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2025 (5) TMI 114 - AT - Income TaxAccrual of interest income - non-receipt of the said interest amount and the debtor being declared a Non-Performing Asset (NPA) and subsequently undergoing insolvency proceedings HELD THAT - As one has to see the probability or improbability of realization of a debt in a realistic manner. Here in this case there was no probability of realizing any interest from the debtor company as the same was declared NPA and therefore there was no reason that assessee should have declared any income on accrual basis when in real there was no income received nor under these circumstances income could have been accrued to the assessee. Ld. CIT (A) has rightly held the tax can be levied on real income and not hypothetically income. Another important fact is that even though TDS was deducted by the debtor company even when no interest was ever paid to the assessee till date. In the subsequent assessment year assessee had not shown any interest and the same has been accepted by the ld. AO in the assessment orders and in fact in A.Y.2021-22 assessee has written off the principal amount as bad debt. Thus showing interest income on accrual basis and then writing it off subsequently was only a futile exercise when assessee was aware that it will not receive any amount from the debtor company. Accordingly we uphold the order of the ld. CIT(A) that there was no interest actually accrued to the assessee which can be brought to tax. The order of the ld. CIT(A) deleting the interest amount of Rs. 3, 60, 00, 000/- is upheld. Credit of TDS - We are unable to accept the proposition of the assessee for the reason that once assessee has not declared any corresponding income assessee cannot deduct take credit of the TDS. This has been held by the Hon ble Jurisdictional High Court in the case of Imageads Communications (P) Ltd 2025 (2) TMI 772 - BOMBAY HIGH COURT . Thus assessee cannot take the credit of TDS once the corresponding income has not been shown. Accordingly the grounds raised by the assessee are dismissed.
The core legal questions considered by the Tribunal in this matter are:
1. Whether the interest income of Rs. 3,60,00,000/- allegedly accrued from the debtor company, M/s. Dharti Dredging & Infrastructure Ltd. (DDIL), can be taxed in the hands of the assessee despite non-receipt of the said interest amount and the debtor being declared a Non-Performing Asset (NPA) and subsequently undergoing insolvency proceedings. 2. Whether the assessee is entitled to credit for Tax Deducted at Source (TDS) of Rs. 36,00,000/- paid by DDIL on the purported interest income, when the assessee has not declared the corresponding interest income in its return. Issue-wise Detailed Analysis Issue 1: Taxability of Interest Income of Rs. 3.6 Crores Allegedly Accrued but Not Received Relevant Legal Framework and Precedents: The Tribunal examined the principles of accrual of income under the mercantile system of accounting, emphasizing the concept of "real income" as opposed to "hypothetical income." The jurisprudence cited includes:
Court's Interpretation and Reasoning: The Tribunal noted that the debtor company, DDIL, had become an NPA as of 30/06/2018, as classified by the State Bank of India (SBI), and was undergoing insolvency proceedings initiated under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. The National Company Law Tribunal (NCLT) had admitted the insolvency petition and appointed an Interim Resolution Professional. The Tribunal found that the financial condition of DDIL was poor, with failure to repay loans and interest, confirmed by the classification as NPA and insolvency proceedings. The assessee had advanced Rs. 30 Crores to DDIL in FY 2016-17, received interest income in AY 2017-18, but did not receive any interest for AY 2018-19. The assessee did not account for interest income on accrual basis for AY 2018-19, given the improbability of receipt. Despite this, DDIL deducted TDS of Rs. 36 lakhs on interest of Rs. 3.6 Crores and deposited it with the government on 08/11/2018, without actually paying the interest to the assessee or issuing a TDS certificate. The assessee was unaware of this TDS deduction at the time of filing the return. The Assessing Officer (AO) rejected the assessee's explanation and added the interest income of Rs. 3.6 Crores to the total income, without giving credit for the TDS. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, holding that the income had not really accrued to the assessee and was only hypothetical income. Key Evidence and Findings: The Tribunal considered the following facts:
Application of Law to Facts: The Tribunal applied the principle that income accrual must be real and not merely book entries or hypothetical. Given the financial distress of DDIL, its classification as NPA, insolvency proceedings, and non-receipt of interest by the assessee, the Tribunal concluded that the interest income had not actually accrued. The payment of TDS by DDIL without corresponding payment of interest to the assessee was held not to create a real income accrual in the hands of the assessee. Treatment of Competing Arguments: The Revenue argued that the TDS payment by DDIL indicated that interest income had accrued and should be taxed. The Tribunal rejected this, emphasizing that mere deduction of TDS without actual receipt of income does not amount to accrual. The Tribunal relied on authoritative Supreme Court decisions to hold that tax can only be levied on real income. Conclusion: The Tribunal upheld the CIT(A)'s order deleting the addition of Rs. 3.6 Crores as interest income, holding that the income was hypothetical and had not really accrued to the assessee. Issue 2: Entitlement of Assessee to Credit for TDS of Rs. 36 Lakhs Deducted by Debtor Relevant Legal Framework and Precedents: The Tribunal referred to the principle that credit for TDS can be claimed only if the corresponding income is declared by the assessee. The Tribunal relied on a judgment of the Hon'ble Jurisdictional High Court in the case of Imageads & Communications (P) Ltd., which held that if the income corresponding to TDS is not offered to tax, credit for TDS cannot be allowed. Court's Interpretation and Reasoning: The Tribunal noted that the assessee had not declared the interest income of Rs. 3.6 Crores in its return for AY 2018-19. Since the income was not offered to tax, the assessee could not claim credit for the TDS deducted by the debtor company. The Tribunal held that allowing credit for TDS without declaration of corresponding income would be contrary to the provisions of Sections 198 and 199 of the Income Tax Act. Key Evidence and Findings: The assessee's return showed no income corresponding to the TDS deducted. The TDS was deducted and deposited by DDIL without the assessee's knowledge or receipt of interest income. The assessee filed a NIL return for the interest income in question. Application of Law to Facts: The Tribunal applied the principle that TDS credit is linked to declaration of income. Since the income was not declared, credit could not be allowed. Treatment of Competing Arguments: The assessee contended that since TDS was deducted and deposited by DDIL, it was entitled to credit. The Tribunal rejected this, emphasizing that credit cannot be claimed on income not offered to tax. Conclusion: The Tribunal dismissed the assessee's ground seeking credit for TDS of Rs. 36 lakhs. Significant Holdings The Tribunal crystallized the principle that "the accrual must be real taking into account the actuality of the situation, whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory." It quoted the Supreme Court's observations: "An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of taxation is difficult to evolve. Besides any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case, when and how does an income accrue and what are the consequences that follow from actual of income as well settled. The accrual must be real taking in to account the actuality of the situation, whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory." Further, it reiterated: "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." On the issue of TDS credit, the Tribunal held: "It is not in dispute that the income corresponding to the TDS was not offered to tax by the appellant... when there is no income being offered qua the corresponding TDS and as TDS is part of the assessee's income, the position being taken by the appellant is a position contrary to its returns... Thus, when there is no income being offered qua the corresponding TDS and as TDS is part of the assessee's income, the position being taken by the appellant is a position contrary to its returns." Accordingly, the Tribunal upheld the deletion of the addition of Rs. 3.6 Crores as interest income and dismissed the assessee's claim for TDS credit of Rs. 36 lakhs.
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