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TMI Blog2023 (5) TMI 1369X X X X Extracts X X X X X X X X Extracts X X X X ..... odification of the agreement of advancing loans has been done. The assessee on its own not recognized the interest income though it was agreed with the assessee as per the loan agreement. The assessee take support from Board resolution where they taken decision not to recognized the income. Being so, it is not tune with the AS-9 which is more concerned with the true and fair view of the state of affairs of the business of the assessee and also in conformity with the mercantile system of accounting as prescribed in section 145 of the Act. AO is empowered and bound to compute the income of the assessee in accordance with section 145 of the Act, which is the mercantile system of accounting. There is no dispute that under mercantile system of accounting, the income of the assessee has been accrued and only the assessee failed to record the same in the books of accounts of the assessee though it was accrued. Therefore, the claim of assessee is not based on any sound accounting system or section 145 . Also in other assessment year 2015-16 the AO has not mentioned anything about section 40A(2)(b) - thus, we dismiss this ground in both the appeals of the assessee. Addition u/s 69C - assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in view of its suspended business operations of the airlines since October 2012. The request letters from KFA dated 12.10.2012 20.03.2023 are at PB-1 pages 8 to 10. The waiver of interest was communicated by the assessee to KFA vide letter dated 25.03.2013. Similarly, M/s.Margosa Consultancy requested for waiver vide letters dt.20.10.2012 and 21.03.2013 and the waiver for full year was communicated by the assessee vide letter dt. 21.03.2013. M/s.Redect Consultancy also requested for waiver vide letters dt.20.10.2012 21.03.2023 and the waiver for full year was communicated by the assessee vide letter dt. 21.03.2013. Upon communication of the waiver decision, a new agreement has come into existence wherein no interest has been charged. On this factual background the AO ignoring the clinching facts issued a show cause notice dt.03.03.2016 proposing to make the addition. The assessee filed point wise reply dt.22.03.2016 against the show cause notice, the contents are extracted hereunder for ready reference: This has reference to your show cause notice F.No. TI-40/ITO, W-(1)(1)/2015-16 dated 3.3.16 regarding the above. 1) Para 1.1.3 It is clear from the above tables showing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place only in October 2012 and it would be wrong to add interest chargeable on the loan given to KFA till 31.3.13, since the waiver was done based on business commitment. 3) Para 1.1.6 - Also since interest has been charged on the loans given to entities mentioned at serial number 2 to 4 of table in para 1.1.2, the proportionate interest expenses be disallowed from the interest expenses claimed Sl. nos. 2 to 4 pertains to Margosa Consultancy Pvt. Ltd,, Redect Consultancy Pvt. Ltd. and Bestride Consultancy Pvt. Ltd. Margosa Consultancy Pvt. Ltd and Redect Consultancy Pvt. Ltd. Margosa and Redect (vide their letters dated 20.10.12 and 21.3.13 copies enclosed) has intimated the company that the loans availed by them were utilized by them to fund the operations of KFA. KFA had approached Margosa and Redect to waive of the interest on the loans extended to KFA in view of suspension of operations of KFA. Margosa and Redect has further intimated that it would not be possible for them to pay interest to BBL unless interest is collected from KFA. In view of the same, Margosa and Redect had requested for interest wiaver on the loans extended to them by BBL. After considering the same, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. in the books of BBL x) Ledger extract of United Breweries (Holdings) Ltd. in the books of BBL xi) Ledger extract of Wave Industries in the books of BBL xii) Ledger extract of Utkal Distilleries Ltd. in the books of BBL xiii) Ledger extract of McDowell Holding Ltd. in the books of BBL xiv) Ledger extract of SICOM in the books of BBL. Regarding interest payable to SWBL, Pinvest Investments Enterprises Pvt. Ltd., Sunstar Hotels Estates Pvt. Ltd. and United Breweries (Holdings) Ltd., we submit as under SWBL The amount o/s as on 31.3.13 was Rs.55,03,079/- represents the interest on the loan taken by BBL. A loan of Rs.11 crs was taken in FY 11-12 and the principal amount of Rs.11 crs was repaid in FY 11-12. Accordingly, there was no further interest payable to SWBL Pinvest Investments Enterprises Pvt. Ltd., Sunstar Hotels Estates Pvt. Ltd. and United Breweries (Holdings) Ltd.