TMI Blog2001 (12) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... books of accounts for the year ended on 31st March, 1989, and 31st March, 1990, for Rs. 36,589 and Rs. 9,511, respectively. The learned CIT(A) has decided the above ground against the appellant in view of the detailed finding given in the appeal order for asst. yr.1990-91. (3) The appellant prays that the reduction in interest income by Rs. 46,100 may be allowed now on the basis of facts and circumstances of the case. For asst. yr. 1989-90 (1) The learned CIT(A) failed to understand the fact, circumstances of the case. (2) The learned CIT(A) erred in confirming the non-reduction in interest income of Rs. 72,901 which have been reduced from interest income receivable from Super Milk Makers (P) Ltd. for the relevant previous year as the appellant has to provide finance as promoter without charging interest/and at lower rate of interest according to the terms and conditions imposed by financial institution, namely, the State Industrial and Investment Corporation of Maharashtra Ltd. while sanctioning term loan to Super Milk Makers (P) Ltd. the entries regarding reversal of interest income have been passed in books of accounts for the year ended on 31st March, 1989. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 12th April, 1984. The main objects of the company as per its memorandum of association are as under: (1) To buy, underwrite, invest in, acquire, hold, trade or deal in shares, stocks, debentures, debenture-stock, bond, obligations and securities, issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debenture stocks, bonds, obligations, and securities issued or guaranteed by any Government, State, Dominations, Sovereign, public body or authority, Supreme, municipal, local or otherwise, firm or person, whether in India or elsewhere either by original subscriptions, participations in equities, tender, purchase, exchange or otherwise and to subscribe for the same either conditionally or otherwise to guarantee the subscription thereof, and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof. (2) To invest, purchase, develop, take on lease or exchange or otherwise acquire, foreclose, purchase on auction, hire, lease, sell, on hire purchase, or finance the sale of any property whether immovable or movable on hire purchase system or on instalment basis, exchange, mortgage, pledge, charge, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o "SMMPL" is placed at p. 25 of the paper book. The learned counsel also drawn attention to the letter dt. 5th Feb., 1992, sent by "SIICOM" to "SMMPL" in which "SIICOM" has confirmed that while sanctioning term loans of Rs. 90 lacs by their corporation to "SMMPL", the appellant-company viz. Vadilal Finance Company (P) Ltd. (in short "VFCL") was accepted as one of the promoter of "SMMPL". As per data available with them, "SIICOM" confirmed that "VFCL" holds shares of Rs. 13 lacs in the paid up share capital of Rs. 54 lacs. "SIICOM", therefore, considered VFCL a corporate entity holding more than 20 per cent of equity share capital of "SMMPL". It has been further observed in the said letter that as per the terms and conditions of sanctioning term loans of Rs. 90 lacs, VFCL is required to bring in interest-free loan of Rs. 18.50 lacs and 14 per cent interest bearing loan of Rs. 21 lacs for partly financing the project cost of "SMMPL". 6. After explaining the aforesaid factual position, the learned counsel submitted that interest was initially wrongly charged by the assessee on loans and advances given to "SMMPL" contrary to the aforesaid obligations undertaken by the assessee as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entry of interest reversal made on 31st March, 1990, which was inadvertantly not made on 31st March, 1989, as the amount of TDS was not taken into consideration while making the reversal entry on 31st March, 1989. 8. Shri Soparkar drew our attention to the judgment of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 746 (SC). In that case the assessee viz. Godhra Electricity Co. Ltd. was restricted from recovering charges more than 1 ps per unit for lights, fans and 20 np per unit for motive power from the customers and that the right to receive increased rates had not crystallized. According to the Tribunal the claim at the increased rates as made by the assessee-company and on the basis of which necessary entries were made in the books represented only hypothetical income and the impugned amount as brought to tax by the ITO did not represent the income which had accrued to the assessee-company during the relevant previous year. Such a view taken by the Tribunal was upheld by the Hon'ble Supreme Court. Shri Soparkar, invited our attention at p. 758 of 225 ITR wherein the Hon'ble Supreme Court has referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m loan to "SMMPL" was reversed partly in asst. yr. 1989-90 and partly in asst. yr. 1990-91. This reversal entry supports the assessee's contention that the interest income to that extent did not really accrue to the assessee in the years under consideration when such interest was wrongly accounted for. 10. Shri Soparkar then drew our attention to the judgment of the Hon'ble Supreme Court in the case of Uco Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC). He submitted that at p. 898 the Hon'ble Supreme Court in the aforesaid judgment have doubted the correctness of their earlier decision in the case of State Bank of Travancore. 