2015 (2) TMI 15 - HC - Income Tax

Accrual of interest - Absence of interest for the proportionate period - AO was dissatisfied with its explanation that its borrower refused to pay any proportionate interest on the plea that the entire deposits had been recalled mid year. - Held that - The CIT(Appeals) took into account not only the additional evidence (especially the letter which was doubted by the ITAT) but also the fact that the AO did not make any enquiry. Significantly, there was a remand directed by the CIT (Appeals) in the course of which apparently, the AO made no attempt to hold further enquiries. In the absence of any concrete material, and having regard to the circumstances that the assessee in fact maintained the mercantile system of account, the failure of the AO to exert himself and requisition the books of account and other material from the M/s. Escorts Ltd. if he felt that in fact such amounts were payable contractually or otherwise, in our opinion, could not have resulted in the addition which was ultimately directed. Having regard to these circumstances, this Court is of the opinion that the assessee, on the basis of the materials on record, was entitled to succeed on this question and the ITAT wrongly interfered with the CIT (Appeals) s determination. Accordingly, the impugned order is set aside. - Decided in favour of assessee.

Summary

Issues:
1. Addition of Rs. 8.75 lakhs made by the Assessing Officer (AO) under the Income Tax Act.
2. Acceptance of additional evidence by the CIT(Appeals) and subsequent direction to dilute the added amount.
3. Discrepancy in interest payment by M/s. Escorts Ltd. and its impact on the income accrued to the assessee.
4. Failure of the AO to conduct further enquiries and reliance on the mercantile system of accounting by the assessee.

Analysis:

Issue 1:
The primary issue in this case revolves around the addition of Rs. 8.75 lakhs by the Assessing Officer (AO) under the Income Tax Act, which was later contested by the assessee through an appeal under Article 260A. The CIT(Appeals) initially ruled in favor of the assessee, directing the dilution of the added amount, but the Income Tax Appellate Tribunal (ITAT) overturned this decision, leading to further legal proceedings.

Issue 2:
One of the key aspects of this case is the acceptance of additional evidence by the CIT(Appeals) under Rule 46A of the Income Tax Rules. The CIT(Appeals) considered a letter from M/s. Escorts Ltd. dated 25.08.1998, which indicated the repayment of the loan amount and the reasons for the absence of interest payment for a specific period. This additional evidence played a crucial role in the subsequent legal analysis and decision-making process.

Issue 3:
The discrepancy in interest payment by M/s. Escorts Ltd. during the relevant financial year raised questions regarding the income accrued to the assessee. The CIT(Appeals) highlighted the absence of concrete evidence suggesting the accrual of income to the assessee, emphasizing the importance of actual income realization over hypothetical entries in bookkeeping. The confirmation from M/s. Escorts Ltd. further supported the assessee's position regarding the repayment of the loan amount without additional interest payments.

Issue 4:
Another significant aspect of this case was the failure of the Assessing Officer (AO) to conduct further enquiries despite the CIT(Appeals) directing a remand. The court criticized the AO for not exerting efforts to obtain relevant books of account or materials from M/s. Escorts Ltd. to verify the contractual obligations regarding interest payments. The reliance on the mercantile system of accounting by the assessee further influenced the court's decision in favor of the assessee, highlighting the AO's lack of diligence in the investigation process.

In conclusion, the High Court set aside the impugned order, allowing the appeal and emphasizing the importance of concrete evidence, proper enquiry procedures, and adherence to accounting principles in income tax assessments.