2018 (1) TMI 542 - HC - Income Tax

Accrual of income - interest accrued to the assessee in respect of the loan given to Method - Whether the finding of the Tribunal that the claim of the assessee that no income accrued to it in respect of the loan given to Method could not be allowed on the basis of resolution of its Board of Directors on the ground of the subsequent fact of passing of decree by the Hon ble High Court against the Bank and the appeal filed therefrom is vitiated by reason of inter alia of consideration of irrelevant materials and/or is otherwise perverse ? Held that - We find from the impugned order, the Tribunal restored the matter of interest to the Assessing Officer on the ground that C.I.T.(A) had not taken note of the subsidiary having had filed the suit and obtained a decree, which though stayed was so on condition of furnishing bank guarantee. However, in doing so, the Tribunal had not referred to the reasoning of the Assessing Officer. Since the suit having been filed and decree obtained being the basis of the Tribunal s reasoning is no longer in existence, the decree having been set aside, we find that the assessee had by Board resolution adopted, prior to the previous year to the assessment year in the reference, decided to waive interest on the loan. That position having been restored it cannot be said there was accrual of interest income in the assessment year. We therefore answer the questions in this reference as follows a) Question no.1 in favour of the assessee in view of the decree having been set aside as brought to our notice though the same was not disclosed to the Tribunal. b) Question no.2 is accordingly answered in the negative and in favour of the assessee.

Summary

Issues involved:
1. Whether the finding of the Tribunal regarding the claim of no income accrued to the assessee in respect of a loan given to a company was vitiated by the subsequent passing of a decree by the High Court against the Bank and the appeal filed therefrom?
2. Whether any income by way of interest accrued to the assessee in respect of the loan given to the company?
3. Whether the Tribunal's direction to re-decide the claim of interest income accrued to the assessee was legal and proper?

Analysis:

Issue 1:
The assessee advanced a loan to its subsidiary company, and the subsidiary company faced difficulties in recovering the advance. The Board of Directors of the assessee decided not to charge any interest on the outstanding loan from the subsidiary. The Assessing Officer, however, deemed interest on accrual basis, which the CIT(A) later deleted. The Tribunal considered a suit filed by the subsidiary in the High Court, where a decree was passed against the Bank, staying the operation of the decree upon furnishing a bank guarantee. The Tribunal found that the Assessing Officer, CIT(A), and Tribunal did not consider the impact of the High Court's judgment on the waiver of interest by the assessee. As the decree was set aside by the Appeal Court, the Tribunal set aside the order and directed the Assessing Officer to redecide the claim.

Issue 2:
The Tribunal restored the matter of interest to the Assessing Officer based on the suit filed by the subsidiary and the decree obtained, which was stayed on the condition of a bank guarantee. However, since the decree was set aside before the impugned order, the Tribunal found that the waiver of interest by the assessee prior to the assessment year negated any accrual of interest income. Consequently, the questions were answered in favor of the assessee, with question 2 being answered in the negative.

Issue 3:
The Tribunal's decision to restore the matter of interest to the Assessing Officer was based on the existence of the suit and the decree obtained by the subsidiary. However, as the decree was set aside, the Tribunal found that the assessee's decision to waive interest on the loan prior to the assessment year was significant. Therefore, the Tribunal did not answer question 3 in light of the circumstances.

Overall, the High Court disposed of the reference by favoring the assessee due to the setting aside of the decree, which impacted the accrual of interest income and the validity of the Tribunal's decision.