2016 (7) TMI 964 - HC - Income Tax

High Court rules income not accrued, no nexus found between borrowed funds and exempt income, Tax Appeal dismissed.

The High Court upheld the decision in favor of the assessee, emphasizing that income did not accrue as the assessee did not have a vested right to receive ... Accrual of income - outstanding amount of commission receivable - cash basis of system of accounting - ITAT allowed the claim - Held that:- In the absence of any perversity in the findings of fact recorded by the Tribunal, the impugned order does not give rise to any question of law, much less, a substantial question of law, so as to warrant interference - Decided in favour of assessee Issues:1. Whether the Appellate Tribunal was right in holding that the system of accounting adopted by the respondent was in accordance with established norms, despite the disallowance made by the Assessing OfficerRs.2. Whether the addition of a specific amount under section 14A of the Act on account of interest and administrative expenses was justifiedRs.Issue 1: System of AccountingThe High Court considered an identical question previously decided in the case of Commissioner of Income-tax II v. Gujarat Apollo Industries Ltd. The Court analyzed whether the income had accrued to the assessee based on the contract terms and the actual circumstances. It was emphasized that unless a debt is created in favor of the assessee, income cannot be said to have accrued. The Court referred to previous judgments to support the conclusion that income must be real and that the right to receive payment must exist for income to be considered accrued. The Court also highlighted that the entries in the books of account do not determine the accrual of income; instead, the terms of the contract are crucial. The judgment dismissed the appeal, emphasizing that the assessee did not have a vested right to receive the disputed amount, hence income did not accrue.Issue 2: Addition under Section 14ARegarding the addition under section 14A of the Act, the Tribunal considered whether borrowed funds were utilized by the assessee to earn exempt income. The Commissioner (Appeals) analyzed the financial summary of the assessee over several years and found that there was no nexus between the expenditure incurred and the earning of exempt income. The Tribunal concurred with the Commissioner (Appeals) that no disallowance under section 14A can be made unless it is established that borrowed funds were used to earn exempt income. The Tribunal found no infirmity in deleting the addition made by the Assessing Officer. The High Court noted that the findings were based on concurrent facts, and there was no perversity or irrelevant material considered. Thus, the impugned order did not raise any substantial question of law for interference.The legal position taken by the High Court of Bombay and the Supreme Court in similar cases was also cited to support the decision. The Court upheld the decision in favor of the assessee based on the established legal principles. The Tax Appeal was dismissed in favor of the assessee.