Mercantile accounting system requires verification of actual interest accrual on inter-corporate deposits before taxation

ITAT Bangalore remitted the matter back to AO regarding accrual of interest income on inter-corporate deposits under mercantile accounting system. The assessee followed mercantile accounting for ICDs and regular business activities without dual accounting system. ITAT held that while interest accrual was undisputed, verification was needed whether interest income actually arose or accrued based on real income theory. If interest became irrecoverable before accrual, it cannot be notionally taxed. If irrecoverable after accrual, deduction under section 36(1)(vii) would apply in subsequent years after writing off in books.

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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.

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