· Assessee is a company maintaining its accounts on mercantile basis and for the year under consideration, the income earned was from interest and commission.
· Assessee had advanced loans to two companies during the F.Y. 1985-86. These companies had requested the assessee for not charging any interest, and this request was acceded to by the assessee. The assessee company had also passed Board Resolution relating to the waiver of interest of these two borrowers. Thus, the assessee did not credit any interest in respect of these two borrowers in its books of accounts from A.Y. 1986-87 up till A.Y. 1990-91.
· Therefore, the AO made the addition of interest income from these parties to the income of the assessee for A.Y. 1990-91.
· The CIT(A) also rejected the plea of the assessee stating that the addition has been rightly made by the AO considering the fact that the assessee was following mercantile system of accounting.
· ITAT further rejected assessee’s stand observing that the assessee continued to receive back the principal amount from these companies, the amounts were not considered as bad debt, and since the assessee is following mercantile system of accounting, the interest income should have been credited by the assessee.
· The Court, relying upon the its earlier decisions in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, harped on the fact that if the income does not result at all, there cannot be a tax. If no income can be said to have resulted, there is obviously neither accrual nor receipt of income, irrespective to the method of accounting adopted by the assessee.
· Thus, the Court concluded that the interest income could not be said to have accrued to the assessee for the year under consideration in the background of the resolution passed by the Board for the waiver of interest. Therefore, the appeal of the assessee was allowed and the order of the Tribunal was set aside.
For further reading, refer the attachment.
Further Reading