| COURT: | Bombay High Court |
| CORAM: | A. K. Menon J., M. S. Sanklecha J |
| SECTION(S): | 4 |
| GENRE: | Domestic Tax |
| CATCH WORDS: | Accrual of income, waiver of income |
| COUNSEL: | Niraj Sheth |
| DATE: | April 5, 2016 (Date of pronouncement) |
| DATE: | April 20, 2016 (Date of publication) |
| AY: | 2007-08, 2009-10 |
| FILE: | Click here to download the file in pdf format |
| CITATION: | |
| Fundamental principles of accrual of income under mercantile system of accounting explained in the context of waiver of income recoverable from person facing financial difficulties | |
Even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mercantile system of accounting:
“(A) that merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it.
(B) earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act.
(C) The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made.
(D) Non recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with ASI notified by the Government.
(E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred.
(F) The provisions of Section 145(1) are subject to, inter alia, mandate of ASI which also prescribes that ‘Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies.’ In the name of compliance with Section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanished.”
The Tribunal further referred to the fact that the various resolutions which were passed by the company as well as the communication exchanged between the parties would establish on facts that interest has been waived. Further on facts it holds that there is no reason to disbelieve the resolution passed by the Assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s. Marketing & Brand Solutions (I) Pvt. Ltd. had amalgamated with the Assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the Respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which would warrant interference by this Court on account of any finding being perverse or arbitrary.
what kind of robots do work in the revenue, is the basic question, i fail to understand, being an advocate with over 45 years at courts.
I will post how Nationalist govt misunderstood the British india in 1929 to 1950, how independence movement messed up, a research article i penned.
i think i ca