2013 (1) TMI 860 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of Rs. 197.13 lakhs as income from interest on advances given by the assessee to its subsidiaries.
2. Accrual of interest income on loans given to sick subsidiaries.

Summary:

Issue 1: Treatment of Rs. 197.13 lakhs as income from interest on advances given by the assessee to its subsidiaries

The appellant, a Government of India enterprise engaged in pharmaceuticals, contested the addition of Rs. 197.13 lakhs as interest income from loans to its subsidiaries, MAPL and MSDPL. The Assessing Officer (AO) and CIT(A) treated this amount as income, despite the assessee not receiving or accruing it, arguing that the subsidiaries were sick industrial units referred to the BIFR u/s 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985. The assessee followed Accounting Standard (AS 9) on 'Revenue Recognition' and did not account for the interest due to uncertainty of recovery. The AO, however, added Rs. 140.94 lakhs from MAPL and Rs. 58.19 lakhs from MSDPL to the returned income, asserting that interest accrued on a mercantile basis.

Issue 2: Accrual of interest income on loans given to sick subsidiaries

The CIT(A) upheld the AO's decision, stating that the loan agreements continued to exist, and thus interest income accrued unless modified. The assessee argued that no real income accrued due to the subsidiaries' financial distress and cessation of operations. The Tribunal referred to the Supreme Court's judgment in Godhra Electricity Co. Ltd., emphasizing that income tax is on real income, not hypothetical accruals. It concluded that the realization of the interest income was highly suspect, and thus, no real accrual occurred. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition of Rs. 197.13 lakhs.

Conclusion:

The Tribunal allowed the appeal for A.Y. 2001-02 and applied the same decision to the appeals for A.Ys. 2002-03 to 2005-06, directing the AO to delete the impugned additions for all years under consideration. The decision was pronounced in the open court on 31st January 2013.