2016 (1) TMI 446 - AT - Income Tax

Addition on account of non recognition of interest income on the funds deployed in optionally convertible debenture - Income Recognition - CIT(A) deleted the addition - Held that - Acts on record show that M/s. Ordyn Technologies Pvt. ltd., went into heavy financial crisis by which it was not in a position to pay the principle amount of debentures least to talk about interest on the said debentures. The assessee purchased the OCDs heavily banking upon the future prospects of M/s. Ordyn Technologies Pvt. ltd. However, it turn out to be that all the Government orders successfully bided by M/s. Ordyn Technologies Pvt. ltd. have been cancelled and the said company ran into deep financial crisis . There is no evidence on record brought by the AO to suggest that the assessee has actually received any interest from M/s. Ordyn Technologies Pvt. ltd. There is also no evidence on record which could suggest that there is any possibility of getting interest on debentures from the said company. Assuming for a moment that the assessee has purchased debentures cum interest and therefore the assessee must account for the interest, but at the same time there being no possibility of receiving interest, the same is allowable as a write off in the books. Therefore, we do not find any logic in making the addition of interest accrued and then allowing the same as a deduction as a bad debt. Considering the facts of the case from all possible angle, we do not find any reason to interfere with the findings of the Ld. CIT(A). To this extent, findings of the Ld. CIT(A) are confirmed. However, we do not find any findings given by the Ld. CIT(A) in respect of money lended to Shri Satish Lade, there is not even a whisper of any finding by the Ld. CIT(A) in respect of interest income added by the AO in respect of the loan given to Shri Satish Lade. We, therefore only to this limited extent, restore the issue to the file of the Ld. CIT(A). The CIT(A) is directed to decide the taxability or other wise of the interest on loan given to Shri Satish Lade after giving reasonable and fair opportunity of being heard to the assessee. - Decided partly in favour of revenue for statistical purpose.

Summary

Issues:
1. Whether non-recognition of interest income on optionally convertible debentures was justified.
2. Whether reliance on specific cases by the Ld. CIT(A) was appropriate.

Analysis:
1. The Revenue appealed against the deletion of an addition of Rs. 2,81,39,521 made due to non-recognition of interest income on debentures. The assessee, providing investment advice, filed a return showing a loss for the year. The AO noted non-recognition of interest on debentures and loans, leading to a loss. The assessee explained financial crisis at M/s. Ordyn Technologies Pvt. Ltd. as reason for non-recognition of interest. The AO added the interest amount, which was upheld by the Ld. CIT(A). However, the Ld. CIT(A) relied on legal precedents and held that if income does not materialize, there cannot be tax. The Ld. CIT(A) directed deletion of the addition, emphasizing lack of actual receipt of the interest income by the assessee.

2. The Revenue contended that the fund deployment for debentures was a colorable device to avoid recognizing interest income. The Tribunal observed that the debentures were purchased based on future prospects, but M/s. Ordyn Technologies Pvt. Ltd. faced financial crisis, making receipt of interest uncertain. The Tribunal noted lack of evidence of interest receipt or possibility thereof. While confirming the Ld. CIT(A)'s decision on debentures, the Tribunal directed a review of the interest income on a loan to Shri Satish Lade. The Tribunal allowed the appeal in part for statistical purposes, emphasizing the need for a fair hearing on the specific loan interest issue.

In conclusion, the Tribunal upheld the deletion of the addition related to debentures due to uncertainty in interest receipt. The Tribunal directed a review of the loan interest issue, emphasizing the importance of a fair hearing. The judgment provided clarity on the tax treatment of interest income based on actual realization, legal precedents, and specific circumstances.