Right to Receive Interest without reasonable certainty of Realization cannot be taxed

DCIT Vs. M/s Harshvardhan land Ltd. (ITAT Jaipur)

Assessee has entered into lease agreement with M/s R.L. Verma & Sons (HUF) dated 19.08.2009 whereby the assessee claimed to have taken on lease the property ad measuring 3650 sq. ft at 9^th floor, Dr. Gopal Das Bhawan, Barakhamba Road, New Delhi. The parties have also entered into a loan agreement in respect of a sum of Rs. 4,50,00,000/- paid by the assessee to the lessor being security deposit on which an interest @ 2.92% P.M. was payable to the assessee. The Assessing Officer has not disputed this fact that the property in question was mortgaged by the lessor with the bank against the loan availed and therefore the property was not free from liean/charges. However, the assessee has not purchased the property and even if the said property was mortgaged with the bank so long the property is not physically taken over by the bank the assessee right over the property as a lessee was not affected. It is also undisputed fact that after the initial payment of interest the cheques issued by the lessor for the subsequent payment of the interest got dishonored when presented for encashment. The assessee took legal action by filing a complaint u/s 138 of Negotiable Instrument Act. Thus, it appears that the interest amount though accrued to the assessee and the assessee had all rights to recover it from the lessor was not received and it was full of uncertainty when the assessee would finally is able to recover the interest from the lessor when the recovery of principal amount of Rs. 4,50,00,000/- itself is doubtful. Therefore, when the amount of interest was not actually received by the assessee and there was a very bleak chance of recovery of the said amount of interest as well as principal amount then the interest which is accrued as per the lease deed and loan agreement would not be regarded as the income of the assessee so long the recovery of the same is uncertain. We further noted that for the A.Y. 2014-15 the assessee has claimed write off the principal amount and the Assessing Officer while passing the order u/s 143(3) which is placed at page 123 & 124 of the Paper Books has not made any dis allowance or addition. Though assessment order is very brief and accepted the total income being loss declared by the assessee however, once the claim of the assessee has not been disputed by the AO for the A.Y. 2014-15 then it amounts to accepting the fact that the recovery of the principal amount itself is doubtful and therefore the interest on the said amount cannot be recognized as income of the assessee as it is only a right to received but it is not certain to be received by the assessee so long this right to receive the interest is not going to be materialized it will not result any income and cannot be taxed as income of the assessee. Hence, even in this case the assessee is following the accrual system of accounting the income is accrued only on the point when it is finally to be received by the assessee with reasonable certainty and absence of certainty of receipt and recovery of the amount cannot be classified as income accrued for the purpose of charging to income tax.

The Hon’ble Supreme Court in case of CIT Vs. Excel Industries Ltd. (Supra) has observed that the probability or improbability of realization of the income by the assessee has to be considered from a realistic and practical point of view which is one test laid down by the Hon’ble Apex Court in determining the income when accrued. Only a right under the agreement to receive the interest by the assessee without reasonable certainty of realization of the same cannot be brought to income tax. Hence, in view of the facts and circumstances of the case when the realization of the amount is not certain then the same cannot be charged to income tax. Accordingly we do not find any error or illegality in the impugned orders of the ld. CIT(A).

Full Text of the ITAT Order is as follows:-

These four appeals by the Revenue are directed against four separate orders of ld. CIT(A), Jaipur for the A.Y. 2010-11 to 2013-14. Since the Revenue has raised common grounds in these appeals except the quantum of addition deleted by the ld. CIT(A), therefore, the grounds raised for the A.Y. 2010-11 are reproduced as under:-

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