. Appeal dismissed.</h1> <h3>UP. Chalchitra Nigam Ltd. Versus Commissioner of Income Tax</h3> UP. Chalchitra Nigam Ltd. Versus Commissioner of Income Tax - [2015] 370 ITR 379 (All) Issues Involved:1. Taxability of hypothetical interest income2. Real income vs. hypothetical income under mercantile system of accounting3. Accrual of income and its taxabilityIssue-wise Detailed Analysis:1. Taxability of Hypothetical Interest Income:The primary issue was whether the interest income of Rs. 627,969, which was not actually received but shown as accrued, should be treated as taxable income. The ITAT had treated this interest as taxable income, stating that the taxability cannot be postponed on the ground of alleged impossibility of recovery. The court upheld this view, emphasizing that under the mercantile system of accounting, income accrues as soon as it becomes due, irrespective of its actual receipt.2. Real Income vs. Hypothetical Income under Mercantile System of Accounting:The appellant argued that the interest income was hypothetical and should not be taxed as it was not realized. The court referred to the Supreme Court's judgment in Commissioner of Income Tax vs. M/s Excel Industries Ltd., which established that income accrues when it becomes due and must be accompanied by a corresponding liability of the other party to pay the amount. The court concluded that the interest income had accrued to the appellant and was not hypothetical, thus making it taxable.3. Accrual of Income and Its Taxability:The court examined whether the interest income shown as accrued in the books of the appellant fell within the definition of income under Section 2(24) of the Income Tax Act and if it was taxable. The court noted that the appellant followed the mercantile system of accounting, where income is recognized when it becomes due. The court found that the interest income had indeed accrued to the appellant as per the agreements with the purchasers, and there was a corresponding liability on the purchasers to pay this interest. Therefore, the income was deemed to have accrued and was taxable under the Act.Conclusion:The court dismissed the appeal, holding that the interest income accrued to the appellant was not hypothetical but real and taxable. The court emphasized that the taxability of income cannot be postponed based on the improbability of its recovery. The court also highlighted the need for the appellant to take legal steps to recover the due amounts and suggested that the matter be considered by a bench dealing with Public Interest Litigation due to the involvement of public money and potential inaction by the state government and its officials.
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