TaxTMI 
TaxTMI 
2012 (11) TMI 756
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....aised by assessee in A.Y 2005-06 in ITA/ 1923/ M /2011 are extracted for the sake of record. "Ground No.I 1. On the facts and circumstances of the case and in law the CIT (A) erred in confirming the action of AO in adding a sum of Rs..16,56,000/- on account of notional interest on deposit on the alleged ground that the aforesaid interest accrued to the Appellant. 2. The appellant therefore prays that addition on account of notional interest on deposit be deleted. Without prejudice to Ground I Ground II 1.On the facts and circumstances of the case and in law the CIT (A) erred in observing that Appellants fact suggested 'extra commercial considerations' and holding that the concept of "real income" is not applicable in the Appellant's case since the Appellant had failed to prove "a clear uncertainty of recoverability" of the amounts given as deposits and thereby added a sum of Rs..16,56,000/- on account of notional interest on deposit. 2. The appellant prays that it be held that the concept of "real income" was applicable in the Appellants case and accordingly the addition be deleted. Without prejudice to Ground I & II Ground III 1. On the facts a....
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....ed that the said company M/s Sameta Exports (P) Ltd vide letter dated 20.6.1996 requested assessee not to charge interest considering its adverse financial position. It was informed that the company was not recognizing the revenue and the Board has taken a conscious decision vide its meeting held on 27.6.1996. As per accounting policy and as per accounting standard AS-9 on revenue recognition, assessee did not recognize any revenue of interest income in the books of account after June, 1996 as uncertainties were involved as regards to the collection of the principal/interest. The CIT (A) however, did not agree with the contentions of assessee. He analyzed the issue on the basis of the accounting standard AS-9, revenue recognition and was of the view that there is no significant uncertainty. He was also of the opinion that on perusal of the balance sheet of the said M/s Sameta Exports (P) Ltd, there are assets in the balance sheet which assessee should have pursued to recover. The case law relied upon by assessee was also rejected on the reason that the facts are different. He confirmed the addition accordingly. 5. The learned Counsel drawing our attention to the orders of AO as ....
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....pment Corpn. Ltd vs. DCIT (2008) 22 SOT 13 (Pune). viii) DCIT (Special Range) vs. Reliance Petroleum Ltd (2006) 5 SOT 164 (Mum.) ix) UCO Bank vs. CIT (1999) 104 Taxman 547 (SC) x) ACIT vs. Coromandal Investment (P) Ltd (2008) 174 Taxman 194 (Guj.) He also referred to the balance sheet of M/s SEPL to submit that they are incurring continuous losses and the so called assets stated by CIT(A) are nothing but the losses shown in the asset side. While admitting that coming to the year under consideration, Bank has advanced unsecured loan to that company but it was his submission that there are large amount of losses and the amounts to be paid by the said company. Therefore, assessee is not in a position either to recover the interest or principal. He submitted that assessee has taken steps to recover the amount that's the reason why the amounts were not written off in the books of account. Assessee's submission that just because the amounts were not written off, income cannot be considered as accrued as was considered by the CIT (A). 7. The learned DR however, relied on the principles laid down by the CIT (A) in the order and the revenue recognition method and it wa....
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....y to pay interest - Accordingly, Commissioner (Appeals) deleted notional interest added to assessee's income - Tribunal upheld order of Commissioner (Appeals) - Whether, no substantial question of law arose from Tribunal's order - Held, yes" ii) CIT vs. Govind Agencies (P) Ltd (2007) 195 ITR 290 (All.) Held that it was on record that the financial position of G had become bad and it was agreed between the assessee and the said company that no further interest would be charged and in order to recover the amount the company would sell its land to the respondent-assessee for a sum of Rs. 12,00,000 and after adjusting the debit balance, the remaining amount shall be paid. It is to be remembered that earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act. The present case was one of such cases where the respondent-assessee, acting as a prudent person, in order to recover the amount, had ag....
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....the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. It was an undisputed fact that in the instant case, till date both principal and interest remained unpaid, accordingly, as per the accepted accounting principle, the revenue should be recognized only in the period when it is reasonably ascertained that ultimate collection would be made. In the instant case, it was a matter of record that till date no interest had been received by assessee nor any amount was received towards refund of principal. Though the Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipts, yet the substance of the matter is income. If the income does not result at all, there cannot be a tax, even thought in book keeping, an entry is made about a 'hypothetical income' which did not materialize. After considering the material placed on record, it could be ....
