Red Fort Shahjahan Properties (P) Ltd. v. ACIT
[ITA No. 742/DEL/2020, dt. 20-8-2020] : 2020 TaxPub(DT) 3294 (Del-Trib)
Notional addition of interest on sticky loan to related
party
Facts:
Assessee had given loan amounting to Rs. 21.40 crores to
its group entity for a project with interest at prime lending rate + 3.5%. The
said project did not crystallize in the hands of the group entity due to
certain litigious aspects inherent to the project due to which the interest
income was not accounted by the assessee. It was subsequently in FY 2018-19 the
entire loan was also written off by the assessee factually. The assessing
officer notionally added the interest in the hands of the assessee for
assessment year 2016-17 which was upheld by the Commissioner (Appeals). The
prime reason for the addition being one would not give money free of cost
besides the fact that the non-accounting of the interest itself was more of a
hogwash to divert amounts to group entity. On higher appeal by the assessee -
Held in favour of the assessee that the notional addition
of interest could not be done.
The principles of uncertainty in revenue recognition as per
AS-9 was canvassed by the assessee.
Applied:
CIT v. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad-HC) : 1981 TaxPub(DT) 0587 (Mad-HC)
".......Where no income has
resulted, it cannot be said that income has accrued merely on the ground that
the assessee has been following the mercantile system of accounting. Even if
the assessee makes a debit entry to that effect, still no income can be said to
have accrued to the assessee. If no income has materialised there can be no
liability to tax a hypothetical income. It is not the hypothetical accrual of
income based on the mercantile system of accounting followed by the assessee
that has to be taken into account but, what should be considered is, whether
the income has really materialised or resulted to the assessee. The question
whether real income has materialised to the assessee has to be considered with
reference to commercial and business realities of the situation in which the
assessee has been placed and not with reference to the system of accounting.
When the facts and the
circumstances of the case clearly indicated that there is not even the remotest
possibility of any interest income materialising in favour of the assessee in
respect of the outstanding for the accounting year relevant to the assessment
year in question, no liability to tax can be imposed on the ground that
interest has accrued because of the mercantile system of accounting employed by
the assessee. The mercantile system of accounting can be only relevant only to
determine the point of time at which tax liability is attracted and it cannot
be relied on to determine whether income has, in fact, resulted or materialized
in favour of the assessee merely because the assessee has been maintaining his
accounts on the basis of mercantile system of accounting, the interest income
on the outstanding in the two firms cannot be held to have accrued at the end
of the accounting year. Viewed against the background of commercial business
realities of the situation in which the assessee was placed, the Tribunal came
to the conclusion that it would be very unrealistic on the part of the assessee
to take credit for a highly illusory interest."
CIT v. Goyal M.G. Gases (P) Ltd. (2008) 303 ITR 159 (Del-HC) : 2008 TaxPub(DT) 508 (Del-HC)
"10. The principle that the
Supreme Court applied was that even if the accounts are maintained in the
mercantile system, what has to be seen is whether income can be said to have
really accrued to the assessee. In support of this principle, reliance was
placed upon CIT v. Birla Gwalior (P) Ltd., (1973) 89 ITR 266 (SC) : 1973
TaxPub(DT) 0469 (SC) which approved the view taken by the Bombay High Court
in H.M. Kashiparekh and Co. Ltd. v. CIT, (1960) 39 ITR 706 (Bom) : 1960
TaxPub(DT) 0158 (Bom-HC), Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835
as well as Poona Electric Supply Co. Ltd. v. CIT, (1965) 57 ITR 521 (SC) :
1965 TaxPub(DT) 0316 (SC). In the penultimate paragraph of the judgment,
the Supreme Court held as follows :--
"The question whether there
was real accrual of income to the assessee-company in respect of the enhanced
charges for supply of electricity has to be considered by taking the
probability or improbability of realisation in a realistic manner. If the
matter is considered in this light, it is not possible to hold that there was
real accrual of income to the assessee-company in respect of the enhanced
charges for supply of electricity which were added by the Income Tax Officer
while passing the assessment orders in respect of the assessment years under
consideration."
11. Applying the law laid down
by the Supreme Court, what has to be seen in the present case is whether there
was any real accrual of interest to the assessee. Both the Commissioner
(Appeals) as well as the Tribunal came to the conclusion that there was no real
accrual of interest. It has been noted that the interest had not even been
recorded by the assessee in its books of accounts.
.....................................
The debts were written off as
bad debts and were also allowed by the assessing officer in subsequent years.
These facts lead to the inescapable conclusion that realisation of even the
principal amount was in jeopardy and, therefore, there cannot be said to be any
real accrual of income by way of interest. We find no fault in this view taken
by the Tribunal and are of the opinion that no substantial question of law
arises for our consideration."
Editorial Note: The landmark
decision of UCO Bank v. CIT (1999) 237 ITR 889 (SC) : 1999 TaxPub(DT) 1303
(SC) may also be referred to where it was held that the mercantile system
alone does not decide the taxability of the interest on sticky loans but it is
the actual right to receive the same.