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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 ..... appeals only changes in figures. 4. The ld. A.R. narrated the facts as follows: That the assessee during the previous year has earned an interest income of Rs.85,14,48,065/- and incurred an interest expenditure of Rs.119,36,75,303/-. The total amount of loan outstanding as on 31.03.2013 is as under: Sl No. Name Amount outstanding as on 31.03.2013 Interest Received 1 Kingfisher Airlines Limited 1747,32,15,238 85,14,48,065 (till October 2012) 2 Margosa Consultancy Pvt Ltd 82,50,13,085 --- 3 Redect Consultancy Pvt Ltd 411,15,55,691 --- Total 2240,97,84,014 85,14,48,065 4.1 With respect to loan advanced to M/s. Kingfisher Airlines Limited (KFA), interest was charged till October 2012. Thereafter the company requested for waiver of interest on loans from 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 commun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inform you that interest to KFA was charged till October 2012 amounting to Rs.85.14 crs. There after KFA had requested for waiver of interest on loans (vide their letters dated 12.10.12 and 20.3.13- copies enclosed) in view of the suspension of operations of its airlines. After considering the same, in the Board Meeting of company dated 21.3.13, it was decided to waive the interest from October 2012 till KFA is recapitalized and resumes normal operations. Accordingly, interest from October 2012 has been waived. A copy of the letter dated 25.3.13 addressed to KFA intimating the waiver is enclosed. In view of the aforesaid, it is submitted that the company charged interest to KFA till October 2012 and did not use the interest bearing funds to provide interest free loans or low interest loans. The waiver 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, you are requested to furnish the complete details of computation of interest charged on loans given and loans taken, detailed ledgers of all lenders and entities to whom loans had been advanced. Failing which interest will be computed on the closing balances available in the financial statements." As required we are enclosing the following - i) Ledger extract of KFA in the books of BBL ii) Ledger extract of Margosa in the books of BBL iii) Ledger extract of Redect in the books of BBL iv) Ledger extract of Bestride in the books of BBL v) Ledger extract of SWBL in the books of BBL vi) Ledger extract of Citicorp Finance India Ltd. in the books of BBL vii) Ledger extract of DNA Networks in the books of BBL viii) Ledger extract of Pinvest Investments & Enterprises Pvt. Ltd in the books of BBL ix) Ledger extract of Sunstar Hotels & Estates Pvt. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year has earned an interest income of Rs.85,14,48,065/- and incurred an interest expenditure of Rs.119,36,75,303/-. The total amount of loan outstanding as on 31.03.2013 is as under: Sl No. Name Total Amount outstanding as on 31.03.2013 Interest Received 1 Kingfisher Airlines Limited 1747,32,15,238 85,14,48,065(till October 2012) 2 Margosa Consultancy Pvt Ltd 82,50,13,085 --- 3 Redect Consultancy Pvt Ltd 411,15,55,691 --- Total 2240,97,84,014 85,14,48,065 With respect to loan advanced to M/s. Kingfisher Airlines Limited (KFA), interest was charged till October 2012. Thereafter the company requested for waiver of interest on loans from the assessee in view of its suspended business operations of the airlines since October 2012. As a prudent businessman on the basis of commercial expediency, the assessee by way of a Board resolution at the meeting held on 21.03.2013 authorized to waive interest on all loans 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) '' Taxability-Notional Interest on debentures-Mercantile system of accounting- Assessee in 2003 subscribed to 2% nonconvertible unsecured debentures of Rs.42 crores issued by one of its group companies 'M'- 'M' in response to demand for interest from Assessee requested waiver of interest on debentures as it were facing financial difficulties-Waiver of interest on debentures was approved-Board of Directors of Assessee also passed Resolution to waive interest on debentures of 'M' and also duly informed same to 'M'-In two assessment years under ;consideration, AO made addition of Rs.84 lakhs each being 2% interest on Rs.42 crores of debentures by Assessment Orders passed U/s 143(3)-AO held that waiver of interest for six year period (2004 to 2010) by board resolution as produced was not believable-CIT(A) upheld orders of AO for both subject assessment years- Tribunal by impugned order held that even in mercantile system of accounting, an item would be regarded as accrued 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a case. If the debt had become bad the deduction can be claimed only in compliance with the provisions of the Act and the rules. Once the provisions of the Act were applicable and the income had already accrued the concept of real income cannot be brought into use to defeat the provisions of the Act.'' 3) Madhu Sudan Dalmia vs. ACIT - ITA 524/Kol/2013 - Kolkata ITAT (Annexure 5) ''4......In view of the above proposition of law laid down by Hon'ble Calcutta high Court, the waiver of interest before the year end cannot be treated as income in the given facts and circumstances of the case. Accordingly, we delete the addition and allow this issue of assessee's appeal.'' The ratio decidendi emanating from the above decisions are that the assessee is within its rights to waive the interest so long as the same is done before the end of the previous year relevant to the assessment year by following due procedure if any prescribed in law. The amounts for the previous year should reflect the entries for waiver if 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 mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver of interest on borrowing and lending in view of the proven dismal financial situation which establishes even to a bare eye that nothing would be recoverable even if interest is charged and paid. Such an exercise would be an exercise in futility. Further she submitted that as per the law on the write off of debt as explained by the Supreme Court