Case Law Details
Essar Steel Metal Trading Limited Vs DCIT (ITAT Mumabi)
ITAT Mumbai held that income can be said to have accrued only when there is certainty of receipts. Accordingly, impugned interest income cannot be said to be accrued as recovery of principal amount is also doubtful.
Facts- The assessee is engaged in the business of trading in Steels and holding investments. The assessee had given inter corporate deposits to M/s Essar Steel India Ltd. The assessee did not offer any interest income on the above said deposits in the return of income filed for the year under consideration. The AO noticed from Form No.26AS that M/s Essar Steel India Ltd has deducted TDS of Rs.32,85,608/- on the interest payable to the assessee. Further, it was noticed that the assessee and M/s Essar Steel India Ltd belonged to the same group. Accordingly, the AO took the view that the interest income receivable by the assessee is assessable in the hands of the assessee. He computed the interest income at Rs.3,28,56,079/- on the basis of TDS amount and accordingly assessed the same in the hands of the assessee. However, he did not allow TDS credit of Rs.32,85,608/- against the tax due from the assessee. The Ld CIT(A) also confirmed the same and hence the assessee has filed this appeal.
Conclusion- We notice that the assessee’s case here is that the recovery of principal amount itself is in doubt, in view of the fact that M/s Essar Steel India Limited has gone under insolvency proceeding and further the value of assets was less than the claim of unsecured creditors and hence there was no certainty that the principal amount of unsecured creditors would be settled. In our view, the contentions of the assessee are in accordance with the decision rendered in the above said cases, as per which an income can be said to have accrued only when there is certainty of receipt. Accordingly, we are of the view that the tax authorities are not justified in holding that the impugned interest income has accrued to the assessee.
We have noticed earlier that the TDS on the above said interest has been deducted and remitted to the credit of the Government, meaning thereby, to the extent of TDS amount, it can be said that the assessee has received interest. Accordingly, we hold that the interest income to the extent of TDS is liable to be taxed in the hands of the assessee. Accordingly, we hold that the TDS amount of Rs. 32,85,608/- is liable to be assessed in the hands of the assessee. Accordingly, we sustain the impugned addition to the extent of Rs.32,85,608/-. Since the above said amount is assessed to tax, we also direct the AO to allow TDS credit of Rs.32,85,608/- to the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed this appeal challenging the order dated 24.11.2022 passed by Ld CIT(A), NFAC, Delhi and it relates to the assessment year 2018-19. The assessee is aggrieved by the decision of Ld CIT(A) in assessing interest income of Rs.3,28,56,079/- on unsecured inter corporate deposit placed with M/s Essar Steel India Ltd and also in not granting credit of corresponding TDS amount of Rs.32,85,608/-.
2. The facts relating to the above said issue are stated in brief. The assessee is engaged in the business of trading in Steels and holding investments. The assessee had given inter corporate deposits to M/s Essar Steel India Ltd. The assessee did not offer any interest income on the above said deposits in the return of income filed for the year under consideration. The AO noticed from Form No.26AS that M/s Essar Steel India Ltd has deducted TDS of Rs.32,85,608/- on the interest payable to the assessee. Further, it was noticed that the assessee and M/s Essar Steel India Ltd belonged to the same group. Accordingly, the AO took the view that the interest income receivable by the assessee is assessable in the hands of the assessee. He computed the interest income at Rs.3,28,56,079/- on the basis of TDS amount and accordingly assessed the same in the hands of the assessee. However, he did not allow TDS credit of Rs.32,85,608/- against the tax due from the assessee. The Ld CIT(A) also confirmed the same and hence the assessee has filed this appeal.
3. The Ld A.R placed reliance on the submissions made before the AO in order to explain the stand of the assessee. The assessee has made following submissions before the AO:-
“3. In response to the same, the assessee company has submitted its reply on 25.02.2021 and the same is reproduced hereunder‑
‘The assessee company had unsecured Inter-corporate deposits placed with M/s Essar Steel India Limited (ESTIL). Due to non-serving of loan availed from the various lenders, the lenders filed petition before the National Company Law Tribunal for initiation of the insolvency proceedings against ESTIL. Vide order dated August 2 2017 passed by Hon’ble National Company Law Tribunal (NCLT), Ahmedabad Bench corporate insolvency resolution process was initiated by appointment of Interim Resolution Professional. Copy of public announcement dated 05 August, 2017 is enclosed herewith for kind reference of your goodself.
As per Section 178 of the Insolvency and Bankruptcy Code, secured creditors, workmen dues and government dues have priority over the unsecured creditors. Since, assets of the Essar Steel India Limited was not sufficient to discharge all the secured creditors, therefore claim of unsecured creditors were not admissible.
