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Issues Involved:
1. Taxability of waived interest on loan 2. Accrual of interest under mercantile system of accounting 3. Commercial consideration vs. tax planning Detailed Analysis: 1. Taxability of Waived Interest on Loan The primary issue revolves around whether the waived interest of Rs. 1,65,000 on a loan of Rs. 11,00,000 to the parent company, J.H. Ltd., should be considered taxable income. The Income Tax Officer (ITO) did not accept the waiver, arguing it was driven by tax planning rather than commercial considerations. The ITO noted that while J.H. Ltd. suffered a loss, the assessee company had taxable income, implying that the waiver was a strategy to reduce the tax burden on the assessee company. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the waiver indicated relinquishment of an accrued right, thus treating the interest as assessable income. The Tribunal, however, directed the ITO to re-examine the issue, emphasizing the need to consider whether the interest had accrued by the time of the waiver. 2. Accrual of Interest Under Mercantile System of Accounting The assessee follows the mercantile system of accounting, where income is taxed based on accrual rather than receipt. The Tribunal highlighted that the lower authorities failed to properly examine whether the interest had actually accrued by 29th March 1983, the date on which the waiver was resolved. The Tribunal referenced the case of CIT vs. Planters Co. (P) Ltd. (1980) 123 ITR 648, emphasizing that income is taxable when it accrues or is earned under the mercantile system. The Tribunal also noted the need to examine any existing agreement regarding the loan, as the time of accrual depends on the terms and conditions of such an agreement. 3. Commercial Consideration vs. Tax Planning The assessee argued that the waiver was a business decision made due to the financial crisis faced by J.H. Ltd., and not a tax planning strategy. They presented evidence, including letters and board meeting minutes, to show that the waiver was decided before the interest accrued. The Tribunal noted that the lower authorities did not adequately consider whether the waiver was made for commercial reasons or as a tax planning measure. The Tribunal instructed the ITO to reassess the situation, taking into account the commercial expediency and the timing of the waiver. Conclusion: The Tribunal set aside the orders of the lower authorities and directed the ITO to re-examine the issue of taxability of the waived interest, considering whether the interest had actually accrued and the commercial rationale behind the waiver. The appeal was allowed for statistical purposes, with instructions for a fresh assessment in accordance with the law after providing the assessee a reasonable opportunity to be heard.
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