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TMI Blog2014 (9) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2005-06 declaring a loss of Rs. 28,93,900/- under the normal provisions of the Income-tax Act, 1961. The assessment u/s 143(3) was completed on 06.12.2007, determining the total income at Rs. 4,21,11,366/-, after making the following additions- S. No. Particulars Amount (Rs.) 1. Disallowance of internest on TDS 1,00,000 2. Disallowance of interest u/s. 40(a)(ia) 1,77,87,183 3. Disallowance of expenditure for earning dividend income estimated @ 10% of dividend income 3,39,000 4. Addition of notional interest computed on advances as interest accrued and not offered 2,76,38,140 4,58,64,323 4. The CIT(A), on appeal, confirmed the addition of notional interest computed on advances as interest accrued. With respect to disallowance u/s. 40(a)(ia) the CIT(A) gave partial relief and with respect to disallowance of expenditure for earning dividend income at 10% of dividend income, the CIT(A) directed the Assessing Officer to rework the same. Aggrieved, the assessee is in appeal before us. 5. The first issue involved in this appeal relates to the addition of Rs. 2,76,38,140 made by the assessing officer on account of notional interest. 6. Facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , inter alia, laid the following ground rules for 'Revenue recognition': (i) The company follows mercantile system of accounting and recognizes income and expenditure on accrual basis. (ii) Revenue is not recognized on the grounds of prudence until realized in respect of liquidated damages, delayed payment charges, as recovery of the amounts are not certain. 9. In the present case, it was submitted before the CIT(A), the Assessing Officer did not state that the method followed by the assessee does not facilitate the finding out of correct income from the accounts, consistently maintained by the assessee. The only reason for such addition by the Assessing Officer is on account of the sworn statement made by the Managing Director of the assessee-company before the Astt. Director of Income-tax(Inv), Hyderabad. The test of mercantile method of accounting needs to be weighed with the fundamental and guiding principles of conservatism and prudence requiring caution in recognizing what is due, while taking care to provide for all liabilities other than contingent. The earning of income is uncertain and therefore, is not to be recognized following the guiding principles of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration, i. e F. Y 2004-05. He has applied the ratio of the decisions of Hon'ble Supreme Court, and of Hon'ble Rajasthan High Court, and held that the Assessing officer was justified in taxing a sum of Rs. 2,76,38,140/- towards accrued interest in the hands of the assessee for the assessment year 2005-06. Accordingly, he confirmed the addition made by the Assessing Officer. Aggrieved, the assessee is in appeal before us. 13. Before us, the learned counsel for the assessee reiterated the submissions as made before the lower authorities and submitted that the assessee being an investment company had made loans/advances during the year on the basis of the sworn statements made by the MD of the assessee before the ADIT (Inv.) and loan agreements with few parties the Assessing Officer computed the interest income for the asst year 2005- 06 by applying interest rate at the rate of 14% on all the loans and advances. The interest income was determined at Rs. 2,76,38,140 and addition was made in the assessment stating it to be unaccounted interest income. The transactions of advances given to the eight concerns involved can be grouped in to two categories. (a) Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succeeding assessment years, no principal was recovered owing to adverse financial circumstances and financial crunch faced by the parties. Hence it is totally unjustifiable on the part of the revenue to infer interest income in cases where the principal amount became doubtful to recover particularly when there are no agreements, and the assessee had no basis to claim any interest. The entire addition under this group (Rs.25,26,519 for A.Y. 2005-06 & Rs. 58,24,690 for AY. 2006-07 referred to in table above) is baseless and is only on assumptions. Hence it is prayed that the Tribunal be pleased to delete the above additions made as notional interest by the Assessing Officer. 16. Regarding Parties with agreement and partial recovery, the learned counsel submitted that in this group the loans are repaid without paying even single rupee interest and in certain other cases interest was paid partially. The advances made to Real Stone Trading Co and Gold Stone Trading Company are refunded without honouring the interest commitments. The same is evident from the ledger extracts placed pages 22 & 30 of paper book-Ill of the parties where in the amount advanced is repaid without any interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requested for considering the realties with regard to recoveries while arriving at the taxable income. It is submitted at this juncture that the tax liability could not be attracted merely on the basis of mercantile accounting. Since it is an undisputed fact that the assessee had not received or even certain of receiving interest from the borrower in the asst year 2005-06, the realities of business, viz. there being defaults in repayment and the refusal of borrower to pay interest, application for waiver of interest and the financial crunch of the borrower needs to be appreciated in determination of the real income of the assessee. 