TMI Blog2014 (9) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... situation - the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax – relying upon CIT vs. Godhra Electricity Co. [1997 (4) TMI 4 - SUPREME Court] - interest which had accrued on a "sticky" advance has to be treated as income of the assessee and taxable as such - ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law - The relevant circulars of the Central Board of Direct Taxes cannot be ignored - So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act – the addition made by CIT(A ) is set aside – Decided in favour of assessee. Rebate u/s 88E in respect of Securities Transaction Tax paid – Held that:- Though furnishing of evidence as to payment of Securities Transaction Tax along with the return filed is prescribed by the statutory provisions, those provisions are only procedural, and non-furnishing of the same is not fatal to the claim for rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delete disallowance after due verification of the claim of the assessee with regard to remittance of the amounts of tax deducted before the due date of filing of the return u/s 139(1) of the Act – Decided in favour of assessee. Reopening of assessment u/s 147 - mere change of opinion – Held that:- The CIT(A) noted that the disallowance made u/s 14A of the Act in the original assessment order was subject matter of adjudication by the CIT(A) and on that very issue further appeal against the disallowance sustained by the CIT(A) was also pending before the Tribunal - the reopening of the assessment is based on the very same material which was already available on record at the time of completion of the original assessment - Since the AO after detailed analysis of the material already available on record at the time of completion of original assessment, made certain disallowance in terms of S.14A of the Act, and such disallowance made by the AO having been contested by the assessee on appeal, it was also examined and adjudicated upon by the first appellate authority, the findings of the CIT(A) is upheld that reopening of assessment in this case is based on mere change of opinion – D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is in appeal before us. 5. The first issue involved in this appeal relates to the addition of ₹ 2,76,38,140 made by the assessing officer on account of notional interest. 6. Facts in brief relating to this issue are that during the assessment year 2005-06, the assessee had advanced certain sums to various parties. These advances comprised of loans which are repayable on demand and short term advances for acquiring securities. The assessee had entered into agreement only for the loans made with the necessary repayment terms including interest whereas it had not entered into any loan agreements for short term advances made for acquiring securities and there are no covenants in the agreements entered with regard to interest payments also. Thus, there are agreements in the case of some loans and there were no loan agreements in others. The assessee has not accounted any interest on accrual basis. The Assessing Officer made addition of notional interest of ₹ 2,76,38,140 with the following observations: A verification of the P L a/c indicate that the assessee has not offered to tax any 'Interest income' on accrual basis. In this connection, it is importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in recognizing what is due, while taking care to provide for all liabilities other than contingent. The earning of income is uncertain and therefore, is not to be recognized following the guiding principles of accountancy namely, conservatism and prudence. The breakup of notional interest is as under: Sl. No. Name of the party Notional income (Rs.) 1. Forum Finvest Pvt. Ltd. 3,83,715 2. Ask Holding Pvt. Ltd. 7,54,849 3. DPK Stocks Securities 4,78,282 4. Sunrich Investments 9,09,673 5. Whitemoon Trading Co. Pvt. Ltd. 60,65,569 6. Pulchand Sons Investments Pvt. Ltd. 1,85,07,916 7. Realstone Trading Co. Pvt. Ltd. 1,73,753 8. Goldstone Trading Co. Pvt. Ltd. 3,64,383 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the assessee reiterated the submissions as made before the lower authorities and submitted that the assessee being an investment company had made loans/advances during the year on the basis of the sworn statements made by the MD of the assessee before the ADIT (Inv.) and loan agreements with few parties the Assessing Officer computed the interest income for the asst year 2005- 06 by applying interest rate at the rate of 14% on all the loans and advances. The interest income was determined at ₹ 2,76,38,140 and addition was made in the assessment stating it to be unaccounted interest income. The transactions of advances given to the eight concerns involved can be grouped in to two categories. (a) Parties with whom no agreement is entered into and (b) Parties with agreement but payment of interest either totally not paid or partially paid. 14. With regard to the parties with whom no agreement, the learned counsel submitted that the Assessing officer applied uniform rate of 14% for all the loans made