INCOME TAX OFFICER-WARD-30(1), KOLKATA, KOLKATA vs. KIRTI JHUNJHUNWALA, KOLKATA

The only issue to be decided in this appeal is as to whether the ld CITA is justified in deleting the addition made towards interest receivable on land on notional basis in the facts and circumstances of the case.

The brief facts of this issue is that the assessee is a HUF following mercantile system of accounting. The AO observed that the assessee had advanced loan to one Shri Ashok Kumar Podder who was a recognized stock broker in stock market during AY 2001-02 bearing an interest rate of 18% per annum. Accordingly, for AY 2001-02, a total provision of Rs.7,84,603/- was made on account of interest on the said loan on accrual basis and offered the tax out of which an amount of Rs.5,95,479/- was realized. The assessee did not charge interest on the said loan during the AY 2002-03. Accordingly, the assessee was show caused as to why interest income on the said loan should not be taxed in the year under appeal at the interest rate of 18%. The assessee replied by stating that the said party became a defaulter in the Stock Exchange at Kolkata and got arrested around September/October, 2002. It was also submitted that the assessee along with other family

Before the ld CITA, the assessee reiterated the submissions and also stated that subsequently i.e. in AY 2003-04, both the principal and the interest portion which was outstanding in the said party’s account was written off as bad debt by the assessee and claimed as deduction which was also allowed by the AO in the assessment. It was argued that the subsequent action itself strengthens the non-charging of interest in AY 2002-03 and party becoming a defaulter and thereby the chance of recovering interest being doubtful is proved beyond doubt. The Ld. CIT(A) duly appreciated the contentions of the assessee and deleted the addition vide para 4.2 of his order by observing as under: “4.2. I have considered the said submissions of the appellant and I am in agreement with the same. Action of the Appellant by filing various cases against the defaulter shows that the said loan had become bad during the FY 2001-02 relating to AY 2002-03 itself. Once the principle amount itself had become irrecoverable and bad thereafter no presumption of accrual of interest can be drawn on the said principal amount. In fact, the AO himself has accepted that the said loan had become bad by allowing the appellant’s claim in its assessment done under section 143(3) for the AY 2003-04. Therefore, there is no doubt on the facts that the said loan had become bad and irrecoverable in the FY 2001-02 itself related to the present assessment year. Even AS9 makes it clear that income cannot be said to have accrued unless an assessee is certain of receiving the same. In the present case, even the principal amount had become uncertain and was also subsequently written off in the immediately subsequent year and was also allowed by the AO. In view of the same I hold that the addition of Rs.8,33,535/- made by the AO is not as per law and I delete the same.”

Ld. DR relied on the order of the AO. In response to this, the Ld. AR vehemently relied on the order of the CIT(A).

We have heard rival submissions and gone through facts and circumstances of the case. We find lot of force in the order of the Ld. CIT(A) wherein a categorical finding has been given that the concerned loan debtor Shri Ashok Kr. Podder had become a defaulter and the chance of recovering even the principal amount was very doubtful much less the interest thereon. This finding has not been controverted by the revenue before us. Under these circumstances, following the principles of real income theory we hold that the interest should not be brought to tax on notional basis when it is proved beyond doubt even that the recovery of principal itself is in jeopardy. Hence, we do not find any infirmity in the order of Ld. CIT(A) and the same is hereby upheld. Appeal of revenue is dismissed.

In the result, the appeal of the revenue is dismissed.