TMI Blog2010 (10) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... account of accrued income chargeable at 18% and not shown by the assessee amounting to ₹ 14,09,11,659/-. 4. The addition has been discussed by the AO in Para 4 and 5 of the assessment order. The A.O. has stated that the assessee had advanced huge loans to M/s. Bhansali Associates. He has stated that in the earlier years the assessee had shown interest income from these advances but during the year under consideration the assessee had not shown any interest income though the advances were continued to be made with this group. He had, therefore, issued shown cause notice to the assessee. The assessee s submissions are reproduced in Para 4 of the assessment order and are dealt with by the assessing officer in Para 5 of the assessment order. The A.O. has stated that the submission of the assessee that the interest rate would be decided by both the parties in the month of March, every year depending upon the profitability of the other party is an after thought story to evade tax liability. Further, during the F.Y. 2002-03, the financial position of the said firm was not good and the said firm was not in a position to pay interest because it has not earned so much of income as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of law. (d) The assessee does not establish that there was improbability of recovery of advances/ interest. (e) The assessee fails to establish objectively to the satisfaction to the effect of preventing the accrual of interest as real income. In the taxing statue, where law is clear, considerations of even injustice do not afford justification for exempting income from taxation. (f) Taxability/ accrual of particular interest income cannot be mutually decided by payer and recipient as convenient to them in order to defeat the provisions of law. In Para 5.3 of the assessment order, the assessing officer has observed that a Survey U/s 133A .of the Act was carried out in the case of Bhansali Associates on 13/9/2005, during the course of which the statements were recorded and financial transactions with M/s Intercontinental India, in whose name credit of more than ₹ 75 crores was outstanding were questioned. The assessing officer has further observed that in the consequent enquiry, it was gathered that the said Bliansali Associates had regularly paid interest up to assessment year 2002-2003 and it was offered for tax by the assessee. From A.Y. 2003-2004, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding and in view of inability of the M/s. Bhansali Associates to pay interest, the assessee agreed not to charge of interest and accordingly no interest had in fact accrued to the assessee firm. It is stated that all such material/ facts were submitted to assessing officer but he has failed to appreciate the same. Further, as interest has not at all accrued to assessee firm, it has not shown the same as income. The assessee further submitted that when it has not received the interest income, the hypothetical income should not be taxed. The assessee stated that there cannot be any presumption that since the assessee has received interest in earlier year, he should receive the same in current year also. 4.1 With reference to observations made by the A.O., the assessee explained as under: (a) The assessee has further stated that though there is no written agreement between both the parties, correspondence/ communication have been made between the assessee and M/s. Bhansali Associates regarding amount advanced by the assessee, terms and conditions regarding such advance, whether interest to be charged or not to be charged, percentage of interest to be charged. It was further sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod under consideration, the said method should be followed. It may be noted that there is no change in our accounting system. In fact, no interest has accrued and legally also, the appellant firm is not entitled to it and, therefore, it has not accounted for. In spite of this, if it is treated as change, then also appellant submits that the provision of income tax cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. Regular in the present context cannot mean permanent. It has not been pointed out with reference to any provision of the Act that a change is impermissible or barred even when it is warranted by the existing situation. It is further stated that no hypothetical or theoretical income can be brought to tax. The income must accrue in the real sense. Merely because theoretically in accordance with the mercantile system of accounting, the income can be said to accrue, no tax can be levied on such basis. The reality of the situation and the facts cannot be ignored. In view of the facts of the case, as interest income has not accrued to appellant at all, appellant has not accounted the same as income even if it is followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing officer; facts are similar to decision of State Bank of Travancore. However, in the case of assessee, it has not debited any interest for the amount given to