by the assessee. But there are interest free loans given on short term basis extended without any loan agreements and are repayable on demand. The details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / doubtful, it is highly unjustified to make an addition of notional interest ignoring the principles of prudence. Under these circumstances, there was no real accrual of interest and interest was not taxable in the hands of the assessee having regard to the principles of real income. In fact, there are no agreements with these parties even to enable the charging of interest for the amounts advanced. The assessee had further claimed even before the Assessing Officer that even in the succeeding assessment years, no principal was recovered owing to adverse financial circumstances and financial crunch faced by the parties. Hence it is totally unjustifiable on the part of the revenue to infer interest income in cases where the principal amount became doubtful to recover particularly when there are no agreements, and the assessee had no basis to claim any interest. The entire addition under this group (Rs.25,26,519 for A.Y. 2005-06 ₹ 58,24,690 for AY. 2006-07 referred to in table above) is baseless and is only on assumptions. Hence it is prayed that the Tribunal be pleased to delete the above additions made as notional interest by the Assessing Officer. 16. Regarding Parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s without interest or by paying lesser amount than the agreed interest. The assessee is not certain of the interest collection till the time it is finally paid by the parties. Hence, the assessee cannot venture into accounting of interest on accrual basis and unnecessarily end up in paying taxes. 18. The learned counsel submitted that in the case of Pulchand Sons Investments P Ltd, the notional interest for the asst year 2005-06, was determined at ₹ 1,85,07,916/-. The fact is that the assessee had not received any interest in the assessment year 2005-06. Though the agreement stipulates interest at the rate of 14%, the borrower could not make any interest payment due to loss suffered in the capital market. The borrower had requested for complete waiver of interest also. The assessee after several negotiations could recover interest amount of only ₹ 25 lakhs as full and final settlement. The same is offered to tax on receipt basis in the asst year 2006-07. The agreement of interest settlement dated 21.12.2005 is placed at pages 40 41 of paper Book 3, confirmation letter is placed at S. No. 37 of paper book-3. In these circumstances, learned counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the decisions relied upon by the parties before us. We are of the opinion that to arrive at a real income, accrual basis cannot be a justifying factor and the commercial and business realties of the assessee, should be considered. The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions- (a) The revenue is measurable (b) The revenue is collectable with certainty. The interest income has been admittedly recognised only on receipt basis. The contention of the revenue that the loan agreements have interest clause permitting the assessee to charge interest at the rate of 14% is not tenable. The terms of the agreements, which enabled the assessee company to demand interest were only enabling provisions and those enabling provisions did not guarantee the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ors. (358 ITR 295) and submitted that going by the accounting standard though the revenue is collectible by certainty, the assessee in the present case, in fact, had not received any interest and hence, interest in question remained only notional interest. As canvassed by the learned counsel for the assessee, some of the parties did not repay even the principal amount and some of the parties settled the accounts by paying some interest and hence, we agree that computation of notional interest at 14% on all the advances and making additions on that basis to the income of the assessee, is not justified. 24. We may, at this juncture, refer to the Ahmedabad Bench decision of the Tribunal in the case of ITO vs. CJ Rathod (11 ITR (Trib.) 252), relied upon by the learned counsel for the assessee. In this case the assessee had given interest free loans to some persons. The Assessing Officer added certain sums as deemed interest on such loans. It was held that there was no agreement between the assessee and the persons to whom the money had been advanced regarding charges of interest and the assessee had actually not charged any interest and these loans were interest free loans. As ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 119 of the Income-tax Act. Such a circular is binding under section 119. The circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the case of Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, the legal effect of such circular is, inter alia, considered by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act 15 of 1955, which came into force on April 1, 1955. The Government, however, realised that the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. This court, however, clarified that the Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act. Also a circular cannot impose on the taxpayer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C.B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility . The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, or the subsequent decision in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or sticky loan. This is done by providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. The next issue involved in this relates to rebate under S.88E in respect of Securities Transaction Tax paid of ₹ 27,07,315. 