TaxTMI 
TaxTMI 
2014 (6) TMI 665
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....olding company for verification and further appeal. The relevant papers were thereafter forwarded to our Chartered Accountants, M/s. Kalyaniwalla & Mistry. b) The Petition of Appeal was finalized on May 3, 2012 and Mr. Vipul Pasad, the Tax Manager of our consultants was to forward the entire set of the necessary appeal papers to the holding company for review and signing by the Company's director. c) However, Mr. Vipul Pasad's father-in-law, Mr Lakhamshi H Vora was in a very critical state in the Intensive Care Unit of the Padmashree Hospital, Dombivili (East), Thane, as he was suffering from chronic diabetes and had suffered a paralytic stroke and, hence, Mr.Vipul Pasad proceeded on unscheduled leave from May 4, 2012 onwards. His father-in-law, unfortunately, passed away on May 10,2012 and to perform the last rituals and prayers, he had to visit the native place of his in-laws and, hence, extended his leave to June 9, 2012 and resumed office on June 11,2012. d) On resuming, he realized that the appeal papers had not been forwarded and he, therefore, immediately forwarded the papers to the Tax Manager of the holding company on June 12,2012. e) However, the conce....
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....g the Assessing Officer to allow the expenditure attributable to the earning of such interest income." 4. Brief facts, qua the issue raised in the grounds of appeal are that, the Assessing Officer, during the course of assessment proceedings, informed the assessee that he has sought information under section 133(6) from M/s. Desai & Gaikwad, wherein, in their ledger account, they have shown the closing balance in the name of the assessee at Rs. 9,60,63,263, which includes the interest liability of Rs. 10,00,03,883, whereas, in the book of the assessee company, the project advance to the said party was shown at Rs. 7,62,30,000. The differential amount is interest income which has not been offered for tax by the assessee. In response to the show cause notice, the assessee made very detail submissions after elaborating the entire facts relating to the transaction between the assessee and M/s. Desai & Gaikwad. The gist of the said submissions were as under:- "a) The appellant company had entered into a memorandum of understanding dated August 23, 2005 for development of a project with the said M/s. Desai & Gaikwad, whereby the Appellant Company was to develop a residential projec....
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.... by the Appellant Company and was not charged. j) In view of the foregoing facts, the Appellant Company did not accrue any interest income for the year ended March 31, 2007, as also for the year ended March 31, 2008, on the project advance given to Mis. Desai & Gaikwad as no interest income was receivable by the company from the said part." 5. In view of the aforesaid facts, it was submitted that no interest income had actually accrued to the assessee as the said party itself has not accepted the charge of interest. The Assessing Officer, however, rejected the assessee's contention and added the difference of Rs. 1,98,33,263 [Rs. 9,60,63,263 (-) Rs. 7,62,30,000] on the ground that merely waiving the interest unilaterally does not absolve the assesse from following the prescribed accounting standard for recognizing the income in its books of account. The assessee has been following mercantile system of accounting and, therefore, it was incumbent upon the assessee to show the accrued interest. His detail reasons after discussing various judicial pronouncements have been elaborated from pages-7 to 11 of the assessment order. 6. Before the learned Commissioner (Appeals), detai....
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....% interest per annum till the date of payment. Further, clause 12 proved that the amount advanced by the assessee shall otherwise also carry interest @ 10% per annum which shall be calculated at the time of execution of the development agreement for the second phase of the property. Since there was an inordinate delay in the procurement of the requisite approval and clearance by the owner, the execution of the formal development agreement was delayed. Accordingly, the assessee company charged interest on the project advance of such delay and raised a debit note dated 19th February 2007, on M/s. Desai & Gaikwad. The said debit note was not accepted by the said party and it was returned back by them vide their letter dated 8th March 2007. He pointed out to the relevant debit note and the said letter returning the debit note by the said party from the paper book. Thereafter, the assessee company, in its board of directors' meeting, passed a resolution that considering the non-acceptance of such a charge of interest by M/s. Desai & Gaikwad, the interest was to be waived off and, therefore, such interest did not accrue to the assessee for the year ending 31st march 2007 and also for the....
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.... which is evident from the fact that there is an interest component in the opening balance in the ledger account of the said party. He requested that the direction should be given by this bench to reopen the case of the assessment year 2007-08 also. He strongly referred to the reasoning of the Assessing Officer as given in Page-7 to 1 of the assessment order, which has been confirmed by the learned Commissioner (Appeals). Thus, in sum and substance, his main contention is that once the assessee is following mercantile system of accounting, then what is due to the assessee in terms of the agreement has to be shown as income. 10. We have heard the rival contentions, perused the findings of the authorities below as well as the material available on record. The main issue before us is, whether the interest which has been worked out by the Assessing Officer at Rs. 1,98,33,263, which is the account of the difference in the ledger account of M/s. Desai & Gaikwad and in the books of the assessee can be treated as income, taxable in this year. For adjudicating this issue, the facts are again reiterated for better appreciation. From the material placed on record, it is evident that the as....
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....est on account of non-fulfillment of requisition as per the terms of MoU, which later on has been waived off by the parties, can be said to be accrued to the assessee so as to be held taxable in this year. It is a settled principle of law that the income can be taxed on the real income only. The liability to tax is attracted either at the time of accrual of the income or on its receipt. However, if the income does not result at all, then the same cannot be taxed even though an entry is made in the books of account about such a hypothetical income which has not been materialized. For taxing an income, the assessee must have received or has the right to receive the income before it can be taxed. Under the mercantile system of accounting also, there must be a debt created in favour of the assessee by somebody and until then, it cannot be said to have accrued to the assessee even under the mercantile system of accounting. This principle of law has been reiterated by the Hon'ble Supreme Court right from the decision of Shoorji Vallabhdas and Co. (supra) up to the decision of Godhra Electricity Co. Ltd. (supra) and also in subsequent decisions by the High Courts. Merely because there....