2016 (5) TMI 1006 - AT - Income Tax

Addition on account of interest on loan accrued to subsidiary companies - Held that - In view of the earlier decision of Co-ordinate Bench of ITAT on the identical issue, we find no merit in the grievance of the Revenue raised as in our considered opinion, the stand of the Revenue to the effect that interest accrued to the assessee cannot be upheld merely because the loan agreement with the subsidiary companies continued to exist. It is imperative that all the attendant facts, circumstances and realities of the situation have to be considered in their proper commercial perspective before it can be evaluated as to whether interest income really accrued in the hands of the assessee. The facts noted are not in dispute. It is also not in dispute that the assessee company has not recovered any dues from the two subsidiaries till now, as asserted by the learned Representative before us. After considering the entire gamut of facts and circumstances, it is an inescapable conclusion that the realization of the interest income in question is highly suspect and therefore, there cannot be said to be any real accrual of income. Thus, having regard to the legal position and the facts and circumstances of the case, we are inclined to hold that the lower authorities have faulted in concluding that interest income accrued to the assessee-company during the year under consideration. Thus, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition - Decided in favour of assessee Disallowance being expenses on account of power and fuel expenses - Held that - Identical issue has been decided in favour of the assessee by the Pune Bench of the Tribunal in assessee s own case relating to assessment year 2002-03 wherein held part of power and fuel expenses were incurred on providing lights to the residential colony and also to the common facilities provided by the assessee to its employees, which was the obligation of the assessee company and hence, expenditure incurred towards discharge of said obligation is business expenditure of the assessee company and is duly allowable in the hands of assessee. Further, the expenditure relatable to residential quarters is no doubt to be recovered from the employees or is to be included as perk in the hands of employees of the assessee company, but merely because no such exercise was carried on, does not merit the disallowance of expenditure in the hands of assessee - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance of ?2,02,38,082/- being interest on loan accrued to subsidiary companies.
2. Deletion of disallowance of ?80,10,000/- being expenses on account of power and fuel expenses.

Detailed Analysis:

1. Deletion of Disallowance of ?2,02,38,082/- Being Interest on Loan Accrued to Subsidiary Companies:

The primary issue revolves around whether the interest income on loans given to two subsidiary companies, Maharashtra Antibiotics and Pharmaceuticals Ltd. (MAPL) and Manipur State Drugs & Pharmaceuticals Ltd. (MSDPL), should be recognized by the assessee. The assessee argued that the interest income was not accounted for due to the subsidiaries being sick industrial units referred to BIFR, with no hope of recovery or interest. The assessee followed Accounting Standards (AS 9) on 'Revenue Recognition', which mandates that income should not be recognized if its recovery is uncertain. The Assessing Officer, however, added ?2,02,38,082/- to the income, asserting that the assessee follows a mercantile system of accounting, and thus, income should be recognized on an accrual basis.

The CIT(A) deleted the addition, relying on the Pune Bench of the Tribunal's earlier decision in the assessee's case for assessment years 2001-02 to 2005-06, which held that there was no real accrual of income due to the subsidiaries' financial conditions. The Tribunal reaffirmed this view, emphasizing that even under the mercantile system, real income, not hypothetical income, should be taxed. The Tribunal referenced the Supreme Court's judgment in Godhra Electricity Co. Ltd., which underscored that income should be considered accrued only if it is realistically realizable. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

2. Deletion of Disallowance of ?80,10,000/- Being Expenses on Account of Power and Fuel Expenses:

The second issue pertains to the disallowance of ?80,10,000/- out of the total power and fuel expenses of ?370.79 lacs, which the Assessing Officer deemed unrelated to the business as it pertained to the residential colony of the staff. The CIT(A) granted relief, following its earlier orders for assessment years 2003-04, 2004-05, and 2005-06.

The Tribunal upheld the CIT(A)'s decision, referencing its recent ruling in the assessee's case for assessment year 2002-03. The Tribunal noted that the residential colony was provided to employees, and expenses on power and fuel for common facilities and lighting were business expenditures. It emphasized that such expenses are allowable as they are part of the employer's obligation to provide facilities to employees. The Tribunal also mentioned that non-recovery of these expenses from employees or non-inclusion as perks does not justify disallowance. Thus, the Tribunal dismissed the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the Revenue's appeal in its entirety, upholding the CIT(A)'s order on both grounds. The Tribunal reiterated the principle that only real income, not hypothetical income, is taxable, and that business expenses incurred for employee facilities are legitimate deductions. The order was pronounced on April 15, 2016.