No Tax when there is only a Right under the Agreement to Receive Interest without reasonable certainty of Realization of the Same: ITAT [Read Order]

While dismissing the appeals of the Revenue the Jaipur bench of Income Tax Appellate Tribunal (ITAT), has recently held that if there is only a right to receive the interest under the agreement without reasonable certainty of realization of the same, then it cannot be charged to income tax.

In the instant case, the assessee-Company was engaged in the business of real estate and filed its returns during the assessment year. During the course of assessment proceedings the Assessing Officer (AO) has noted that the assessee had taken a property for lease from a HUF and deposited Rs. 4,50,00,000 as security. As per the lease deed the assessee entitled to 2.92 percent of interest per month. Further he found that the assessee also entered into a loan agreement with the said person on the aforesaid amount. The AO was of the view that the assesse company was following the accrual system of accounting and therefore the accrued interest on security deposit should have been disclosed by the assessee in its return of income. Accordingly, he made additions of the differential amounts being the interest accrued but was not admitted by the assessee for the previous years also.

Revenue has filed appeals before the bench against the CIT (A) was deleted the additions made by the AO.

The assessee contended that after the execution of the lease, the lessor mortgaged the said property to the assessee to Kotak Mahindra Bank Ltd. And the possession of the property has transferred in the hands of the bank. The cheques for payment of interest issued by the lessor were got dishonored when the assessee presented for encashment, accordingly the assessee filed complaint under section 138 of the Negotiable Instrument Act. Hence, recovery of principal as well as interest was doubtful and it cannot be considered as real income and not taxable.

After analyzing the entire facts in detail, the bench comprising of Judicial Member Vijay Pal Rao and Accountant Member Vikram Singh Yadav has observed that the assessee does not realize the principal as well as interest amount as per the lease deed.

“When there is bleak chance of recovery of interest as well as advance from the lessor then no income in this regard can be brought to income tax. The ld. AR has further contended that the advance has been subsequently written off in the assessee’s books in the year 2014-15 as the same was not recoverable and the Assessing Officer has accepted the written off these advances of Rs. 4,50,00,000/-. He has also referred to the accounting standard-9 and submitted that as per para 9 of accounting standard-9 the recognition of Revenue requires that it is measurable and also the assessee is able to collect with reasonable certainty. If it is lacking the certainty of collection at the time of raising any claim, the Revenue recognition has to be postponed to the extent of uncertainty involved. Thus, the ld. AR has contended that the income tax only be levied on real income and not notional income. No tax can be charged of notional interest income in the case of the assessee when it is quite clear that neither the advance nor interest income is recoverable.”