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1989 (12) TMI 82

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..... Ltd in the matter of tax while the assessee company will lessen its tax burden by way of such waiver. Therefore, the ITO did not accept the waiver of interest of Rs. 1,65,000 and treated the same as the income of the assessee company. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). 3. Before the CIT(A) the assessee 's counsel submitted that the assessee company by its letter dt. 28th Aug., 1984 wrote to the ITO that the amount of Rs.1,65,000 computed @15 per cent on the loan of Rs. 11,000, 000 to J.H. Ltd waived by it should not be subjected to tax on accrual basis. The parent company, J.H. Ltd., being faced with acute financial crisis approached the assessee on 25th March., 1983 for waiver of interest amount that will be due on 31st March,1993. The Board of Directors of the assessee company having regard to the financial strain of the parent company, J.H. Ltd had agreed to waive the interest. The assessee pointed out in the said letter to the ITO that interest could not be said to have resulted at all as there was obviously neither accrual nor receipt of income. Reliance was placed on the decisions in the cases of CIT vs. M/s Shoorji Vallabh .....

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..... ee company with effect from 1st Jan., 1978 as per the order of the Calcutta High Court. All the shares in the assessee company are held by J.H. Ltd. The erstwhile sterling company had given a loan of Rs.11,00,000 to J.H. Ltd and the same was taken over by the assessee company on amalgamation. Interest on the loan amount fell due at the close of the relevant accounting year, that is, on 1st March, 1983. J.H. Ltd. Till the financial year 1982-83 relevant to the asst. yr. 1983-84 had paid annual interest on the loan amount regularly. During the relevant accounting year J.H. Ltd. was facing acute financial crises and, therefore, had approached the assessee company before the end of the financial year for waiver of the interest as a special case. This is evidence from the copy of their letter dt. 25th March, 1983 which is placed at page 7 of the paper book. The assessee company appreciated the gravity of the situation faced by the parent company, J.H. Ltd. and having regard to the grounds of commercial expediency and also the assessee-company's financial stake in the investment of Rs. 11,00,000 had agreed to waive the interest for the relevant assessment year under consideration. This c .....

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..... ITO (1987) 27 ITD 189. Reliance is also placed on the decisions of the Supreme Court in the cases of CIT vs M/s Shoorji Vallabhdas Co. and CIT vs. Birla Gwalior (P) Ltd. 5. The arguments of the Department were to the following effect: All the developments took place in the last fortnight tight of the year. There was already an accrual of income by that time. The claim that the amount of Rs. 11,00,000 being the principal amount was at stake was never there except before the Tribunal. In fact, it is not correct J.H. Ltd. is a sound company. In fact, there were additions to the fixed assets to the extent of Rs. 5,13,456 and Rs. 6,86,085 as can be seen from the Schedule 5 at page A-17 of the printed accounts of J.H. Ltd. for the financial year 1982-83. Of course, there was some sale of obsolete machinery to the extent of Rs. 40,176. The accounts of the said company do not show any financial stringency as argued by the assessee's counsel. As can be seen from the said company's profit loss account, it has paid interest payment of Rs. 66,51,871. Even then there was a net profit of Rs. 43,25,947. The interest payment of Rs. 1,65,000 to the assessee company would not have made any de .....

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..... ed assets of Rs. 77,073,104 credited to the profit loss account. In effect, there was a loss of Rs. 34,47,157 out of business operations. The very fact that fixed assets of Rs. 6,94,615 + Rs. 40,176 had to be disposed of gives enough indication that the financial situation was desperate. 7. I have considered the rival submissions and the papers filed before me. The Assessing Officer was of the opinion that the waiver of interest was not on any commercial consideration but out of considerations of tax planning. In that view, the ITO did not accept the assessee 's claim for waiver of interest of Rs. 1,65,000. The assessee argued before the ITO in its letter dt. 28th Aug., 1984 that interest would be due on 31st March, 1983 and the assessee-company's Directors waived the same on 29th March, 1983 even before the accrual. According to the assessee, it amounts to waiver of income before its accrual and it was not liable to be taxed as per the decisions of the Supreme Court in the cases of CIT vs. Shoorji Vallabhdas and Co. and CIT vs. Birla Gwalior (P) Ltd. The ITO did not consider the aspect of whether there was any accrual of interest to the assessee. Even the CIT(A) did not exami .....

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..... ot at all examined the aspect as to whether any interest accrued to the assessee by 29th March, 1983 on which date the assessee company resolved that "interest chargeable to Jardine Henderson Ltd. on the loan of Rs. 11,00,000 in respect of the year ending 31st March, 1983 be and is hereby waived." The lower authorities ought to have examined whether there existed any agreement for the loan of Rs. 11,00,000 by the sterling company (which devolved on the assessee) to J.H. Ltd. The time of accrual of interest depends upon the terms and conditions of the agreement. Accrual of interest is different from periodicity of payment of interest. Once accrued, income is liable to charge even if, subsequently, it is foregone and not realised. See the case of Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835 (SC). 9. In the circumstances, I set aside the orders of the lower authorities on the issue of taxability of Rs. 1,65,000 being the interest on loan of Rs. 11,00,000 and restore the matter to the ITO. The ITO is directed to examine the case keeping in view the above discussion and make a fresh assessment as per law after affording the assessee a reasonable opportunity of being heard. 10. .....

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