11. Shri Soparkar then made an alternative submission that in case the excess amount of interest charged from "SMMPL" is brought to tax in asst. yrs. 1988-89 and 1989-90, the same should be allowed as deduction in the year when reversal entries have been made, either as a trading loss or as bad debt, as no interest income has really been received nor it is likely to be realised at any further point of time. He submitted that deduction can be allowed in any of the years viz., asst. yrs 1989-90 and 1990-91. Since no real income had accrued n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced rate of electricity charges. The consumers had disputed the levy of enhanced rates and filed cases against such excess levy. On these facts the Hon'ble Supreme Court held that such entries relating to such hypothetical and notional income which was subject-matter of dispute, cannot be charged to tax in the relevant years. In the present case the assessee has accounted for interest income charged from "SMMPL". M/s "SMMPL" have also debited interest expenditure in their books of account and have deducted the amount of tax at source therefrom. The assessee has claimed and has been allowed the credit of TDS on such interest income in the respective years. The facts of various judgments relied upon by the learned counsel are, therefore, clearly distinguishable. 13. Shri Bhati, the learned senior Departmental Representative relied on the judgment of Hon'ble Supreme Court in the case of CIT vs. Shiv Prakash Janak Raj Co. (P) Ltd. (1996) 136 CTR (SC) 421 : (1996) 222 ITR 583 (SC). In that case it was held that the interest on loan given up after expiry of relevant accounting years would be taxable in the year of accrual of interest. He submitted that the facts of this case are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve submitted that in asst. yrs. 1990-91 and 1991-92 the appellant-company did not charge interest on loans and advances given to "SMMPL" to the extent of Rs. 18.50 lacs and has also charged interest at lower rate of interest of 14% p.a. on further loan of Rs. 21 lacs, though it had borrowed loans at higher rate of 16.5 per cent. The AO had rightly disallowed the interest of Rs. 3,57,750 in asst. yr. 1990-91 and Rs. 4,17,000 in asst. yr. 1991-92. The borrowings to the extent of interest-free loans given to "SMMPL" cannot be said to have been made for the business purpose of the assessee-company. Further, there is no business purpose for advancing at lower rate of interest. The AO had, therefore, rightly disallowed the interest to the aforesaid extent in asst. yr. 1991-92. Shri Bhati submitted that the onus lies on the assessee to prove that the interest was paid on money borrowed for the purpose of business. Promoting another company is not a business purpose of the assessee-company. The primary object of the assessee-company is to carry on business of financing. Borrowing money at higher rate and lending it without interest or at lower rate of interest by no stretch of imagination, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MMPL" had deducted the tax at source amounting to Rs. 9,511 out of such interest credited by them in assessee's account and duly deposited the same in Government treasury. To the extent to TDS of Rs. 9,511 paid by "SMMPL" on behalf of the appellant, the interest was really received by the assessee as they have claimed and have been granted credit in respect of such TDS amount. The previous year relating to asst. yr. 1989-90 was a transactional previous year which comprised of 15 months. The first accounting period covered the period from 1st Jan.,1988, to 30th Sept., 1988, and the second accounting period covered the period from 1st Oct., 1988, to 31st March, 1989. The interest pertaining to the aforesaid period was duly accounted for in the books of account closed on 30th Sept., 1988, and 31st March, 1989, respectively, as shown in the chart reproduced in earlier part of this order. The assessee originally credited the interest income of Rs. 3,52,709 in the accounting year ended on 30th Sept., 1988, and Rs. 2,05,912 in the accounting period ended on 31st March, 1989. M/s "SMMPL" had deducted the tax at source amounting to Rs. 74,069 and Rs. 42,931 from such interest credited by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted on entire amount of such interest credited by "SMMPL" in the account of the assessee, clearly shows that the entire amount of loans given by the assessee to "SMMPL" were originally interest-bearing loans, which had been given on interest at market rates. The accrual of income in the respective years pertaining to asst. yrs. 1988-89 and 1989-90 is thus clearly supported by entries in the books of account made by the assessee and also by "SMMPL" in their books of account and also by the fact that "SMMPL" had deducted the tax at source on entire amount of interest credited by them, which was duly deposited in the Government treasury. 