Bhansali Associates nor the said firm has credited account of the assessee by the amount of interest payable. No suspense account has been created as was done in aforesaid two cases. No entry in the books of accounts for charging any such interest/ compensation was passed at all. The aforesaid two decisions relied upon by the assessing officer are not similar to the facts of the assessee and hence the same cannot be applied in case of the assessee in wrong manner. Further, it is the decision of the partners not to charge interest considering the facts and circumstances. (f) With regard to other decisions relied upon by the assessing officer, the assessee has stated as under: - Appellant further states that decision of Western India Paints and Colour company vs. CIT 206 ITR 359 relied on by assessing officer is not applicable to present facts of case of appellant because, in such case correspondence regarding waiver of interest was made even after six months after expiry of accounting year whereas in case of appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derstanding. The A.O. has not been able to bring any material on record to contradict the contention of the appellant that there was a mutual agreement between the two parties in the month of March every year and also with regard to the financial position of M/s Bhansali Associates. I agree with the appellant that interest had not at all accrued to the appellant and hence hypothetical income should not be taxed. The AO has stated that relinquishment of income after accrual does not make it unreal. The advances have not become sticky and the assessee does not say there was improbability of recovery of advances. This argument of the AO is not correct since there is no accrual of income. The relinquishment of income occurs only after accrual. It is not the appellant's case that the advances have become sticky. The appellant has argued that interest income has not accrued at all. There is force in the argument of the counsel that during survey u/s 133A M/s Bhansali Associates stated that no interest has-been paid by them to the appellant and have not claimed any liability on that account and hence there is no concealment of interest income on the part of the appellant. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that financial position of M/s. Bhansalai Associates was not good to repay the advance. There was no written agreement at the time of giving advances or at the time of relinquishment of the interest. There was no improbability of recovery of advances, therefore, income accrued to the assessee. Learned D R submitted that the decision of the Hon'ble Calcutta High Court in the case of Kewal Chand Bagri (supra) relied upon by the learned CIT (A) is not applicable to the facts in the case. The learned D R submitted that the entries in the books of account would not affect taxability of income. In the absence of evidences rule of consistency may be followed. He has submitted that the department is not aware of parties for non-charging of interest. Learned D R submitted that it was a colorable device to avoid payment of tax, therefore, A O rightly taxed the interest income on accrual basis. 7. Learned Counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that in the case of M/s. Bhansali Associates they have not claimed any deduction of the expenditure on account of impugned interest. He has relied upon the decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of close of the financial year because it was decided to charge/pay interest. There is no evidence on record whether M/s. Bhansali Associates paid any interest to other parties. He has referred to PB 78 and 79 (A Y 2004-05), statement of facts in which it was also explained before learned CIT (A) that assessee company noted that in earlier year also financial position of M/s. Bhansali Associate was not good and shown their inability to pay the interest and as such with the mutual understanding no interest was charged. He has submitted that written correspondence was exchanged between the parties and copies of such correspondence were also enclosed with the statement of facts filed before learned CIT (A). He has submitted that on the basis both the parties have decided not to pay/charge interest on such loans given by the assessee. He has therefore, submitted that learned CIT (A) rightly deleted the addition. 