2023 (5) TMI 1369 - AT - Income Tax

Addition of interest said to be agreed on loans - as per AO assessee used interest-bearing funds to provide interest-free loans, invoking Section 40A(2)(b) - HELD THAT - The parties are not in a position to pay the interest receivable. However, it cannot escape from the payment of interest to the parties from whom it has been borrowed. Hence, the interest receivable is not booked in the books of accounts of the assessee. As discussed earlier in a mercantile system of accounting revenue is recognized on accrual basis as per the agreement entered by the assessee with the parties to whom loan has been advanced. Accrual of interest is the most important fact under the receipt of the interest income. When there is no due or modification of agreement through which the money has been advanced the interest accrued on the basis of said agreement to be recorded in the books of accounts of the assessee and it cannot be modified by a Board resolution. In the case of assessee, no such modification of the agreement of advancing loans has been done. The assessee on its own not recognized the interest income though it was agreed with the assessee as per the loan agreement. The assessee take support from Board resolution where they taken decision not to recognized the income. Being so, it is not tune with the AS-9 which is more concerned with the true and fair view of the state of affairs of the business of the assessee and also in conformity with the mercantile system of accounting as prescribed in section 145 of the Act. AO is empowered and bound to compute the income of the assessee in accordance with section 145 of the Act, which is the mercantile system of accounting. There is no dispute that under mercantile system of accounting, the income of the assessee has been accrued and only the assessee failed to record the same in the books of accounts of the assessee though it was accrued. Therefore, the claim of assessee is not based on any sound accounting system or section 145 . Also in other assessment year 2015-16 the AO has not mentioned anything about section 40A(2)(b) - thus, we dismiss this ground in both the appeals of the assessee. Addition u/s 69C - assessee has not replied to AO's question to understand the nature of the said expenditure being revenue and connected to the business of the assessee - HELD THAT - Before the lower authorities, the assessee has said that expenditure was paid to SREI Infrastructure Ltd. and no further details have been furnished. Even before us, the assessee reiterated the arguments made before the lower authorities. In our opinion, it is appropriate to remit the issue to the file of AO with direction to assessee to establish that the expenditure is wholly and exclusively incurred for the purpose of business. With this observation, we remit the issue to the file of AO for fresh consideration.

Summary

Issues Involved:
1. Addition on the issue of interest said to be agreed on loans.
2. Addition towards consultancy fee as unexplained expenditure under section 69C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition on the issue of interest said to be agreed on loans:

The appeals concerned the assessment years 2013-14 and 2015-16, where the assessee faced additions related to interest on loans amounting to Rs.179,50,18,919/- and Rs.302,53,20,841/- respectively. The assessee earned an interest income of Rs.85,14,48,065/- and incurred an interest expenditure of Rs.119,36,75,303/-. The loans were advanced to Kingfisher Airlines Limited (KFA), Margosa Consultancy Pvt Ltd, and Redect Consultancy Pvt Ltd, with interest charged till October 2012, after which interest was waived due to KFA's suspended operations. The waiver was communicated through letters and board resolutions.

The Assessing Officer (AO) issued a show cause notice proposing additions, arguing that the assessee used interest-bearing funds to provide interest-free loans, invoking Section 40A(2)(b). The assessee contended that the waiver was based on business expediency and supported by board resolutions. The AO's addition was challenged, stating that Section 40A(2)(b) applies only to interest paid to related parties, not to interest waiver.

The CIT-A upheld the AO's decision, emphasizing the dual standard of the assessee in recognizing interest expenses while not recognizing interest income. The assessee argued that the waiver was commercially expedient and supported by legal precedents, including CIT vs Neon Solutions Pvt Ltd and H.P. Mineral & Industrial Development Corpn. Vs. CIT, which support the waiver of interest before the end of the accounting year.

The Tribunal found that the assessee, following the mercantile system of accounting, should have recognized the interest income as per the loan agreements. The board resolution alone was insufficient to modify the agreement terms. The Tribunal dismissed the assessee's appeal, stating that the AO's addition was justified as the interest income had accrued and should have been recorded.

2. Addition towards consultancy fee as unexplained expenditure under section 69C of the Income Tax Act:

The AO disallowed Rs.60,00,000/- claimed as consultancy fees, treating it as unexplained expenditure under section 69C. The assessee failed to substantiate the claim, only stating that the payment was made to SREI Infrastructure Ltd. The AO noted the absence of details regarding the nature of consultancy, TDS, and invoices.

The assessee argued that the expenditure was reflected in the books and sourced from regular bank accounts, making section 69C inapplicable. The CIT-A upheld the AO's decision due to the lack of detailed explanation from the assessee.

The Tribunal remitted the issue to the AO for fresh consideration, directing the assessee to establish that the expenditure was wholly and exclusively for business purposes.

Conclusion:

The appeal for the assessment year 2013-14 was partly allowed for statistical purposes, and the appeal for the assessment year 2015-16 was dismissed. The Tribunal emphasized the importance of recognizing accrued interest income under the mercantile system and the necessity of substantiating business expenditures with adequate documentation.