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TMI Blog2014 (5) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned 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, the AO was right in charging interest on the monies given by it as advances. 3. The Ld. CIT(A)-VII, Hyderabad ought to have appreciated the fact that the assessee company has neither written off the advances nor has made any provision for doubtful debts even in subsequent years. Also, the assessee company has approached the judicature for justification of their claim of having advanced the monies along with interest (termed by the company as "Damages" ) from the recipient company, i.e. M/s. SCSL which has merely placed these amounts under "Suspense" -without denying having received these monies by it. 4. ...." Similar grounds have been raised by the Department in all the other appeals also. 3. Brief facts of the case are that all the four assessee companies have filed their returns of income for the relevant assessment year. During the assessment proceedings under S.143(3) of the Act, notices were issued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is investigating the matter under the Prevention of Money Laundering Act of 2002 and directed the companies to furnish details with regard to the alleged advances and has further directed the companies not to return the alleged advances until further instructions from the Enforcement Directorate. It was further submitted that the assessees herein have filed recovery of advances before the City Civil Court, Secunderabad on November 11, 2009 and have also claimed interest at the rate of 18% per annum towards damages. It was also reiterated that the company M/s.SCSL have denied liability to repay the alleged advances and also interest there on and therefore, there is no admission of liability and accrual of interest thereon. 6. After considering the assessee's submissions, the Assessing Office rheld that since the assessee companies are following mercantile system of accounting, they ought to have accounted for the interest on accrual basis, as the assessees have inherent right to receive the interest on the sum advanced,as evidenced from its claim. He therefore, brought to tax the interest income working out the same at the rate of 18% p.a. on the advances given by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment orders on this issue have to be restored. 10. The learned counsel for the assessee, Shri Devadas, on the other hand, supported the orders of the CIT(A) and submitted that the important factor to be considered is that the company, M/s.SCSL, has denied its liability to pay any amounts to the assessee companies, and therefore, there is no certainty of recovery of the temporary advances itself given by the assessee companies. He therefore, submitted that due to the uncertainty of the recovery of the temporary advances itself, there is no certainty of receipt of interest income on such temporary advances. It is further submitted that there was no contract between the assessee companies and M/s.SCSL to receive interest on these temporary advances and in the absence of such contract, the interest income cannot be deemed to have arisen or accrued to the assessees. He further submitted that the advances have been made out of share application monies and not out of borrowed funds, and therefore, it cannot be presumed that the assessee has incurred any interest expenditure by advancing the interest free loans to the sister concerns, and therefore, no notional interest can be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest free and overdraft and /or loans taken, then a presumption would arise that investment would be out of the interest free funds generated or available with the assessee, if interest free funds would be sufficient to make the investments. 3. The Hon'ble Gujarat High Court in the case of Highways Constructions P. Ltd. V/s. CIT (199 ITR 702), was dealing with a case of an assessee company which had advanced interest free loans to directors from amounts borrowed on interest. The Hon'ble High Court held that there was no finding of fact to the effect that actually loan had been granted to the Managing Director or any other person on interest or any interest had actually been collected, but the collection of the interest was not reflected in the accounts. The Hon'ble high Court after observing that the finding of the ITO was that the assessee should have collected interest, held that if the assessee had not bargained for interest or had not collected the same, the Income Tax Officer could not fix a notional interest as due or as collected by the assessee,as there was no provision in the Income-tax Act, empowering the income-tax authority to include in the taxable income, any int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it cannot be said that the said rate of interest is applicable as M/s.SCSL has not admitted the liability of even the amounts of advance. As such, we find that there is no certainty with regard to the said rate of interest. Therefore, it cannot be presumed that the interest accrued to the assessee at the rate of 18% p.a. as claimed by the assessees in the suits filed for recovery of advances. The Civil Courts would consider and decide the liability of M/s. SCSL to repay the amounts of advances and would also consider the liability of M/s. SCSL to payinterest thereon and the rate of interest at which the advances should be repaid. Therefore, unless and until the 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. However, 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 Hon'ble Punjab and Haryana High Court in the case of Abhishek Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X
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