(UBHL) - The loans taken by BBL from Pinvest, Sunstar and UBHL were given to KFA for its operations. The operations of KFA got suspended in October 2012. In view of the financial situation, KFA did not pay interest to BBL. In such a situation, BBL had requested for waiver of interest on the loans received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s extended by the assessee to the company w.e.f 01.10.2012 and accorded for reversal of interest charged from 01.10.2012 to 31.12.2012. With respect to the loans advanced to M/s.Margosa Consultancy Pvt Ltd and M/s. Redect Consultancy Pvt Ltd, these companies also intimated the assessee their inability to pay interest as they had inturn lent the moneys to M/s.Kingfisher Airlines. Thus by way of a Board resolution at the meeting held on 21.03.2013, the assessee waived the interest on loans of these companies for the financial year 2012-13. Thus factually and legally the assessee was not entitled to receive any interest. In the absence of right to receive any interest no income can be said to have arisen or accrued to the assessee. Such a view is also supported by the Accounting Standards issued by ICAI on this issue. Likewise, the assessee had taken loans from M/s.United Breweries (Holdings) Ltd [UBHL], M/s.Pinvest Investments Enterprises Pvt Ltd (Pinvest) and M/s.Sunstar Hotels Estates Pvt Ltd (Sunstar) which were given by the assessee to KFA for its operations. On para materia reasoning the assessee requested for waiver of interest on loans from these three companies vide its lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income only if there was certainty of receiving it and not when it had been waived Tribunal held that inspite of following mercantile system of accounting, Assessee was entitled not to bring notional interest on debentures subscribed by it to tax Held, provisions of Section 145(1) were subject to mandate of ASI which also prescribed that 'Accounting policies adopted by assessee should be such so as to represent true and fair view of state of affairs of business, profession or vocation in financial statements prepared and presented on basis of such accounting policies In name of compliance with s 145(1), it could not be open to anyone to force adoption of accounting policies which result in distorted view of affairs of business Therefore, even under mercantile method of accounting, and, on peculiar facts of instant case, assessee was justified in following policy of not recognizing these interest revenues till point of time when uncertainty to realize revenues vanished Tribunal referred to fact that various resolutions which were passed by company as well as communication exchanged between parties would establish on facts that interest had been waived There was no reason to disb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest has already been charged. The assessee has met the requisite conditions for waiver in all respects. The AO has erred in refusing to rely on these decisions in making the disallowance which is clearly not as per law and hence the action of the AO requires to be set aside by deleting the addition. Further the notional income as is calculated by the AO cannot be brought to tax in the absence of any specific provisions under the IT Act authorizing to do so. Section 5 of the IT Act talks of income received, accrued or arisen. No other type of income is liable for tax. Notional interest as considered by the AO is neither earned nor received by the assessee. The assessee is a stranger to such income. Consequently the addition based on notional interest has no legs to stand and requires to be deleted. 4.3The ld. CIT-A while holding in favour of the revenue has held in para 6 as under: Hence, I am of the view that the AO, for the reasons recorded in the assessment order, is justified in charging the interest advances during the year amounting to Rs.179,50,18,919. The case laws relied in by the appellant are not applicable to the facts of the case as the appellant has a dual standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to enforce after the waiver. It is an established law that nothing is liable to tax when neither income is accrued nor received nor is there a right to receive. There is no provision under the Income tax Act to tax notional income. 4.5 In view of the above, the ld. A.R. requested that the addition on the issue of interest income be deleted in the interest of justice and equity. 