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TMI Blog2009 (8) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is following mercantile system of accounting. Therefore, in the absence of any waiver decision before the accrual of interest, the interest is deemed to have been accrued for the year relevant and he brought it to tax on notional basis. 3. However, on appear to the CIT(A), the CIT(A) found that for the very same reason he passed for the asst. yr. 1999-2000, he deleted the addition. As the interest has not been fixed by the Government, therefore the actual interest amount that would be receivable from M/s Kerala Ceramics Ltd. was not quantifiable. Under the above circumstances, he was of the view that there was no incidence of interest income on loans. 4. On consideration of the rival submissions, we are of the view that on identical set of facts, the Cochin Bench of the Tribunal in the case of Kerala Minerals & Metals Ltd., particularly the Department appeal in ITA No. 708/Coch/2007, for the asst. yr. 2004-05, relied on the decision of Hon'ble Supreme Court, in the case of CIT vs. Sarabhai Holdings (P) Ltd. (2008) 219 CTR (SC) 644 : (2008) 14 DTR (SC) 137 : (2008) 307 ITR 89 (SC) wherein it was held that interest for the asst. yr. 1979-80 had already been accrued- to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retion of the Kerala Government to be decided in due course. It is a fact available on record that while the assessee-company had made the advance of Rs. 124 lakhs to M/s Kerala Ceramics Ltd., there was no stipulation regarding payment of interest. 6. In the income escaping assessment also, the AO has no case that there was any stipulation attached to the advance given by the assessee-company to M/s Kerala Ceramics Ltd. At the time of hearing it was made clear by the learned chartered accountant that the advance amount has been repaid by M/s Kerala Ceramics Ltd. without any interest. 7. The crucial point to be borne in mind is that on the last day of the previous year under reference, i.e., on 31st March, 1992, no condition or stipulation existed in the matter of interest relating to the advance of Rs. 124 lakhs. The question whether interest was to be levied at all or not, was yet to be decided by the Kerala Government. 8. In such circumstances, in the previous year relevant to the assessment year under appeal, no income by way of interest could be recognized. in the hands of the assessee-company attributable to the advance amount of Rs. 124 lakhs given to M/s Kerala Ceramic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While disposing of the said appeal filed by the Revenue through its common order dt. 30th Jan., 2009, the Tribunal has upheld the action of the AO in recognizing the income in the hands of the assessee-company against the advances made to other Government companies. But the facts of that case are dramatically different from the present case under consideration. In para 13 reflected in p. 9 of the said common order of the Tribunal, there is a specific finding to the effect that "interest rate mentioned in the agreement is at 13 per cent". In the above-mentioned case, there was a stipulation for payment of interest at 13 per cent. The decision to waive the said interest was taken only after the close of the previous year. It is in that context the Tribunal held, relying on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Sarabhai Holdings (P) Ltd. that the interest accrued till the last day of the previous year cannot be undone by a subsequent resolution waiving the levy of interest. The working result of an assessee is computed on closure of a particular previous year, on a particular date. What is important is the events that occurred during that particular previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that rate. Thereafter, an agreement was made between the parties whereby the rate of commission was reduced. The issue was whether the commission should be considered at 10 per cent or at the reduced rate. The Hon'ble Court held that the subsequent agreement was at a lesser rate of commission in such a way as to make the income, which really accrued, to the assessee different from what had been entered in the books of account. That was not a case of a gift by the assessee to the managed companies but a portion of income, which had already accrued, but reduced further. The Court held that the assessee had in fact received only lesser amount in spite of the entries in the account books, and that lesser amount alone was taxable. The Court further observed that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialize. While dealing in the above propos1tion, the Court observed that where income has, in fact, been received and is subsequently given up, in such circumstances it remains the income of the recipient, even though given up, the tax may be payable. The said observation by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of Rs. 18,60,000. 18. In result, the appeal filed by the Revenue is dismissed. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 22nd May, 2009 As there is a difference of opinion between the Members who heard the appeal, the following question is referred to the Hon'ble President, Tribunal: "Whether on the facts and in the circumstances of the case, the AO is right in law to estimate an income of Rs. 18,60,000 by way of notional interest in the context of advance of Rs. 124 lakhs given by the assessee company to M/s Kerala Ceramics Ltd.?" VIMAL GANDHI, PRESIDENT (AS THIRD MEMBER): 14th Aug., 2009 On account of difference of opinion between the learned Members of Tribunal, Cochin Bench, the following question has been referred to me: "Whether on the facts and in the circumstances of the case, the AO is right in law to estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above circumstances, he held that no interest, which could be subjected to tax had accrued to the assessee. The basis of conclusion of the learned AM is contained in para g of his order, which is as under: "g. Accrual of interest is one step ahead from recognition of income. The method of accounting, whether mercantile system or cash system, comes into play only after the factum of income is recognized. If no income is recognized or if no income is generated, no occasion arises to examine whether the income is to be accounted on accrual basis or on cash basis. Therefore, the method of accounting whether mercantile or cash is something which is to be reckoned after recording a finding of fact whether income is to be recognized or not. In the present case, as already made clear, there was no stipulation regarding the payment of interest and no such stipulation was made till the close of the relevant previous year. So long as the parties do not agree upon such a condition, there is no occasion for anybody, to presume any income on a hypothetical basis." 5. The learned AM then examined the facts, which showed that no income was generated during the relevant previous year. The deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage'. The word 'arise' is defined as 'to spring up, to come into existence'. The words 'accrue' and 'arise' do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word 'receive' and indicate a right to receive. Thus, it is manifest that if an assessee acquires a right to receive income, the income can be said to accrue to him though it may be received later on. Unless and until there is created in favour of an assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. A mere claim to income without an enforceable right thereto, cannot be regarded as accrued income for the purpose of the IT Act." 8. The Hon'ble Calcutta High Court in the case of CIT vs. Bharat Petroleum Corporation Ltd. (1992) 108 CTR (Cal) 140 : (1993) 202 ITR 492 (Cal), went to the extent of saying that a mere claim of income without any enforceable right thereto cannot be regarded as accrued income. 9. In the present case, admittedly the assessee has no enforceable right to receive interest. Therefore, question of accrued of income in this case does not arise. In the above circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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