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TMI Blog2013 (9) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... desirable proposition for any business enterprises. Further, on what basis does the Revenue state it to be a device (for tax avoidance) is not understood, and which allegation cannot be lightly made. In fact, the borrower also would not book the liability to this extent, so that until and unless the transaction is not genuine would not be entered into. In any case, such an allegation has to have its basis in fact/s and support of materials, while we find it to be de hors any basis. As such, we are unable to appreciate the Revenue's case. At the same time, there is no finding by either of the authorities below that the borrower has not booked this liability in its accounts. This is fundamental to the validity of the financial arrangement under reference. The assessee has also in fact neither claimed so, i.e., of the borrower having not booked the liability to interest, or of having after booking reversed it pursuant to this arrangement, nor placed the settlement agreement on record. As such, subject to the confirmation of the borrower having not booked this liability in its accounts, i.e., toward interest for Rs. 17.37 lacs, we confirm the non accrual of the same as income to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares (Rs.1309.94 lacs) pledged by the assessee-company to IDBI Trusteeship Services Ltd. - Held that:- the accommodation provided is non-fund based. There is no charge of the assessee being entitled to any guarantee fee or commission, and which was also clarified by us during hearing from the ld. AR, and which, in any case, is not the Revenue's case. - All that has transpired is that, being a part of the RPJ group, the assessee has placed its investment by way of shareholding in the group concerns with the trustee as a part of the financial arrangement to enable funds being borrowed by its group concerns from the financial institutions. The assumption of interest under the circumstance is purely notional, without basis either in fact/s or in law. - Decided against the assessee. Disallowance of bad debts - Held that:- write off by the assessee in its accounts of a debt as irrecoverable would itself deem or signify it as having become bad. No doubt, this would not preclude the Revenue from disallowing the claim where the write off is not genuine, but we are unable to come to any such finding. In fact, the amount has been written off, as clarified in the notes to the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational Ltd., constituting its principal source of its funds. The Assessing Officer (A.O.) during the course of assessment proceedings observed certain disclaimers and/or disqualification/s by its Auditors in their audit report dated 26.04.2005 issued u/s.217 and 217(4A) of the Companies Act. Even for the earlier years, the company had violated the provisions of the Companies Act, which had come to surface on inspection by the Department of Companies Affairs (DCA), as in fact mentioned in the 'Notes to Accounts' forming part of the annual accounts for the year ending 31.03.2004, with the said violations being finally disposed of by compounding the offences (Note # 12). The assessee-company in his view had not maintained its accounts properly, and had not made full disclosures, accounting for income at its sweet will. The company is following mercantile method of accounting and obliged to maintain its accounts following the percepts of commercial accounting. It therefore is required to maintain its accounts following the established principles of accountancy as also the applicable accounting standards. The taxability of income depends not on the guidelines issued by Reserve Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries Ltd. vs. CIT [1971] 82 ITR 835 (SC) and CIT vs. Thiagaraja Chetty (K.R.M.T.T.) and Co. [1953] 24 ITR 525 (SC)]. Relinquishment or waiver of income after its accrual would, thus, amount to a mere application of income and not a charge on the profit. For this proposition he relied on the decision in the case of CIT vs. Confinance Ltd. [1973] 89 ITR 292 (Bom) and CIT vs. Shrimati Singari Bai [1945] 13 ITR 224 (All), which stand noted and approved by apex court in State Bank of Travancore vs. CIT [1986] 158 ITR 102 (SC), subsequently followed by it in Shiv Prakash Janak Raj and Co. Pvt. Ltd. (supra). Reference was also made by him to the decisions by the Tribunal. 4. We have heard the parties, and perused the materials on record as well as the decisions relied upon by them, including those cited at bar. Before we may proceed to discuss the relevant facts, we consider it necessary and relevant to delineate the law in the matter in some detail. This is as most of the issues arising in this appeal relate to such like adjustments, with the assessee contending of non accrual of income, basing its case on the theory of real income, with in fact the guidelines/norms prescribed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g been confirmed by the hon'ble apex court in the case of Southern Technologies Ltd. vs. Jt. CIT [2010] 320 ITR 577 (SC) cited by the Revenue, even as observed by the hon'ble court in the case of CIT vs. