The Kolkata bench of the Income Tax Appellate Tribunal ( ITAT ) allowed a deduction of Rs. 34.2 lakhs under Section 57 of the Income Tax Act, noting that the taxpayer consistently followed the mercantile system of accounting.
Brief facts of the case are that the assessee Bal Krishan Das Mundhra has filed its return of income on 30.12.2020 declaring total income of Rs.2,81,829/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued and served upon the assessee.
The Assessing Officer that the assessee has shown interest income of Rs.1, 32, 22,133/- from Simplex Projects Limited. He also claimed interest expenditure of Rs.1, 29, 23,294/- as paid to Bikaner Land & Properties LLP. Further found that this interest expenditure has been claimed under Section 57 of the Income Tax Act. He observed that on examination of Ledger Account of Bikaner Land & Properties LLP, it revealed that the assessee has actually paid interest of Rs.95,00,000/- only.
Therefore, he sought explanation from the assessee as to why the difference between the interest expenditure claimed by the assessee in the accounts, vis-à-vis actually paid, should not be added back to the total income of the assessee. The assessee filed a detailed submission. However, the Assessing Officer was not satisfied with the submission of the assessee. He disallowed the interest expenditure of Rs.34, 23,294/- and made the addition to the total income of the assessee. In this way, total income has been determined at Rs.37, 05,123/-.
Mrs. Sm. Mita Rizvi, representing the assessee submitted that the assessee has been following mercantile system of accounting. It has recognized interest income of Rs.1, 32, 22,133/- on accrual basis. Actually, this total amount was not received by the assessee before the end of the accounting year. Similarly, the assessee has recognized the interest expenditure on accrual basis out of the total amount accrued to it. It has actually paid Rs.95,00,000/- and the balance was paid on 14th September in the next year. The Commissioner of Income Tax ( Appeals ) [CIT (Appeals)] has erred in creating artificial distinction to the sum of Rs.70,00,000/- paid in the next year. This sum contains the interest component also. Further there cannot be a mixed system of accounting for assessment of income on accrual basis and disallowance of expenditure on cash basis.
Mr. Smt. Ranu Biswas, on the other hand representing the revenue submitted that if expenditure was not reflected in Form 26AS issued by the recipient, then, how it will be allowed to the assessee.
The two member bench of the tribunal comprising Irish Agarwal ( Accountant member ) and Rajpal Yadav ( Vice President ) found that there was no dispute with regard to the fact that the assessee has been consistently following a mercantile system of accounting. It has accounted its interest income on the mercantile system and not on receipt basis. This stand of the assessee was not disputed by the Assessing Officer.
Further appreciate the stand of the Assessing Officer that if he excluded the interest income shown by the assessee to the extent, it was not received in this year by following the cash system of accounting. Similarly, The Assessing Officer cannot disallow the expenditure worked out by the assessee on mercantile system of accountancy. The Supreme Court in the case of Kerala State Industrial Development Corporation Limited-vs. – CIT relied upon by the counsel for the assessee has considered an identical situation. ITAT allowed this ground of appeal and deleted the disallowance. Accordingly, the appeal of the assessee was allowed.
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