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2009 (8) TMI 121

..... e is directed against the order of the CIT(A)-I, Trivandrum, dt. 10th March, 2004. The assessment year involved is 1992-93. 2. We have heard the learned Departmental Representative and the learned counsel for the assessee at length. We have heard the rival submissions and perused the material available on record including the precedents relied upon. The only issue is on the chargeability of interest on an advance of Rs. 124 lakhs made by the assessee to M/s Kerala Ceramics Ltd. which was outstanding as on the last day of the previous year relevant to the assessment year under appeal. The AO noticed that the assessee is following mercantile system of accounting. Therefore, in the absence of any waiver decision before the accrual of interest, the interest is deemed to have been accrued for the year relevant and he brought it to tax on notional basis. 3. However, on appear to the CIT(A), the CIT(A) found that for the very same reason he passed for the asst. yr. 1999-2000, he deleted the addition. As the interest has not been fixed by the Government, therefore the actual interest amount that would be receivable from M/s Kerala Ceramics Ltd. was not quantifiable. Under the above circums .....

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..... rectors of the assessee-company passed a resolution authorizing the assessee-company to make an advance of Rs. 124 lakhs to M/s Kerala Ceramics Ltd. on the terms and conditions if any, that would be decided by the Kerala Government in due course. It was on the basis of the above resolution that the assessee-company had made the advance of Rs. 124 lakhs to M/s Kerala Ceramics Ltd. 5. No terms arid conditions regarding the rate of interest, mode of repayment, etc. were determined at the time of making, the payment of advance to M/s Kerala Ceramics Ltd. Those matters were left to the discretion of the Kerala Government to be decided in due course. It is a fact available on record that while the assessee-company had made the advance of Rs. 124 lakhs to M/s Kerala Ceramics Ltd., there was no stipulation regarding payment of interest. 6. In the income escaping assessment also, the AO has no case that there was any stipulation attached to the advance given by the assessee-company to M/s Kerala Ceramics Ltd. At the time of hearing it was made clear by the learned chartered accountant that the advance amount has been repaid by M/s Kerala Ceramics Ltd. without any interest. 7. The crucial po .....

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..... r through any other lawful means. Therefore, in the facts and circumstances of the present case, the advance of Rs. 124 lakhs given by the assessee to M/s Kerala Ceramics Ltd. has not generated any income during the previous year relevant to the assessment year under appeal, and therefore, the question that there was income by way of accrual of interest is out of place and quite premature. 11. The learned JM, while arriving at his conclusion has relied on the order of the Tribunal, Cochin Bench in the case of Dy. CIT vs. Kerala Minerals & Metals Ltd. (ITA No. 708/Coch/2007). While disposing of the said appeal filed by the Revenue through its common order dt. 30th Jan., 2009, the Tribunal has upheld the action of the AO in recognizing the income in the hands of the assessee-company against the advances made to other Government companies. But the facts of that case are dramatically different from the present case under consideration. In para 13 reflected in p. 9 of the said common order of the Tribunal, there is a specific finding to the effect that interest rate mentioned in the agreement is at 13 per cent . In the above-mentioned case, there was a stipulation for payment of int .....

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..... ings (P) Ltd. is not applicable to the present case. 13. The learned JM has relied on another judgment of the Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. In that case, the Supreme Court was in fact examining the effect of book entries, passed, by the assessee, which were different from the subsequent agreement, entered into between the parties. The assessee in that case was the managing agent of two shipping companies and under the managing agency agreement, it was entitled to receive commission at 10 per cent. The assessee credited commission income as per that rate. Thereafter, an agreement was made between the parties whereby the rate of commission was reduced. The issue was whether the commission should be considered at 10 per cent or at the reduced rate. The Hon ble Court held that the subsequent agreement was at a lesser rate of commission in such a way as to make the income, which really accrued, to the assessee different from what had been entered in the books of account. That was not a case of a gift by the assessee to the managed companies but a portion of income, which had already accrued, but reduced further. The Court held that the assessee had in .....

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..... made about a hypothetical income, which does not materialize . This decision is in pari materia forerunner to the decision of the Supreme Court in the case of CIT vs. Sarabhai Holdings (P) Ltd. 16. Therefore, neither the Tribunal decision nor the Supreme Court judgments relied on by the learned JM do support the case of the Revenue in any manner. This is for the simple reason that the AO was making an attempt to assess hypothetical income or potential income . 17. In the facts and circumstances of the case, I concur with the findings of the CIT(A) in deleting the addition of Rs. 18,60,000. 18. In result, the appeal filed by the Revenue is dismissed. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 22nd May, 2009 As there is a difference of opinion between the Members who heard the appeal, the following question is referred to the Hon ble President, Tribunal: Whether on the facts and in the circumstances of the case, the AO is right in law to estimate an income of Rs. 18,60,000 by way of notional interest in the context of advance of Rs. 124 lakhs given by the assessee company to M/s Kerala Ceramics Ltd.? VIMAL GANDHI, PRESIDENT (AS THIRD MEMBER): 14th Aug., 2009 On account of differe .....

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..... ear under consideration, no rate of interest was decided by the Government of Kerala. Even the AO had not stated that there was any stipulation attached to the advance given by the assessee company. In the above circumstances, he held that no interest, which could be subjected to tax had accrued to the assessee. The basis of conclusion of the learned AM is contained in para g of his order, which is as under: g. Accrual of interest is one step ahead from recognition of income. The method of accounting, whether mercantile system or cash system, comes into play only after the factum of income is recognized. If no income is recognized or if no income is generated, no occasion arises to examine whether the income is to be accounted on accrual basis or on cash basis. Therefore, the method of accounting whether mercantile or cash is something which is to be reckoned after recording a finding of fact whether income is to be recognized or not. In the present case, as already made clear, there was no stipulation regarding the payment of interest and no such stipulation was made till the close of the relevant previous year. So long as the parties do not agree upon such a condition, there is n .....

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..... gets the money under his own control. According to the Oxford English Dictionary, the meaning of the word accrue is to fall as a natural growth or increment; to come as an accession or advantage . The word arise is defined as to spring up, to come into existence . The words accrue and arise do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word receive and indicate a right to receive. Thus, it is manifest that if an assessee acquires a right to receive income, the income can be said to accrue to him though it may be received later on. Unless and until there is created in favour of an assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. A mere claim to income without an enforceable right thereto, cannot be regarded as accrued income for the purpose of the IT Act. 8. The Hon ble Calcutta High Court in the case of CIT vs. Bharat Petroleum Corporation Ltd. (1992) 108 CTR (Cal) 140 : (1993) 202 ITR 492 (Cal), went to the extent of saying that a mere claim of income without any enforceable right thereto cannot be regarded as accrued income. 9. In the pr .....

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