By Ajay R. Singh
Advocate
1.
CIT vs. Godrej Realty Pvt.
Ltd.
ITA
No.: 264 of 2015 (Bom High Court)
AY:
2008-09 Dated: 11th December, 2017
[Godrej
Realty Pvt. Ltd v. ITO; ITA No.: 4487/Mum/2012;
Dated: 04th June, 2014; Mum. ITAT]
The Assessee Company had
entered into a Memorandum of Understanding (MoU) with M/s. Desai & Gaikwad
to develop residential project on a plot of land, belonging to M/s. Desai &
Gaikwad at Pune. In terms of the MoU, the Assessee had given an advance to M/s.
Desai & Gaikwad and the assessee was entitled to receive from M/s. Desai
& Gaikwad interest at 10% p.a. on the aforesaid project advance. However,
the obligation to pay interest on M/s. Desai & Gaikwad to the assessee, was
from the date of execution of the development agreement. In its return for the
subject AY, the assessee did not offer to tax any interest on the aforesaid
advance with M/s. Desai & Gaikwad.
However, the A.O, brought
to tax the amount of interest on advance. This on the basis of M/s. Desai &
Gaikwad’s ledger account showed an aggregate of advance and interest, as
payable by it to the assessee. Thus, concluding that interest had accrued to
the assessee, as it follows the mercantile system of accounting. Therefore,
interest is includable in its total income.
The CIT(A) dismissed the
assessee appeal. Thus, upholding the view of the A.O that as M/s. Desai &
Gaikwad had shown interest liability to the assessee as expenditure in its
books of account, it follows that interest has accrued to the assessee.
Therefore, the interest was includable in the total income subject to tax.
The Revenue case is that,
assessee was following the mercantile system of accounting. Therefore, it was
obligatory on its part to account for its accrued interest, which had so
accrued in terms of MoU. This accrual of interest is further supported,
according to him by the fact that M/s. Desai & Gaikwad has shown in its
books the above amount as a liability to the assessee. In support of the
proposition that in a mercantile system of accounting, the income is said to
accrue, when it becomes due and the postponement of the date of payment or non
receipt of the payment, would not affect the accrual of interest, he places
reliance upon the decision of the Supreme Court in Morvi Industries Ltd.
vs. CIT (1971) 82 ITR 835.
The Tribunal records the
fact that in terms of MOU, M/s. Desai & Gaikwad was liable to pay interest
at 10% p.a. on the advance from the date of the execution of the development
agreement and the undisputed position is, it has not been executed. The debit
note sent by the assessee to M/s. Desai & Gaikwad towards the interest chargeable
on the advance was returned by M/s. Desai & Gaikwad, denying its liability
to pay any interest as demanded. Moreover, the board of directors of the
assessee had recording the no acceptance of the debit note towards the interest
payable, decided to waive the interest chargeable which is to be recovered from
M/s. Desai & Gaikwad.
Being aggrieved, the
Revenue carried the issue in appeal to the High court. The Hon. Court observed
that, in fact, there was no accrual of income in the present case. This for the
reason that there was no right to receive income of Rs.1.98 crores as interest
as admittedly development agreement has not been executed. The interest in
terms of the MoU would only commence on development agreement, being executed.
Admittedly, this is not done. Further, the return of the debit note by M/s.
Desai & Gaikwad was also an indication of the fact that M/s. Desai &
Gaikwad did not accept that interest is payable to the Assessee. Consequently,
there was no amount which had become due to the Assessee.
The entire grievance of the
Revenue before us is that the entries made by M/s. Desai & Gaikwad in its
ledger account, indicating that interest was payable, by itself, lead to the
conclusion that interest had accrued to the assessee is not correct.
Particularly, in the context of the MoU and return of debit note. Moreover, the
board of directors of assessee had passed a resolution, waiving the interest
receivable from M/s. Desai & Gaikwad. This, on account of non acceptance of
liability to interest by M/s. Desai & Gaikwad. Therefore, it was not an
unilateral giving up of accrued income but acceptance of the rejection of debit
note by M/s. Desai & Gaikwad. Moreover, the reliance upon Morvi Industries
Ltd., (supra) is inapplicable for the reasons on facts, the accrual of
income in this case would only arise after the execution of the development
agreement. Undisputedly, it has not taken place. Thus, as no income i.e.
interest has accrued or has been received, the occasion to levy tax on such
hypothetical income, cannot arise. Accordingly, Revenue appeal was dismissed. 
