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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 ..... 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. 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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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) "Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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, 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) 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 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 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: ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscretion 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier 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 has been booked in the books of accounts of the assessee and correspondingly Board Resolution has been passed not to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 service becomes chargeable. 9. Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable 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 unc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under the receipt of the interest income. When there is no due or modification of agreement through which the money has been advanced the interest accrued on the basis 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 receipts. According to the assessee, the AO has recorded in para 4.2 of his order for the assessment year 2013-14 as follows:- "4.10 Therefore, in view of the above facts leading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 additional evidence was either produced to explain the nature of the said transaction. Further, the ld. D.R. submitted that necessary information that the said payment suffered TDS together with the purpose/ nature of the payment has not been furnished. In the absence of the same, the AO is justified in invoking Section 69C of the Act and in disallowing the expenditure. Accordingly, the ld. D.R. stated that this ground of appeal was dismissed by the ld. CIT(A). 9. We have heard the rival submissions and perused the materials available on record. Before the lower authorities, the assessee has said that expenditure was paid to SREI Infrastructure Ltd. and no further details have been furnished. Even before us, the assessee reiterated the arguments made before the lower authorities. In our opinion, it is appropriate to remit the issue t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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