DCIT, NEW DELHI vs. M/S. FERROUS INFRASTRUCTURE PVT. LTD., GURGAON

The assessee calculated the interest on the delayed payments and served 2 the debits notes to allottees for not making the payment in time as stipulated in the agreements. The assessee booked the income of Rs.1,09,64,450/- on account of interest in the financial year 2008-09 to be realized from the allottees. The customers refused to pay the interest and threatened to cancel the bookings in the event the company charges the interest. The company cancelled the recovery of the interest in order to realize the principal amounts under the circumstances, the company had to reverse the income by debiting the profit and loss account in the financial year 2009-10. Therefore, the AO disallowed and added back the amount of Rs. 1,09,64,450/- in the hands of the assessee and completed the assessment u/s 143(3) of the IT Act vide order dated 25.01.2013 at Rs. 88,23,020/-. Aggrieved by the assessment order dated 25.1.2013, the assessee appealed before the Ld. CIT(A), who vide his impugned order dated 30.4.2014 has deleted the addition and partly allowed the appeal of the assessee

“2.1 I have carefully considered the facts of the case and the submissions made by the counsel of the appellant. The perusal of the facts make it clear that the company is developing group Housing projects in Sector-89, Faridabad.

The flats were sold to the buyers on the payment plan linked to the various stages of the construction. The allottee’s of the flats were not making the payments on the due dates as stipulated in the agreement. The appellant calculated the interest on the delayed payments and served the debit notes to the allottee’s for not making the payment in time as stipulated in the agreements. The appellant booked the income of Rs. 1,09,64,450/-on account of interest in the Financial Year 200'8-09 to be realised from the allottee's. The customers refused to pay the interest and threatened to cancel the bookings in the event the company charges the interest. The company cancelled the recovery of the interest in order to realise the principal amounts under the circumstances, the company had to reverse the income by debiting the profit and loss account in the Financial Year 2009-10.

In CIT vs. Shoorji Vallabhdas & Co. reported in 46 ITR 144 (SC1 held as under:-

" Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If 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 materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances,' have been made in the books of account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated.-CIT vs. Shoorji Vallabhdas & Co.(1959) 36 ITR 25 (80m) : TC39R.740 affirmed; CIT vs. Chamanlal Mangaldas & Co.(1960) 39 ITR 8 (SC) : TC39R.745 applied."

In CIT vs Bokaro Steel Ltd. 2361TR 315 {SC} held as under:

"The assessee had shown in its books of accounts a sum of Rs. 7,39,232 as income from interest received from H. Ltd. for the eight locomotives supplied by the assessee-company to had replaced the eight locomotives lent by the assessee- company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. The entry which was initially made as interest was reversed the next year because in 'fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax.-Bokaro Steel Ltd. vs. CIT (1988) 67 CTR (Pat) 281 : (1988) 170 ITR 545 (Pat) : TC 38R.1012 and CIT vs. Bokaro Steel Ltd. (1988) 67 CTR (Pat)

138 : (1988) 170 ITR 522 (Pat) : TC 38R.1011 affirmed; Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (sq 564 :

(1997) 225 ITR 746 (SC) applied."

The Income Tax Act takes into account two points of time at which the liability to tax is attracted, the accrual of income or its receipt, but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in accounts, an entry is made about the "hypothetical income" which does not materialise. Where income has, infact, been received and is subsequently given up, in such circumstances it remains the income of the 7 recipient, even though given up, the tax may be payable.

Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an, entry to that effect may, in certain circumstances, have been made in the books of accounts. In the instant easel the appellant raised the debit notes to the allottee's and booked the income in the books of accounts.

The entry which was initially made as interest was reversed in the next yea r because in fact the nature of the transaction was changed and the assessee did not receive any real income. The addition of Rs.1,09,64,450/-made by the Assessing Officer is therefore, deleted.”

7.1 We further find that the Hon’ble Supreme Court of India in the case of CIT vs. Shoorji Vallabhdas & Co. reported in 46 ITR 144 (SC) held as under:-

" Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If 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 materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances,' have been made in the books of account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated.-CIT vs. Shoorji Vallabhdas & Co.(1959) 36 ITR 25 (80m) : TC39R.740 affirmed; CIT vs. Chamanlal Mangaldas & Co.(1960) 39 ITR 8 (SC) : TC39R.745 applied."

7.2 We further note that the Hon’ble Supreme Court of India in the case of CIT vs Bokaro Steel Ltd. 2361TR 315 {SC} has held as under:

"The assessee had shown in its books of accounts a sum of Rs. 7,39,232 as income from interest received from H. Ltd. for the eight locomotives supplied by the assessee-company to had replaced the eight locomotives lent by the assessee- company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. The entry which was initially made as interest was reversed the next year because in 'fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax.-Bokaro Steel Ltd. vs. CIT (1988) 67 CTR (Pat) 281 : (1988) 170 ITR 545 (Pat) : TC 38R.1012 and CIT vs. Bokaro Steel Ltd. (1988) 67 CTR (Pat)

138 : (1988) 170 ITR 522 (Pat) : TC 38R.1011 affirmed; Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (sq 564 :

(1997) 225 ITR 746 (SC) applied."

7.3 We further observe that the Income Tax Act takes into account two points of time at which the liability to tax is attracted, the accrual of income or its receipt, but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in accounts, an entry is made about the "hypothetical income" which does not materialise. Where income has, infact, been received and is subsequently given up, in such circumstances it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an, entry to that effect may, in certain circumstances, have been made in the books of 11 accounts. In the instant case the assessee raised the debit notes to the allottee's and booked the income in the books of accounts. The entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. Therefore, the addition of Rs.1,09,64,450/- made by the Assessing Officer was rightly deleted, which does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the ground raised by the Revenue.