TMI Blog2008 (4) TMI 361X X X X Extracts X X X X X X X X Extracts X X X X ..... rming the addition of Rs. 2,15,53,466 alleging to be interest income on loans not declared by the appellant. He should have appreciated the submissions made by the appellant that the appellant being a NBFC (already registered with the Reserve Bank of India) has to comply with the Reserve Bank of India Act, 1934. The appellant has explained that the provisions of section 45Q of the RBI Act and provisions of Chapter III-B of the said Act have overriding effect on the provisions of all over Acts which includes Income-tax Act also. The lower authorities did not appreciate this legal position. 5.1 In this connection the appellant has also brought to the notice of lower authorities, the decisions reported in 91 ITD 573 (Hyd.) and 87 ITD 298 (Delhi) of the Delhi Tribunal which is a jurisdictional Tribunal and, therefore, binding on them and, thus, should have been followed. All these have been though noticed, the lower authorities have not understood the legal implications flowing therefrom. This has resulted in the addition of Rs. 2,15,53,466 which is wrong and bad in law and has to be deleted. 6. The charge of interest invoking section 234B is wrong and bad in law. 7. The appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued interest on such loan should not be taken as its income for the year under concern as it was maintaining its accounts on mercantile/accrual basis. It was also asked to prove with evidences that these loans have actually become NPA. In response, details of loans outstanding as on 31-3-2003 along with copies of agreements regarding loans indicating rates of interest thereupon have been filed. It has also been stated that loans to Jindal Equipment Leasing Consultancy Services Ltd. and Mansarovar Investments Ltd. were advanced in the financial year 1996-97 and the assessee accrued interest on the loan till the financial year 1997-98. As the amount of interest for financial year 1997-98 remained outstanding for more than six months, the advances became NPA as per the definition of NBFC's Prudential Norms (RBI) Directions, 1993. As regards loan given to Goswamis Credits Inv. Ltd. it was stated that loan was given in the financial year 1998-99 and the assessee accrued interest on this loan till financial year 2000-01 and since, the interest for financial year 2000-01 remained outstanding for more than six months, the advances became NPA as per the definition of NBFC's Prudentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order, the CIT(A) confirmed the action of the Assessing Officer by further stating that as per provisions of section 145, the interest income accrued to the assessee, even though not actually received, since the assessee was following mercantile system of accounting. However, without referring to any material on record, the CIT (Appeals) also stated that assessee-company and borrowing company are known to each other, the auditor of lender and borrowing company are same and that the assessee-company was not following the directions of the RBI. 6. We have considered the rival contentions carefully gone through the orders of the authorities below and deliberated on the various case laws cited by the lower authorities in their respective orders, as well as cited by the learned AR and DR during the course of hearing before us. Facts in brief are that the assessee is a non-banking financial company, during the course of its business of advancing loans, it has granted loans to various companies. During the course of scrutiny assessment, the Assessing Officer found that in respect of loans given to M/s. Jindal Equipments, Mansarover Investment and Goswami Credit Investment, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a situation where there is uncertainty regarding the ultimate collection of interest, at the time of raising the claim, the recognition of income on that account should be postponed, and in terms of AS-9 and guidance note on accrual basis of accounting, it is appropriate to recognise revenue in such cases only when it became reasonably certain that the ultimate collection will be made. However, in the present case, in view of the fact ,that principal and interest remained unpaid as per the accepted accounting principle, revenue should be recognized only in the period in which it is reasonably certain that the ultimate collection will be made. Postponement of recognition of such revenue pending certainty of ultimate collection, as per the pronouncement of ICAI is in accordance with the accrual basis of accounting. He further submitted that assessee being a non-banking financial company, having been granted certificate of registration by the RBI under section 45-IA of the RBI Act, 1934, the assessee is bound to follow the directions/instructions/guidelines issued by the RBI from day-to-day including NBFC's Prudential Loan (RB) Directions, 1998. 7. On the other hand, learned DR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from time to time, are to be followed by class of assessee or in respect of any class of income and to that extent, notified accounting standard as AS-1, stipulating that irrespective of whatever be the method of accounting employed by the assessee, it is sine qua non that the financial statements prepared on the basis of such method of accounting must represent a true and fair view of the state of affairs of the business based on the policy of prudence. Therefore, an improvised method of mercantile or cash method of accounting, which may result from such a blending of considerations of prudence with the strict principles of mercantile or cash method of accounting, meets the requirements of section 145. From the reading of section 145 in conjunction with the charging provisions contained in section 4, the scope of total income as defined in section 5 and other relevant provisions, in the various judgments discussed hereinbelow, the provisions of section 145 cannot override section 5 of the Act. If income has neither actually accrued nor received within the meaning of section 5 of the Act, whatever section 145 may say, such income cannot be charged to tax even though a book keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived in India in the previous year, or income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. No doubt, the Income-tax Act, 1961 takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materialize. The instant case is on more better footing, wherein after realizing and establishing the bad financial position of debtors and no chance of realization of interest income, the assessee had not even passed any entry in the books of account for such interest. The guidance note on accrual basis on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. Following observations of the guidance note are relevant for this purposes: "3.4 When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to the doubtful loans was not real income in the year in which it accrues but only when it was realized. In the instant case also, it is a matter of record that till date no interest has been received by the assessee nor any amount was received towards refund of principal. Hon'ble Supreme Court in case of CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 and in case of Godhara Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, reiterated that income-tax is not leviable on hypothetical income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipts, but the substance of the matter is income. If the 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 did not materialise. Therefore, the instant case before us under consideration is on a better footing wherein the assessee has not made any entry in the books of account with regard to such interest which was not realizable at all. After considering the material placed on record, we find that neither any interest nor any principle could be recovered by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng policies which result in a distorted view of the affairs of the business. We, therefore, uphold the claim of the assessee that even under the mercantile method of accounting, and, on peculiar facts of this case, the assessee is justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanishes". 12. Lower authorities had relied on the decision in the case of Stale Bank of Travancore wherein the assessee credited the interest income to the interest suspense account with corresponding debit to the account of the debtor, and claimed that no interest income accrued. It was held by the Hon'ble Supreme Court that after debiting the debtor's account and not reversing that entry - but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or treated as such by the assessee. However, the instant case is quite distinguishable where neither interest income was credited to the suspense account nor corresponding debit entry was passed in the account of debtors. Furthermore, Hon'ble Supreme Court in its later decision in the case of U ..... X X X X Extracts X X X X X X X X Extracts X X X X
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