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TMI Blog2016 (11) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that assessee had made investments in Mutual Funds wherein NAV is calculated after deducting expenses and as such, based on 106 transactions of purchase and sale, assessee had correctly estimated administrative expenses at Rs. 50,000/-. Consequentially AO made similar addition in computation of book profits u/s 11 5JB which also deserves to be restricted to Rs. 50,000/-. 3. Ld. CIT(A) erred in confirming addition of Rs. 53,43,800/- being unaccrued interest on Loan extended to Appellant's wholly owned subsidiary, in the course of carrying on its business, applying the rule of consistency even though the AO had invoked provisions of section 61 for making said addition." 2. Ground 1: In this grounds, the assessee challenges the action of Ld. CIT(A) in confirming the action of AO in not allowing the claim of depreciation of Rs. 16,49,070/- in respect of capital expenditure incurred on account of technical fee and other related expenses towards setting up of the hotel project. 3. During the course of hearing, it was submitted at the very outset by the Ld. Counsel that this issue had come up before the Tribunal in earlier years also wherein the Tribunal had decided this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue principally in favour of the assessee and held that assessee was entitled to capitalise the amount and claim depreciation thereon. But for the purpose of verification of facts, this issue was sent back to the file of the AO with the direction to verify the amount of expenditure and allowing depreciation accordingly. Thus, this year also we send this issue back to the file of the AO with direction to follow the order of the Tribunal for the A.Ys 2007-08 & 2008- 09 and accordingly allow depreciation after verification of requisite facts. With these directions, this issue is sent back to the file of the AO and may be treated as allowed, for statistical purposes. 7. Ground 2 : In this ground, the assessee has contested the action of lower authorities in making disallowance u/s 14A on account of administrative expenses @0.50% of average investment u/r 8D(2)(iii). 8. During the course of hearing it has been submitted by the Ld. Counsel that during the assessment proceedings, the assessee submitted that the assessee had made investment mostly in mutual funds wherein no active involvement of assessee's infrastructure was required. But, the AO did not record any reasons or any ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Subsection (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d subsidiary, viz. M/s Mahima Holdings Pvt Ltd. The brief facts of the case are that the assessee had given loan to its 100% subsidiary company, M/s Mahima Holdings Pvt Ltd in the earlier years. The assessee had booked interest income from the said company in the preceding two years. But, in the year under consideration, the assessee did not book any interest income on the ground that during the year, loan was converted into equity and the said company had incurred huge losses and its net worth had been eroded and the said company was not in a position to pay any interest, therefore, there was no chance of recovery and there was uncertainty in realising income and, therefore, no provision was made on account of interest income. But, the AO did not agree with the approach of the assessee and he held that interest becomes accrued with the passage of time and, therefore, till the amount was converted into equity, the assessee was bound to charge interest from the said company and, therefore, assessee should have booked interest income in its P&L Account. Under these circumstances, the AO made addition on account of notional interest for an amount of Rs. 53,43,800/-. 13. Being aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahima. On justification being sought by AO appellant company believed that the AO is harbouring the view that part of the interest expenditure incurred by JHP calls for disallowance u/s.36(1)(iii). Appellant therefore demonstrated that funding of Mahima was out of owned funds of the JHPL and even otherwise borrowals of JHPL were fully utilized in the hotel business. It was further submitted that funds provided to Mahima have remained utilized in business assets of the company and in fact no loan is given there from to any individual or entity. Business of the subsidiary being business of the holding company, interest paid on borrowals made for the funding of subsidiary deserves to be fully allowed u/s.36(1)(iii) of the Act. For this proposition appellant also relied on the decision of the Hon'ble Apex Court in the case of S. A. builders Ltd. vs. CIT(A) Chandigarh reported in 288 ITR 1 (SC). AO obviously could not make any disallowance of interest u/s.36(i)(ii) on the facts of the case but then invoked provisions of section 61. The appellant had demonstrated how the AO has erred in invoking provisions of sec. 61 and extract of sec. 61, 62 and 63 was also submitted during app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appel lant was charging interest of Rs. 53,43,800/- till the last assessment year and this interest was offered for income-tax purposes. However, at the end of this year appellant had converted this loan into equity and not offered any income for the loan which was extended to the subsidiary company for the whole year. The A.O. had added this amount considered it u/s.61 as irrevocable transfer of assets. The A.O. considered transfer of loan into equity as irrevocable transfer of assets and added into income of the appellant. On examination of various details of the appellant and also earlier years assessment it was clear that appellant is offering this income for the income tax purposes for the loan extended to the subsidiary company. However, the loan which was converted into equity this year, at the end of the year appellant had not offered any income. Here it clearly shows that appellant's loan was with the subsidiary company throughout the year, following the rule of consistency as held in the case of CIT vs. Paul Brothers 216 ITR 548 (Born) and CIT vs. Western Outdoor Interactive 80 DTR 246 (Born). Following the above Rule as appellant had failed to offer the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred during the year were transferred to the Balance Sheet as loss. 18. Thus from the above it is clear that neither the said company had made any provision of interest nor it had capacity to make payment of interest or repayment of loan to the assessee company. Under these circumstances, the assessee took a decision to not to book any interest income by way of just creating an accounting entry. It is further noted that during the year under consideration, the loan was converted into share application money. Under these circumstances, we find that merely because the assessee was following mercantile system of accounting and merely because interest accrues with the passage of time, the interest income will not automatically accrue to the assessee in the given facts of the case where neither the liability of interest has been provided by the said company nor are there any chances of recovery of the interest amount in the hands of the assessee company. The income of an assessee must be computed fairly and in accordance with real life facts. The income should be computed on realistic terms and should not be based merely on theoretical ideas or notions. The assessee can be m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the mercantile system of accounting, when the same is in accordance with AS-1 notified by the Government. (E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. (F) The provisions of Section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. 'In the name of compliance with Section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of Section 28(iv) of the Act, the value of the benefit obtained by the assessee is its income and is liable to tax under the head "Profits and gains of business or profession". We are unable to accept the contention of learned counsel for the Revenue for several reasons. 16. Section 28(iv) of the Act reads as follows: "Profits and gains of business or profession 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession" - ..................... (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; ................ 17. First of all, it is now well settled that income-tax cannot be levied on hypothetical income. In Commissioner of Income Tax v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) it was held as follows:- "Income-tax is a levy on income. No doubt, the Income-tax takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. 24. This Court did not accept the view taken by the High Court on facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Commissioner of Income Tax, [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income. 25. Finally a reference was made to State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that well accepted principles under the Income-tax law have been again reiterated laying down that income-tax cannot be levied on hypothetical income. Hon'ble Apex Court further observed that when we talk about accrual of income, we mean real accrual of income and not hypothetical accrual of income. Thus, accrual of income must be real, taking into account the actuality of situation considered from a realistic and practical point of view. Thus, whether the accrual had taken place or not, must in appropriate cases, be judged on the principles of 'real income theory'. Finally, the Hon'ble Apex Court suggested that under such circumstances, essentially, the Assessing Officer is required to be pragmatic and not pedantic. 21. Further, apart from the above reasoning, the assessee is a company and is bound to follow the Accounting Standards issued by the Institute of Chartered Accountants of India while maintaining its final accounts. As per Accounting Standards-9 pertaining to 'Revenue Recognition', if there is uncertainty with regard to collection of the amount, then recognition of same as income should be deferred in the books of account. 22. Coming back to the facts of this case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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