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....er the mercantile system of accounting, when the same is in accordance with ASI notified by the Government. The principle question that was to be considered whether the assessee's method of accounting violated Accounting Standards notified by the Central Government. The case of the revenue was not that AS-I had been violated by the assessee. In fact, the Supreme Court's judgment in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 / 24 Taxman 337 was on the position of law prior to the Act adopting AS-I and II from 25-1-1996, vide Notification No. SO 69(E). The notification came into effect from 1-4-1996 and, accordingly, applied to the assessment year 1997-98 and subsequent assessment years. The issue that was not in dispute was that the accounting policies adopted by the assessee were those that were mandated by the RBI. The accounting policies mandated by RBI are not contrary to AS-I notified by the Central Government. In fact, they define what is 'prudence' and also require assessees to go by the substance of the issue rather than the form. [See Para (4) of AS-I and Prudential Norms issued by RBI.] The revenue could not require the assessee to change its method of ....
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....ich were filed by many creditors. Those circumstances led to an uncertainty insofar as, recovery of interest was concerned, as a result of the aforesaid precarious financial position of 'S'. What to talk of interest, even the principal amount itself had become doubtful to recover. In that scenario, it was legitimate move to infer that interest income thereupon had not 'accrued'. (2)The assessee being an NBFC was governed by the provisions of the RBI Act. In such a case, interest income could not be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these Norms, the ICDs had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, interest could not be treated to have been accrued in favour of assessee" vi) CIT vs. Woodward Governor India (P) Ltd (2007), 162 Taxman 60 (Delhi): Section 5, read with section 145, of the Income-tax Act, 1961 - Income - Accrual of - Whether in determining whether there has, in fact, been accrual of liability or income, accountancy standards prescribed by ICAI would ha....
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....elate.' What is required, therefore, is that all anticipated liabilities and foreseeable losses have to be provided for, while caution is to be exercised against accounting for unearned gains. Ultimately the emphasis is on presenting a true and correct state of affairs of the company as a going concern. This explains why, for instance, the valuation of closing stock as on the date of the balance sheet, is done at cost or market value, whichever is lower. Where the market value is lower than the cost, valuation at market value reflects the anticipated loss. On the other hand, where the market value is higher than the cost, the unrealized gains are not accounted for. Accounting Standard 11 (AS 11) issued by the ICAI specifically deals with the issue of accounting for fluctuation in foreign exchange rates as impacting the current assets and liabilities. The Supreme Court has, in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, put its seal of approval on adopting the accounting standards while interpreting section 10(2)(vi), (via), (vib ) and section 10(5) of the Indian Income-tax Act, 1922 while interpreting the expression 'actual cost'. Therefore, the judicially accepted p....
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....measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. No doubt, as a general principle of the mercantile method of accounting, revenues are reflected in the books of account of the period in which revenues accrue, and revenue is recognized as it is earned. However, there are exceptions to this principle and such exceptions are warranted by the considerations of 'prudence' which, in any event, override the strict principles of mercantile method of accounting. 'Guidance note' on accrual basis of accounting, issued by the ICAI, unambiguously demonstrates the rationale of such exceptions. While these 'guidance note on accrual basis of accounting' issued by the ICAI are not binding under the Act; but these authoritative pronouncements by the premier accounting body in India do throw light on the nature and principles of 'mercantile method of accounting' which is not defined under the Act. It is well-settled....
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.... in western region of the Maharashtra State. These activities were surely not on commercial lines and the predominant purpose of these activities was to promote growth and development in the target area. When seed money was given to an entrepreneur, the purpose of this advance was to enable him to start his business and even the repayment process would start only after the entrepreneur was able to repay the commercial loan. It was more of a venture capital than a commercial funding and this venture capital was extended to the sections of society which were not only underprivileged but were least safe from the commercial point of view. Therefore, the approach of the assessee in recognizing the revenue, by way of interest on seed loans only when received, could not be said to be unjustified. Further, even after the amendment in the Companies Act, which, post-amendment, permits accounting only on mercantile basis, the Government of India issued a notification for relaxing the norms and permitting the assessee-corporation to book the revenues in question only when actually received. This fact aptly demonstrated the bona fides of the approach of the assessee, and justified delayed....
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....d basis to come to the conclusion that the revenues in question could be treated as income only when the revenues were realized. A best judgment assessment is also required to be a sound and rationale judgment about the income of the assessee. Therefore, the assessee could not be forced to pay tax on the interest accrued on seed money loans. Therefore, the Assessing Officer was directed to delete the impugned addition made to the income of assessee". viii) ITAT Mumbai Bench 'F' in the case of DCIT, Special Range 18 Mumbai vs. Reliance Petroleum Ltd (2006) 5 SOT 165 (Mum). "Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment year 1994-95 - Assessee-company had shown certain amount as interest accrued on deposits given to RIL, RIIL and 'L' company - Assessee later reversed said claim in spite of fact that its accounts were finalized, audited by statutory auditors and approved by its board of directors - According to revenue, this was an after-thought so as to defraud revenue of tax due; once income accrued, assessee had no right to reverse it and to say that no income accrued - According to assessee, however, by virtue of an agreement between part....