8. We have considered the rival submissions and material on record. Hon'ble Allahabad High Court in the case of Jwala Prasad Radhakrishna 198 ITR 415 held as under: We are clearly of the view that in the absence of any agreement, whether in writing or otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 410 held as under: The Assessing Officer made an addition of ₹ 68,25,000 being the interest accrued on interoperate deposit given by the assessee to L. The Assessing Officer observed that the assessee did not declare any interest accrued and that the assessee followed the mercantile system of accounting. The assessee on being asked, explained that the loan had become irrecoverable and so no interest could be said to have really accrued thereupon. This was because according to the assessee, the loan which was given to L by agreement dated March 17,1993 was duly credited in the books of account on year to year basis up to March 31, 1999, which was duly assessed to tax, though interest was actually received only for the first two years and no interest was received thereafter till March 31,1999, and the board of directors of the assessee company took a decision not to account for the interest income in the books. The further facts which emerged on record were that the total outstanding amount of ₹ 617 lakhs including the principal amount of ₹ 350 lakhs and interest amount of ₹ 267 lakhs was ultimately settled at ₹ 480 lakhs (principal ₹ 350 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociates in assessment year 2000-01. When the assessee had given loan to the said firm, it was agreed between both parties that M/s. Bhansali Associates will compensate assessee by way of its share of profit either in the form of mutually agreed lump sum amount to be determined at the end of the working of the financial year or in the form of interest at the rate to be mutually agreed between the parties at the end of the working of financial year i.e. in the month of March of every year depending upon the profitability of the other party. Such mutual understanding between the parties was present from the very first day when assessee had advanced money. Up to assessment year 2002-03 M/s. Bhansali Associates paid the amount/interest to the assessee on product basis. However, on the close of the financial year relevant to the assessment year under appeal it was decided not to charge/pay interest. Such facts explained before the learned CIT (A) have not been disputed through any material on record. It is also admitted fact that there was no written agreement existed between the parties on such understanding. Therefore, the mutual understanding agreed to between the parties explained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted here that assessee is a firm, so passing of the resolution by the Board of Directors as in the case of company for waiver of interest may not arise and would not be relevant in the case of firms. The facts and circumstances and conduct of the parties shall have to be seen in such circumstances in the case of the firm. Since both the parties prior to close of the financial year decided not to pay/charge interest and no entry has been made in the books of account would support the case of the assessee that the interest stood waived for the assessment year under appeal. The A O has not brought any evidence on record that there was no mutual understanding between parties in the month of March of every year to charge or not to charge interest. The interest had not accrued to the assessee and no hypothetical income could be taxed in the hands of the assessee. Merely, interest was charged in earlier year is no ground to make addition in the assessment year under appeal. It may also be noted here that Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra) quoted a passage from its earlier decision in the case of CIT Vs Shoorji Vallabhdass Co. 46 ITR 144, where i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had given monies from borrowed funds. It is further stated by the A.O. that the assessee s alternate contention that keeping in view the ITAT decision in the case of Torrent Financers reported at 73 TTJ 624, at the most interest to the extent of ₹ 82,03,429/- only could be disallowed, is not accepted. The A.O. has staled that this is for the reason that the assessee had made advances to Bhansali Associates as business transactions with the motive to earn interest income. It is not the case of diversion of interest bearing funds to non-business purpose. It is staled that for the sake of argument if the assessee s contentions are accepted that it is a case where the assessee had interest bearing fund which were advanced to the said concern, the interest free fund available to assessee were not so large but it was fixed in business assets as investment. Therefore, the fund transferred to Bhansali Associates was from circulating fund withdrawn from the bank. It is stated that had there not been any transfer of such fund the assessee would have to pay less interest to the banks and others. The assessee had during the year paid interest of ₹ 24.93 crores, this could have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of allowing deduction for the interest paid by the assessee. The Supreme Court in the case of Madhav Prasad Jatia vs CIT (1979) 118 ITR 200 has laid down at page 208 as under: ....... we may point out that under s. 10(2)(iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount land claimed it as a deduction ... The principle of law after going through the various decisions such as, i) Madhya Pradesh High Court in the case of Birla Gwalior Pvt. Ltd. v/s. CIT (1962) 44 ITR 847 ii) The Madras High Court in the case of CIT v/s. Pudukottal Co. (P) Ltd (1972) 84 ITR 788 iii) The Madhya Pradesh High Court in the case D H Secheron Electrodes