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TMI Blog2005 (2) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... tives of both the parties and gone through the observations of the authorities below and details submitted in the paper book by the counsel for the assessee. 3. Briefly stated, the facts as taken from the record, are that the assessee is engaged in the business of purchase and sale of cotton. Return of income for the asst. yr. 1999-2000 was filed on 2nd Nov., 1999, at the income of Rs. 25,289. The return was processed under s. 143(1) on 24th March, 2001. The AO initiated proceedings under s. 147/148 on 29th Aug., 2001, by issuing the notice to the assessee as the assessee declared interest income of Rs. 8,54,764.30 from M/s Arihant Cotsyn Ltd. pertaining to the asst. yr. 1999-2000 in the return of income for the asst. yr. 2000-01. The TDS certificate issued to the assessee clearly indicate that the amount of interest credited to M/s Ganga Parshad Parshotam Lal, Fazilka, pertained to the period 1st April, 1998 to 31st March, 1999, relevant to the asst. yr. 1999-2000 but this income was declared during the asst. yr. 2000-01. In compliance to the notice under s. 148, the assessee filed his return of income declaring same income as was shown in the original return. It was pleaded bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same was filed before the AO. The AO, however, rejected the Guide Notes issued by the Institute of Chartered Accountants. The AO also did not rely upon the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. The AO was of the view that it should have been shown as income in the assessment year in question. The AO accordingly directed to make the addition of Rs. 8,54,764 being interest income from M/s Arihant Cotsyn Ltd. The assessment order was challenged before the CIT(A). The initiation of proceedings under s. 148 of the IT Act was challenged along with the addition in the assessment order in question. The same submissions were reiterated and it was submitted that since the amount was not recoverable and the accounts were not finalised, therefore, there was no question of accrual of interest in favour of the assessee. The assessee also relied upon the catena of authorities in which it was held that real income is to be taxed. It was also submitted that though the assessee received post-dated cheques but all the cheques were dishonoured and, therefore, the assessee has to resort to file criminal complaint under s. 138 of the Negotiable Instruments Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1999, and only then the assessee carne to know that interest has been credited in the account of the assessee and the TDS has been deducted. The learned counsel for the assessee submitted that the post-dated cheques which were payable subsequently were got dishonoured and, therefore, the assessee filed criminal complaint under s. 138 of the Negotiable Instruments Act along with recovery suit against the debtor and that company had gone in liquidation. Therefore, the recovery of principal amount was itself in doubt. The assessee also filed written submissions in which it was explained that sequence of events absolutely made it clear that the assessee could not have credited the interest in the books of account of M/s Arihant Cotsyn Ltd. (as) the interest income never accrued to him nor there was any possibility of recovery of principal amount from the parties concerned. He has further submitted that since the TDS certificate was issued, therefore, the assessee made entry in the asst. yr. 2000-01 and shown the same income in the asst. yr. 2000-01. He has relied upon the decision of the Hon'ble Punjab and Haryana High Court in the matter of Vipan Khanna vs. CIT (2002) 175 CTR (P H) 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration is a matter subsequent to the initiation of proceedings under s. 147 of the IT Act. We, therefore, do not find any justification to interfere in the orders of the authorities below as regards initiation of proceedings under s. 147 of the IT Act; the same is justified in the matter. We, therefore, dismiss this ground of appeal of the assessee as regards challenging the initiation of proceedings under s. 147 of the Act. The connected point is of real income. The case law relied upon by the learned counsel for the assessee before the authorities below as well as before us is in the matter of Godhra Electricity Co. It is held in this case that income-tax is levied on all the income. It is further held that 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 materialise. There is no dispute about the legal proposition decided in this case as relied upon by the counsel for the assessee. We find in this case though a subsequent entry is made by M/s Arihant Cotsyn Ltd., but in this case there is no mere entry as post-dated cheque was also issued to the assessee upon which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at p. 31 of the