Facts of the Case

  • The appeals were filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) deleting additions made by the Assessing Officer for AY 2012-13 and 2013-14.
  • The Assessing Officer had added interest income on FDRs amounting to ₹8.57 crore and ₹16.15 crore respectively, on the ground that the FDRs were in the name of the assessee.
  • The funds (approx. ₹190 crore) were deposited pursuant to disputes between parties and were placed in FDRs under directions of an Arbitral Tribunal.
  • The FDRs were made in the name of the assessee company, but with clear restrictions that the amount could not be used without permission of the Tribunal.
  • The interest was to be distributed depending on the final outcome of arbitration.

Issues Involved

  1. Whether interest accrued on FDRs can be treated as income of the assessee under Section 5(1) of the Income Tax Act, 1961?
  2. Whether income can be said to have accrued when entitlement to such income is uncertain and subject to arbitration proceedings?

Petitioner’s Arguments (Revenue)

  • The FDRs were in the name of the assessee, and interest had accrued and was credited in its name.
  • Therefore, such interest should be treated as taxable income in the hands of the assessee.
  • The share of other parties could be determined later, but tax liability arises upon accrual.
  • The amount deposited exceeded the disputed sum, and settlement arrangements did not negate accrual of income.

Respondent’s Arguments (Assessee)

  • The FDRs were created pursuant to a consensual order of the Arbitral Tribunal.
  • The assessee had no absolute right over the funds or interest.
  • The interest income was contingent upon final adjudication of rights by the Tribunal.
  • The funds were under restriction and could not be used freely.

Court’s Findings / Order

  • The Court observed that the FDRs were created under directions of the Arbitral Tribunal and were subject to strict conditions.
  • The ownership of the funds and entitlement to interest had not crystallized.
  • Income cannot be said to have accrued unless there is a clear and enforceable right to receive it.
  • Since the entitlement was pending adjudication, interest income had not accrued to the assessee within the meaning of Section 5(1).
  • The Court agreed with ITAT and held that no taxable income had arisen in the hands of the assessee.
  • Appeals were dismissed as no substantial question of law arose.

Important Clarification

  • Mere credit of interest in the name of an assessee does not result in taxable income if the right to receive such income is uncertain or disputed.
  • Income accrues only when there is a definite and enforceable right, not when it is contingent.
  • Deposits made under judicial or arbitral directions with restrictions do not automatically lead to taxable accrual.

Sections Involved

  • Section 5(1) of the Income Tax Act, 1961
  • Principles relating to accrual of income

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:4089-DB/MMH06102022ITA3772022_201340.pdf

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