In a recent case the income tax appellate tribunal, Hyderabad observed that the unless the revenue is (i) measurable and (ii) collectable with certainty no income can be said to have arisen irrespective of the method of accounting followed.
The abovementioned ruling is regarding the case of CIT v. Maruti Securities Ltd., ITA No. 468 of 2009, ITAT Hyderabad, Order dated 05-09-2014.
The taxpayer i.e. Maruti Securities Ltd advanced certain amount to some parties, on which the interest due to some reasons was not received due to some reasons and hence not offered to tax. The revenue authority however held it to be notional interest being accrued to assessee, and consequently taxable. On these facts the tribunal held that income cannot be taxed on hypothetical basis and only real income can be brought to tax.
As per Accounting Standard 9 Revenue Recognition, of ICAI, when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection. Hence the tribunal held that, to arrive at a real income, accrual basis cannot be a justifying factor and the commercial and business realties of the assessee, should be considered. The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per Accounting Standard 9.