Income Tax Appellate Tribunal (ITAT), Lucknow has recently upheld the non recognition of interest income by the assessee despite following mercantile method of accounting due to uncertainty in collection of the interest income which was as approved by Supreme Court.

ITA No.461/LKW/2013; Assessment year: 2008 -09
ACIT-4 Kanpur (Appellant) vs Rajeev Tandon (Respondent)
Date of Order: 14-08-2015

ORDER

PER A. K. GARODIA, A.M.

This is revenue’s appeal directed against the order of Ld CIT(A)-I Kanpur Dated 31.08.2013 for A.Y. 2008 – 09.

2. The revenue has raised the following grounds:-

“1. The CIT (A) has erred in law and on facts in deleting the addition of Rs. 35,62,864/- without appreciating the facts of the case brought on record by the AO during assessment proceedings.

2. In doing so, the CIT (A) has not appreciated the fact that the resolution dated 01.04.2007 passed by the Board of Directors of M/s Auchite Chemicals Pvt. Ltd. is nothing but a colourable device to circumvent the provisions of the Act to defer the tax liability, which the assessee is actually liable to.

3. The CIT (A) has erred in law and on facts in deleting the addition of Rs. 35,62,864/- without appreciating the fact that the resolution was signed by only Smt. Deepa Tandon in the capacity of Director of the company and agreed by Shri Rajeev Tandon in the capacity of Depositor only to suit the convenience of the assessee to get away with his tax liability.

4. The CIT (A) has erred in law and on facts in deleting the addition of Rs. 35,62,864/- without appreciating the fact that the accounting method adopted by the assessee is “mercantile” and not “cash” as claimed by the assessee. 5. The order of CIT (A), Kanpur being erroneous, unjust and bad in law be vacated and the order of the AO be restored.”

3. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A).

4. We have considered the rival submissions. We find that the learned CIT (A) has decided the issue as per Para 5 & 5.1 of his order, which are reproduced below for ready reference:-

“5. Decision:

I have carefully considered the erudite and elaborate arguments of the Ld. A.R. in this regard. When an assessee is following mercantile method of accounting and has not recognized certain revenues on accrual basis, it is necessary for the assessee to demonstrates that even under mercantile method, there are good reasons for not recognizing revenues in question on accrual basis and that facts and circumstances of case warrant that such revenues are recognized only when the same are received. In this regard, reference is made to the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs JCIT (320 ITR 377) wherein the Hon'ble Court in no uncertain terms held that the collectability of interest is different from accrual and in each and in each and every case, the assessee has to prove that the income (interest) is not recognized or not taken into account due to uncertainty in collection of the income. In the instant case, there was a Board's Resolution (which has been extracted above) and to which the appellant was also signatory; and had certainly curtailed the "right to receive" such interest amount during the year. In that view of the matter, the assessee has clearly demonstrated as to why there was uncertainty in collection of the impugned interest income and, therefore, under the given peculiar facts of the case, it has to be held that such amount was not liable to be included in the income of the assessee (for the instant asstt. year) either on the accrual basis or on receipt basis as none of these two events had occurred during the current financial year. In CIT vs Hindustan Housing and Land Development Trust Ltd. [161 ITR 524 (SC) while analyzing the scope of accrual of income, the Hon'ble Supreme Court categorically held that in case of an inchoate right to receive income, it does not result in income.

5.1 In this view of the matter, the impugned addition made in this asstt. year is deleted and the assessee is directed to offer the said amount of income to tax in the year when the "right to receive" such income occurs. The assessee would file an affidavit before the A.O. to this effect. Further, the A.O. will allow the TDS claim strictly in accordance with Sec. 199 of the I.T. Act read with the Board's Circular No. 5 of 2001, 2nd March 2001.”

5. From the above Paras of the order of CIT (A), it comes out that his decision is on the basis of Board Resolution of the borrowing company with which the assessee also agreed. This board resolution is dated 01.04.2007 and it is reproduced by CIT (A) in Para 3.3 of his order. As per the same, the assessee will receive the right to receive the balance amount of interest i.e. total interest less TDS being the disputed amount of Rs. 35,62,864/-only if deduction of interest expenditure is allowed in the hands of the borrower company. There is no embargo on the assessee to give loan to the present borrower company interest free or at lesser rate of interest. The resolution of the borrower company with which the assessee also agreed amounts to granting loan to the borrower company at lesser interest for the time being but it may go up in case the borrower company gets deduction in its income tax assessment. Hence, in our considered opinion, it cannot be termed as a colourable device. We also find that learned CIT (A) has followed two judgments of Hon’ble apex court rendered in the case of Southern Technologies Ltd. vs. JCVIT, 320 ITR 577 and in the case of CIT vs. Hindustan Housing and Land Development Trust Ltd,. 161 ITR 524. In the first case, although the dispute was different i.e. allowability of Provision of NPA as per RBI Guidelines and this issue was decided against the assessee but following observation in Para 31 of this judgment on page 606 of 320 ITR are relevant:-

“31. Before concluding on this point, we need to emphasise that the 1998 Directions has nothing to do with the accounting treatment or taxability of " income" under the Income-tax Act. The two, viz., the Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as " income" is recognized under the accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its presentation under the said directions, there would be an add back but not under the Income-tax Act necessarily. It is important to note that collectibility is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the sum of Rs.20,34,605, that interest is not recognized or taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the Incometax Act or not to accept it in which case there will be add back even under the real income theory as explained hereinbelow.”

6. As per above observations of Hon’ble apex court collectability is different from accrual and the assessee has to prove that interest was not recognized or taken into account due to uncertainty in collection of income and if the assessee fails to prove so, there will be add back under real income theory. In the present case, as per the board resolution of the borrower company dated 01.04.2007 with which the assessee also agreed, the collection of the disputed amount of interest income is uncertain as it depends on the income tax assessment of the borrower company which cannot be final in the present year and therefore, the same is not taxable in view of real income theory as approved in this judgment of Hon’ble apex court. Therefore, we find no infirmity in the order of CIT (A). Hence, we decline to interfere in his order.

7. In the result, the appeal of the revenue is dismissed.
(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/.                                                      Sd/.
(SUNIL KUMAR YADAV)      ( A. K. GARODIA )
Judicial Member                     Accountant Member
dated:14/08/2015