2014 (8) TMI 1219 - AT - Income Tax

Accrual of income - Assessment of accrued interest brought to tax - A.O. calculated interest on the advances given for the year on the number of days for which the temporary advance was given and brought such amounts to tax on accrual basis - A.O. computed interest on these advances at 18% because the company made a claim on M/s. SCSL for repayment of these advances along with damages claimed at 18% p.a. from the date of advance - HELD THAT - As in assessee s own group of cases for the A.Y. 2010-2011 unless and until the liability to pay the advances and the rate of interest at which the temporary advances are to be repaid is determined by the Civil Court, it cannot be said that the same has accrued or arisen to the assessees. However, if the assessees had advanced interest bearing funds as interest free advances, the interest paid by the assessees towards such borrowed funds would have to be disallowed and treated as the income of the respective assessees. The Hon ble Punjab and Haryana High Court in the case of Abhishek Industries 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT has held that the nexus between the interest bearing funds and the interest free advances will have to be proved before making the disallowance of interest and bringing it to tax. We find that neither the Assessing Officer nor the CIT(A) has examined the issue from this angle. Therefore, the orders of the CIT(A) and the Assessing Officers are set aside and the issue is remitted to the file of the Assessing Officer of the respective assessees for de novo consideration in the light of our observations above - if the amounts advanced to M/s. SCSL by the respective assessees are from their own funds, then the interest expenditure cannot be disallowed and brought to tax. Thus we remit the matter back to the file of the A.O. to decide it denovo. Appeals of the Revenue are allowed for statistical purposes.

Summary

Issues involved:
Assessment of accrued interest brought to tax by the Assessing Officer in the hands of the assessees.

Analysis:
The appeals were filed by the Revenue against the Orders of the CIT(A)-VII, Hyderabad for the assessment year 2008-2009, concerning the assessment of accrued interest brought to tax by the Assessing Officer. The assessees were companies controlled by Mr. B. Ramalinga Raju and his family members, with transactions involving M/s. Satyam Computer Services Limited (SCSL). The Assessing Officer calculated interest on advances given to SCSL by the assessees and brought such amounts to tax on an accrual basis. The interest was computed at 18% based on the claim made by the company for repayment of advances along with damages at the same rate. The CIT(A) held that interest income had not definitively accrued to the assessees at 18%, stating that income could be taxed when the court finalizes the suit pending before it. Consequently, the CIT(A) deleted the additions made by the Assessing Officer. The Revenue appealed this decision.

Upon considering the submissions, it was noted that a similar issue had been addressed by the Tribunal in the assessee's cases for the A.Y. 2010-2011, where it was decided in favor of the assessee. The Tribunal found that in the absence of a contract for charging interest on the advances given to SCSL, the assessees were not entitled to interest income. The Tribunal emphasized that the interest rate could not be presumed to have accrued at 18% merely based on the claims made in suits for recovery of advances. It was determined that until the Civil Court established the liability of SCSL to repay the advances and the applicable interest rate, it could not be concluded that interest had accrued to the assessees. The issue was remitted back to the Assessing Officer for reconsideration in line with the Tribunal's observations.

Considering the identical facts and issues, the Tribunal decided to remit the matter back to the Assessing Officer for fresh consideration following the directions of the Coordinate Bench in a previous order. Consequently, the appeals of the Revenue were allowed for statistical purposes, and the matter was remitted to the Assessing Officer for denovo consideration.

In conclusion, the judgment primarily revolved around the assessment of accrued interest brought to tax by the Assessing Officer in the hands of the assessees, with the Tribunal emphasizing the need for a definitive determination of interest accrual based on legal proceedings and contractual obligations.