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Del), relied upon by the assessee. 6.2 What, then, is the controversy about? Section 145 of the Act mandates computation of income chargeable to tax under the head `profits and gains of business or profession' or `income from other sources' in accordance with either cash or mercantile system of accounting regularly employed by the assessee, and in accord with accounting standards notified by the Central Government u/s. 145(2) of the Act. The Central Government has notified two Accounting Standards, being AS-I and AS-II, u/s. 145(2). AS-I emphasizes that the accounting policies to be adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of his business. Further, that the financial statements are based on the fundamental accounting assumptions of 'going concern', 'consistency' and 'accrual'; prepared and presented conforming to the considerations of prudence, substance over form and materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quintessentially a matter of fact, involving a finding of fact, to be determined on the basis of the underlying criteria, i.e., uncertainty or otherwise qua realization. In a given case, the non-performing asset (NPA) may be backed by adequate and sufficient security, so that there is no reasonable uncertainty or, per contra, there is reasonable certainty or expectation with regard to the ultimate realizability of income and, as such, the same cannot be said to have not accrued. In another case, the NPA may be insured or backed by a guarantee by a sound person or otherwise secured. Similarly, a borrower may be performing well, though facing a tight liquidity position for the time being, leading to the non-servicing of its account. In all such cases, could it (reasonably) be said that it is not reasonable to expect collection as interest could not be serviced for the past 90 days, which is the period of delinquency for an account to be characterized as a NPA? We think not. As such, while we are in agreement with the validity of an accounting policy conforming to the principle of prudence, in our opinion it cannot be said so of one which mandates non-recognition of income solely on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Income-tax Act." [Para 24, pg.603] (3) Deviations between RBI Directions, 1998 and the Companies Act It stands explained by the apex court that the deviations under the RBI Directions with the provisions of the Companies Act are deliberate and contextual, serving a different purpose. The accounting treatment prescribed by the said Directions, may not necessarily agree with the mercantile system of accounting, would though override the provisions of the Companies Act. In its words: "Before concluding on this point, we need to emphasise that the 1998 Directions has nothing to do with the accounting treatment or taxability of 'income' under the Income- tax Act. The two, viz., Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as 'income' is recognized under accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its presentation under the said Directions, there would be an add back but not under the Income-tax Act necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by an NBFC cannot determine the taxable income." [para 40, pg. 610] It is thus abundantly clear that the RBI Directions 1998, which are binding on the NBFCs in view of s.45JA of the RBI Act, 1934, are only disclosure and presentation requirements, setting forth the prudential norms for being followed by them, issued by the RBI in public interest and/or to regulate the financial system of the country. The same, though inconsistent and, thus, overriding the provisions of the Companies Act, 1956, in view of section 45Q of the RBI Act, so that the same would prevail, are not in conflict with the provisions of the Act, which are toward determination of total income under the Act. The said norms or directions have nothing to do with the computation of the taxable income under the Act. That is, the two operate in different fields. In fact, these two observations/findings by the apex court, i.e., of the said directions having nothing to do with the computation of taxable income under the Act; the two being in a different areas, are all pervasive in the said order, having been repeated a number of times in the judgment, viz. para 21/pg. 603, para 22/pg.603, para 24/pg.603, para 26/pg.60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative. 