Interest not received on doubtful loan can’t be taxed on accrual basis

By | November 22, 2015
(Last Updated On: November 22, 2015)

Facts of the Case:-

Assessee had advanced certain amount to a party on interest that said amount was outstanding and income from interest accrued had not been shown in the return.

Assessing Officer View Point :-

Assessing Officer, invoking the provisions of section 145, held that the interest was accrued to assessee for the year under consideration.

HELD

AO had made addition only because the assessee was following mercantile system of accounting. It is a fact that the assessee had not received any income though it was entitled to get the interest from Al-Haj Abdus Salam Barlaskar. The principle of accountancy cannot takes place the theory of real income and in the case under consideration the assessee had to write off the loan finally during the AY 2008-09. Just because, the interest was due, it cannot be always presumed same had to be taxed. The agreement in question is effective till September, 2008 only i.e., for a period of three years. In these circumstances, if the assessee was not receiving interest, then in our opinion, the addition should not have been made just because it had accrued to the assessee as per the mercantile system of accounting.

Full Judgement

IN THE ITAT GUWAHATI BENCH

Cachar Drug Distributors

v.

Income-tax Officer, Silchar

H.L. KARWA, PRESIDENT
AND RAJENDRA, ACCOUNTANT MEMBER

IT APPEAL NOS. 33 TO 35 (GAU.) OF 2012
[ASSESSMENT YEARS 2004-05 TO 2006-07]

JANUARY  27, 2015

Sanjay Modi, AR for the Appellant. O.P. Kanther, DR for the Respondent.

ORDER

Rajendra, Accountant Member – Challenging the order dated 18-05-2012 and 29.5.2012 of the Commissioner of Income Tax (Appeals) [CIT(A)], Shillong for the above three assessment years, the assessee has raised almost identical grounds of appeal.

2. Grounds of appeal for the assessment year 2004-05 read as under:

” For that the order passed by the learned Commissioner of Income Tax (Appeals)[CIT(A)] is bad in law, facts and procedure.
For that the ld. CIT(A) was not justified both in law and on facts in not finding that the impugned order of re-assessment having been passed without service of any valid notice u/s 143(2) of the Act, the impugned order of re-assessment is without jurisdiction, bad in law and consequently, in not cancelling the said order of re-assessment.
For that on facts and circumstances of the case, the ld. CIT(A) ought to have held that the order of re-assessment made by the ld. AO is barred by limitation and consequently bad in law and is liable to be cancelled.
For that the ld. CIT(A) failed to appreciate the fact that re-opening of assessment in the instant case without satisfaction of the pre-requisite conditions, invalid and was not based on any definite, reliable and relevant material for the year under consideration and the re-opening assessment being based only on suppositions, surmises and assumptions, such re-opening of assessment made by the ld. AO was bad in law, without jurisdiction and consequently, the ld. CIT(A) erred in not holding that the impugned order of reassessment passed is liable to be quashed.
(a)For that on the facts and circumstances of the case, the ld. CIT(A) grossly erred on facts in misconstruing and arbitrarily assuming that the appellant could not furnish any evidence to show that the agreement with Al-Haj Abdur Salam Barlaskar had expired on 30.09.2002. The addition of Rs. 1,20,000/- being confirmed by the ld. CIT(A) solely on the basis of above erroneous assumption of facts, the addition of Rs. 1,20,000/- is legally unsustainable and liable to be deleted.
(b)For that the ld. CIT(A) erred in not holding that the ld. AO was not justified in arbitrarily rejecting the bona fide and genuine explanation of the assessee by simply branding the same as ‘cannot be accepted’ without verifying the explanation given by the assessee and without pointing out any error therein. For that the learned AO was not justified in rejecting the explanation of the assessee after turning down the request of the assessee to issue necessary summons to the borrower for verification of the matter. After, refusing the request of the assessee, such arbitrarily, unsubstantiated and non-speaking order passed by the ld. AO is against all norms of fair play and justice and therefore unsustainable and is liable to be cancelled and the ld. CIT(A) has erred in not holding so.
(c)For that the ld. CIT(A) failed to appreciate the fact that ld. AO has added Rs. l,20,000/- as interest income of the year under consideration in a proceeding initiated u/s 147 of the Act without bringing on record any relevant material to show that any real income of such amount had actually accrued to the assessee during the relevant year or the assessee had actually received such amount at any time. The addition being made without discharging the burden which was on the ld. AO under law, the addition is bad in law and unsustainable.
(d)For that on the facts and circumstances of the case, the addition of Rs. 1,20,000/- is being based merely on arbitrary assumption, presumptions and suppositions, the same is incorrect, unsustainable, invalid and bad in law and therefore, the same may kindly be deleted.
For that the learned CIT(A) was not justified in confirming the arbitrarily made disallowance of Rs. 44,739/- out of the interest expenditure. For that the disallowance made being without jurisdiction and being against the principles of natural justice, is bad in law and is liable to be deleted.
For that your appellant denies its liability of being charged off of interest u/s 234B of the Act. For that interest charged under the aforesaid section at Rs. 35,200/- in the impugned order being not in accordance with the law the same may kindly be deleted in full.”