19. The learned counsel for the assessee further submitted that in the case of Whitemoon Trading Co Pvt Ltd, the Assessing officer had determined notional interest of Rs. 60,65,669/- for the A.Y. 2005-06. It is submitted that it had not received any interest in the relevant asst year. In the asst year 2006-07, it had received Rs. 78,78,760/- which includes interest pertaining to asst year 2005-06 Rs. 62,84,566/-.The same is offered to tax in the asst year 2006-07 on receipt basis. The letter from the said party is placed at page 11 of paper book-3. Ledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest. They only gave a cause of action to the applicant. 22. The method of accounting, as followed by the assessee, does not create any income; but the method of accounting only recognizes income. There is some merit in the submission of the assessee that when the principal itself is overdue and not collected, there is no basis for making out a case that interest income would be collectable with certainty. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax, that accrual is a matter to be decided on commercial belief having regard to the nature of business of the assessee and character of the transaction. Accordingly, 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 situations. The decision very heavily relied upon by the first appellate authority in the case of State Bank of Travancore Vs CIT (1986) 158 ITR 102 was subsequently overruled in its land mark decision in the case of UCO Bank Vs CIT 237 ITR 889. In this regard, we plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee was not entitled to any income and the deemed addition made by the Assessing Officer is to be deleted. 25. We may further refer to the decision of this Tribunal in CCI Finance V/s. ACIT (91 ITD 573), also relied upon by the learned counsel for the assessee, wherein it was held that accrual of interest income on non-performing assets account has to be judged from realistic point of view. Non recognition of interest income on the ground that the interest had not really accrued as the realisability of principal outstanding itself was doubtful was held to be legally correct under the mercantile system of accounting. 26. We may further refer to the decision of this Tribunal in the case of NSL Power Infrastructure Ltd. V/s. CIT in ITA No.1219/Hyd/2011 dated 24.1.2013, relied upon by the learned counsel for the assessee before us, duly pointing that the High Court in ITTA No. 607 of 2013, has dismissed the appeal by the Department, by holding that non-offering of interest income is distinguished when there is no certainty and the company has not derived any interest. As for the decision of State Bank of Travancore V/s. CIT (158 ITR 102), relied upon by the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. Accordingly, a circular was issued by the Central Board of Revenue on May 10, 1955, pointing out to all Income-tax Officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K.P. Varghese v. ITO [1981] 131 ITR 597. There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as lay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the Department was a judgment of a Bench of two judges of this court in Kerala Financial Corporation v. CIT [1994] 210 ITR 129, where this court, following the majority view in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), held that interest which had accrued on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e return, the appellant has shown income from capital market at Rs. 4,15,57,891 and dividend income at Rs. 33,09,372. In the statement of computation of total income, while claiming the income from dividend as exempt u/s. 10(33), the appellant has computed loss at Rs. 28,93,904. However, after making addition of Rs. 1,77,87,183, disallowance out of expenses amounting to Rs. 3,39,000 and addition of a sum of Rs. 2,76,38,140 towards accrued interest on loans, the Assessing Officer has arrived at gross income of Rs. 4,29,70,423, and after allowing set off of unabsorbed depreciation for an amount of Rs. 8,59,057, he has arrived at the taxable income of Rs. 4,21,11,366. After excluding the amount of Rs. 2,76,38,140 towards interest, which is assessed under the head 'Income from Other Sources', which has no nexus with the taxable securities transactions carried by the appellant, it would be seen that the appellant was having income for an amount of Rs. 1,82,26,183 from business, as per the assessment made by the Assessing Officer, and since the appellant has shown the major income from the capital market, it has to be construed that the same. was from the taxable securities trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alongwith the return, the appellant has filed a statement of computation of income, calculation of MAT working, report u/s. 115JB in form No.29B, Audit Reports in form No.,3CA and 3CD, and the 11th Annual Report for the year 2004-05, copy of audited Balance Sheet, Profit and Loss Account and the scheduled thereto. Since the appellant has not filed the require evidence in the prescribed form with the return of income, having regard to above proviso to section 88E of the Act, in my considered view, the appellant cannot be allowed any rebate u/s. 88E of the Act, notwithstanding the fact of payment for an amount of Rs. 27,07,315 made towards such tax during the previous year. Hence, the claim of the appellant for allowance of rebate u/s. 88E of the Act is rejected. Thus, the above additional ground is rejected." 30. The assessee is in appeal before us on this issue. 31. Learned counsel for the assessee submitted that the assessee had paid securities transaction tax of Rs. 27,07,315 during the previous year relevant to assessment year 2005-06 and evidence for payment of the same had also been submitted to the Assessing Officer. He also submitted that the CIT(A) did not dispute the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure attributable to earning of dividend income of Rs. 33,09,372. 