The Delhi bench Income Tax Appellate Tribunal ( ITAT ) deleted the addition made on the accrual basis with respect to the interest income earned from the arbitration award.
The Assessee MMTC Ltd is the merchant and also exporter of manufactured goods. Who entered into an agreement with M/s K.J. International ( KJI ) for procurement of paddy. In terms of the agreement, KJI procured paddy on behalf of MMTC for which advance payments were released to them. Subsequently, KJI committed breach of contract and misappropriated stocks lying with them and a dispute arose between the assessee and KJI.
Arbitration proceedings were initiated. Arbitration award was received on 30.05.2002 by which Rs. 4.12 crores was awarded in favor of the assessee being principal amount of Rs. 2,14,96,329/- and interest of Rs. 1,98,88,327/-.
When the assessee did not receive the award, it filed execution proceedings before the High Court of Delhi. But, due to lack of collateral security, could not get favorable order for execution of arbitral award.
When the properties of KJI were attached, it approached the Disputes Settlement Committee for amicable settlement. Ultimately, a Memorandum of Settlement was signed and the assessee received post dated cheques of Rs. 2.75 crores upfront, which was adjusted against the advance recoverable. But the post dated cheques could not get encashed. However, as and when the cheques got encashed, the assessee offered the same in its income in the subsequent years. Accordingly the AO made addition on accrual basis.
Aggrieved by the order assesee filed an appeal before the CIT(A). The CIT(A) dismissed the appeal filed by the assessee. Thereafter the assessee filed an appeal before the tribunal.
The tribunal relied upon the decision of Supreme Court in the case of Shoorji Vallabhji and in the case of Godara Electricity Observed that the income which has to be recognized as per the system of accounting followed by the assessee in view of section 145 of the Income Tax Act 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 does not materialize.
After analyzing the submission of both parties, the bench comprising N.K. Billaiya, ( Accountant Member ) & Astha Chandra ( Judicial Member ) deleted the addition made on the accrual basis with respect to the interest income earned from arbitration award .
Rohit Jain, counsel appeared for the assessee and Tavish Verma, counsel appeared for revenue.
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