in T.R.F Ltd vs CIT (323 ITR 397), it is enough if the debt is written off in the books and it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. The AO cannot question once the write off of debt is established. The charging of interest and waiver thereof is a matter of commercial expediency which should be best left to the esteemed discretion of the business person as held in Supreme Court in S.A.Builders Ltd vs CIT(Appeals) & Anr (288 ITR 1). In view of this the disallowance made by invoking section 40A(2)(b) is clearly untenable. Further the disallowance is not even justifiable as the addition is only a notional income which the assessee had no right 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirectly to KFA Ltd. However, at the same time while charging interest on loans received from the related parties, the whole of which has been lent to KFA Ltd directly or indirectly through related parties, it has not waived the interest payable by the assessee on the same borrowings. This is a double standard method adopted by the assessee. If at all going by the logic with which the assessee is arguing that there is a strong case for not recognizing the interest income, then, on the same logic it should not be paying the said interest on its borrowals from the related and unrelated parties as the entire amount has been advanced to the KFA Ltd. Hence, the ld. D.R. was of the view that the AO, for the reasons recorded in the assessment order, is justified in charging the interest advanced during the year amounting to Rs. 179,50,18,919/-. The ld. D.R. argued that the case laws relied on by the assessee are not applicable to the facts of the case as the assessee has a dual standard when it comes to debit the interest expenditure paid to the related concerns on the amounts borrowed which were ultimately used to advance to KFA Ltd., vis-a-vis not recognizing the interest income on sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest receipts of Rs.85,14,48,065/- and has incurred direct loss of Rs. 34,22,27,238/-. 6.4 Similarly, in the assessment year 2015-16 assessee has advanced loan as follows: Sl.No. Name Total amount outstanding as on 31.3.2013 Interest received Remarks 1 Kingfisher Airlines Ltd. 1747,32,15,238 85,14,48,065 Till October, 2012 2 Margosa Consultancy Pvt. Ltd. 82,50,13,085 Nil Nil 3 Redect Consultancy Pvt. Ltd. 411,15,55,691 Nil Nil Total 2240,97,84,041 85,14,48,065 Outstanding loans: Sl.No. Name Total amount outstanding as on 31.3.2013 Interest received Remarks 1 Kingfisher Airlines Ltd. 1747,32,15,238 Nil Nil 2 Margosa Consultancy Pvt. Ltd. 82,50,13,085 Nil Nil 3 Redect Consultancy Pvt. Ltd. 411,15,55,691 Nil Nil Total 2240,97,84,041 6.5 As discussed in earlier para, the assessee has not charged interest on advances made by assessee in this assessment year though assessee has paid certain interest to the party from whom it has taken advances. The contention of the assessee that even interest is booked in the books of accounts as receivable taken up in the books of accounts. Hence, no interest h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letion method or by the completed service contract method. (i) Proportionate completion method-Performance consists of the execution of more than one act. Revenue is recognised proportionately by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method-Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. 12. 12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service." 6.6 The main plea of the assessee before us is that even interest is accrued, it cannot be recovered. The parties are not in a position to pay the interest receivable. However, it cannot escape from the payment of interest to the parties from whom it has been borrowed. Hence, the interest receivable is not booked in the books of accounts of the assessee. As discussed earlier in a mercantile system of accounting revenue is recognized on accrual basis as per the agreement entered by the assessee with the parties to whom loan has been advanced. Accrual of interest is the most important fact unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been notified. 6.9 AS-9 has not been notified u/s 145 of the Act. There may be a contention of the assessee that AS-9 has not been notified u/s 145 of the Act, hence, does not have statutory force. In our opinion, assessee follows mercantile system of accounting and AS-9 trapping of both cash system and mercantile system and it has to be followed while recognizing the income of the assessee when assessee is following the mercantile system of accounting, which is prescribed by section 145 of the Act. Further, the 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 of the Act. The assessee has made one more contention before us that in assessment year 2013- 14, the AO invoked the provisions of section 40A(2)(b) of the Act, which is applicable only to the payment and not to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainable, arbitrary and ought not to have been done. Invoking section 69C of the Act is incorrect. In this case expenditure is already reflected in the books of accounts and the sources are explained as out of the regular bank accounts. The expenditure is part of the regular books of accounts and not unexplained by any stretch of imagination. Thus, she submitted that invoking section 69C of the Act is unwarranted and requires to be deleted. 8. The ld. D.R. submitted that the AO has discussed the same in para 5 of the assessment order wherein the assessee has not replied to AO's question to understand the nature of the said expenditure being revenue and connected to the business of the assessee. It has simply stated in its reply that the said expenditure was paid to SREI Infrastructure Ltd. Apart from this, neither any explanation on the exact nature and business exigency was established / proved by the assessee. In these proceedings also, no effort was made to establish or rebut the findings of the AO that there was explanation from the assessee. The arguments taken here in this appeal are very general without there being any content in the -direction discussed above. No additi ..... 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