Assessee must record accrued interest income despite board resolution under Section 145 and AS-9

ITAT Bangalore dismissed the assessee's appeal regarding addition of interest income under mercantile accounting principles. The tribunal held that despite board resolution not recognizing interest income on loans advanced, the assessee must record accrued interest as per loan agreements under Section 145 and AS-9. The AO correctly computed income under mercantile system. However, regarding Section 69C addition for unexplained expenditure to SREI Infrastructure Ltd., the tribunal remitted the matter to AO for fresh consideration, directing the assessee to establish the expenditure was wholly and exclusively for business purposes.

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Issues Involved:
1. Addition on the issue of interest said to be agreed on loans.
2. Addition towards consultancy fee as unexplained expenditure under section 69C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition on the issue of interest said to be agreed on loans:

The appeals concerned the assessment years 2013-14 and 2015-16, where the assessee faced additions related to interest on loans amounting to Rs.179,50,18,919/- and Rs.302,53,20,841/- respectively. The assessee earned an interest income of Rs.85,14,48,065/- and incurred an interest expenditure of Rs.119,36,75,303/-. The loans were advanced to Kingfisher Airlines Limited (KFA), Margosa Consultancy Pvt Ltd, and Redect Consultancy Pvt Ltd, with interest charged till October 2012, after which interest was waived due to KFA's suspended operations. The waiver was communicated through letters and board resolutions.

The Assessing Officer (AO) issued a show cause notice proposing additions, arguing that the assessee used interest-bearing funds to provide interest-free loans, invoking Section 40A(2)(b). The assessee contended that the waiver was based on business expediency and supported by board resolutions. The AO's addition was challenged, stating that Section 40A(2)(b) applies only to interest paid to related parties, not to interest waiver.

The CIT-A upheld the AO's decision, emphasizing the dual standard of the assessee in recognizing interest expenses while not recognizing interest income. The assessee argued that the waiver was commercially expedient and supported by legal precedents, including CIT vs Neon Solutions Pvt Ltd and H.P. Mineral & Industrial Development Corpn. Vs. CIT, which support the waiver of interest before the end of the accounting year.

The Tribunal found that the assessee, following the mercantile system of accounting, should have recognized the interest income as per the loan agreements. The board resolution alone was insufficient to modify the agreement terms. The Tribunal dismissed the assessee's appeal, stating that the AO's addition was justified as the interest income had accrued and should have been recorded.

2. Addition towards consultancy fee as unexplained expenditure under section 69C of the Income Tax Act:

The AO disallowed Rs.60,00,000/- claimed as consultancy fees, treating it as unexplained expenditure under section 69C. The assessee failed to substantiate the claim, only stating that the payment was made to SREI Infrastructure Ltd. The AO noted the absence of details regarding the nature of consultancy, TDS, and invoices.

The assessee argued that the expenditure was reflected in the books and sourced from regular bank accounts, making section 69C inapplicable. The CIT-A upheld the AO's decision due to the lack of detailed explanation from the assessee.

The Tribunal remitted the issue to the AO for fresh consideration, directing the assessee to establish that the expenditure was wholly and exclusively for business purposes.

Conclusion:

The appeal for the assessment year 2013-14 was partly allowed for statistical purposes, and the appeal for the assessment year 2015-16 was dismissed. The Tribunal emphasized the importance of recognizing accrued interest income under the mercantile system and the necessity of substantiating business expenditures with adequate documentation.

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