TaxTMI 
TaxTMI 
2008 (4) TMI 361
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....ncipal of real income. 5. The CIT (Appeals) erred in law and on facts in confirming the addition of Rs. 2,15,53,466 alleging to be interest income on loans not declared by the appellant. He should have appreciated the submissions made by the appellant that the appellant being a NBFC (already registered with the Reserve Bank of India) has to comply with the Reserve Bank of India Act, 1934. The appellant has explained that the provisions of section 45Q of the RBI Act and provisions of Chapter III-B of the said Act have overriding effect on the provisions of all over Acts which includes Income-tax Act also. The lower authorities did not appreciate this legal position. 5.1 In this connection the appellant has also brought to the notice of lower authorities, the decisions reported in 91 ITD 573 (Hyd.) and 87 ITD 298 (Delhi) of the Delhi Tribunal which is a jurisdictional Tribunal and, therefore, binding on them and, thus, should have been followed. All these have been though noticed, the lower authorities have not understood the legal implications flowing therefrom. This has resulted in the addition of Rs. 2,15,53,466 which is wrong and bad in law and has to be deleted. 6. The ....
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....ting, as per Assessing Officer, it was required to declare interest income on the above loan on accrual basis only irrespective of date of actual receipt of interest and this accrued interest for the year under consideration should have been declared by it as its income earned from interest in this year, which it has not done. Accordingly, it was asked to give details of NPAs (including details of deposits, when given, rate on which the said loans were given on interest accrued) on which interest income was not declared. It was also asked to file copies of loan agreements and to explain and show cause as to why the accrued interest on such loan should not be taken as its income for the year under concern as it was maintaining its accounts on mercantile/accrual basis. It was also asked to prove with evidences that these loans have actually become NPA. In response, details of loans outstanding as on 31-3-2003 along with copies of agreements regarding loans indicating rates of interest thereupon have been filed. It has also been stated that loans to Jindal Equipment Leasing & Consultancy Services Ltd. and Mansarovar Investments Ltd. were advanced in the financial year 1996-97 and the ....
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....ts contention, assessee-company has further cited decisions of Tribunals in the cases of T.C.I. Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 (Hyd.) and TEDCO Investment & Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 (Delhi) to emphasize that non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under mercantile system of accounting. Being not convinced with the submissions of the assessee, the Assessing Officer added the interest accrued, in the total income of the assessee. 5. By the impugned order, the CIT(A) confirmed the action of the Assessing Officer by further stating that as per provisions of section 145, the interest income accrued to the assessee, even though not actually received, since the assessee was following mercantile system of accounting. However, without referring to any material on record, the CIT (Appeals) also stated that assessee-company and borrowing company are known to each other, the auditor of lender and borrowing company are same and that the assessee-company was not following the directions of the RBI. 6. We have conside....
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.... assessee having regard to the principles of real income. It was also submitted before the lower authorities that even in accordance with the accounting standard AS-9, issued by the Institute of Chartered Accountants of India dealing with the effect of uncertainty on revenue recognition, the guidance note on Accrual Basis of Accounting issued by ICAI according to which where ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. Accordingly, it was also vehemently argued by the learned AR during the course of hearing before us that in a situation where there is uncertainty regarding the ultimate collection of interest, at the time of raising the claim, the recognition of income on that account should be postponed, and in terms of AS-9 and guidance note on accrual basis of accounting, it is appropriate to recognise revenue in such cases only when it became reasonably certain that the ultimate collection will be made. However, in the present case, in view of the fact ,that principal and interest remained unpaid as per the accepted accounting principle, revenue should be recognized only in the period ....
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....tax Act levies charge of income-tax on the total income as per section 4. Section 5 of the Act defines the scope of total income. The provisions of section 145(1) defines that income chargeable under the head "Profit and gain of business or profession" or "Income from other sources", shall subject to provisions of section 145(2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus, the provisions of section 145(1) are subject to the provisions of section 145(2), which, in turn, provide that the Accounting Standard, as may be notified by the Central Government from time to time, are to be followed by class of assessee or in respect of any class of income and to that extent, notified accounting standard as AS-1, stipulating that irrespective of whatever be the method of accounting employed by the assessee, it is sine qua non that the financial statements prepared on the basis of such method of accounting must represent a true and fair view of the state of affairs of the business based on the policy of prudence. Therefore, an improvised method of mercantile or cash method of accounting, which may result from such a blen....
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....objectively established is sufficient to prevent accrual of real interest thereon as real income and would have the effect of rendering such income hypothetical and the same cannot be brought to tax. Under the Income-tax Act, 1961, in order that income should accrue it should not merely fall due or become legally recoverable, but should also be factual and practically realizable. Factual or practical unrealisibility thereof, may prevent its accrual depending upon the facts and circumstances attending upon the transaction. 9. Under the Income-tax Act, 1961, income chargeable to tax is the income received or due to be received in India in the previous year, or income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. No doubt, the Income-tax Act, 1961 takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made abou....
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....te Bank of Travancore v. CIT [1986] 158 ITR 102, the Hon'ble Supreme Court in its decision in case of UCO Bank v. CIT [1999] 237 ITR 889 vide its order dated 30-5-1999 had considered the concept of the accrual of the income and hold that what could be brought to tax was only the real income accrued to the assessee and that there could be no levy of tax on any hypothetical or illusory income. In this case also, income was not accounted for in respect of interest on sticky advances of a banking company, the Hon'ble Supreme Court held that even though assessee was following mercantile system of accounting, but the interest pertaining to the doubtful loans was not real income in the year in which it accrues but only when it was realized. In the instant case also, it is a matter of record that till date no interest has been received by the assessee nor any amount was received towards refund of principal. Hon'ble Supreme Court in case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and in case of Godhara Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, reiterated that income-tax is not leviable on hypothetical income. Though the Income-tax Act takes into account two points of time at....
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....ll result in distortion in the financial results disclosed by the books of account maintained by the assessee. It is also important to remain alive to the fact that the provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that "Accounting policies adopted by the assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented by on the basis of such accounting policies". In the name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. We, therefore, uphold the claim of the assessee that even under the mercantile method of accounting, and, on peculiar facts of this case, the assessee is justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanishes". 12. Lower authorities had relied on the decision in the case of Stale Bank of Travancore wherein the assessee credited the interest income to the interest suspense account with....