- (1.) This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') has been preferred against the order dated 24.08.2007 passed by Income Tax Appellant Tribunal (in short 'the ITAT') in Income Tax Appeal No.55/LUC/2007 for the assessment year 2003-04, whereby the interest accrued during the said assessment year was treated as income of U.P. Chalchitra Nigam Limited (in short 'the Corporation') and observed that taxability on the aforesaid income of interest cannot be postponed on the ground of alleged impossibility of recovery. The relevant paragraphs i.e. 6 and 7 of the order impugned are as follows: "6. We have considered the rival submissions and have perused the record of the case. A perusal of the statements regarding accounting of interest in the case of Sikandarabad unit and Dariabad unit would reveal that assessee had accounted for interest and only in such years where it had received the amounts against the interest accrued to it but did not treat the interest income in those years where there was no recovery. This treatment was opposite to the system of accounting viz mercantile system of accounting regularly followed by the assessee. In mercantile system of accounting, the income accrues as soon as it has become due and it cannot be postponed to subsequent years based on the recovery against this amount. Specific statutory provisions are there in the statute to meet such contingencies. The real income theory has no role to play once the income had accrued to the assessee. In this regard, we may refer to the decision in the case of ITAT Delhi Bench in the case of Poysha Oxygen (P) Ltd. Vs. Deputy Commissioner of Income Tax,2004 91 ITD 616, wherein after examining various case laws, the Tribunal has observed as under: "From the combined reading of the case law, the following legal position emerges: (1) If the income does not result at all to the assessee then it cannot be taxed even though (i) such income might have hypothetically accrued; or (ii) entries are made in the books of account of such hypothetical income; (2) If the income, on mutual understanding is given up or surrendered by the assessee before its accrual then the income surrendered cannot be taxed on the principle of real income theory. However, if such surrender is made after the accrual of such income then such income would be taxable though the assessee may be entitled to claim bad debt on the basis of evidence; (3) If the income has accrued or arisen from the transactions, then its taxability cannot be postponed on the ground of improbability of recovery; (4) The issue, whether income has resulted or not to the assessee, should be decided after considering all the facts and circumstances of the case including the subsequent events; (5) Considering the genuine hardship of the assessee, if the Board exercise its option under section 119 and issues a circular to mitigate the hardship then the above legal position shall not be applied and the assessee would be entitled to relief in terms of the circular instructions of the Board (Para 19)" 7. Thus, from the above, it is clear that if the income had accrued or arisen from the transaction, then its taxability cannot be postponed on the ground of impossibility of recovery. We, therefore, do not find any infirmity in the orders of the lower Revenue authorities. The grounds are dismissed."
(2.) The present appeal was admitted by this Court vide order dated 18.01.2008 on the following substantial questions of law: "1. Whether on the facts and in the circumstances of the case the learned ITAT erred in law by treating hypothetical interest income of Rs.627969/- as taxable income? 2. Whether on the facts and in the circumstances of the case there was a no such real income, in spite of the fact that mercantile system of accounting was adopted and the amount of Rs.627969/- was shown as Interest Suspense A/c, in the Books of A/c of the Appellate Corporation? 3. Whether on the facts and in the circumstances of the case the learned ITAT grossly erred in law by assuming that income had accrued, when there was no real accrual of income and where the accrual of income had to be decided on the basis of interpretation given to the term accrual through the settled law as pronouncements made by the Hon'ble Supreme Court and binding decisions of the various High Courts?"
(3.) The facts necessary for deciding this appeal in short are that the Corporation was constituted for promoting cinematic activities in State of Uttar Pradesh. This Corporation was owned by the State Government to implement a scheme as per policy decision of the State of U.P. vide Government Order dated 24.03.1993. The State Government by the said Government Order envisaged selling-off certain properties, which was non-viable Cinema-Houses and constructed by the Corporation in suburban/ mofussil towns. The scheme under which these cinema houses sought to be sold were under deferred payment plan, for which the tenders were invited. The prospective purchasers purchased the property after executing an agreement on deferred payment plan which includes the payment of instalments of part consideration along with interest at the rate given under the agreement/sale deed. In the relevant accounting year, the income of interest was of three units, known as Sikandarabad, Bharwari and Dariyabad Unit. In all these three units, the first instalment of principal amount to the extent of 25% was received in assessment year 2002-03. The accumulated interest was not actually paid but was shown to be accrued during the assessment year in question which was credited in interest suspense account for the reason that the same was not realised in relevant assessment year.;