6.5 Coming back to the facts of the relevant ground, being Ground II, in our view, notwithstanding that the case law relied upon by the Revenue states the correct position of law, the Revenue's case is inconsistent with the facts of the case. This is as, as we understand, the interest on the ICDs (of Rs.80 lacs) was not forthcoming from the borrower. It was under these circumstances that a settlement was arrived at between the parties, whereby while the assessee waived the interest receivable to the extent of Rs. 17.37 lacs, the borrower issued it shares for the balance amount due, i.e., Rs.83 lacs. Any lender, for whom interest income is a primary source of income, would resort to such a measure only with a view to safeguard his capital, i.e., as a measure of last resort. This is as this would put a stop to its regular source of income; the dividend income on the shares being uncertain and, in any case, would arise only subject to adequate profits being earned by the borrower, and then, again, only at the discretion of the management. In fact, it needs to be appreciated that this amounts to conversion of a trading asset (interest bearing advance) to a capital asset, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e., as were relied upon by him while deciding the assessee's appeal for A.Y. 2003-04. 8. Before us, it was submitted by the ld. AR that the matter stands settled, as far as the tribunal is concerned, by its orders in the assessee's own case for A.Y. 2003-04 (in ITA No.3734/Mum/2009 dated 22.07.2011) and A.Y. 2004-05 (in ITA No.3735/Mum/2009 dated 03.04.2012), whereat, similarly, the interest stated to have accrued on NPAs stands deleted, placing the copies of the said orders on record. The ld. DR, on the other hand, would rely on the orders of the authorities below, as well as by the apex court in the case of Southern Technologies Ltd. (supra). The ld. AR, in rejoinder, would further submit that the decision in the case of Southern Technologies Ltd. (supra) stands considered by the hon'ble Delhi high court in the case of Vasisth Chay Vyapar Ltd. (supra), and which has in fact been followed by the tribunal in the assessee's own case for A.Y. 2003-04. 9. We have heard the parties, and perused the material on record. 9.1 The accrual or otherwise of income, or expenditure for that matter, is essentially a matter of fact, and not of law. The legal aspect of the matter, on which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, viz. ss. 36(1)(vii), 36(1)(viia), 145 of the Act. Section 43D is also relevant in this regard. To conclude this controversy, which is purely a matter of fact, we draw attention to para 6.4 of this order (pgs.7-10), as also para 31 (pg.606) of the decision in Southern Technologies Ltd. (supra), wherein the apex court has clearly said that in each case the assessee has to prove whether the income has accrued or not on the relevant parameters, and it is for the Assessing Officer to accept or not to accept the assessee's claim with reference to the real income theory, i.e., in the facts and circumstances of the case. The umpteen times the hon'ble apex court has clarified this in its decision stands enumerated by us at pages 9, 10 of this order, to establish that this aspect of the matter should be regarded as settled. Rather, going by the assessee's argument, i.e., of the RBI directions being not applicable and, thus, relevant to the computation of income under the Act qua the provisioning norms, but so qua the income recognition norms, would raise a host of issues. As, for example, as to whether one part of the said Directions, issued under the same charter and authority and, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. AR, after taking time for seeking instructions from his client, the assessee-appellant, confirmed that it was in a position to meet the case on the merits of the addition on quantum inasmuch as the interest under reference has not been received even by now, i.e., after a lapse of a number of years. The matter may, therefore, be proceeded with on the footing of the applicability of decision by the apex court in the case of Southern Technologies Ltd. (supra), i.e., on merits, and restored back to the file of the assessing authority for necessary determination. The ld. DR also raised no objection. Accordingly, the matter of accrual or otherwise of the impugned interest of Rs.133.99 lacs, is restored back to the file of the AO for adjudication afresh in accordance with law, independent of the guidelines issued by the RBI. The AO shall decide the same by issuing definite findings of fact, account wise, i.e., as to whether interest income can under the given facts and circumstances be said to have accrued, i.e., de hors the classification of the relevant debts in accounts as NPAs. The onus to substantiate its case though would be on the assessee, who shall be allowed reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having share holding in the companies as RPJ Capitals Ltd., CESA Ltd. As per the terms of the agreement entered into by these companies with the financial institution/s, they were required to pledge the shares therein with the IDBI Trusteeship Services Ltd. The assessee being in the business of advancing loans, the A.O. was of the view that the same could not be without any business interest and, therefore, assumed income by way of notional interest on the value of the shares pledged. The same stood confirmed in appeal by the ld. CIT(A) by following his decision in the case of M/s. Business Press Pvt. Ltd. (in appeal No.CIT(A)-VIII/DCIT-8(1)/IT- 268/2007-08 dated 10.12.2008), so that, aggrieved, the assessee is in second appeal. 