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TMI Blog2014 (5) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said rate of interest is applicable as M/s.SCSL has not admitted the liability of even the amounts of advance. As such, we find that there is no certainty with regard to the said rate of interest. Therefore, it cannot be presumed that the interest accrued to the assessee at the rate of 18% p.a. as claimed by the assessees in the suits filed for recovery of advances. The Civil Courts would consider and decide the liability of M/s. SCSL to repay the amounts of advances and would also consider the liability of M/s. SCSL to payinterest thereon and the rate of interest at which the advances should be repaid. Therefore, unless and until the liability to pay the advances and the rate of interest at which the temporary advances are to be repaid is determined by the Civil Court, it cannot be said that the same has accrued or arisen to the assessees. However, if the assessees had advanced interest bearing funds as interest free advances, the interest paid by the assessees towards such borrowed funds would have to be disallowed and treated as the income of the respective assessees. We find that neither the Assessing Officer nor the CIT(A) has examined the issue from this angle. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings under S.143(3) of the Act, notices were issued to the assessees herein under S.143(2) and 142(1) of the Act calling for certain information relevant for the assessment . The learned representatives of the assessees appeared and furnished the information called for. On the perusal of the information furnished during the course of scrutiny proceedings, the Assessing Officer observed that during the accounting year 2007-08, the assessee companies have made advances to M/s. Satyam Computer Services Ltd.(SCSL), but no interest is shown to have accrued or received on such advances in the books of account of the assessees. It was also found that in August, 2009, the assessees have made a claim on M/s.SCSL for repayment ofthe advances along with interest at the rate of 18% per annum from the date of advance in the form of damages and that the assessee s also initiated legal proceedings to recover the said advances along with the right to receive interest by filing suits before the City Civil Courts, Secunderabad. 4. The Assessing Officer observed that the assessee companies are following mercantile system of accounting, and since they have made a claim for recovery o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the same at the rate of 18% p.a. on the advances given by the assessee companies. 7. Aggrieved, the assessees preferred appeals before the CIT(A),reiterating the submissions made by the assessees before the Assessing Officer and also placing reliance upon the decisions of various High Courts with regard to the accrual of income. The learned CIT(A) after considering the assessee s submissions and placing reliance upon the decision of the Hon ble Delhi High Court in the case of Paragon Constructions (I)) P. Ltd., reported in 274ITR 413, has held that it cannot be held that interest income has definitely accrued and arisen to the assessee at the rate of 18% as held bythe Assessing Officer, and that as and when the City Civil Court finalised the said interest rate mentioned therein, the interest can be taxed in the year in which the Court pronounces its order on the Civil Suit, pending before it.Thus, the CIT(A) allowed the assessees appeals. 8. Aggrieved by the rele if given by the CIT(A), Revenue is in appea lbefore us. 9. The Learned Departmental Representative, Smt. Haritha,submitted that the issue of advances by the four assessee companies to M/s.SCSL was admitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans to the sister concerns, and therefore, no notional interest can be brought to tax even on this count. 11. Having heard both the parties and having considered the rival contentions and the material on record, we find that the basis for bringing to tax the notional interest income on advances allegedly made by the assessee company to M/s.S CSL are the Civil Suits filed by the assessee companies for recovery of the suit amounts along with interest at the rate of 18% per annum. The undisputed facts are that the assessees have advanced the loans/temporary advances to M/s. SCSL and this fact has come to light only by the statement of Shri Ramalinga Raju dated 7th/8th of January, 2009. Further, the assessees have advanced the loans or temporary advances through banking channels and immediately after the statement of Shri Ramalinga Raju, the assessees have also issued legal notices for the repayment of the loans and also filed civil suits for recovery of the loan amounts along with interest inthe City Civil Court, Secunderabad. Therefore, the liability may have been denied by M/s. SCSL, but as far as the assessees are concerned, there is no dispute or controversy with regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act, empowering the income-tax authority to include in the taxable income, any interest which was not due or not collected by the assessee, and the addition of an amount as notional interest was not justified. 4. Hon ble Punjab Haryana High Court in the case of CIT V/s. Abhishek Industries Ltd. (286 ITR 1), was dealing with a case of interest free advances given to sister concerns on the basis of which the assessing authority has disallowed interest paid by the assessee on borrowed funds. The Hon ble High Court has held that the nexus between the interest bearing funds and the advances made to the sister concerns is not proved and therefore, there cannot be any disallowance of interest expenditure. 13. Applying the above rationale propounded by the Hon ble Supreme Court as well as the Hon ble High Courts, in the cases discussed above, we observe that the following points emerge (a) It is for the assessee to decide how it conducts its business; (b) Where an assessee advances interest free loans to its sister concerns, unless nexus between interest bearing funds and the interest free advances is proved, expenditure on account of interest on borrowed funds can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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