In DCIT v. M/s Ferrous Infrastructure Pvt. Ltd, the ITAT Delhi deleted addition in respect of interest income shown in the books of accounts by the assessee on ground that income tax cannot be levied on ‘hypothetical income’.
The assessee company is engaged in the business of real estate development, building of housing project etc. Assessee charged Interest charged on Flat buyers for late payment of amount. The same was entered into the books of accounts after calculation. However, the same was reversed due to refusal from customers to pay the amount and threat of cancellation of booking. However, AO disallowed the claim of the assessee and added the income back to the total income of the assessee.
Assessee successfully appealed the assessment order before the first appellate authority.
On departmental appeal, the Tribunal noted that the Income Tax Act is leviable on two points of time i.e, the accrual of income or its receipt, but the substance of the matter is the income. “If the income does not result at all, there cannot be a tax, even though in accounts, an entry is made about the “hypothetical income” which does not materialise. Where income has, infact, been received and is subsequently given up, in such circumstances it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an, entry to that effect may, in certain circumstances, have been made in the books of accounts. In the instant case the assessee raised the debit notes to the allottee’s and booked the income in the books of accounts. The entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income.”
Read the full text of the Order below.
