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2016 (11) TMI 357

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..... case before us failed to record any reasoning whatsoever or satisfaction and thus he did not assume jurisdiction to make disallowance u/s 14A read with rule 8D(2) (iii) as per law. Thus the disallowance deleted - Decided in favour of assessee Addition of notional interest on the loan given by the assessee to its wholly owned subsidiary - Held that:- Assessee never recorded the impugned amount in its books of account shows that none of the parties considered the amount of interest for the year under consideration as expenses / income. The assessee company took a decision for not booking the interest income in view of the facts and circumstances of the case as have been discussed in detail in above part of our order. Thus, in the given facts of this case, the impugned amount of interest was merely a hypothetical income, therefore it cannot be considered as income as per principles of ‘real income theory’. The AO has wrongly added it as part of income on notional basis and the same is directed to be deleted. This ground is allowed. - I.T.A. No.100/Mum/2015 - - - Dated:- 21-9-2016 - SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) For The Appell .....

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..... noted that similar issue had come up before the Tribunal in A.Ys. 2007-08 and 2008-09 wherein the Tribunal vide its order dt 22-10-2014 in ITA No.344 4858/Mum/2012 decided this issue as under: 10. We have considered rival contentions and found that some of the expenditure incurred on construction of hotel was not approved by the projectee, therefore, same were neither paid nor booked in accounts in the year of incurring. However, in the previous year relevant to A.Y.2007-08 under consideration, a settlement was reached with the projectee, assessee company approved the same and amount was remitted after deducting required tax at source u/s.195. As the expenses were crystallized during the year itself, the assessee has capitalized the same and claimed depreciation thereon which was disallowed by the AO on the plea that expenses were related to the earlier year. As per our considered view since the expenses were crystallized only during the year under consideration, the assessee was entitled to capitalize the same and claim depreciation thereon. So far as issue of bills in the name of Seajuli Property Viniyog Pvt. Ltd. is concerned, we find that as per Registrar of Companies .....

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..... any reasoning, whatsoever. 9. Per contra, the Ld. DR submitted that admittedly, no reasoning has been given by the AO for making disallowance @0.50%, but since the rule has prescribed disallowance @0.50%, the AO has followed the law by applying the rate of 0.50%. 10. We have gone through the order of the AO. It is noted by us that assessee made submissions before the AO wherein it was submitted in detail that investment was made only in mutual fund and only for 7 8 times during the year which was an automatic process and no heavy expenses were involved and that is why assessee offered a sum of ₹ 50,000 for the purpose of disallowance out of indirect expenses. It is noted by us that the AO has not mentioned even a single line in the assessment order as to why he did not accept the disallowance offered by the assessee. He has not recorded any finding that having regard to the books of account and other material, more disallowance was required to be made. Reliance has been placed in this regard by the Ld. Counsel on the judgement of the Hon ble Delhi High Court in the case of CIT vs I.P. Support Services India Pvt Ltd 378 ITR 240 (Del). We find the following observations .....

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..... e case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. In CIT v. Taikisha Engineering India Ltd. [2015] 370 ITR 338 (Delhi), in similar circumstances, the court disapproved of an Assessing Officer invoking section 14A read with rule 8D(2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable and unsatisfact .....

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..... has set up a Five Star Hotel at Vakola in Santacruz(East), Mumbai. Appellant Holding Company had a vision to set up Training Institute for the Hotel Industry which could also be beneficial from the point of sourcing new employees for its Hotel business and could also use the name for training of its existing employees. Appellant, therefore, started scouting for a suitable plot of land and finally succeeded in identifying and striking the deal. Since setting up and running Training Institute for Hotel Industry is quite different from running of hotel. Appellant company formed a separate company as its 100% subsidiary and acquired the plot in the said subsidiary for which funding was done by the holding company by way of loan. Loan given to Subsidiary was substantially utilized for meeting its administrative expenses and working capital. A perusal of the Financial Statements of Mahima would show that loan received from JHPL has been fully utilized in the business of Mahima and not diverted therefrom for any other business. However, the process of converting the long term vision of setting up training institute in to a reality required an elaborate planning among others, i .....

