2013 (7) TMI 222 - AT - Income Tax

Notional interest on debentures - additions as the said interests have been accrued to the assessee - assessee stated to be following mercantile system of accounting - Held that - As regards the findings of the AO and CIT(A) that various resolutions have been back dated and the same cannot be relied is based on presumptions and assumptions as the perusal of the records and the subsequent events leading to the amalgamation establishes that the debenture issuing company has been under serious financial crisis and the impugned resolutions passed to the effect of waiver of interest are reliable. Regarding the requirement of the resolution to be registered u/s 106 r.w.s. 192 of the Companies Act as observed by the CIT(A), it is pertinent to mention that the said provisions are not applicable as the resolutions passed by the debenture issuing company do not fall under the resolutions prescribed by the provisions of section 192(4) of the Companies Act. Also in similar set of facts, the ITAT in the case of Riya Holdings Ltd 2012 (11) TMI 756 - ITAT Mumbai has directed the AO delete a similar amount of interest brought to tax concluding that merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it. As one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. In favour of assessee.

Summary

Issues Involved:
1. Addition of notional interest on debentures for assessment years 2007-08 and 2009-10.
2. Levy of interest under section 234 of the Act.
3. General ground in nature.

Analysis:

Issue 1: Addition of Notional Interest on Debentures
The appeals were against the orders of the Ld.CIT(A)-13 for the assessment years 2007-08 and 2009-10, regarding the addition of notional interest on debentures. The assessee, a company in the advertising business, had invested in 2% non-convertible debentures issued by another company. The AO added Rs. 84,00,000 each for both years as notional interest accrued to the assessee. The assessee argued that as per Accounting Standard 9, revenue should only be recognized when certain of realization. The debenture issuer later decided to issue preference shares in lieu of the debentures, and the High Court approved amalgamation with the assessee company. The ITAT found that the resolutions of waiver of interest were reliable, considering the financial crisis of the debenture issuing company. The ITAT referred to a previous case where a similar interest amount was deleted, emphasizing the principles of accounting prudence and revenue recognition. Consequently, the impugned additions were deleted.

Issue 2: Levy of Interest under Section 234
Ground no. 2 of the appeals related to the levy of interest under section 234 of the Act. The ITAT deemed this issue consequential and premature, thus not requiring adjudication.

Issue 3: General Ground
Ground no. 3 was of a general nature and did not necessitate specific adjudication.

In conclusion, the appeals filed by the assessee were allowed, and the impugned additions of notional interest on debentures were deleted. The ITAT's decision was based on accounting principles, prudence, and the circumstances surrounding the waiver of interest, ultimately favoring the assessee.

This detailed analysis of the judgment provides insights into the reasoning and legal principles applied by the ITAT Mumbai in deciding the issues raised in the appeals.