Since ICD held by the assessee company in Essar Steel India Limited was unsecured loan therefore its claim towards principal and interests were not admissible.
As per Para 9 of Accounting Standard-9 issued by the Institute of Chartered Accountants of India, the recognition of Revenue requires that it is measurable and also the assessee is able to collect with reasonable certainty. If it is lacking the certainty of collection at the time of raising any claim, the revenue recognition has to be postponed to the extent of uncertainty involved.
As the claim of the assessee company was not admissible and no interest is recoverable from ESTIL, therefore the assessee company has not recognized the interest income in its books of account.
We do hereby submit that subsequently, the assessee company had to write-off entire amount of ICDS placed with ESTIL Further, no interest was paid by ESTIL It seems that on prudent basis, ESTIL had provided provision for interest in its books of account and deducted tax at source thereon under Section 194A of the Act. The assessee company had not claimed credit for tax deducted at source by ESTIL against its taxable company.”
4. He submitted that, under mercantile system of accounting, an income could be said to have accrued and it could be recognized only when there is certainty of its receipt. In the instant case, there was no certainty of receipt of interest income and hence the same cannot be construed as accrued to the In support of this proposition, he placed his reliance on the decision rendered by Pune bench of Tribunal in the case of M/s Nutan Warehousing Co Pvt Ltd Vs. ACIT (ITA No.471/PUN/2018 dated 11-05-2021). He further submitted that the assessee can be said to have received interest only to the extent of TDS amount deducted by the Interim Resolution Professional. Accordingly, he submitted that the interest income, to the extent of TDS amount of Rs.32,85,608/-, may be taxed in the hands of the assessee and the said TDS amount may be given credit to the assessee.
5. The Ld D.R, on the contrary, submitted that M/s Essar Steel India Limited belongs to assessee group only. Hence it cannot be said that there was no certainty of receipt of interest income. Accordingly, she contended that the Ld CIT(A) has rightly confirmed assessment of interest income. She further submitted that she has read reports that unsecured creditors are also being compensated. Accordingly, in the alternative, the Ld D.R submitted that a direction be given to the assessee to offer interest income, if any, received in future in that year, if the impugned issue is decided by the Tribunal in favour of the assessee.
6. We heard rival contentions and perused the record. The question that needs to be adjudicated by us is whether the interest income due on the inter corporate deposits kept with M/s Essar Steel India Limited can be considered to have accrued to the assessee or not?. Further, this question has to be answered in the back ground that the Interim Resolution Professional of M/s Essar Steel India Ltd has deducted TDS on interest payable to the assessee.
7. The case of the assessee is that M/s Essar Steel India Limited has gone under Insolvency proceedings and Interim Resolution Professional has been It was learnt by the assessee that the assets available with M/s Essar Steel India Limited may not be sufficient to discharge the liabilities of secured creditors and hence the assessee has come to the conclusion that it will not get any money on the inter corporate deposits made by it with the above said company. It is the case of the assessee that, when the principal amount itself is doubtful of recovery, the question of realizing interest income shall not arise. In view of the uncertainty over the receipt of the same, it is contended that it cannot be said that the interest income has accrued.
8. Before us, Ld A.R placed his reliance on the decision rendered by Pune bench of Tribunal in the case of M/s Nutan Warehousing Co Pvt Ltd (supra), wherein an identical issue was examined. In this case also, the assessee did not declare interest income on fixed deposits kept with M/s Rupee Co-op Bank Ltd. The AO came to know of the said interest income from Form No.26AS data. The above said M/s Rupee Co-op Bank Ltd had become defunct and RBI had banned all financial transactions. Under these set of facts, the Tribunal held that the interest income on the deposits kept with the above said bank cannot be included in the total income, when the mercantile system of accounting and “real income theory” are placed juxtaposition to each other. For the sake of convenience, we extract below the relevant portion of the order passed by the Tribunal:-
“2. The only issue raised in the appeal is against the confirmation of addition of Rs.26,125/- on account of interest from bank.
3. Briefly stated, the facts of the case are that the assessee is a company engaged in the business of warehouse renting. The return of income was filed declaring total income of Rs.66,41,800/-. During the course of assessment proceedings, the Assessing Officer (AO) observed from 26AS data that the assessee had not shown interest from bank amounting to Rs.26,125/-. An addition was made on this account, which came to be sustained in the first appeal.
4. We have heard the ld. DR through virtual court and gone through the relevant material on record. There is no appearance from the side of assessee despite notice. It is seen that the 26AS data revealed the assessee earning interest income of Rs.26,125/-from Rupee Co-op Bank Ltd., that was not disclosed. The bank had become defunct and no financial transactions were allowed. The RBI, vide its direction dated 21-02- 2013, referred to on page 16 of the impugned order, banned the transactions of the bank. Due to such a ban, even the principal amount deposited by the assessee became doubtful of recovery, much less the interest in question that was not received. Not only that, the assessee stated before the ld. CIT(A) during the course of the first appellate proceedings taking place in the year 2017 that the interest was not received even till that time.
