The Income Tax Appellate Tribunal ( ITAT ), Delhi Bench, has recently, in an appeal filed before it, held shortage towards principal in a lending business is allowable as bad debt.
The aforesaid observation was made by the Delhi ITAT, when an appeal was preferred before it by the assessee, M/s. Global Consultants & Designers Pvt. Ltd, as against the order dated 20.12.2018, in Appeal No. 190/17-18/CIT(A)-4 for the assessment year 2015-16, passed by the Commissioner of Income Tax (appeals) New Delhi, in regard to the appeal before it arising out of assessment order dated 23/11/2017 under section 143(3) of the Income Tax Act, 1961, passed by ITO, Ward – 11(4), New Delhi (AO).
The facts of the case were that the assessee company had filed its return of income on 24.09.2015 declaring a total loss of Rs.32,85,141/- for the assessment year 2015-16, and the case was selected for limited scrutiny. A notice u/s 143(2) was also issued on 26.09.2016 and was duly complied with.
Subsequently, the assessee company filed the various details, particulars and documents as were asked for during the course of assessment proceedings. And the assessment in this case was completed at a total income of Rs.44,28,723/- U/s 143(3) vide order dated 23.11.2017, thereby making an addition of Rs.77,13,864/ to the declared income of the assessee.
The dispute hovers around the fact that during the year under consideration, the assessee company had advanced a sum of Rs. 6,00,00,000/- to M/s Parsvnath Developers Ltd. (PDL), refundable by 24.09.2014. However, with M/s Parsvnath Developers Ltd., having defaulted in the payment of principal and interest to be paid by the agreed date, i.e., 24.09.2014, the assessee company claims to have persuaded hard, for the recovery of the principal as well as interest and with great persuasion, it is said to have been able to recover Rs.2,00,00,000/- by the end of the previous year.
The assessee company, having further asked for payment of the balance amount and interest due, M/s Parsvnath Developers Ltd. agreed to pay the principal only on the condition of waiver of interest due. And in the month of April 2015, M/s Parsvnath Developers Ltd. paid a sum of Rs.3,80,00,000/- out of principal and a balance amount of Rs.20,00,000/- was paid in the month of June 2015.
However, having deposited the TDS, amounting to Rs.8.57,096/- on the interest payable to the assessee company, as was agreed earlier in April 2015, the interest was waived off and a formal agreement was entered, vide Settlement Deed dated 14.07.2015. Thus, the assessee claims to have only received the interest to the extent of TDS deposited by M/s Parsvnath Developers Ltd., which have been duly accounted for in the books of account and shown as interest received from M/s Parsvnath Developers Ltd.
Since M/s Parsavnath Developers Ltd. had accounted for interest expense and paid the TDS, it was appearing in Form 26AS, that the gross interest of Rs.85,70,960/- had been shown as interest paid /credited by M/s Parsvnath Developers Ltd., whereas settlement deed was entered into on 14.07.2015 i.e., prior to finalization of the balance sheet of the assessee company and that, as per the settlement deed, no interest was receivable by the assessee company. Therefore, the assessee company had not credited the interest of Rs.85,70,960/- in its profit & loss account but credited only TDS deducted amounting to Rs.8,57,096/- being real income received / receivable by the company on inter-corporate deposit given to M/s Parsvnath Developers Ltd.
The Assessing Officer, having issued a notice u/s 133(6) to M/s Parsvnath Developers Ltd., which was duly complied with, M/s Parsvnath Developers had written back its liability to pay interest in the immediately succeeding year.
However, with the assessee claiming that no real income accrued to the company and that merely as the assessee was following a mercantile system of accounting, it does not result in accrual of income from interest when there is no interest in real terms, the assessee added that the statement of the accounts of the assessee also did not reflect any credit entry in respect of the interest receipt from the borrower.
It was the claim of the assessee that in the absence of realization of real income and there being no accrual of such income subsequent to the aforesaid settlement deed, interest income could not be added to the income of the assessee.
However, with the AO has observed that the income of expenditure has been recognized on an accrual basis, that the assessee was following the mercantile system of accounting in the previous year, that the assessee had shown interest income of Rs. 8,57,096/- and also claimed TDS of 8,57,096/-, he thus, assumed that the interest income that has accrued should be 85,70,960/- and accordingly added the balance 77,13,864/- to the income of the assessee.
On appeal, the Ld. CIT(A) also having sustained the same, the assessee was left with the only option to prefer the instant appeal before the Delhi ITAT.
With Sh. Rohit Jain, Adv. & Ms Manisha Sharma, Adv., the Counsels for the assessee, having submitted that the Tax authorities below have failed to appreciate that no real income had occurred, and that out of commercial and business expediency, the assessee company had given up the claim of interest to ensure that there is no bad debt, it was further submitted by them that the relevant law cited to the Tax Authorities has not been considered.
However, Sh. Anuj Garg, Sr. DR, on the other hand, submitted that there was no error in the findings of the Tax Authorities below.
Hearing the opposing contentions of either side and perusing the materials available on record, the ITAT Bench consisting of Shamim Yahya, the Accountant Member, along with Anubhav Sharma, the Judicial Member, observed:
“Appreciating the matter on record, the bench is of considered opinion that the Ld. Tax Authorities below have failed to keep in mind the fundamental principles of taxation that only real income should be taxed and not hypothetical income. What the Ld. Tax Authorities below have considered to be income arising from interest to be taxable on an accrual basis would be a case where an interest account is not settled. However, when the loan account and interest account stand settled between the parties and a deed of settlement stands (page 29 to 32 of the paper book) then, on the basis of accrual interest, income cannot be attributed and only the actual interest received on that account, was liable to be shown in P& L account, as is rightly done by the assessee company.”
Thus, allowing the assessee’s appeal the Delhi ITAT concluded:
“There is also a force in the contention of Ld. Counsel for the assessee that in any case, if a shortfall in interest is adjusted from the principal amount on the principle of first appropriation towards the interest before applying it to the principal. Then being in the lending business, the shortage towards principal would be allowable as bad debt. Which assessee prevented. Being in the lending business the bad debt ratio is crucial to the assessee and thus business expediency cannot be more justified than here. Consequently, grounds are allowed in favour of the assessee and the appeal is allowed.”
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