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2014 (6) TMI 665 - AT - Income TaxAccrual of income - recognition of interest income on the basis of penal clause for charging of interest on account of delay in execution of contract – Held that:- The development agreement was still to be legally executed and approvals and clearances were pending and the construction of the residential project had not commenced, penal interest would not be charged, assessee decided to waive the same - The income can be taxed on the real income only - The liability to tax is attracted either at the time of accrual of the income or on its receipt - if the income does not result at all, then it cannot be taxed even though an entry is made in the books of account about such a hypothetical income which has not been materialized - Under the mercantile system of accounting also, there must be a debt created in favour of the assessee by somebody and until then, it cannot be said to have accrued to the assessee even under the mercantile system of accounting – Relying upon Commissioner Of Income-Tax, Bombay City I Versus Messrs. Shoorji Vallabhdas And Company [1962 (3) TMI 6 - SUPREME Court] - Merely because there was a penal clause for charging of interest on account of delay in getting the requisite approval and clearance, it does not ipso facto confers right upon the assessee to charge interest, unless the other party also recognises as a debt to be discharged in actual terms. The debit note raised by the assessee has been rejected / returned back to the assessee and based on this, the assessee has not recognised this income, has not been disputed by any material on record or by way of any enquiry from the said party specific on this score, then it cannot be held that the income, has accrued to the assessee in the real sense - the income cannot be said to be generated, actual or accrued, by mere entries in the accounts made by the parties - Such a hypothetical income cannot be said to have been accrued to the assessee merely because the other party has treated it as a liability – thus, the interest income as taken by the AO has not accrued to the assessee and it is not liable to the taxed in the hands of the assessee – Decided in favour of Assessee.
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