Pvt. Ltd. v/s. CIT 142 ITR 528 (ivj) The I.T.A.T., Ahmedabad Bench, in the case of Sahibaug Enterprise vs. I.T.O. is that once it is found that the capital is borrowed for the purposes of business, the assessee is entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the assessee, no interest is disallowable. If it exceeds, proportionate disallowance can be made. The entire interest-free funds include owner's own capital, accumulated profits and other interest-free creditors and loans, if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilisation of fund for non-business purposes . The assessee further relied on the decision of CIT Vs. Radico Khaitan Limited 142 Taxman 681, where Hon ble Allahabad High Court has decided the issue in favour of the assessee and has held as under: The Principle for allowing the amount of interest paid in respect of capital borrowed is that the following three conditions should be fulfilled(i) The Capital must have been borrowed or taken for the purpose of business or profession, (ii) the interest should have been payable (iii) if the borrowing is not for the business purpose and is for private purpose or not connected with the business, interest paid on such borrowing cannot be allowed as deduction u/s. 36(l)(iii) of the Act. Applying the said principal to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable to the appellant's case. The counsel for the appellant has rightly placed reliance on a number of other decisions of the various High Courts and the IT AT Ahmedabad in the case of Sahibaug Enterprises Vs ITO in support of his contention which has been discussed supra. The counsel for the appellant has taken alternative plea that it had sufficient interest free funds available in the form of partner s capital and interest free borrowings for giving advance to M/s Bhansali Associates and hence interest cannot be disallowed on this ground. The counsel has placed reliance on the decision of 1TAT, Ahmedabad in the case of Torrent Financial Vs ACIT 73 TTJ 624 and also on the decision of the Allahabad High Court in the case of CIT Vs Radico Khaitan Ltd. 142 Taxman 681. I do not find any force in the alternate plea of the counsel in view of the decision of the Punjab Haryana High Court in the case of CIT Vs Abhishek Industries Pvt Ltd. 286 ITR 1. In view of the Punjab Haryana High Court decision had the appellant not advanced interest free loan to M/s Bhansali Associates, there was no need for the appellant to raise interest bearing loans and to that extent, the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Abhishek Industries. Hon'ble Supreme Court subsequently, reversed the decision in the case of Munjal Sales Corporation, therefore, decision of the High Court in the case of Abhishek Industries is no longer a good law. He has submitted that CIT (A) in the present appeal rejected the alternate contention of the assessee by following decision of Punjab Haryana High Court in the case of CIT Vs Abhishek Industries Pvt. Ltd. (supra). However, the said decision is now superceded by the decision of Hon'ble Supreme Court in the case of Munjal Sales Corporation 298 ITR 298. Therefore, even on alternate contention, the appeal of the assessee should have been allowed by the learned CIT (A). 14. We have considered the rival submissions and material available on record. ITAT Ahmedabad Bench in the case of Core Health Care Ltd. (supra) relied upon decision of the Hon'ble Supreme Court in the case of S. A. Builders Vs CIT 288 ITR 1, according to which, if interest free advances are given for business purposes, then no disallowance of interest is required to be made irrespective of whether they are given out of interest free capital or interest bearing funds. The Tribunal, cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition. In the result, this ground of appeal of the revenue is dismissed. 15. On ground No. 3, revenue challenged the order of the learned CIT (A) in deleting the addition of bad debts amounting to ₹ 1,49,18,720/-. 15. This issue has been discussed by the AO in Para 10 of the assessment order. It is observed by the A.O. that total amount of ₹ 1,54,84,949/- was debited to the Profit and Loss Account as miscellaneous expenses being excess provision written back. This included the following amounts: ₹ 583379 Interest income. ₹ 14918720 DEPB and Advance Licenses ₹ 16150 Less: Rent Expenses ₹ 15485949 Total The Assessing Officer has out of the above amount disallowed ₹ 1,49,18,720/-. The assessee had contended before the A.O. that it had offered DEPB license and advance license received during the earlier ears as income and corresponding debit was given to export incentives receivable. However, certain licenses were not utilized even after lapse of 4 to 5 years and hence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the appellant had produced necessary details to justify the claim and the observation of the A.O. that the appellant had not furnished any details was not correct. The appellant further referred to section 36(1) (vii) and slated that the bad debt written off as irrecoverable in the account