29. Facts in brief relating to this issue are that by mistake, the assessee debited the said amount to Profit and Loss Account under the expenditure head turnover charges paid , and claimed it as regular expenditure. Thereafter before the CIT(A) the assessee claimed for rebate u/s. 88E by filing additional ground. The learned AR submitted before the CIT(A) that since the income returned was loss, the assessee had not claimed the rebate under S.88E before the Assessing Officer. However, since the assessment resulted in positive income, it was claimed, rebate based on evidences is allowable. In the remand report submitted by the assessing officer to the CIT(A), the assessing officer s only objection was that the loss was converted into positive income due to the technical addition and hence, rebate under S. 88E is not allowable. The CIT(A) after detailed consideration of the matter, rejected the claim of the assessee for rebate under S.88E of the Act, for the reasons discussed in paras 14.1 to14.4 of the impugned order, relevant portion of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provisions of Rule 20AAB of the Income Tax Rules, 1962, which deals with the prescribed form for the above purpose, are as under: 20AB. Evidence of payment of security transaction tax for claiming deduction under Section 88E.-The evidence of payment of securities transaction tax which is required to be furnished alognwith the return of income by the assessee under the first proviso to section 88E- (i) On the value of transaction entered into by him in a recognised stock exchange, shall be in Form No.10DB and shall be verified in the manner indicated therein; (ii) On the value of transactions of sale, by him, of a unit of an equity oriented fund to the Mutual Fund, shall be in Form No.10DC and shall be verified in the manner indicated therein. 14.4 Thus, unless an assessee furnishes alongwith return of income, evidence of payment of Securities Transaction Tax, in the prescribed form, no rebate can be allowed u/s. 88E of the Act for any tax claimed to have been paid towards Securities Transaction Tax. However, in the instant case, as verified by me, the appellant has not furnished any evidence of payment in the said prescribed form regarding payment of any Securities Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed is prescribed by the statutory provisions, those provisions are only procedural, and non-furnishing of the same is not fatal to the claim for relief under S.88IE of the Act. In the facts of the present case, the claim of the assessee for rebate under S.88E is an off-shoot of conversion loss returned into positive income on account of additions made. In this view of the matter, we do not find any justification for rejection of the assessee s claim for rebate under S.88E of the Act. We accordingly set aside the impugned order of the CIT(A) on this aspect and direct the assessing Officer to verify whether the assessee had filed the required evidence in the prescribed with regard to provisions of S.88E of the Act. Ld.CIT(A) allowed similar claim in later year on which Revenue has come up in appeal. Since the assessee had made the payment of an amount of ₹ 27,07,315 towards Securities Transactions Tax during the previous year, the claim of the assessee for allowance of rebate under S.88E of the Act has to be considered in the light of the evidence furnished in that behalf. The assessing officer is directed to allow the claim of the assessee after due verification of the evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders of the Revenue authorities. Besides reiterating the contentions urged before the Revenue authorities, assessee filed before us an additional ground contending that the CIT(A) failed to appreciate the legal position that Rule 8D was inserted w.e.f. 24.03.2008 and hence is not applicable to the facts of the case since it is held to be prospective in nature. We find merit in this contention of the assessee. The issue relating to retrospective nature of the provisions of Rule 8D is covered by the decision of Godrej Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) (Bom) and Bellwether Microfinance Fund Pvt. Ltd. (ITA No. 908/Hyd/2013 dated 8.1.2014), wherein it was held that provisions of Rule 8D are not retrospective in nature. We accordingly hold that the provisions of Rule 8D are not applicable to the facts of the assessee's case for the Assessment year 2005-06. However, considering the volume of dividend income earned and the nature of the business of the assessee, we