TMI Blog2014 (10) TMI 214X X X X Extracts X X X X X X X X Extracts X X X X ..... he liability to pay the advances and the rate of interest at which the temporary advances are to be repaid is determined by the Civil Court, it cannot be said that the same has accrued or arisen to the assessees - if the assessees had advanced interest bearing funds as interest free advances, the interest paid by the assessees towards such borrowed funds would have to be disallowed and treated as the income of the respective assessees – the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh adjudication – Decided in favour of revenue. - ITA No. 1879/Hyd/2013 - - - Dated:- 28-8-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Shri Solgy Jose T. Kottaram For the Respondent : Shri K.C. Devdas ORDER Per Saktijit Dey, J. M. This appeal filed by the Revenue is directed against the order of CIT(A)-VII, Hyderabad dated 30/09/2013 for the assessment year 2008-09. 2. Grounds raised by the department are as under: 1. The ld. CIT(A)-VII, Hyderabad has erred in both facts and in law. 2. The ld. CIT(A)-VII, Hyderabad ought to have appreciated the fact that under the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of ₹ 3,53,28,82/- as interest accrued to the assessee on the amount advanced to M/s SCSL and completed the assessment accordingly. Being aggrieved of such assessment order, assessee preferred appeal before the CIT(A). 6. Before the CIT(A), it was contended by the assessee that though the amount was given as temporary advance, but, was never accounted by M/s SCSL, which is evident from the note appended to the financial statement of M/s SCSL for the year ended 31/03/2009. It was submitted that M/s SCSL has also contested the claim in the City Civil Court. It was submitted that AS-9 also prescribes income should be reckoned when it is not unreasonable to expect collection. Only because mercantile system of accounting is followed by the assessee, it cannot be construed that income has accrued. It only recognizes the income that has accrued but when there is no scope of recovery of principal amount and assessee chooses not to charge interest, the AO cannot bring such interest income to tax as concept of real income is to be applied. In this context assessee relied upon a number of decisions of Hon'ble Supreme Court as well as various High Courts. Further, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 13. Having heard both the parties and having considered the rival contentions and the material on record, we find that the basis for bringing to tax the notional interest income on advances allegedly made by the assessee company to M/s. SCSL are the Civil Suits filed by the assessee companies for recovery of the suit amounts along with interest at the rate of 18% per annum. The undisputed facts are that the assessees have advanced the loans/temporary advances to M/s. SCSL and this fact has come to light only by the statement of Sri Ramalinga Raju dated 7th/8th of January, 2009. Further, the assessees have advanced the loans or temporary advances through banking channels and immediately after the statement of Sri Ramalinga Raju, the assessees have also issued legal notices for the repayment of the loans and also filed civil suits for recovery of the loan amounts along with interest in the City Civil Court, Secunderabad. Therefore, the liability may have been denied by M/s. SCSL, but as far as the assessees are concerned, there is no dispute or controversy with regard to the loans advanced by them to M/s. SCSL. The only dispute now is with regard to the liability of M/s. SCSL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, any interest which was not due or not collected by the assessee, and the addition of an amount as notional interest was not justified. 4. Hon'ble Punjab Haryana High Court in the case of CIT V/s. Abhishek Industries Ltd. (286 ITR 1), was dealing with a case of interest free advances given to sister concerns on the basis of which the assessing authority has disallowed interest paid by the assessee on borrowed funds. The Hon'ble High Court has held that the nexus between the interest bearing funds and the advances made to the sister concerns is not proved and therefore, there cannot be any disallowance of interest expenditure. 15. Applying the above rationale propounded by the Hon'ble Supreme Court as well as the Hon'ble High Courts, in the cases discussed above, we observe that the following points emerge - (a) It is for the assessee to decide how it conducts its business; (b) Where an assessee advances interest free loans to its sister concerns, unless nexus between interest bearing funds and the interest free advances is proved, expenditure on account of interest on borrowed funds cannot be disallowed nor it can be presumed that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of Abhishek Industries (supra) has held that the nexus between the interest bearing funds and the interest free advances will have to be proved before making the disallowance of interest and bringing it to tax. We find that neither the Assessing Officer nor the CIT(A) has examined the issue from this angle. Therefore, the orders of the CIT(A) and the Assessing Officers are set aside and the issue is remitted to the file of the Assessing Officer of the respective assessees for de novo consideration in the light of our observations above. Further, we hold that if the amounts advanced to M/s. SCSL by the respective assessees are from their own funds, then the interest expenditure cannot be disallowed and brought to tax. Needless to mention that the Assessing Officer shall give fair opportunity of hearing to the assessees before passing any orders in the light of our above observations and in accordance with law. 17. Further, same view was taken by this Tribunal in the case of other assessees viz., M/s. Banganga Agro Farms Pvt. Ltd., Others in ITA Nos. 1852 to 1855/Hyd/2013. Accordingly, on similar lines, we are inclined to remit the issue back to the file of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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