2.1 In the other two assessment years i.e. 2005-06 and 2006-07, the only difference is about amount involved. As the issues are common, therefore, for the sake of convenience, we adjudicate all the appeals by a single order.

2.2 Facts in brief of the case are that the assessee is a firm engaged in the wholesale business of medicine, filed its return of income on 18-10-2004. The Assessing Officer (AO) completed the assessment u/s 143(3)/147 of the Act on 31-03-2010, determining the income of the assessee at Rs. 2,50,539/-. In this case, the return of income was processed u/s 143(1) of the Act on 05-04-2005. On verification of the records for the AY 2006-07, the AO found that the assessee had advanced Rs.5 lakhs to Rahamatnagar Tea Estate (RNTE). As per the agreement entered into with RNTE dated 22-12-1999, the RNTE shall pay simple interest @ 24% per annum; that Rs.5 lakhs was outstanding and income from interest accrued had not been shown in the return which was required to be shown. The AO held that the assessee was not maintaining its account on mercantile system and that as per the provisions of sec. 145 of the Income Tax Act, the income had to be shown on accrual basis. Accordingly, notice u/s. 148 of the Act was issued to the assessee on 31-03-2009. In reply, the assessee stated that the original return filed should be treated as return filed on 18-10-2004 to be treated as return u/s 148 of the Act. During the course of assessment proceedings, the AO directed the assessee to explain about the short-term loan advance to Al-Haj Abdus Salam Barlaskar, Lease of Rahamatnagar Tea Estate as per the agreement dated 22-12-1999. As per the AO, the assessee did not disclose any income from the loan advanced to Al-Haj Abdus Salam Barlaskar for the year under consideration. The assessee vide its letter dated 07-12-2009 explained the circumstances under which the income had not been shown on accrual basis. Invoking the provisions of Sec. 145 of the Income Tax Act, the AO held that the interest is accrued to the assessee @ 24% of Rs.5 lakhs for the year under consideration, and resultantly he made an addition of Rs. 1.20 lakhs to the total income of the assessee. Aggrieved by the order of the AO, assessee preferred appeal before FAA.

3. During the course of hearing before the FAA, the assessee-firm furnished copy of deed of agreement made between it and Mr. Al-Haj Abdus Salam Barlaskar dated 22-12-1999. After considering the materials available on record, he held that as per deed of agreement, a loan of Rs.5 lakhs was advanced by the assessee for a simple rate of interest @ 24% per annum; that the assessee had failed to substantiate the contention that the agreement between it and Al-Haj Abdus Salam Barlaskar had expired; that it could not furnish any evidence that the money was not due. He held that the asseeee’s contention is without any evidence and had no weight. Confirming the order of AO, the Ld. FAA dismissed the appeal filed by the assessee.

4. Before us, Ld. AR stated that the agreement entered into on 22-12-1999 had expired on 30-09-2002; that the assessee had not received any interest; that the amount in question was shown as bad debt in the P & L a/c for the year ended on 31-03-2008; that finally in the year 2008-09, the amount was written off. He relied on upon the order of the Hon’ble Delhi High Court in the case of CIT v. Eicher Ltd. [2010] 320 ITR 410 On the other hand, Ld. DR supported the order of the FAA.

5. We have heard the rival submissions and perused the record of the case. We find that the AO had made addition only because the assessee was following mercantile system of accounting. It is a fact that the assessee had not received any income though it was entitled to get the interest from Al-Haj Abdus Salam Barlaskar. The principle of accountancy cannot takes place the theory of real income and in the case under consideration the assessee had to write off the loan finally during the AY 2008-09. Just because, the interest was due, it cannot be always presumed same had to be taxed. The agreement in question is effective till September, 2008 only i.e., for a period of three years. In these circumstances, if the assessee was not receiving interest, then in our opinion, the addition should not have been made just because it had accrued to the assessee as per the mercantile system of accounting. In the case of Eicher Ltd. (supra) the same principle has been propounded. Respectfully following the same, we reverse the order of the FAA and decide the effective grounds i.e., 1 to 5 in favour of the assessee.

6. Ground No. 6 is about disallowance of Rs. 44,739/- out of interest expenditure.

7. We find that FAA has not given any reason for the disallowance. As his order is non-speaking, therefore, same has to be reversed. Ground No. 6 is decided in favour of assessee.

8. The last ground of appeal deals with interest u/s 234B of the Act. As it is consequential in nature the same stands allowed for statistical purposes.

9. Now we taken up in appeal in ITA 34 and 35/Gau/2012 for A.Y. 2005-06 & 2006-07.

10. The facts and circumstances of the case for both the AYs are same as stated earlier. Following our order, for AY 2004-05 we decide the appeal in favour of assessee.

As a result, appeals filed by the assessee are allowed.

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