AS-9 lays down that when uncertainties exist regarding the determination of the amount in its collectability, the revenue shall not be treated as accrued and shall not be recognized until collection. The accounting rules are found acceptable to even SC in 404ITR409 where it held that when a recognised body of Accountants, after due deliberation and consideration publishes certain materials for its members, one can rely upon the same.
In 319ITR196 the assessee accounted for overdue financial charges on hire purchase and lease transactions on a cash basis, i.e., on receipt basis and not on an accrual basis. The AO required their inclusion on an accrual basis alleging a mercantile system of accounting for all incomes and expenses. The assessee submitted that keeping in line with the norms of the Reserve Bank of India as well as the credit rating agency, it had been recognizing income by way of overdue charges only to the extent of actual collection. The Madras High Court held that when the installments themselves were overdue and were not collected, there was no basis for making out a case that the additional overdue charges payable by the parties would be collectible with certainty. The terms of the agreements, which enabled the assessee-company to demand overdue charges, were according to the Court only enabling provisions and those enabling provisions did not guarantee the collection of overdue charges and they only gave a cause of action to the assessee.
In the context of application fees, front end fees, administrative fees and processing fees for loans granted by HUDCO the DHC in 421ITR599 held that such items of income did not accrue with certainty on the date of signing of the loan agreement. The income fell due only when the loan was disbursed as the fee was to be collected at that stage. Likewise, additional finance charges were held taxable on cash receipts basis and not on accrual basis vide 378ITR533.
ICDS IV to a limited extent says that revenue shall be recognized when there is reasonable certainty of its ultimate collection and where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved. Therefore the decisions in the above may not guarantee the same benefit hereinafter as ICDS IV does not make reference to the word interest as against AS-9. Moreover, section 145B steals the show after when it writes that any claim for escalation of price or export incentive shall be deemed to be income in the year in which reasonable certainty of realization is achieved