2009 (8) TMI 121 - AT - Income Tax

Summary

Issues Involved:
1. Chargeability of interest on an advance of Rs. 124 lakhs.
2. Income escaping assessment u/s 143(3) r/w s. 147 of the IT Act, 1961.

Summary:

Issue 1: Chargeability of Interest on Advance
The primary issue was the chargeability of interest on an advance of Rs. 124 lakhs made by the assessee to M/s Kerala Ceramics Ltd. The AO noticed that the assessee followed the mercantile system of accounting and, in the absence of any waiver decision before the accrual of interest, deemed the interest to have accrued and brought it to tax on a notional basis. The CIT(A) deleted the addition, reasoning that the interest amount was not quantifiable as it had not been fixed by the Government. The Tribunal, referencing the Supreme Court decision in CIT vs. Sarabhai Holdings (P) Ltd., reversed the CIT(A)'s findings, holding that interest had accrued and could not be wiped out later by a resolution.

Issue 2: Income Escaping Assessment u/s 143(3) r/w s. 147
The AO brought to tax Rs. 18,60,000 as notional interest on the advance. The assessee argued that no terms regarding interest were determined at the time of the advance, and the amount was repaid without interest. The AM disagreed with the JM's view, emphasizing that no income by way of interest could be recognized as there was no stipulation regarding the payment of interest by the end of the relevant previous year. The AM distinguished the case from CIT vs. Sarabhai Holdings (P) Ltd., noting that in the present case, no income was generated, and the judgment did not apply.

Third Member Decision:
The President, acting as the third member, agreed with the AM, stating that no right to receive interest accrued to the assessee as the terms and conditions of the advance were not settled. The decision of the Hon'ble Supreme Court in E.D. Sassoon & Co. Ltd. vs. CIT was cited, emphasizing that income must be a debt owed to the assessee to be considered accrued. The President concluded that the assessee had no enforceable right to receive interest, and thus, no income accrued.

Final Outcome:
The appeal filed by the Revenue was dismissed, and the CIT(A)'s deletion of the addition was upheld.