4.6 Further, he relied on order of the Hyderabad bench in the case of Satyam Federation Engineering Services in ITA No.431 432/Bang/2015 for the assessment years 2005-06 2010-11 dated 30.11.2015, wherein held as under: 18. We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. From the above, it may be perceived that assessee has not charged any interest to AE as well as non- AE entities. Moreover, the TPO has considered only the account receivable of AE without considering the account payable to AEs. It is pertinent to note that account payable to AE and i ts affiliates are Rs. 28 , 58 , 98 , 204 compared to account receivables from AE and i ts affiliates of Rs. 26 , 88 , 97 , 856 . We find that the account payables are more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns on the amounts borrowed which were ultimately used to advance to KFA Ltd., vis-a-vis not recognizing the interest income on similar advances made directly or indirectly to KFA Ltd, by it. Accordingly, the grounds of appeals of the assessee were dismissed by the ld. CIT(A). 6. We have heard the rival submissions and perused the materials available on record. In the case, in the assessment year 2013-14 the assessee has taken and charged interest as follows: During the year under consideration the assessee has paid interest of Rs.119,36,75,303/- on the loans borrowed from related parties and other lenders. S. No Name of the Lender Total amount borrowed outstanding as on 31/03/2013 Interest paid 1 Citicrop Finance india Limited 42,69,99,128 96,63,406 2 Related parties (SW Finance Co. Ltd ) 55,03,079 3 DNA Networks 3,00,00,000 27,00,000 4 Pinvest Investment Enterprises Pvt Ltd 20,00,00,000 5 Sunstar Hotels Estates Pvt Ltd 32,86,00,000 6 Related parties (United Breweries Holding) Ltd 1828,33,88,589 82,01,58,905 7 Wave Industries 190,00,00,000 22,80,00,000 8 Utkal Distilleries Ltd 50,43,00,000 6,35,12,942 9 McDowell Holding Limited 20,50,70,767 3,13,49,689 10 SICOM 3,82,90,361 Total 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account the interest receivables in the books of accounts of the assessee and accordingly it has not been offered for taxation. It is admitted fact that assessee has been following mercantile system of accounting and Accounting Standard-9 issued by Institute of Chartered Accountants of India (ICAI) is applicable to the assessee s case. Accounting Standard 9 details with recognition of income following paragraph: 9. The following paragraphs, viz., Paragraphs-4, 5, 7, and 9 to 12 of AS-9 would be relevant for the purpose of the present appeal:- Definitions 4. The following terms are used in this Statement with the meanings specified: 4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of said agreement to be recorded in the books of accounts of the assessee and it cannot be modified by a Board resolution. In the case of assessee, no such modification of the agreement of advancing loans has been done. The assessee on its own not recognized the interest income though it was agreed with the assessee as per the loan agreement. The assessee take support from Board resolution where they taken decision not to recognized the income. Being so, it is not tune with the AS-9 which is more concerned with the true and fair view of the state of affairs of the business of the assessee and also in conformity with the mercantile system of accounting as prescribed in section 145 of the Act. 6.7. The relevant statutory provisions regarding method of accounting under the Act, have to be first seen. Sec.145 of the Act (prior to its amendment by the Finance Act, 2014 w.e.f. 1.4.2015 applicable in the present case) deals with Method of accounting and it reads thus: Sec.145: Method of Accounting: (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion that the interest bearing funds have been used to provide interest free loans or low interest loans and the provisions of section 40A(2)(b) of the Income tax Act, I am of the considered opinion that interest chargeable on the loan given to M/s. Kingfisher Airlines limited be charged till 31/03/2013 and interest chargeable from other two borrowers be charged for the entire year and added to the returned income. The waiver of interest chargeable from borrowers cannot be allowed under Income Tax Act. 6.10 In our opinion, this is only a passing remark. We have to see the substance over the form and mentioning of wrong provision cannot be fatal. In other assessment year 2015-16 the AO has not mentioned anything about section 40A(2)(b) of the Act. In view of the above discussion, we dismiss this ground in both the appeals of the assessee. 7. Next ground in ITA No.438/Bang/2018 in assessment year 2013-14 is with regard to addition towards consultancy fee of Rs.60,00,000/- as unexplained expenditure u/s 69C of the Act. 7.1 In this regard, the ld. A.R. submitted that the AO issued a notice seeking details of consultancy charges paid which was duly replied vide reply lette ..... X X X X Extracts X X X X X X X X Extracts X X X X
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