paper book in which in the first column, it is mentioned, date of payment/credit-6th July, 1999, The date of payment is 18th Nov., 1999, for the period from 1st April, 1998 to 31st March, 1999. The claim of the assessee had been that the audit was completed for the assessment year under appeal. i.e., 1999-2000 as on 31st May, 1999. Copy of the audit report is also filed at p. 7 of the paper book. The assessee has also shown the debit amount of M/s Arihant Cotsyn Ltd. in a sum of Rs. 12.18,241.64 as on 31st March, 1999. The debtor, M/s Arihant Cotsyn Ltd., also shows the opening balance as on 1st April, 1999, in a sum of Rs. 12,18,241.64 as per certificate filed at p. 30 of the paper book. These facts clearly establish that both the parties did not make any entry of the interest amount up to the period 31st March, 1999. M/s Arihant Cotsyn Ltd. for the first time, credited the amount of interest as on 6th July, 1999, which is also supported by the entry recorded in the TDS certificate. As per TDS certificate, the date of payment is 18th Nov., 1999. M/s Arihant Cotsyn Ltd. in their certificate has mentioned the amount of TDS. Though it is dt. 6th July, 1999, but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossibility of recovery of the principal amount is supported by the subsequent litigation in which the assessee filed civil and criminal cases in the Court of law against M/s Arihant Cotsyn Ltd. as the post-dated cheques of the payment were dishonoured. M/s Arihant Cotsyn Ltd. went in liquidation, therefore, the plea of the assessee that as on 31st March, 1999, there was impossibility of the recovery of the principal amount was justified. The assessee did not account for the interest as the assessee was almost certain that principal amount due from M/s Arihant Cotsyn Ltd. is not likely to be recovered. The decision of the assessee not to debit the interest in those accounts was, therefore, directly relatable to the business expediency. 10. The Hon'ble Rajasthan High Court in the matter of CIT vs. Banswara Fabrics Ltd. (2004) 186 CTR (Raj) 52 : (2004) 267 ITR 398 (Raj), while considering the appeal of the Revenue on the question of addition on account of notional interest on debit balances of two of the debtors, considered the following facts. In this case interest on these accounts had not been charged in the account of the assessee for the accounting period relevant to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as the assessee-company was following the mercantile system of accounting and as the assessee was charging interest In the previous years, the interest should be added to the income of the assessee on the same basis for the year in question also. This finding was affirmed in appeal by the AAG. On a further appeal, the Tribunal set aside the orders of the authorities below and held that there was no material on the record to show that any agreement, whether written or otherwise, existed between the assessee and the debtor companies for payment of interest. The Tribunal further held that the interest had neither legally nor actually accrued in favour of the assessee and, consequently, the assessee rightly did not show the same in its return. The Hon'ble Allahabad High Court affirmed the findings of the Tribunal and dismissed the reference application of the Revenue and has held as follows: "We are clearly of the view that in the absence of any agreement, whether in writing or otherwise, whether express or implied, interest could not be added to the income of the assessee. Broadly, interest can accrue in favour of the assessee either under or by virtue of some statute or under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount became doubtful. The assessee as well as M/s Arihant Cotsyn Ltd. have not shown any interest in the assessment year under appeal, i.e., 1999-2000 as the assessee had rightly shown the amount of interest because of entry made on 6th July, 1999, in the asst. yr. 2000-01 as the accounting period for 6th July, 1999, would end on 31st March, 2000. This fact shows that ultimately interest is assessed in subsequent year and as such there is no escapement of income, i.e, amounts of interest in question. Therefore, both the decisions of the Hon'ble Allahabad High Court and the Rajasthan High Court are clearly applicable in the case of the assessee. 13. The Hon'ble Rajasthan High Court in the matter of CIT vs. Rajasthan Financial Corpn. (1997) 140 CTR (Raj) 47 held that where the litigation is going on, interest in cases under litigation could not be treated as income of the assessee. In this case the assessee was following hybrid system of accounting. The learned counsel for the assessee submitted that the assessee got the benefit of TDS certificate in the asst. yr. 2000-01 as the whole amount of interest of Rs 8,54,764 was shown in the asst. yr. 2000-01. The contention of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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