2016 (8) TMI 1449 - AT - Income Tax

Accrual of income - lease rental income - mercantile system of accounting followed by the appellant - year of assessment - whether the lease rental income not received by the assessee is liable to be taxed in the assessment year 2000-01 or the same should be excluded from total income of the assessee on the basis of real income theory ? - HELD THAT - Issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) while dealing with the issue in assessment year 2000-01 partly deleted the addition in respect of Parasrampuria Industries Ltd. and Parasrampuria International Ltd. by following the concept of real income and upheld the addition in respect of Modi Alkalies Ltd. and Inertia Industries Ltd. whereas all the four companies are similarly placed. Accordingly we deem it appropriate to remit this issue back to the file of Commissioner of Income Tax (Appeals) for deciding the issue afresh in the light of decision rendered in the case of Commissioner of Income Tax Vs. M/s. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT . The findings of Commissioner of Income Tax (Appeals) on this issue are set aside and the ground No. 7 in the appeal of the assessee and ground No. 4.1 to 4.5 in the appeal of the Revenue for assessment year 2000-01 are allowed for statistical purpose.

Summary

Issues Involved:
1. Addition of lease rental income to the assessee’s income for assessment year 2000-01.
2. Deduction of bad debts for the assessment year 2001-02.
3. Application of the real income theory in recognizing lease rental income.

Issue-Wise Detailed Analysis:

1. Addition of Lease Rental Income to the Assessee’s Income for Assessment Year 2000-01:
The assessee contested the addition of Rs. 4,17,888 and Rs. 19,20,000 to its income, arguing that the lease rental income had not accrued under the mercantile system of accounting. The Revenue, on the other hand, argued that the CIT(A) erred in holding that the AO should grant deduction of bad debt in the subsequent assessment year and in deleting the lease rental income of Rs. 34,37,380. The Tribunal noted that the assessee had not shown lease rentals from certain companies due to their poor financial conditions and that these companies were referred to BIFR. The AO had added these amounts to the income, but the CIT(A) partially upheld and partially deleted the additions. The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, directing a reconsideration in light of the Supreme Court decision in Commissioner of Income Tax Vs. M/s. Excel Industries Ltd.

2. Deduction of Bad Debts for the Assessment Year 2001-02:
The Revenue appealed against the CIT(A)’s deletion of lease rental income of Rs. 1,53,21,302 for the assessment year 2001-02. The CIT(A) had deleted the additions, citing the financial restructuring of the lessee companies, which froze the debts and reduced the amounts payable. The Tribunal found that the facts in assessment year 2001-02 were similar to those in 2000-01 and remitted the issue back to the CIT(A) for fresh adjudication, aligning with the decision for the previous year.

3. Application of the Real Income Theory in Recognizing Lease Rental Income:
The assessee argued that no lease rental income accrued due to the financial instability of the lessee companies, invoking the real income theory supported by the Supreme Court’s decision in Commissioner of Income Tax Vs. M/s. Excel Industries Ltd. The Tribunal acknowledged that the CIT(A) had inconsistently applied the real income concept, upholding additions for some companies while deleting for others. The Tribunal directed the CIT(A) to revisit the issue and apply the real income theory consistently across all cases.

Conclusion:
The Tribunal set aside the findings of the CIT(A) and remitted the issues back for fresh adjudication, emphasizing the application of the real income theory and the need for consistent treatment of similar cases. The appeals by both the assessee and the Revenue were allowed for statistical purposes, with directions for reconsideration in light of relevant Supreme Court judgments.