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Issues involved: Assessment of interest income u/s Government orders, conversion of loan amount to equity, cancellation of interest income assessment by Tribunal, dismissal of appeals by department.
The High Court of Kerala heard the case regarding the assessment of interest income at the hands of the respondent-assessee, a Government of Kerala company, which had given advances to two other companies under the control of the Kerala Government. The loans were advanced under Government orders, and since no interest was received from the loanee companies, the respondent converted the loan amount to equity based on the Government's instructions. The Board of Directors of the respondent accepted the Government's proposal, allowing the loan to be converted into equity shares. Despite the respondent's request for interest payment during the period the loan amounts were retained, no interest was received or agreed to be paid by the loanee companies. The Tribunal cancelled the assessment of interest income, stating that as the loans were treated as advances for investments in equity, and there was no accrual or receipt of interest, there was no scope for assessment. The High Court agreed with the Tribunal's finding, emphasizing that as long as the department had no evidence of interest accruing to the assessee, there was no basis for assessment. The Court noted that the other questions raised by the department were not considered by the Tribunal, and therefore, those questions did not arise from the Tribunal's orders. Consequently, the Court dismissed all three appeals filed by the department.
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