Assessee cannot claim TDS credit without declaring corresponding income despite NPA status exempting interest accrual

ITAT Mumbai held that interest income need not be accrued when debtor was declared NPA and underwent insolvency proceedings, as there was no realistic probability of realization. The tribunal upheld CIT(A)'s deletion of Rs. 3.6 crore interest income, noting tax should be levied on real income, not hypothetical income. However, ITAT denied TDS credit claim, ruling that without declaring corresponding income, assessee cannot claim TDS credit, following Bombay HC precedent in Imageads & Communications case.

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The core legal questions considered by the Tribunal in this matter are:

1. Whether the interest income of Rs. 3,60,00,000/- allegedly accrued from the debtor company, M/s. Dharti Dredging & Infrastructure Ltd. (DDIL), can be taxed in the hands of the assessee despite non-receipt of the said interest amount and the debtor being declared a Non-Performing Asset (NPA) and subsequently undergoing insolvency proceedings.

2. Whether the assessee is entitled to credit for Tax Deducted at Source (TDS) of Rs. 36,00,000/- paid by DDIL on the purported interest income, when the assessee has not declared the corresponding interest income in its return.

Issue-wise Detailed Analysis

Issue 1: Taxability of Interest Income of Rs. 3.6 Crores Allegedly Accrued but Not Received

Relevant Legal Framework and Precedents: The Tribunal examined the principles of accrual of income under the mercantile system of accounting, emphasizing the concept of "real income" as opposed to "hypothetical income." The jurisprudence cited includes:

• State Bank of Travancore vs. Commissioner of Income Tax Kerala (1986) 158 ITR 101, which held that accrual of income must be real and not hypothetical, considering the probability of realization.
• Shoorji Vallabhdas & Co., 46 ITR 144, which emphasized that income-tax is levied on income that has actually resulted, not on hypothetical entries in books of account.
• Godhra Electricity Co. Ltd., 91 Taxman 351, where the Supreme Court reiterated that income must be realistically accrued, and hypothetical income should not be taxed.

Court's Interpretation and Reasoning: The Tribunal noted that the debtor company, DDIL, had become an NPA as of 30/06/2018, as classified by the State Bank of India (SBI), and was undergoing insolvency proceedings initiated under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. The National Company Law Tribunal (NCLT) had admitted the insolvency petition and appointed an Interim Resolution Professional.

The Tribunal found that the financial condition of DDIL was poor, with failure to repay loans and interest, confirmed by the classification as NPA and insolvency proceedings. The assessee had advanced Rs. 30 Crores to DDIL in FY 2016-17, received interest income in AY 2017-18, but did not receive any interest for AY 2018-19. The assessee did not account for interest income on accrual basis for AY 2018-19, given the improbability of receipt.

Despite this, DDIL deducted TDS of Rs. 36 lakhs on interest of Rs. 3.6 Crores and deposited it with the government on 08/11/2018, without actually paying the interest to the assessee or issuing a TDS certificate. The assessee was unaware of this TDS deduction at the time of filing the return.

The Assessing Officer (AO) rejected the assessee's explanation and added the interest income of Rs. 3.6 Crores to the total income, without giving credit for the TDS. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, holding that the income had not really accrued to the assessee and was only hypothetical income.

Key Evidence and Findings: The Tribunal considered the following facts:

• Loan advanced by assessee to DDIL and interest received in AY 2017-18.
• Classification of DDIL's loan account as NPA by SBI on 30/06/2018.
• Filing of insolvency petition by SBI and admission by NCLT on 05/04/2022.
• Non-receipt of interest for AY 2018-19 by the assessee.
• Subsequent write-off of the principal amount by the assessee in AY 2020-21.
• Payment of TDS by DDIL without actual payment of interest to assessee.

Application of Law to Facts: The Tribunal applied the principle that income accrual must be real and not merely book entries or hypothetical. Given the financial distress of DDIL, its classification as NPA, insolvency proceedings, and non-receipt of interest by the assessee, the Tribunal concluded that the interest income had not actually accrued. The payment of TDS by DDIL without corresponding payment of interest to the assessee was held not to create a real income accrual in the hands of the assessee.

Treatment of Competing Arguments: The Revenue argued that the TDS payment by DDIL indicated that interest income had accrued and should be taxed. The Tribunal rejected this, emphasizing that mere deduction of TDS without actual receipt of income does not amount to accrual. The Tribunal relied on authoritative Supreme Court decisions to hold that tax can only be levied on real income.

Conclusion: The Tribunal upheld the CIT(A)'s order deleting the addition of Rs. 3.6 Crores as interest income, holding that the income was hypothetical and had not really accrued to the assessee.

Issue 2: Entitlement of Assessee to Credit for TDS of Rs. 36 Lakhs Deducted by Debtor

Relevant Legal Framework and Precedents: The Tribunal referred to the principle that credit for TDS can be claimed only if the corresponding income is declared by the assessee. The Tribunal relied on a judgment of the Hon'ble Jurisdictional High Court in the case of Imageads & Communications (P) Ltd., which held that if the income corresponding to TDS is not offered to tax, credit for TDS cannot be allowed.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had not declared the interest income of Rs. 3.6 Crores in its return for AY 2018-19. Since the income was not offered to tax, the assessee could not claim credit for the TDS deducted by the debtor company. The Tribunal held that allowing credit for TDS without declaration of corresponding income would be contrary to the provisions of Sections 198 and 199 of the Income Tax Act.

Key Evidence and Findings: The assessee's return showed no income corresponding to the TDS deducted. The TDS was deducted and deposited by DDIL without the assessee's knowledge or receipt of interest income. The assessee filed a NIL return for the interest income in question.

Application of Law to Facts: The Tribunal applied the principle that TDS credit is linked to declaration of income. Since the income was not declared, credit could not be allowed.

Treatment of Competing Arguments: The assessee contended that since TDS was deducted and deposited by DDIL, it was entitled to credit. The Tribunal rejected this, emphasizing that credit cannot be claimed on income not offered to tax.

Conclusion: The Tribunal dismissed the assessee's ground seeking credit for TDS of Rs. 36 lakhs.

Significant Holdings

The Tribunal crystallized the principle that "the accrual must be real taking into account the actuality of the situation, whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory." It quoted the Supreme Court's observations:

"An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of taxation is difficult to evolve. Besides any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case, when and how does an income accrue and what are the consequences that follow from actual of income as well settled. The accrual must be real taking in to account the actuality of the situation, whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory."

Further, it reiterated:

"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise."

On the issue of TDS credit, the Tribunal held:

"It is not in dispute that the income corresponding to the TDS was not offered to tax by the appellant... when there is no income being offered qua the corresponding TDS and as TDS is part of the assessee's income, the position being taken by the appellant is a position contrary to its returns... Thus, when there is no income being offered qua the corresponding TDS and as TDS is part of the assessee's income, the position being taken by the appellant is a position contrary to its returns."

Accordingly, the Tribunal upheld the deletion of the addition of Rs. 3.6 Crores as interest income and dismissed the assessee's claim for TDS credit of Rs. 36 lakhs.

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