The Tax Publishers2021 TaxPub(DT) 0271 (Bang-Trib) : (2021) 085 ITR (Trib) 0018

INCOME TAX ACT, 1961

Section 5

Where assessee had not recognised the overdue interest as income for the purpose of Income Tax until it was received but section 145 provides that income has to be computed either on cash system or on mercantile system and it was an overdue interest and it is not collectable from the financial year 1996-97, therefore, there was no question of claiming it as a bad debt because it was not accountable as there was uncertainty of collection and accordingly, CIT(A) was justified in allowing the appeal of assessee.

Income - Accrual - Interest on overdue payments - Assessee had not recognised the overdue interest as income for the purpose of tax

Assessee had signed a contract with M/s. E(EIC), Ministry of Defence, Government of Ethiopia, for supply of machine and equipment and rendering technical services. EIC was required to pay 75% of value of contract along with 7% interest and 2.5% penal interest per annum for overdue payments. However, assessee received only 25% of the value of supplies and EIC did not make balance payment of 75%. Assessee decided to write off debts in its books of account and the same was done in the financial year 2002-03 and financial year 2003-04. As regards interest the same was accounted for in the books of account and offered to tax till financial year 1996-97. Thereafter, assessee stopped offering the same as income, considering the fact that there was uncertainty surrounding its recovery. However, since assessee was still pursuing the matter of recovery with Government of Ethiopia through Government of India, in its annual report, it kept on reflecting outstanding interest due from EIC in the form of 'Notes forming parts of account', indicating that the amount related to overdue interest due from February 1991, which was not accounted for in the books of account. Held: Assessee had not recognised the overdue interest as income for the purpose of Income Tax until it is received but section 145 provides that income has to be computed either on cash system or on mercantile system. It was important to note that collectable is different from accrual. In the present case, it was an overdue interest and it is not collectable from the financial year 1996-97 and as a prudent businessman, following Accounting Standards-9 issued by Institute of Chartered Accountants of India, the assessee had not recognised the said income. There was no question of claiming it as a bad debt because it was not accountable as there was uncertainty of collection. The same cannot be recognised as income accrued till it was realised by assessee. Accordingly, CIT(A) was justified in allowing the appeal of assessee.

Relied:CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Del-HC) : 2011 TaxPub(DT) 663 (Del-HC). Followed:Southern Technologies Ltd. v. Jt. CIT (2010) 320 ITR 577 (SC) : 2010 TaxPub(DT) 1302 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2009-10 to 2012-13



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