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..... person by virtue of a revocable transfer of assets. Obviously what can be brought to tax is restricted to income actually arising to the and not any notional or fictitious income. Income must be real making the transferee richer immediately and not presumed income which may arise in future. From the Audited Financial Statements, it can be see that in the hands of Mahima no revenue, whatsoever, accrued during FY 2008-09 and on the debit side of the P L A/c. it incurred administrative expenses of ₹ 10,164/- and the resultant loss of ₹ 10,164/- was carried forward. The appellant had discussed the meaning of transaction of loan in detail and reliance was also placed in the case of S. A. builders Ltd. vs. CIT 288 ITR 1 (SC). Section 61 is part of the scheme of Income clubbing provisions contained in Chapter V which is designed to meet the situation arising out of tendency on the part of tax payers to endeavour to avoid or reduce the tax liability. In the case of your appellant, loan was never given to transfer income to subsidiary. It also needs to be appreciated that during the succeeding Financial Year i.e. FY 2009-10 said loan as converted into equity and he .....

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..... aggrieved, the assessee filed appeal before the Tribunal. During the course of hearing, it has been submitted by the Ld. Counsel, drawing our attention on the balance-sheet of the subsidiary company that the said company did not make any provision of interest payable to the assessee and its balance-sheet showing continuous losses, the income was not recoverable. Thus, a decision was taken not to credit interest income. An amount can be taxed in the hands of the assessee only if it is in the nature of income. The AO made notional addition on account of interest which was neither recoverable nor has ever been recovered. The AO disregarded the well accepted concept of real income theory. He also placed reliance on Accounting Standarde-9 on revenue recognition issued by the Institute of Chartered Accountants of India. 16. Per contra, the Ld. DR submitted that since in the earlier two years assessee had booked interest income, therefore, in this year also, the assessee is bound to book the interest income. 17. We have gone through the orders passed by the lower authorities as well as the submissions and evidences placed before us. The admitted facts on record are that the intere .....

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..... ificial or hypothetical income. In the peculiar facts of this case, the department cannot assess the income of the assessee by ignoring the sound principles of real income theory . The taxable income of the assessee must be computed in accordance with sound judicial principles. It would be too harsh to ask the assessee to pay tax on the amount of notional interest, which the assessee is apparently not going to receive / recover. In the case of CIT vs Neon Solutions Pvt Ltd, order dt April 5, 2016 in ITA No.2251 of 2013 2300 of 2013, Hon ble Bombay High Court held that interest income could not be added on notional basis by the AO where the parties had agreed not to make provision for interest. The observations of the Hon ble High Court are relevant to the issue and, therefore, reproduced below: 6. On further appeal, the Tribunal by the impugned order takes into account the fact that even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving it and not when it has been waived. The Tribunal has in the impugned order very succinctly set out the principles to be applied while recovering income in following the mer .....

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..... ime when the uncertainty to realize the revenues vanished. The Tribunal further referred to the fact that the various resolutions which were passed by the company as well as the communication exchanged between the parties would establish on facts that interest has been waived. Further on facts it holds that there is no reason to disbelieve the resolution passed by the Respondent-Assessee waiving interest. The Tribunal further adverted to the fact that subsequently, M/s, Marketing Brand Solutions (I) Pvt. Ltd. had amalgamated with the Respondent-Assessee which would also establish that the debentures issuing company was in serious financial difficulties which was incidentally a group company of the Respondent. The decision rendered by the Tribunal in the impugned order is a decision on facts and nothing has been shown to us which could warrant interference by this Court on account of any finding being perverse or arbitrary. 19. Further, in the case of CIT vs Excel Industries Ltd 358 ITR 295(SC), the revenue raised the question of taxability of benefits accruing to the said assessee on account of duty entitlement passbook benefits arising out of exports made by the ass .....

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..... ich does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. 18. The above passage was cited with approval in Morvi Industries Ltd. v. Commissioner of Income- Tax (Central), [1971] 82 ITR 835 (SC) in which this Court also considered the dictionary meaning of the word accrue and held that income can be said to accrue when it becomes due. It was then observed that: ..........the date of payment .......does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. 19. This Court further held, and in our opinion more importantly, that income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. 20. It follows from .....

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..... es, be judged on the principles of real income theory. The majority opinion went on to say What has really accrued to the assessee has to be found out and what has accrued must be( considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made no income . 26. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was advised to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but one has to look at things from a practical point of view. (R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took the .....

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