Case Law Details
If there was funds available both, interest-free and overdraft and or/loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest free funds were sufficient to meet the investments. In the present case, there sufficient interest free funds were available at the disposal of the assessee.
ITAT held that that if interest income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted.
Income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax.
1.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the ld. A.O. has failed to establish that the assessee has received any interest from the above seven parties during the year under consideration and the interest free advances to above stated seven parties were out of interest bearing funds. It is the contention of the assessee that it had sufficient non-interest bearing funds to the tune of Rs. 10.11 crores as on 09.12.2010, which inter-alia included partners capital of Rs. 1.20 crores, and unsecured loan from partners of Rs. Rs. 8.91 crores as against interest bearing funds of Rs. 8.16 crores. The ld. A. R. contended that the assessee had utilised these funds for giving interest-free advances to aforesaid parties on which no interest was shown by the assessee even though M/s. Shubham Kela Agency, M/s. Ram Kela Agency and M/s. Saibaba Cotton Industries have shown to have paid interest of Rs. Rs. 1,31,735/- , Rs. 93,289/- and Rs. 27,00,000/- respectively to the assessee as per AIR information on which TDS was also deducted. We find that as per books of accounts of the assessee , the assessee has not received any interest during the year under consideration even though interest received in preceding year was duly shown by the assessee as its income for assessment year 2010-11. It is the contention of the assessee that the assessee has debited interest in to account of these parties but failed to realize the said interest from these parties hence, it was not offered to tax. It was noticed that the assessee was not able to even receive principal amount from these parties and cheques issued could not be realized. In view of this matter, we are of the view that interest income has been recognized in the books of accounts only to the extent of actual collection, which is the method recognized as per Accounting Standard 9 of ICAI. The Ld. A.R. also relied in the case of Maruti Securities Ltd. vs. Addl CIT (I.T.A. No. 468/Hyd/2009 and 1939/Hyd/2011 for the assessment year 2005-06 dtd. 05.09.2014 wherein para 22 is reproduced as under:
“22. The method of accounting, as followed by the assessee, does not create any income; but the method of accounting only recognizes income. There is some merit in the submission of the assessee that when the principal itself is overdue and not collected, there is no basis for making out a case that interest income would be collectable with certainty. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax, that accrual is a matter to be decided on commercial belief having regard to the nature of business of the assessee and character of the transaction. Accordingly, for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to ascertain the nature of business and character of the transaction and the realities and peculiarities of the situations. The decision very heavily relied upon by the first appellate authority in the case of State Bank of Travancore Vs CIT (1986) 158 ITR 102 was subsequently overruled in its land mark decision in the case of UCO Bank Vs CIT 237 ITR 889. In this regard, we place reliance on the ratio laid down by various judicial authorities on the proposition that the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax. In this behalf, we also rely, giving below summary of the ratio laid down, on the following decisions
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