DCIT, JAIPUR vs. HARSHVARDHAN LAND LTD., JAIPUR

PER BENCH:

These four appeals by the Revenue are directed against four separate orders of ld. CIT(A), Jaipur for the A.Y. 2010-11 to 2013-14. Since the Revenue has raised common grounds in these appeals except the quantum of addition deleted by the ld. CIT(A), therefore, the grounds raised for the A.Y. 2010-11 are reproduced as under:- “1. Whether on the facts and in the circumstances of the case the CIT(A) was right in deleting the addition of Rs. 49,94,000/- made on account of accrued interest income without appreciating the facts that the assessee company followed mercantile system of accounting. The Appellant crave, leave or reserving the right to amend modify, alter added or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

There was a search & seizure action in case of Johari group on

05.09.2011 to which the assessee belongs. The assessee filed its return

of income in response to notice u/s 153A. The AO noted that the 2

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

assessee has taken a property on lease from M/s R.L. Verma & sons

(HUF) and deposited Rs. 4,50,00,000/- as security with lessor on

which the assessee was entitled to receive interest @ 2.92% P.M. i.e.

Rs. 13,14,000/- P.M. The assessee also entered into a loan agreement

with the said person M/s R.L. Verma & Sons in respect of the said

amount of Rs. 4,50,00,000/- paid by the assessee. The AO further

noted that for A.Y. 2010-11 the assessee has admitted interest income

of Rs. 46,42,000/- as against the interest accrued of Rs. 96,36,000/-.

For the A.Y. 2011-12 the assessee has admitted the interest income of

Rs. 3,12,000/- as against the accrued interest of Rs. 1,57,68,000/-. For

the A.Y. 2012-13 and 2013-14 the assessee did not admit any interest

income as against the accrued interest of Rs. 1,57,68,000/- and Rs.

1,05,12,000/- respectively. The AO was of the view that the assessee

company is following 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, the AO proposed to make

the addition of the differential amounts being the interest accrued but

was not admitted by the assessee for all these four years. The assessee

contended before the AO that after execution of lease deed it was

found that the lessor defrauded the assessee and this property led out

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

to the assessee was already mortgaged to Kotak Mahindra Bank Ltd.

and consequently the bank took over the possession of the property.

The cheques for payment of interest issued by M/s R.L. Verma (HUF)

were got dishonored when the assessee presented for encashment.

Accordingly, the assessee filed a complaint before the Metropolitan

Magistrate u/s 138 of Negotiable Instrument Act. Thus, the assessee

contended that the recovery of the principal as well as interest was

doubtful and therefore the interest income which was not a real income

cannot be charged to tax. Further, when the assessee has not claimed

any interest expenses, then no interest on advance can be brought to

income tax on accrual basis particularly when the interest could not be

realized or recovered. The Assessing officer did not accept the

contentions of the assessee and made the respective additions on

account of interest income accrued of Rs. 49,94,000/- for the A.Y.

2010-11 Rs. 1,57,68,000/- for the A.Y. 2011-12 to 2013-14 respectively.

The assessee challenged the action of the AO before the ld. CIT(A). The

CIT(A) accepted the explanation and contention of the assessee that all

subsequent cheques of interest issue by the lessor have got dishonored

against which the assessee filed the claim u/s 138 of Negotiable

Instrument Act. Thus, the ld. CIT(A) accepted the claim of the assessee

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

that no recovery of principal as well as interest could be made and

therefore the addition made by the AO was deleted. Aggrieved by the

impugned order of the ld. CIT(A) the Revenue has filed the present

appeal. The ld. DR has submitted that as per lease dated 19th August, 3.

2009 the assessee deposited Rs. 4,50,00,000/- with the lessor as a

security and was to receive interest @ 2.92% P.M. on the security deposit amount every 20th days on each month. Thus as per the said

lease deed as well as loan agreement of even dated the assessee was

entitled and had right to received Rs. 13,14,000/- P.M. as interest from

the lessor. There is no dispute that the assessee company is following

accrual system of accounting and therefore the interest which accrued

to the assessee on the security deposit has to be assessed as income of

the assessee for each of the assessment year. Filing of the complaint

u/s 138 of Negotiable Instrument Act has no bearing on the accrual of

the income which is a real income and cannot be termed as notional

income. The Assessing Officer has not calculated the interest on the

basis of any notion or notional basis but the same has been calculated

on the basis of the terms of the lease entered into between the parties

and as per rate agreed upon between the parties. Therefore, the

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

contention of the assessee that the interest income cannot be charged

to tax on notional basis is not acceptable as it was a real income and

not notional income. Further, part of the total interest to be received

during the A.Y. 2010-11 was received by the assessee to the extent of

Rs. 46,42,000/- and the AO has made the addition only of the balance

amount of Rs. 49,94,000/-. Similarly for the subsequent assessment

years the Assessing Officer had made an addition only on account of

accrued interest for which the assessee was entitled and had right to

receive from the lessor. He has relied upon the order of the Assessing

Officer.

