Case Law Details

Case Name : Nutan Warehousing Co. Pvt. Ltd. Vs ACIT (ITAT Pune)
Appeal Number : ITA No. 471/PUN/2018
Date of Judgement/Order : 11/05/2021
Related Assessment Year : 2013-14

Nutan Warehousing Co. Pvt. Ltd. Vs ACIT (ITAT Pune)

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.

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.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee arises out of the order dated 04-12-2017 passed by the CIT(A)-3, Pune in relation to the assessment year 2013-14.

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.

8. In the result, the appeal is allowed.

Order pronounced in the Open Court on  11th  May, 2021.

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