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TMI Blog2016 (4) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that:- As per the guidelines of RBI if assessee does not pay interest for a period of exceeding six months then interest income should not be recognized in its books of account. The guideline of RBI is very much applicable to assessee as it is NBFC and governed by regulations of RBI. We also find that various courts has decided that real income should be brought to tax merely assessee has booked the income in its books of account. It does not mean that it has become the income of assessee.- Decided in favour of assessee. Accrued interest - Held that:- Assessee has given loan to M/s Shaw Wallace & Co. on interest but assessee did not account for the interest income due to the dispute which then was pending in the court of law. M/s Shaw Wallace & Co. paid the interest amount after deducting TDS in AY 2003-04 and accordingly assessee has booked the income in that year. However, AO disagreed the view of assessee on the ground that the income was accrued in the AY 2001- 02 so it was to be offered for tax in that year. Before us Ld. AR submitted that this issue is already covered in favour of assessee by this Tribunal in assessee’s own case - Decided in favour of assessee. - ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is a party there is yet another aspect which, perhaps, cannot be ignored, if appeals brought by Government are lost for such defaults, no person is individually affected but what, in the ultimate analysis, suffers is public interest. The decisions of Government are collective and institutional decisions and do not share the characteristics of decisions of private individuals. 5. In the instant case as the Government is Appellant as submitted that before finalization of appeal, the case has to cross many channel and we feel that there is sufficient cause for condoning the delay in the institution of the appeal hence we are inclined to condone the delay of 191 days in preferring the instant Appeal. Now let us proceed with the case on merits. 6. Grounds raised by Revenue are below:- 1) That order of ld. CIT(A) is bad in law, hence not acceptable. 2) That under the facts and circumstances of the case, ld. CIT(A) had erred in law as well as on facts by directing the AO to assess loss in business of purchase and sale of shares as business loss. 3) That ld. CIT(A) had erred on facts by observing that the principal business of the assessee was granting of loans an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Share capital 4,36,89,700.00 2 Unsecured loan 100,68,04,058.00 The deployment of fund as on 31-03-2001 stand as under:- Sl.No Particulars Amount (₹) % fund deployment 1 Investment in shares 35,37,98,204 36.5% 2 Investment in stock-in-trade 18,54,43,915 17.65% 3 Investment in loans 33,58,26,810 31.97% During the course of assessment proceedings, as made a reference before Ld. ACIT, Range-4 Kolkata dated 18.12.2003 for the intervention in respect of pending assessment proceeding on the request of assessee u/s 144A of the Act and accordingly the Ld. CIT(A) directed the AO to treat the loss of ₹7,30,88,822/- as speculation loss by virtue of provision of Explanation to Sec. 73 of the Act. As per the said Explanation the loss from share dealing business shall be treated as spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark View Properties Pvt Ltd. (supra) was applied because they applied test of composition of Gross Total Income. In the decided case the assessee claimed exemption from the Explanation, on the ground that whole of its income consisted, income from other sources. No case was made out by that assessee that the Explanation was not applicable because its principal business was granting of loans. In this case however the assessee has claimed exemption with reference to the test of principal business. The assessee carried on business of non-banking financial company and was registered with RBI as NBFC. As an NBFC the assessee arrived on business of financing and derived substantial interest. It also carried on share trading business. However, when the assessee carried on more than one business; it was necessary to ascertain the principal business with reference to regularity of the activities and predominant deployment of funds in different business segments. From the comparative chart of deployment of funds during the relevant year in preceding and subsequent years I find that funds deployed in business of granting loans as on 31st March 2000, 2001, 2002 2003 were ₹ 8239.19 Lac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the relevant and past years and the nature of the activities of the assessee will all help in determining the principal business of the assessee. If in any particular year, the assessee has nominal business since and has substantial interest income, it does not imply that the assessee s principal business is of fianc or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loans and advances, may earn a comparatively high income from other activities in any particular year and still the principal business of the assessee may remain granting of loans and advances. The Explanation to section 73 is in the nature of a deeming provision and as such has to be strictly construed. The decisive factor is the true nature of activities of the relevant period as well as in the past or succeeding periods. 11. Applying ratio laid down in this decision I find that the assessee regularly carried on business of granting of loans earned substantial interest. Deployment of funds in the business of granting of loans was predominantly more than share trading business and therefore applying fund deployment criteria assessee s princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 crores as against loan and advance of ₹ 36.73 crores. Even the sundry debtors which are out of share trading business constitute further fund of ₹ 4.01 crorer. Thus assessee s statement that major fund is locked up in loans and advance is wrong and mischievously placed. Ld. DR submitted that the assessee s turnover of ₹121 crores in share trading. Thus, assessee s main engagement was trading in shares and investment in shares and assessee is no more an NBFC company as RBI has cancelled its certificate. Therefore, exceptions to explanation to Sec. 73 of the Act do not apply and requested to treat the loss in share trading as speculative and relied on the order of AO. From the aforesaid discussion, we understand that the AO has invoked the provisions of explanation to Sec. 73 of the Act for treating the loss from shares trading business as speculation loss on the ground that loss from share trading business was greater than the income from other sources and capital gain. However the ld. CIT(A) reversed the order of the AO by holding that AO has in his order has overlooked the criteria for the exception to the explanation to Sec. 73 of the Act i.e. this explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ], or a company [the principal business of which is the business of banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. From the above, it is very clear that the provisions of Explanation to Sec. 73 of the Act will not be applied where the principal business of the assessee is that of granting loans and advances and such company is also in the business of purchase and sale of shares, then the activity of purchase and sale of shares would not attract the provisions of Explanation to Sec. 73 of the Act. We have already held that the fund deployed in lending activity exceeds the fund deployed in share trading activity on a consistent basis over a period of time. Hence the principal business of assessee is that of granting loans and advances and thereby outside the ambit of Explanation to Sec. 73 of the Act. Hence, the share trading loss of claimed by the assessee cannot be construed as speculation loss and accordingly we have no hes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee by confirming the addition of ₹3,04,18,767/- towards the interest on the above loan in the total income of assessee. 11. Aggrieved, assessee preferred appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- 15. The present assessee regularly followed mercantile system of accounting. In mercantile system of accounting assessment of income is made on accrual basis. Accrued income is required to be assessed irrespective of the difficulties; in realization of the accrued income. The concept of real income cannot therefore be brought into play in every case of non realization of income to postpone assessment of accrued income. This proposition is laid down by the Supreme Court in CIT Vs. Shiv Prakash Janak Raj Co Pvt. Ltd. (222 ITR 583). In that case assessee followed mercantile system of accounting. It had advanced loans to a firm whose partners were shareholders/directors. After the expiry of the relevant year interest on loan was given up. The Tribunal found that such waiver was not based on commercial consideration therefore the Supreme Court upheld the assessment of accrued interest rejecting assessee s plea that on the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for AY 2001-02. Considering the totality of the facts I am therefore inclined to accept submissions of the A/R that ₹ 3,04,18,767/- did not represent assessee s real income and therefore not chargeable to tax in AY 2001-02. The AO is accordingly directed to exclude interest of ₹ 3,04,18,767/- from assessee s total income. Ground Nos. 3 to 6 are allowed. Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 12. We have heard rival contentions and perused the materials available on record. Before us Ld. DR submitted that assessee is not a charitable organization to provide the interest free loans to the parties. There is no substance in the argument of the assessee that there is no clause in writing in the agreement between the two parties regarding charging of interest. The business of the assessee is of a money lender and each loan was given to earn interest. Hence it was the correct procedure which the assessee has done by showing interest income in its books of account as maintained on mercantile basis. Even if the assessee thought that interest was unrecoverable then it should write it off in the books of account. If the theory of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Supreme Court in the case of Godhra Electricity Co. Ltd. 225 ITR 746 (SC) From the above discussion, we understand that assessee has shown interest income in its books of account but while framing of assessment before AO requested to exclude the income from assessment on the ground that it was never realized by assessee. From the submission of Ld. AR we find that assessee was able to recover the principal amount during financial year in which loan was given to above parties concerned. But AO did not agree with the plea taken by assessee and AO added it to the total income of assessee. In our considered view there has to be real income before charging the tax. In the present case the ld. DR has not brought anything on record to controvert the findings of the ld. CIT(A). The AO has not taken the confirmation by exercising his power under section 133(6) of the Act from the loan parties. We are also putting our reliance in the similar case where the Hon ble Supreme Court has held in the case of CIT v. Shoorji Vallabhadas and Co. (1962) 46 ITR 144 (SC) as under:- Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve already discussed in ITA No. 1796/Kol/2008 for AY 2001-02 in para-7 to 14 of this order and taking a consistent view in this matter, hence, we dismiss issue No 1 and 2 of this appeal of Revenue accordingly. 18. Next issues raised in ground No. 3 and 4 in this appeal by Revenue is that Ld. CIT(A) erred in deleting the addition made by AO for ₹ 8.40 lacs on account of interest receivable from Shaw Wallace Co. Ltd. 18.1 The assessee has claimed TDS on receipt of interest from Shaw Wallace Co. during the AY 2003-04. On question by the AO, assessee submitted that this interest income relates to the AYs 1999-00 to 2002-03 and the suit for recovery of loan was pending in the court of law that is why assessee did not account for any interest income in its books of account in earlier years. So, the AO opined that the income of ₹ 8.40 lacs for the AY 2001-02 has escaped assessment and accordingly framed assessment under section 147 of the Act. 19. Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition by observing as under:- 5. In Ground No.s 4 to 10 the assessee has objected to the assessment of ₹ 8,40,000 being accrued int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals taken by the Department for both the assessment years under consideration are rejected with the above observation that the amount of interest of ₹ 17,50,000/- and of ₹ 17,48,801/- are both liable to be taxed in the assessment year 2003-04 and not in the assessment years under consideration. 15. Before we part with these appeals, we may sate that our above directions for charging of interest of ₹ 17,50,000/- and of ₹ 17,48,801/- are to be charged in the assessment year 2003-04 are necessary as it was stated at the time of hearing of these appeals that the above interests have been charged on substantive basis by the AO in these assessment years under consideration and on protective basis in the assessment year 2003-04. Accordingly, the AO while giving effect to our order will take necessary action as per law and considering our above observations. Taking a consistent view in assessee s own case (supra), this ground of Revenue s appeal is dismissed. 20. In the result, Revenue s appeal is dismissed. 21. In the combined result, both appeals of Revenue are dismissed. Order pronounced in the open court 18/03/2016 - - TaxTMI - TMITa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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