Interest from Partnership firm needs to be offered for tax on accrual basis

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INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 2430/Mum/2011 – Assessment Year 2005-06

Smt. Gita Yogendra Divecha,

Vs.

Income Tax Officer – 16(1) (1),

Date of pronouncement: 01-08-2012

Accrual of income is a well-known concept of taxation jurisprudence. It is a fact that assessee is following the Mercantile system of accounting and as per the established principles of that system, whatever accrues to an assessee in a particular AY has to be offered for taxation for that particular year. In our opinion the concept of real income or no real income can never be a concept which can work if it is at variance with the statutory provisions. Under section 5 of the Act the moment there is an accrual of income by way of interest income, it has to be inevitably offered to tax and even if it is not so offered, it is the duty of the income tax authorities to bring it to tax. In other words the accrual of income must be real. What really accrues to the assessee has to be found out and what accrues must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together, but once the accrual takes place on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made as no income. In the case under consideration interest of Rs.6.5 Lacs had accrued to the assessee partner as per the provisions of agreement entered into between the assessee partner and the firm. It is also a fact that the assessee had claimed to have received Rs.10.6 lakhs from the firm during the AY. under consideration. In these circumstances, mere filing of a loss return for trading activities by the firm, cannot be a basis for not offering the accrued interest to the assessee for taxation.