Law:

Section:

Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessing Officer made certain addition to returned income of assessee on account of interest accrued on inter-corporate deposits made by assessee in company 'L' - Assessee contended that loan had become irrecoverable and, so, no interest could be said to have accrued thereupon - It further explained that interest on said loan given to 'L' vide agreement dated 17-3-1993 had been credited in books of account on a yearly basis up to 31-3-1999 which was duly assessed to tax, though interest was actually received only for first two years - On appeal, Tribunal deleted addition holding that no tax was payable unless interest income was real income and not merely accrued income, especially when principal amount had been written off as bad debt in subsequent years - Whether, on facts, Tribunal had taken a correct decision - Held, yes FACTS The Assessing Officer made certain addition to the income declared by the assessee-company on account of interest accrued on inter-corporate deposits made by the assessee in a company 'L'. The Assessing Officer observed that the assessee had not declared the amount of interest accrued and had followed mercantile system of accounting. The assessee contended that the loan had become irrecoverable and, so, no interest could be said to have been accrued thereupon. It further explained that the interest on loan given to 'L' vide agreement dated 17-3-1993 had been credited in the books of account on a yearly basis up to 31-3-1999 and had been assessed to tax, though interest was actually received only for the first two years; and that since no interest was received after the said date, the directors decided not to account for the interest income in the books of account. Total outstanding amount of Rs. 617 lakhs including principal amount of Rs. 350 lakhs and interest amount of Rs. 267 lakhs was ultimately settled at Rs. 480 lakhs (principal Rs. 350 lakhs and interest Rs. 130 lakhs) videone-time settlement agreement. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. However, on second appeal, the Tribunal deleted the addition holding that no tax was…

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