is allowable subject to the following conditions: (a) The debt has been taken into account in computing the income of the assessee of previous year or (b) It represents money lent in the ordinary course of business of money lending which is carried on by the assessee. As in the case of appellant, income arising from DEPB/ advance licenses are already considered as part of income in earlier years, writing off of such income as bad debt because such licenses have been expired/ non usable or surrendered to DGFT is allowable business expenditure u/s. 36(l)(vii) of the Act. The following decisions support the arguments of appellant: (i) CIT vs. Girish Bhagwatprasad reported at 256ITR page 772 (Gujarat High Court) (ii) ITO vs. Anil H. Rastogi reported at 86 ITD 193 (Mumbai IT AT) (in) (iii) New Deal Fin. Invest. Ltd 74 ITD 469 (Chennai ITAT) As regards the observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es depend on whether the outgoing, or what is regarded as bad debt resulting in a loss, is on the capital or revenue account. Most trading losses incurred in the course of carrying on of business in a particular year will also come under that category and will naturally enter into computing the net total income as the real profits chargeable to tax cannot be arrived at without setting off of legitimate trading loss................................... B. Supreme Court decision in Ramchandar Shivnarayan v. CIT (111 ITR 263) (SC) Under section 10(1) of the Indian Income-tax Act, 1922, hereinafter called the 1922 Act, the assessee was required to pay tax in respect of the profits or gains of any business carried on by him. The corresponding provision in the 1961 Act is to be found in section 28. Sub-section (2) of section 10 of the 1922 Act prescribed the method for computation of profits or gains after making the allowances enumerated in the various clauses of that sub-section. The corresponding section 29 of the 1961 Act says: The income referred lo in section 28 shall be competed in accordance with the provisions contained in sections 30 to 43A. In terms no specific pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides. The A.O. has made disallowance of ₹ 1,49,18,7207/- which has been claimed by the appellant as a bad debt- on account of DEPB license and advance license. The disallowance has been made by the A. O. on the ground that the appellant has enjoyed deduction u/s 80HHC on the DEPB License and advance license income. Since the income was exempt the bad debt on account of these licenses cannot be allowed. On the other hand the counsel has mainly argued that the debt has been taken into account in computing the income of the assessee of the previous year. Therefore writing off such income as bad debt; because these licenses have expired or have been surrendered to DGFT is allowable as business expenditure u/s 36(1) (vii). The counsel has also placed reliance on some case laws in this regard which have been discussed supra, I find force in ' the arguments of the counsel that the income from these licenses has been considered as income by the appellant and from such income deduction u/s 80HHC has been claimed and that the entire income is not exempt from inception. The, counsel slated that the appellant is satisfying the condition that to claim any bad debt the receipts which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. M.P. was not in the ordinary course of business of the assessee-firm. The debt owed by M/s. M.P. was one which sprang directly from the business of the assessee and was allowable as a bad debt and consequently, therefore, as a trading loss under s. 28(1). He has also relied upon recent decision of the Hon'ble Supreme Court in the case of T. R. F. Ltd. Vs CIT 323 ITR 397 in which it was held as under: This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior to date of receipt of the bill, therefore, claim of expenditure was made in the assessment year under appeal because such expenditure has been crystallized during the year which is allowable u/s 37 of the IT Act. The assessee relied upon decision of Hon'ble Gujarat High Court in the case of Saurastra Cement Chemical Industries Ltd. Vs CIT 213 ITR 523 in which it was held that the assessee followed mercantile system of accounting expenditure relating to earlier year liability arising in relevant previous year, expenditure is deductible. The assessee further explained that in case expenditure is not allowed deduction in the assessment year under appeal, the same should be allowed in the earlier year. 22. The learned CIT (A) considering explanation of the assessee and material on record noted that the expenditure has been incurred by the assessee and the decisions cited by the assessee support the contention of the assessee and accordingly deleted the addition. 23. On consideration of the rival submissions we do not find it to be a fit case for interference. The assessee admittedly received bill during the current assessment year, therefore, liability of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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