the assessee offered the interest income for the A.Y. 2010-11 to the

extent the assessee received the amount from the lessor, however,

subsequently it was revealed that the lessor has defrauded the assessee

and this property in question was already mortgaged with the Kotak

Mahindra Bank against the loan and therefore the bank took over the

possession of the property. The ld. AR has further submitted that when

the recovery of principal amount of Rs. 4,50,00,000/- paid as security

deposit as well as interest was doubtful as lessor was not having

capacity to pay the same and the assessee has exercised all its legal

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

remedy to recover the amount then the interest as per lease agreement

and loan agreement not recoverable and not received by the assessee

cannot be charged to tax as income of the assessee. He has further

submitted that the advance cheques given by the lessor for payment of

interest got dishonored and there was least possibility of recovery of

amount despite the assessee filed a complaint u/s 138 of Negotiable

Instrument Act. The ld. AR has thus contended that when these facts of

dishonored of cheques and non recovery of the amount as well as the

complaint filed by the assessee are not in dispute then the interest on

the deposit is not a real income to be taxed as the recovery of the

principal amount itself is doubtful. The assessee though following

accrual system of accounting, however, even in accrual system of

accounting any income cannot be recognized until there is reasonable

certainty to its realization. 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

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

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. It is settled law that the

income tax cannot be levied on hypothetical income. In support of his

contention he has relied upon the following decisions. • CIT Vs. shoorji Vallabhadas & Company 46ITR 144 (SC) • Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746 (SC) • CIT Vs. Excel Industries ltd. 358 ITR 295 (SC) • CIT Vs. Eastern Investment Ltd. 213 ITR 334 (Cal.)(HC) • CIT Vs. Mahavir Co. (P) Ltd. 206 ITR 68(Raj.)(HC)

material on record. The assessee has entered into lease agreement with

M/s R.L. Verma & Sons (HUF) dated 19.08.2009 whereby the assessee

claimed to have taken on lease the property admeasuring 3650 sq. ft.

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur at 9th floor, Dr. Gopal Das Bhawan, Barakhamba Road, New Delhi. The

parties have also entered into a loan agreement in respect of a sum of

Rs. 4,50,00,000/- paid by the assessee to the lessor being security

deposit on which an interest @ 2.92% P.M. was payable to the

assessee. The Assessing Officer has not disputed this fact that the

property in question was mortgaged by the lessor with the bank against

the loan availed and therefore the property was not free from

liean/charges. However, the assessee has not purchased the property

and even if the said property was mortgaged with the bank so long the

property is not physically taken over by the bank the assessee right

over the property as a lessee was not affected. It is also undisputed fact

that after the initial payment of interest the cheques issued by the

lessor for the subsequent payment of the interest got dishonored when

presented for encashment. The assessee took legal action by filing a

complaint u/s 138 of Negotiable Instrument Act. Thus, it appears that

the interest amount though accrued to the assessee and the assessee

had all rights to recover it from the lessor was not received and it was

full of uncertainty when the assessee would finally is able to recover the

interest from the lessor when the recovery of principal amount of Rs.

4,50,00,000/- itself is doubtful. Therefore, when the amount of interest

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

was not actualy received by the assessee and there was a very bleak

chance of recovery of the said amount of interest as well as principal

amount then the interest which is accrued as per the lease deed and

loan agreement would not be regarded as the income of the assessee

so long the recovery of the same is uncertain. We further noted that for

the A.Y. 2014-15 the assessee has claimed write off the principal

amount and the Assessing Officer while passing the order u/s 143(3)

which is placed at page 123 & 124 of the Paper Books has not made

any disallowance or addition. Though assessment order is very brief and

accepted the total income being loss declared by the assessee however,

once the claim of the assessee has not been disputed by the AO for the

A.Y. 2014-15 then it amounts to accepting the fact that the recovery of

the principal amount itself is doubtful and therefore the interest on the

said amount cannot be recognized as income of the assessee as it is

only a right to received but it is not certain to be received by the

assessee so long this right to receive the interest is not going to be

materialized it will not result any income and cannot be taxed as income

of the assessee. Hence, even in this case the assessee is following the

accrual system of accounting the income is accrued only on the point

when it is finally to be received by the assessee with reasonable

ITA No. 582 to 584/JP/2016 & 332/JP/2017 DCIT vs. M/s Harshvardhan Land Ltd., Jaipur

certainty and absence of certainty of receipt and recovery of the

amount cannot be classified as income accrued for the purpose of

charging to income tax. The Hon’ble Supreme Court in case of CIT Vs.

Excel Industries Ltd. (Supra) has observed that the probability or

improbability of realization of the income by the assessee has to be

considered from a realistic and practical point of view which is one test

laid down by the Hon’ble Apex Court in determining the income when

accrued. Only a right under the agreement to receive the interest by the

assessee without reasonable certainty of realization of the same cannot

be brought to income tax. Hence, in view of the facts and

circumstances of the case when the realization of the amount is not

certain then the same cannot be charged to income tax. Accordingly we

do not find any error or illegality in the impugned orders of the ld.

CIT(A).

In the result, all the appeals of the Revenues are dismissed.

Order pronounced in the open court on 22/11/2017 Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vikram Singh Yadav) (Vijay Pal Rao) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 22/11/2017. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 11

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