2011 (8) TMI 700 - HC - Income Tax

Interest on mortgage loan - held that - the assessee cannot take advantage of guarantor-debtor company being sick company. As rightly pointed out by the Tribunal, the situation which prevailed at the time of sanctioning of the loan continued even thereafterwards; ultimately the assessee went in for the assignment of the debt in favour of the third party through tripartite agreement, to which the assessee as well as borrower company were parties. - Decided against the assessee. Regarding distribution of income - held that - once the interest income is directed to be assessed at Rs.52.50 lakhs for each of the assessment years starting from 2000-01 to 2002-03, as rightly pointed out by the Assistant Commissioner of Income Tax in her communication to the Standing Counsel, the Revenue would not be justified in taxing the entire interest income again for the year 2003-04. Thus, with the interest income of Rs.157.50 crores spread over from the assessment year 2000-01 onwards, the assessment of the said amount for the assessment year 2003-04 cannot be sustained.

Summary

Issues Involved:
1. Accrual of interest on mortgage loan.
2. Accrual of interest on loan.
3. Treatment of amount covered by the debit note as income.
4. Double taxation on the same interest income.
5. Levy of penal interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

Issue 1: Accrual of Interest on Mortgage Loan
The primary issue was whether the interest on the mortgage loan of Rs.250 lakhs accrued to the assessee. The Tribunal held that the interest income had accrued and must be assessed on an accrual basis. The assessee argued that due to the financial instability of the debtor and the complications in enforcing the mortgage, the interest should not be recognized. The Tribunal rejected this, emphasizing that the assessee was aware of the debtor's financial status and had not taken steps to write off the interest as a bad debt. The Tribunal cited the Supreme Court decision in *State Bank of Travancore v. Commissioner of Income Tax* to support its stance that mere impossibility of recovery does not make the interest income a bad debt.

Issue 2: Accrual of Interest on Loan
The Tribunal also addressed the interest on a loan of Rs.23.37 lakhs advanced to M/s. S&S Industries and Enterprises Limited. The assessee argued that the financial status of the debtor made the interest non-recoverable. The Tribunal held that the interest had accrued and must be assessed accordingly, as the assessee had not taken steps to treat the interest as a bad debt nor written it off in the books of accounts.

Issue 3: Treatment of Amount Covered by Debit Note as Income
The Tribunal examined whether the amount covered by the debit note represented income. The assessee had raised a debit note for Rs.75,84,350/- but later agreed to a reduced amount of Rs.58,78,491/-. The Tribunal held that once the amount was mutually agreed upon, the claim that 50% of the agreed amount had not accrued could not be accepted. Thus, the Tribunal confirmed the lower authorities' view that the amount was assessable as income.

Issue 4: Double Taxation on the Same Interest Income
The Tribunal's order led to double taxation of the same interest income for different assessment years. The assessee had initially offered the entire interest income for the assessment year 2003-04. However, the Tribunal directed that the interest income should be spread over the assessment years 2000-01 to 2002-03. The Court agreed that the assessment of the same interest income for the year 2003-04 could not be sustained and directed the Assessing Officer to redo the assessment for 2003-04, ensuring that the interest income is spread over the relevant years.

Issue 5: Levy of Penal Interest under Sections 234B, 234C, and 234D
The assessee contended that the levy of penal interest under Sections 234B, 234C, and 234D was harsh, given the bona fide difficulties in enforcing the mortgage and the conflicting balance sheets. The Court noted the provisions under these sections and suggested that the assessee could seek relief from the appropriate authority, which should consider the bona fide circumstances while passing the order.

Conclusion:
The Court upheld the Tribunal's order for the assessment years 2000-01 to 2002-03, confirming the accrual of interest income and the treatment of the debit note amount as income. However, it set aside the Tribunal's order for the assessment year 2003-04, directing the Assessing Officer to reassess the interest income, ensuring it is not taxed twice. The Court dismissed the appeals for the assessment years 2000-01 to 2002-03 and partly allowed the appeal for the assessment year 2003-04, advising the assessee to seek relief for penal interest from the appropriate authority.