find that the disallowance made by the assessing officer estimating the expenditure relatable to dividend income at 10% of such income is quite reasonable. We accordingly sustain the disallowance made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well, as proof of evidence for remittance before the due date under S.139(1). The learned counsel placed reliance on the following decisions and contended that the amendment brought in by Finance Act 2010 is curative in nature and has retrospective effective application. I. In the case of CIT vs. M/s. PEC Electricals Pvt. Ltd. (ITTA No. 263 of 2013 dated 12.07.2013) the Hon'ble Andhra Pradesh High Court held that the amendment to section 40(a)(ia) made by the Finance Act of 2010 is retrospective in nature. II. The Calcutta High Court in the case of CIT vs Virgin Creations (ITAT No.302 of 2011 dated 23rd November, 2011) held that the amendment in Sec. 40(a)(ia) is having retrospective application. III. The ITAT, Hyderabad in the cases- (i) Sri Lakshmi Gayatri Hotels Pvt. Ltd V/s. ACIT (ITA No 625/Hyd/2013 dated 19.08.2013) (ii) ITO V/s. Meil Ratna JV (ITA No. 20/Hyd/2013 dated 21.08.2013) (iii) DCIT V/s. IVRCL Infrastructure Projects Ltd (ITA No. 1220/Hyd/2013 dated 20.12.2013) -held that amendment to Sec 40(a)(ia) is retrospective in nature. IV, In the case of ACIT vs Piyush C. Mehta (52 SOT 27 (Mum), it was held that amendment to provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f dividend income. Since lesser amount of expenses incurred by the assessee for earning dividend income was disallowed in terms of S.14A of the Act while completing the original assessment, the assessing officer was of the view noticing that income chargeable to tax has escaped assessment. He accordingly issued a notice under S.148 of the Act, and ultimately disallowing an amount of ₹ 46,39,452, as against earlier disallowance of exp sustained by the CIT(A) of ₹ 37,90,491, the assessing officer ultimately determined the taxable income of the assessee at ₹ 4,89,39,527, vide order of assessment dated 31.12.2010 passed under S.143(3) read with S.147 of the Act. 48. On appeal before the CIT(A), the assessee contested the legality and validity of reopening of the assessment. Finding merit in the contentions of the assessee on that aspect, drawing support from the decision of the Full Bench of the Delhi High Court in the cases of Kelvinator India Ltd. (256 ITR 1) among others, the CIT(A) held the reopening of assessment as not valid, and consequently held the re-assessment to be null and void. 49. Aggrieved by the above order of the CIT(A), Revenue is in appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result, Revenue s appeal for the assessment year 2005-06, being ITA No.1939/Hyd/2011, is dismissed. Assessee's Appeal:ITA No.1111/Hyd/2010 Assessment year 2006-07 52. This appeal by the assessee is directed against the order of the Commissioner of income-tax(Appeals) V, Hyderabad dated 10.06.2010 for the assessment year 2006-07. 53. The first effective grievance of the assessee in this appeal is against the addition of ₹ 82,59,078 towards notional interest made by the assessing officer on estimate basis, which has been sustained by the CIT(A). This issue is identical with the one considered by us hereinabove, in the context of the assessee s appeal for assessment year 2005-06. Facts and circumstances of the case for the assessment year 2006-07, being similar to the ones involved in the assessment year 2005-06, for the detailed reasons discussed by us in paras 21 to 27 hereinabove, we delete the addition of ₹ 82,59,078 made by the assessing officer and sustained by the CIT(A), allowing the grounds of the assessee on this issue. 54. The next effective grievance of the assessee in this appeal relates to interest amount of ₹ 60,65,569 offered to tax b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order of the CIT(A) on this aspect for that year and directed the assessing Officer to verify whether the assessee had filed the required evidence in the prescribed with regard to provisions of S.88E of the Act, and to allow the claim of the assessee for rebate under S.88E after due verification of such evidence. The CIT(A), in the impugned order for the year under appeal has directed the assessing officer to verify whether there is evidence of payment in the prescribed format, and if the assessee has complied with the statutory condition, to allow the rebate as claimed by the assessee. Since the directions of the CIT(A) in the impugned order for the year appeal are in consonance with the ones given by us hereinabove for the assessment year 2005-06, we do not find any infirmity in the order of the CIT(A), which is accordingly upheld. Consequently, the grounds of the Revenue, being devoid of merit, are rejected. 59. In the result, Revenue s appeal for the assessment year 2006-07, being ITA NO.1120/Hyd/2010, is dismissed. 60. To sum up- (a) While the assessee s appeal for assessment year 2005-06, being ITA No.468/Hyd/2009, is allowed, the same for assessment year 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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