Accrual of Interest on hypothetical income outstanding in books cannot be taxed

TG Team 12 Jun 2015 5,140 Views 0 comment Print Income Tax | Judiciary

Case Law Details

Case Name : The Liquidator Polymerland India P. Ltd. Vs DCIT (Delhi High Court)

Appeal Number : ITA Nos. 268/2008, 269/2008 & 270/2008

Date of Judgement/Order : 19/05/2015

Related Assessment Year :

Courts : All High Courts Delhi High Court

Download Judgment/Order

Brief Facts:

Assessee is a Joint Venture Company currently facing liquidation proceedings before Allahabad High Court but continued to disburse amount to suppliers for business purposes.
Due to deteriorating condition one of the suppliers failed to repay the amount advanced by assessee.
In the AY 1997-98 assessee come into an agreement with supplier according to which advances converted into loan and supplier agreed to pay interest also.
Due to breach of agreement by supplier assessee reversed entries of outstanding amounts in its books in order to avoid dual accounting.
Revenue added interest accrued on outstanding for subsequent years.
CIT (A) accepted assessee’s plea that income on the amounts due had not accrued for the years in consideration. ITAT decided against assessee.
Now the question is before Hon’ble HC that whether any interest accrued to assessee and liable to tax.

Contention of Revenue:

Revenue urged that income deemed to have been accrued in absence of write off.
Assessee never reversed entries during the relevant points in time in his books of account so such amount can be taxed on the basis of accrual.

Contention of Assessee:

Income on the amount due had not accrued for years in concern.
Outstanding dues in books were based on advance paid and they may or may not be realised over a course of time and such hypothetical income cannot be taxed.
Case of CIT vs. Shoorji Vallabdas & Co. 46 ITR 144 (SC) relied upon in which Hon’ble SC held that income tax enactment takes into account two points of time at which taxation liability is directed, i.e. accrual of income or its receipts, nevertheless the substance of the matter is income and if income does not result there cannot be taxed.

Held by Court:

The judgment Shoorji Vallabhdas & Co.(supra) has been recently follows in CIT V.Excel Industries Ltd. 358 ITR 295 where it was reiterated that income tax is levied on real income and not hypothetical income.
Revenue accepted assessee’s plea in previous period and it cannot agitate identical matter for succeeding years without any compelling reason.

Comments:

While setting aside the order passed by ITAT Hon’ble HC held that tax can be levied on real income not on hypothetical income. Realization of some entries is doubted and such entries can not constitute a valid levy of tax.

(Compiled by our Team Member- Advocate Jagjeet Singh )