35. Facts of the case in brief in relation to this issue are that during the year under consideration, assessee had earned dividend income of Rs. 33,09,372. The assessee has not attributed any expenditure for earning this income on the ground that these dividends are directly credited into the bank account without any effort from the assessee. The assessing officer attributed an indirect expenditure of Rs. 3,39,000, by estimating the same adopting a rate of 10% of the dividend income earned during the year. He accordingly treating the said amount as expenditure incurred for earning such dividend income, made an addition of Rs. 3,39,000/- under S.14A of the Act to the income returned by the assessee. 36. The assessee filed a ground before the first appellate authority to the effect that 'the Assessing Officer erred in attributing Rs. 3,39,000/- as the expenditure incurred for earning exempted dividend of Rs. 33,09,372/-'. Before the first appellate authority, assessee submitted a computation with regard to expenditure attributable to earning of dividend income, according to which it worked out to Rs. 1,30,309/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 40. Facts in brief in relation to this issue are that during the previous year relevant to assessment year 2005-06, the assessee had incurred interest expenditure of Rs. 1,77,67,183/-. The assessee had deducted TDS and remitted the same before the due date for filing return of income u/s 139(1). The entire expenditure of Rs. 1,77,67,183 (wrongly typed as 1,77,87,183/- in the order u/s 143(3)) was disallowed by the Assessing officer for the reason that the TDS was not remitted within the time stipulated in S.200 of IT Act. Before the First Appellate Authority, the assessee had submitted that it had remitted Rs. 91,033/- pertaining to interest payment of Rs. 4,35,358/- relating to March 2005 on 7th May 2005 along with the other TDS amounts payable and the same should not be disallowed u/s 40(a)(ia) in view of amendment made to provisions of 40(a)(ia) in Finance Act, 2008. Accordingly, the First Appellate authority directed the Assessing officer to allow the deduction for the said amount of Rs. 4,35,358/-, but upheld the balance disallowance of Rs. 1,73,51,825/- made by the assessing officer, though the assessee had remitted the TDS deducted in respect of all the interest paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e could be made. 43. Learned Departmental Representative on the other hand, strongly supported the orders of the Revenue authorities. 44. We have heard both the parties and perused the material available on record. It is an undisputed fact that the assessee has remitted all the amounts of TDS effected from the interest payments in question before the due date for the filing of the return under 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 under S.139(1) as well as on the nature of amendment under Finance Act, 2010, we find no justification for the disallowance of Rs. 1,73,51,825 in terms of S.40(a)(ia) of the Act. We accordingly set aside the impugned order of the CIT(A) and direct the assessing officer to delete this disallowance of Rs.,1,73,51,825 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 under S.139(1) of the Act. Assessee's grounds of appeal on this issue are treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.12.2007 was subject matter of adjudication by the CIT(A) vide his order dated 28.1.2009, and on that very issue further appeal against the disallowance sustained by the CIT(A) was also pending before the Tribunal. Thus, the reopening of the assessment in this case is based on the very same material which was already available on record at the time of completion of the original assessment. The CIT(A), after referring to the decision of the Full Bench decision of Delhi High Court in the case of Kelvinator India (256 ITR 1) and the subsequent decisions of the Madras High Court in the case of Apollo Hospital Enterprises Ltd. V/s. ACIT (287 ITR 25) and CIT V/s. Abdul Rahaman Sait (306 ITR 142), held that the assessing officer could not have re-assessed any income by making recourse once again to the provisions of S.14A. Apart from this, going into the factual matrix of the case as well, the CIT(A) held that the reopening of the assessment was made on account of mere change of opinion and as such, reopening of the assessment is not valid. Since the assessing officer after detailed analysis of the material already available on record at the time of completion of original assessment, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her by the assessing officer or the CIT(A). In view of our decision, deleting the addition made by the assessing officer towards notional interest in the preceding year, viz. assessment year 2005-06, vide paras 21-27 hereinabove, we uphold this amount of Rs. 60,65,569 being assessed on receipt basis in the year under appeal. We accordingly reject the ground of the assessee on this issue. 55. The next issue involved in this appeal relates to disallowance of claim of loss of Rs. 1,85,07,916 as non-receipt of interest added one estimate basis in earlier assessment year. Admittedly, this issue also is inter-linked to the addition made on account of notional interest in the preceding year, viz. assessment year 2005-06 and if interest is held to be assessable on actual receipt basis, this ground becomes infructuous and no interference with the impugned orders of the Revenue authorities is called for. In view of our decision, deleting the addition made by the assessing officer towards notional interest in the preceding year, viz. assessment year 2005-06, vide paras 21-27 hereinabove, we find no merit in this ground of the assessee, which has become infructuous, and as such liable to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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