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2014 (9) TMI 317 - AT - Income TaxAddition of notional interest accrual of interest - uncertainties exist - Benefit of circular dated June 20, 1978 - The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per Accounting Standard 9 of ICAI - Held that - To arrive at a real income, accrual basis cannot be a justifying factor and the commercial and business realties of the assessee, should be considered - The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection - for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to ascertain the nature of business and character of the transaction and the realities and peculiarities of the situation - the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax relying upon CIT vs. Godhra Electricity Co. 1997 (4) TMI 4 - SUPREME Court - interest which had accrued on a sticky advance has to be treated as income of the assessee and taxable as such - ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law - The relevant circulars of the Central Board of Direct Taxes cannot be ignored - So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act the addition made by CIT(A ) is set aside Decided in favour of assessee. Rebate u/s 88E in respect of Securities Transaction Tax paid Held that - Though furnishing of evidence as to payment of Securities Transaction Tax along with the return filed is prescribed by the statutory provisions, those provisions are only procedural, and non-furnishing of the same is not fatal to the claim for relief under S.88IE of the Act - the claim of the assessee for rebate u/s 88E is an off-shoot of conversion loss returned into positive income on account of additions made there was no justification for rejection of the assessee s claim for rebate under S.88E of the Act the order of the CIT(A) is set aside and the AO is directed to verify whether the assessee had filed the required evidence in the prescribed with regard to provisions of S.88E of the Act - CIT(A) allowed similar claim in later year on which Revenue has come up in appeal - the assessee had made the payment of an amount of ₹ 27,07,315 towards Securities Transactions Tax during the previous year, the claim of the assessee for allowance of rebate under S.88E of the Act has to be considered in the light of the evidence furnished in that behalf Decided in favour of assessee. Expenses on earning of dividend income disallowed u/s 14A Held that - Assessee contended that the CIT(A) failed to appreciate the legal position that Rule 8D was inserted w.e.f. 24.03.2008 and hence is not applicable to the facts of the case since it is held to be prospective in nature - The issue relating to retrospective nature of the provisions of Rule 8D has been decided in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT provisions of Rule 8D are not retrospective in nature - the provisions of Rule 8D are not applicable to the facts of the assessee s case for the AY 2005-06 - considering the volume of dividend income earned and the nature of the business of the assessee, the disallowance made by the AO estimating the expenditure relatable to dividend income at 10% of income is quite reasonable Decided against assessee. Interest expenses disallowed u/s 40(a)(ia) Held that - The assessee has remitted all the amounts of TDS effected from the interest payments before the due date for the filing of the return u/s 139(1) of the Act - Following the consistent view taken by the coordinate benches of the Tribunal under identical circumstances where remittance of the TDS amounts were made into government account before the due date for the filing of the return u/s 139(1) as well as on the nature of amendment under Finance Act, 2010, there was no justification for the disallowance in terms of S.40(a)(ia) of the Act thus, the order of the CIT(A) is set aside and the AO is directed to delete disallowance after due verification of the claim of the assessee with regard to remittance of the amounts of tax deducted before the due date of filing of the return u/s 139(1) of the Act Decided in favour of assessee. Reopening of assessment u/s 147 - mere change of opinion Held that - The CIT(A) noted that the disallowance made u/s 14A of the Act in the original assessment order was subject matter of adjudication by the CIT(A) and on that very issue further appeal against the disallowance sustained by the CIT(A) was also pending before the Tribunal - the reopening of the assessment is based on the very same material which was already available on record at the time of completion of the original assessment - Since the AO after detailed analysis of the material already available on record at the time of completion of original assessment, made certain disallowance in terms of S.14A of the Act, and such disallowance made by the AO having been contested by the assessee on appeal, it was also examined and adjudicated upon by the first appellate authority, the findings of the CIT(A) is upheld that reopening of assessment in this case is based on mere change of opinion Decided against revenue.
Issues Involved:
1. Addition of notional interest. 2. Rebate under Section 88E for Securities Transaction Tax. 3. Disallowance of expenditure attributable to earning dividend income under Section 14A. 4. Disallowance of interest expenditure under Section 40(a)(ia). 5. Legality and validity of reopening of assessment under Section 147. Issue-wise Detailed Analysis: 1. Addition of Notional Interest: The primary issue involved the addition of Rs. 2,76,38,140 on account of notional interest. The assessee, an investment company, had advanced sums to various parties without charging interest in some cases. The Assessing Officer (AO) added notional interest based on the mercantile system of accounting. The CIT(A) confirmed this addition, but the Tribunal found merit in the assessee's argument that income should be recognized based on actual receipt and commercial realities. The Tribunal referred to various judicial precedents, including UCO Bank vs. CIT, which emphasized that income should not be taxed on a hypothetical basis. Consequently, the Tribunal deleted the addition of notional interest, recognizing only the actual interest received. 2. Rebate under Section 88E for Securities Transaction Tax: The assessee claimed a rebate under Section 88E for Rs. 27,07,315 paid as Securities Transaction Tax. The CIT(A) rejected this claim due to the absence of the prescribed form along with the return of income. The Tribunal, however, held that the procedural lapse of not furnishing the form with the return should not nullify the claim, especially since the claim arose from additions converting a loss into positive income. The Tribunal directed the AO to verify the evidence and allow the rebate if substantiated. 3. Disallowance of Expenditure Attributable to Earning Dividend Income under Section 14A: The AO attributed Rs. 3,39,000 as expenditure for earning dividend income and made an addition under Section 14A. The CIT(A) directed the AO to rework the disallowance as per Rule 8D, which the Tribunal found inapplicable for the assessment year 2005-06 as it was prospective. The Tribunal upheld the AO's original estimation of 10% of dividend income as reasonable, rejecting the assessee's ground. 4. Disallowance of Interest Expenditure under Section 40(a)(ia): The AO disallowed Rs. 1,77,67,183 for non-compliance with TDS provisions. The CIT(A) provided partial relief for timely remittance of TDS on some amounts. The Tribunal, referencing amendments by the Finance Act 2010 and judicial precedents, held that the amendment was retrospective and allowed the deduction since the TDS was remitted before the due date for filing the return under Section 139(1). The Tribunal directed the AO to verify and allow the deduction. 5. Legality and Validity of Reopening of Assessment under Section 147: The AO reopened the assessment on the grounds of under-disallowance of expenses under Section 14A. The CIT(A) found the reopening invalid, citing it as a mere change of opinion and referencing judicial precedents like Kelvinator India Ltd. The Tribunal upheld the CIT(A)'s decision, confirming that the reopening was not justified as it was based on the same material available during the original assessment. Conclusion: - The Tribunal allowed the assessee's appeal for the assessment year 2005-06, deleting the addition of notional interest and directing the AO to allow the rebate under Section 88E after verification. - For the assessment year 2006-07, the Tribunal partly allowed the assessee's appeal by deleting the addition of notional interest and upholding the interest income on receipt basis. - The Tribunal dismissed the Revenue's appeals for both years, affirming the CIT(A)'s decisions on the invalidity of reopening the assessment and the rebate under Section 88E.
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