Interest accrued on bank deposit cannot be treated as income until taxpayer receives it, even though it was subject to TDS

The Bangalore ITAT upholds that interest accrued on the bank deposit of Bellary Iron-Ores Pvt. Ltd (Assessee) subjected to CBI’s prohibitory order cannot be treated as income until the Assessee actually receives it from the bank, even though it was subject to TDS.

The Bench opines by relying upon the case Selvi J. Jayalalitha Vs. ACIT (2016) that “the interest income can be recognized only when there is no uncertainty and significant scope to receive the same”.

A Division Bench of Justice Madhumita Roy (Judicial Member) and Chandra Poojari (Accountant Member) observed that “income accrued to the assessee, without the actual right to receive the same, cannot be brought to tax. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by the parties concerned with whom the assessee made deposits for interest. ITAT observes that unless and until there is a creation of right in favor of the Assessee, it cannot be said that he had acquired the right to receive the income or that the said income has accrued to him.”

The Bench further observed by relying on the Supreme Court ruling in ED Sassoon that what is sought to be taxed under the Income Tax Act is commercial profits and not theoretical or notional income, unless the statute otherwise provides for imposing the tax on a notional basis by legislative fiction.

Advocate Shivprasad Reddy appeared for the Assessee whereas Advocate D. K. Mishra appeared for the Revenue.

The brief facts of the case were that Assessee-Company engaged in the business of extraction, processing, manufacturing, and sale of iron ore. CBI placed prohibitory orders on the fixed deposits under Section 102 of CrPC, thus, the Assessee was restrained from drawing any amount or interest from the said fixed deposits. Assessee filed the return of income for AY 2014-15 and 2015-16 by recognizing only the TDS amount remitted by the bank on FD interest. Revenue observed that the banks deducted TDS of Rs.1.08 Cr and Rs.1.14 Cr on the interest of Rs.11.51 Cr and 11.47 Cr, for the relevant AYs and brought to tax the interest on the said fixed deposits, which was confirmed by the Commissioner of Income Tax. Here, the Assessee approached the Bench to seek relaxation.

After considering the submission, the Bench noted with the analyses of Section 5 that the receipt or accrual itself is not sufficient to bring a receipt to tax, and in order to bring a receipt to tax, it should be the income that ought to have been accrued to the Assessee in the relevant AY.

The Bench stated that the character of the receipt or nature of income should be determined in the light of the treatment of the contract and the rights and obligations of the parties flowing therefrom unguided by the nomenclature of the transaction, by relying on Supreme Court ruling in National Cements Mines Ltd. Vs. CIT (42 ITR 69).

The Bench further relied on the Supreme Court ruling in CIT Vs. Kamal Beharilal Singha (82 ITR 460) stated that the income that is taxable or not must be determined only by the reference to the legal position of the recipient.

The Bench also considered the ruling passed by the Kolkata High Court in DCIT Vs. EMC Limited in ITA No.2149/Kol/2017 that Assessee has no vested right to receive the retention money in the year in which it is retained, thus, it is not income for that year.

By referring to AS-9, the Bench stated that if there is significant uncertainty in the ultimate collection of the revenue, then the revenue recognition is postponed and, in such cases, revenue should be recognized only when it becomes reasonably certain that ultimate collection will be made.

The Bench further opined that “income accrued to the assessee, without the actual right to receive the same, cannot be brought to tax”.

The Bench expressed that the issue of deduction of tax at source on the interest on the fixed deposits was decided by the jurisdictional HC ruling vide order dt. Sep 21, 2021, in a writ petition filed by the Assessee, whereby it was held that the entitlement to interest accruing on the fixed deposits to the Assessee would be dependent on the result of the pending CBI proceedings and till the conclusion of the said court proceedings, the interest accruing on the fixed deposits cannot be considered as income for the purpose of deduction of TDS under Section 194A.

Accordingly, the Bench partially allowed the Assessee’s appeal.

Cause Title: M/s. Bellary Iron-Ores Pvt. Ltd. Vs. ITO [ITA No.1540/Bang/2018 / 2023-Enterslice-42-ITAT-Bang]

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