Facts of the Case

The present appeals were filed by the Appellant challenging the common order dated 5th October 2020 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2012-13 and 2013-14.

The Assessing Officer had made additions of ₹8,57,25,871/- and ₹16,15,54,801/- respectively on account of interest accrued on Fixed Deposit Receipts (FDRs), treating the same as income of the assessee.

The FDRs were created pursuant to a consensual arrangement before an Arbitral Tribunal, where an amount exceeding ₹190 crores was deposited in the name of the respondent-assessee to earn interest. However, the ownership of the deposit and interest was subject to the final adjudication of the arbitral proceedings.

The ITAT deleted the additions, holding that the interest income had not accrued to the assessee in real terms.

Issues Involved

  1. Whether interest accrued on FDRs held in the name of the assessee can be treated as taxable income under Section 5(1) of the Income Tax Act, 1961?
  2. Whether income can be said to accrue when the right to receive such income is contingent upon the outcome of arbitration proceedings?
  3. Whether mere credit of interest in the name of the assessee constitutes real income?

Petitioner’s Arguments (Revenue)

  • The FDRs were in the name of the assessee, and interest had accrued and was credited accordingly.
  • The assessee had dominion over the funds, and therefore, the interest income should be taxed in its hands.
  • The share of other parties in the interest would arise only after payment of due taxes.
  • The amount deposited exceeded the disputed sum, indicating beneficial ownership of funds by the assessee.

Respondent’s Arguments (Assessee)

  • The FDRs were created pursuant to a consensual arbitral arrangement, and the funds were under the control of the Tribunal.
  • The assessee did not have absolute ownership or right over the principal amount or the interest accrued.
  • The interest income was contingent upon the final decision of the arbitral tribunal regarding ownership and distribution.
  • Therefore, no real income had accrued to the assessee during the relevant assessment years.

Court’s Findings / Order

Delhi High Court upheld the findings of the ITAT and dismissed the appeals filed by the The FDRs were created under a consensual order of the Arbitral Tribunal, and the funds were subject to strict control and conditions.

  • The amount and interest could not be utilized without prior permission of the Tribunal.
  • Ownership of the funds and entitlement to interest were yet to be determined by the arbitral award.

The Court held that:

  • Income cannot be said to have accrued unless there is a crystallized and enforceable right to receive it.
  • Since the right to interest was uncertain and contingent, it could not be treated as income under Section 5(1) of the Income Tax Act.

Accordingly, the Court concluded that no substantial question of law arose and dismissed the appeals.

Important Clarification

  • Mere accrual of interest in accounting records or in the name of an assessee does not constitute taxable income.
  • The doctrine of “real income” applies, meaning income must be real, certain, and enforceable, not hypothetical or contingent.
  • Where income is subject to dispute and pending adjudication, it cannot be taxed until the right to receive is conclusively determined.

Sections Involved

  • Section 5(1) of the Income Tax Act, 1961 – Scope of Total Income (Accrual of Income)
  • Principles of Real Income Theory
  • Taxability of Contingent Income

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:4088-DB/MMH06102022ITA3762022_201301.pdf

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