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TMI Blog2013 (1) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... -III Pune dated 31-1-2008 which, in turn, has arisen from an order passed by the Assessing Officer, under section 143(3)(ii) of the Income-tax Act, 1961 (in short the Act ) dated 31-3-2004. 2. In brief, facts giving rise to impugned dispute can be summarized as follows. The appellant is a Government of India enterprise which is engaged in the business of pharmaceuticals. The assessee-company has two subsidiaries, viz. Maharashtra Antibiotics and Pharmaceuticals Ltd. (MAPL) and Manipur State Drugs and Pharmaceuticals Ltd (MSDPL). The Assessing Officer noticed that for the assessment year under consideration, assesseecompany had not accounted for interest income from the two subsidiaries on the loans and advances given to them, such interest amounts being ₹ 140.94 lakhs from MAPL and ₹ 58.19 lakhs from MSDPL. On being show caused, assessee submitted that interest income was not accounted for on such loans because the two subsidiary companies were sick industrial units and were referred to the Board for Industrial and Financial Reconstruction (BIFR) u/s 15(1) of the sick Industrial companies (Special Provisions) Act, 1985. The assessee explained that the subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proposition that even where assessee was following mercantile system of accounting in order to assess interest income, it is necessary to see that such interest income actually accrued to the assessee. The CIT(A) however, did not agree to the submissions put forth by the assessee. The CIT(A) observed that the uncertainty in collection of interest from the subsidiaries would not be a factor because the loan agreement with and the subsidiary companies continued to exist and thus in terms thereof interest income shall accrue to the assessee unless the loan agreement was modified in the light of the changed circumstances. Accordingly, the CIT(A) has upheld the addition of ₹ 197.13 lakhs made by the Assessing Officer on account of interest income accruing to the assessee. Not being satisfied with the order of the CIT(A), assessee is in further appeal before us. 5. Before us, the learned counsel for the assessee has vehemently submitted that no interest income has actually accrued to the assessee because the subsidiary companies were consistently loss making units. MAPL was a company referred to the BIFR, being a sick company and even in the case of MSDPL, the said concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest income on such loans in its books of account. For the assessment year 2001-02 and the subsequent years, assessee did not record in its books of account such interest income The assessee contended that there was no real accrual of such interest. With regard to MAPL it was pointed out that vide order dated 14-1- 1997 of the BIFR, such company was declared to be a sick industrial company within the meaning of sec. 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, a copy of such order has been placed in the Paper Book at page 5. In terms thereof, it emerges that the net-worth of the said subsidiary was fully wiped out on account of accumulated losses as on 31-3-1996. It was therefore, contended by the assessee that there was no hope of recovery of interest from the subsidiary and therefore, no interest was accounted for as it cannot be said to have accrued. Similarly, with regard to MSDPL it was also explained that the said subsidiary had become sick under the Sick Industrial companies (Special Provisions) Act, 1985. As per Note No. 12(x) of Schedule 24, being the Notes on Accounts annexed to and forming part of the audited financial statements for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee, which may either be cash system or the mercantile system. It referred to the following passage from its earlier decision in the case of CIT Vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) wherein it had been stated as under: Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. 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. 10. The Hon ble supreme Court noticed that the aforesaid principle was applicable even if the accounts are maintained on mercantile system of accounting. In fact, the Hon ble supreme court applied the principle that even if the accounts are maintained on mercantile system, what is to be seen is whether income can be said to have really accrued to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but what is to be seen is whether income can be said to have really accrued to the assessee. In examining whether any income had accrued in a given situation, it is necessary to have regard to the reality and speciality of the situation rather than purely theoretical aspect of the matter. Keeping the aforesaid in mind, in our considered opinion, the stand of the Revenue to the effect that interest accrued to the assessee cannot be upheld merely because the loan agreement with the subsidiary companies continued to exist. It is imperative that all the attendant facts, circumstances and realities of the situation have to be considered in their proper commercial perspective before it can be evaluated as to whether interest income really accrued in the hands of the assessee. The facts noted by us in para 7 above, are not in dispute. It is also not in dispute that the assessee company has not recovered any dues from the two subsidiaries till now, as asserted by the learned Representative before us. After considering the entire gamut of facts and circumstances, it is an inescapable conclusion that the realization of the interest income in question is highly suspect and therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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