5. The ld. CIT(A) has gone with the accrual concept of income under the mercantile system of accounting and held that the interest once accrued became chargeable to tax notwithstanding its non-receipt.
6. The concept of `accrual of income’ needs to be considered in the hue of the ‘real income theory’. Where accrual of an income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax. In the case of mercantile system of accounting, an accruing income can be charged to tax only when it is likely to be received under the given circumstances. In a case where receipt of income, after its accrual, is marred with complete uncertainty as to its realization, such an accrual gets deferred to the point of clearing of the clouds of uncertainty over it.
7. Assimilating the entire factual scenario prevailing in the instant case, it is seen that even the principal amount of deposit made by the assessee became irrecoverable. These facts indicate that the assessee did not receive any such interest income from Rupee Co-op Bank Ltd. whose functions were banned by the RBI. When we consider the mercantile system of accounting in juxtaposition to ‘real income theory’ in the facts and the circumstances of the instant case, the inescapable conclusion which follows is that the interest income of Rs.26, 125/- cannot be included in the total income of the assessee for the year under consideration. Such an income may be appropriately charged to tax on the regularisation of the operations of the bank coupled with the possibility of receipt of income in foreseeable future. Insofar as the instant year is concerned, we hold that the interest cannot be charged to tax. The impugned order is overturned and the addition is deleted.”
9. The Hon’ble High Court of Delhi has considered an identical issue in the case of CIT vs. Goyal M G Gases P Ltd (2008)(303 ITR 159)(Delhi), wherein it was held as under:-
“7. The third substantial question of law raised by the revenue is with regard to the deletion of an addition of interest computed by the Assessing Officer on an advance given by the assessee to seven parties. According to the Assessing Officer, since the assessee was following the mercantile system of accounting, interest had accrued to the assessee as its income.
8. The contention of the assessee was that in the subsequent year, the assessee had written off the loans given to the seven parties as bad debts and the Assessing Officer had also accepted the writing off of the principal Learned counsel for the revenue submitted that both the [CIT(A)] as well as the Tribunal were in error in taking note of subsequent events and should have strictly gone by the principles of the mercantile system of accounting and on that basis it should have been held that the Assessing Officer was correct in taking the interest on those advances as income having accrued to the assessee.
9. The Tribunal relied upon the decision of the Supreme Court in Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746. We have gone through this decision. The Supreme Court quoted a passage from an earlier decision rendered in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 where it had been stated as follows :-
“Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a Hypothetical income, which does not materialise.'” (p. 756)
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 CITv. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) which approved the view taken by the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.), Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) as well as Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (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 CIT(A) 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 account. The assessee had also issued a notice to the parties under section 138 of the Negotiable Instruments Act for dishonour of cheques issued by all (except one of the debtors) followed by initiation of appropriate proceedings. 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.”
10. The facts in the instant case, in our view, are identical to the above said cases. We notice that the assessee’s case here is that the recovery of principal amount itself is in doubt, in view of the fact that M/s Essar Steel India Limited has gone under insolvency proceeding and further the value of assets was less than the claim of unsecured creditors and hence there was no certainty that the principal amount of unsecured creditors would be settled. In our view, the contentions of the assessee are in accordance with the decision rendered in the above said cases, as per which an income can be said to have accrued only when there is certainty of receipt. Accordingly, we are of the view that the tax authorities are not justified in holding that the impugned interest income has accrued to the assessee.
11. We have noticed earlier that the TDS on the above said interest has been deducted and remitted to the credit of the Government, meaning thereby, to the extent of TDS amount, it can be said that the assessee has received interest. Accordingly, we hold that the interest income to the extent of TDS is liable to be taxed in the hands of the assessee. Accordingly, we hold that the TDS amount of Rs. 32,85,608/- is liable to be assessed in the hands of the assessee. Accordingly, we sustain the impugned addition to the extent of Rs.32,85,608/-. Since the above said amount is assessed to tax, we also direct the AO to allow TDS credit of Rs.32,85,608/- to the assessee.
12. The Ld D.R submitted that, if the appeal is decided in favour of the assessee, then a direction may be given to the assessee to offer interest income, if any, received in the future, in the year of receipt. The Ld A.R also submitted that there is no quarrel on the above said proposition put forth by the Ld D.R. Accordingly, we direct the assessee to offer interest income, if any received in future, in the year of receipt.
13. In the result, the appeal filed by the assessee is partly allowed. Pronounced in the open court on 21.3.2023.
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