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TMI Blog2025 (2) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and in law the Ld. CITA) has erred in ignoring sub section. 3 of sec. 145 of the IT Act and relied only upon the sub sec (1) and (2) of section 145 which states that the income of the assessee has to be computed on the basis of cash or mercantile system of accounting regularly employed by the assessee?" 3. Whether on the facts and circumstances of the case and in law the Ld. CITA) has erred in ignoring the sub section. 3 of sec. 145 of the IT Act which states that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under subsection (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144?" 4. "Whether on the facts and Circumstances of the case and in law, the Ld. CITA) has erred in ignoring the finding of AO in assessment order that the assessee had taken a free run to decide an accounting system/policy which suits him to evade paying taxes?" 5. Whether on the facts and in the Circumstances of the case and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 827,00,00,000 8,81,35,246 Nil Nil 3.1. After considering the submissions made by the assessee, ld. Assessing Officer passed the assessment order making an addition of Rs. 63,91,85,245/- towards interest income not accounted on accrual basis. Details of addition made by the ld. Assessing Officer is tabulated as under: Sr. No. Company Outstanding loan (Rs.) Rate of interest Interest Income (Rs.) 1. M/s. Shapoorji Pallonji and Co Pvt Ltd (M/s. SPCPL) 677,00,00,000 8.5% 55,10,49,999 2. M/s. Roxanna Consultancy Services Pvt. Ltd. (M/s. Roxanna) 150,00,00,000 8.5% 8,81,35,246 Total 827,00,00,000 63,91,85,245 3.2. In the first appeal before the ld. CIT(A), additions so made are deleted. While giving relief to the assessee, ld. CIT(A) in para 6.5.5 made certain factual notings. He noted that SPCPL group was passing through financial stress because of which assessee did not receive interest income from SPCPL and Roxanna. Also, SPCPL had not accrued interest expense in its books of account as interest payable for which copy of notes forming part of the financial statement of SPCPL was submitted whereby in note No.8, it was disclosed and reported th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest income had accrued in the hands of the assessee and added it to the total income. Details of loans given by assessee and component of interest thereon are already tabulated above and therefore not reiterated. 4.3. We first take up the transaction of loan with SPCPL in respect of which addition of interest income of Rs. 55,10,49,999/- is made by ld. Assessing Officer. In relation to the loan granted to SPCPL, it had requested assessee for waiver of interest on account of severe financial stress, there being little or no possibility of interest payment by it. Being a promotor, Director, assessee extended his waiver of interest which was accepted by SPCPL in its Board of Directors meeting. This fact was disclosed in the financial statements of SPCPL included in its Annual Report for the year. The note contained in the financial statement of SPCPL is reproduced as under: "5. We draw attention to Notes 2(b), 53(ii) and 55 to the standalone financial statements which indicate material uncertainty in the timing of the cashflows on account of the One Time Restructuring (OTR) application dated September 17, 2020 made by the company to its lenders and cash flows from monetization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense to reduce the capital gain to that extent, which was in fact not done by SPCPL. 4.7. Ld. Assessing Officer has given significant thrust to the fact that assessee was following accrual basis of accounting in the immediately preceding year, i.e., Assessment Year 2019-20, wherein he had included interest income from SPCPL on accrual basis in his return and also claimed credit towards TDS done thereon. However, in the year under consideration, i.e., Assessment Year 2020-21, assessee claims to change the method of accounting from accrual basis to cash basis which he did not accept. He observed referring to provisions of section 145(1) that the said section explicitly mandates to follow method accounting on regular basis. Rejecting the contention of assessee of not including the interest income on account of change in method of accounting from accrual basis to cash basis, ld. Assessing Officer included interest income on accrual basis in respect of loans given to SPCPL and added it to the total income of the assessee even though there was no such accrual at the end of SPCPL in its books of account. 4.8. On the aspect of change in method of accounting, we note that assessee did cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of receipt of interest income by following cash basis of accounting. What is material for the purpose of section 145 is that method of accounting should be such as to enable the real income to be properly deduced therefrom. What can be taxed, is only real 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 materialize. This observation find force from various judicial precedents of Hon'ble Supreme Court including in the case of Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC), Excel Industries Ltd., [2014] 358 ITR 295(SC). Change in method of accounting is not impermissible or barred, more particularly when assessee explains the situations which warrants such a change. Hon'ble High Court of Punjab and Haryana in the case of CIT vs. Punjab State Industrial Development Ltd. [2002] 255 ITR 351 (P&H) held that - "Reliance is placed on the decision of Punjab and Haryana High Court in the case of CIT v. Punjab State Industrial Development Corp Ltd [2002] 255 ITR 351 (Pun) & Har) (Refer page no. 197-198) wherein it was held that on perusal of section 145, the income could be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Roxanna also, who had complied with the same. In this case, Roxanna had accrued interest expense in its books of accounts and done TDS on the same. However, the same was not paid to the assessee during the year under consideration. This transaction reflected in Form 26AS of the assessee for the year under consideration. Since assessee having adopted cash system of accounting in this year and having not received the interest income from Roxanna, accrued by it in its books of account, assessee did not include this interest income in his total income reported in the return filed by him. He carried forward the TDS credit to the subsequent year. In this respect, assessee claimed before the authorities below that this will be offered to tax in the year in which the same is received by him. Accordingly, in this case, a timing difference has occurred on the taxability of the interest component since Roxanna had accounted for it in its books of account by following mercantile system of accounting whereas assessee has deferred it owing to non- receipt, by adopting cash system of accounting. 5. On the above stated observations on the two transactions of assessee with SPCPL and Roxanna, th ..... 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