13. We have heard the parties, and perused the material on record. During hearing, the ld. DR was specifically enquired by the Bench as to how the facts and circumstances in the case of Business Press Pvt. Ltd. (supra), i.e., the order relied upon by the first appellate authority, were applicable in the facts and circumstances of the instant case and, further, the copy of the order in that case having not been made available to the assessee, how could it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India Ltd. [1998] 232 ITR 324 (Cal) 4. CIT vs. Ahmedabad Electricity Co. Ltd. [2003] 262 ITR 97 (Guj) 5. South India Surgical Co. Ltd. vs. Asst. CIT [2006] 201 CTR 289 (Mad) The same found confirmed by the ld. CIT(A) on the same basis, following his decision for A.Y. 2003-04 extracting the relevant part of the said order. Aggrieved, the assessee is in appeal. 15. Before us, the assessee's claim was principally with reference to the decision by the apex court in the case of T.R.F. Ltd. vs. CIT [2010] 323 ITR 397 (SC); the assessee proclaiming the said decision to have settled the controversy with regard to the onus on the assessee in establishing a debt to be bad, for a valid claim u/s. 36(1)(vii) of the Act. 16. We have heard the parties, and perused the material on record. The assessee is in the business of advancing loans, so that advancing of interest bearing loan/advances would qualify for being bad debt in terms of section 36(1)(vii) r.w.s 36(2) of the Act. Further, there is also no doubt that the amount had been actually written off by the assessee in its accounts. The Notes to the Accounts (Schedule L) and the auditors report by the A.O. confirm the same. The law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Ltd. vs. CIT [1985] 156 ITR 585 (SC) and Indian Molasses Co. (Pvt.) Ltd. vs. CIT [1959] 37 ITR 66 (SC), so that only actual liabilities in praesenti and not those which are contingent, are allowable. Aggrieved, the assessee is in appeal. 19. We have heard the parties, and perused the material on record. We are moved by the assessee's argument that its claim, if disallowed, may amount to a double jeopardy where the provision had not been allowed in the computation of the income for the year in which the same was made. True, the provision against NPA is not allowable as deduction, as clarified by the apex court in Southern Technologies Ltd. (supra). However, unless a deduction qua the said provision had been claimed/allowed in the assessment of an earlier year, no taxable event, it is to be appreciated, arises for the current year. If no deduction, as claimed, had been claimed or allowed to the assessee for an earlier year qua the provision now written back, how we wonder the same, i.e., its write back, or to this extent, gives rise to any tax liability for the current year. There is surprisingly no clarity on this aspect of the matter in the orders of the Revenue authorities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as was also the tribunal's decision in its case for A.Y. 2004-05. We decide accordingly, dismissing the assessee's ground. 21. The final and the tenth ground of the assessee's appeal is in respect of the corresponding adjustment to the book profit by the A.O. qua the adjustments made to its regular income, and which we may tabulate as under:- i) Interest Income not accounted or on accrual basis Rs.4,68,76,000/- ii) Provision for Non-performing assets - Rs.1,60,00,000/- iii) Difference in interest Rs.9,25,986/- iv) Difference in net profit Rs.4,94,332/- 22. Before us, it was the common contention of both the parties that the adjustments as made to the returned income would, where and to the extent they survive in assessment, would also warrant a corresponding adjustment to the book profit. And, that, therefore, the matter is to be remitted back to the file of the A.O. for the purpose, to be disposed of in consistence with his adjudication on the respective additions on merits. We find the same as only reasonable and justified under the circumstances. We may though also add that no corresponding adjustment may be required where the assessee has only made a book entry, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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