19. The question which arises for our consideration is as to whether such interest income which had accrued to the assessee as per the terms agreed between the assessee and "SMMPL" and which had duly been credited in the books of account, can be treated as income not really accrued in favour of the assessee because of certain terms/conditions and restrictions placed by "SIICOM". Let us, therefore, carefully examine documents relied upon by the learned counsel for the assessee to support their contention about non-accrual of interest income on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured by that company. "SIICOM" have mentioned in the said letter that Vadilal Enterprises Ltd. will not charge interest more than 14 per cent p.a. No specific obligation relating to the assessee for providing interest-free fund or for advancing interest at lower rate, was specifically mentioned in this letter. The learned counsel then drew our attention to letter dt. 5th Feb., 1992, which is the first document in point of time in which the obligation of the assessee as a promoter company has been mentioned. This is a letter given by "SIICOM" to "SMMPL" in response to their letter dt. 21st Jan., 1992. Copy of this letter sent by "SIICOM" to "SMMPL" has not been placed on record. Unless the context in which such reply was given is known, the scope and applicability of the terms and conditions cannot be fully and properly appreciated. However, it may be relevant here to reproduce the contents of letter dt. 5th Feb., 1992, on which heavy reliance has been placed by the learned counsel: "Re: Term loan of Rs. 90 lacs: ..........(illegible) We hereby confirm that while sanctioning term loan of Rs. 90 lacs by our corporation to Super Milk Makers (P) Ltd., Vadilal Finance Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these documents produced before the learned Departmental authorities. It cannot therefore, be validly contended that the interest charged by the assessee from "SMMPL" in the accounting periods relevant to asst. yrs. 1988-89 and 1989-90 was erroneously charged in violation of the terms and conditions agreed with "SIICOM" in relation to sanction of term loan of Rs. 90 lacs in favour of M/s "SMMPL". 23. The learned counsel placed heavy reliance on the judgments of the Supreme Court. Let us examine the applicability of the principles of law laid down by the apex Court on the facts of the present case. The Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. was considering assessability of enhanced amount of electricity charges accounted for by the assessee in their books of account. The unilateral increase in the rates for supply of electricity by the electricity company was challenged by the consumers in the Court of law. Even after litigation relating the enhancement of electricity charges was finally settled by the Supreme Court vide judgment dt. 26th Feb., 1969, the State Government advised the assessee-company to maintain status quo for at least six months and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to the period upto 31st March, 1989, is simply the amount of income voluntarily forgone by the assessee after it had already accrued in favour of the assessee. Such forgoing of income already accrued cannot result in non-accrual of interest income, which had already accrued in favour of the assessee and had duly been accounted for by both the parties in their respective books of account. 24. The next judgment which was heavily relied upon by the learned counsel is the judgment of Supreme Court in the case of CIT vs. Bokaro Steel Ltd.. The Hon'ble Supreme Court in this case observed as under at pp. 323 and 324 of Report: "In the asst. yr. 1971-72, the assessee had shown in its books of account a sum of Rs. 7,39,232 as income from interest received from Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-company to them. The entry in this regard was reversed in the next year since Hindustan Steel Ltd. had replaced the right locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval the following observations made in the case of State Bank of Travancore. The relevant extract as appearing at p. 758 of is reproduced below: "In State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC), after considering the various decisions of this Court, Sabyasachi Mukharji, J (as the learned Chief Justice then was), has said: "An acceptable formula of co-relating to notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation, it must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of the real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 28. We will now consider the appeals filed by the Revenue. In asst. yr. 1990-91, the first ground relates to deletion of Rs. 1,26,511 being the reversal of interest income charged from M/s "SMMPL" in asst. yrs. 1988-89 and 1989-90. In view of the forgoing discussions, we are of the view that no deduction can be made in respect of reversal of interest income pertaining to those years had really accrued in favour of the assessee and subsequent forgoing of such income and reversal of entry relating to such interest income, cannot justify deletion of the said amount of disallowance/addition made by the AO. The relief granted by the CIT(A) to the extent of Rs. 1,26,511 in asst. yr. 1990-91 is, therefore, set aside and the order of the AO in relation to this point is restored. 29. The second common ground raised by the Revenue in their appeals for asst. yrs. 1990-91 and 1991-92 relates to deletion of disallowance of interest expenditure amounting to Rs. 3,57,750 in asst. yr. 1990-91 and Rs. 4,17,000 in asst. yr. 1991-92. The learned senior Departmental Representative had mainly relied on the reasons mentioned in the assessment order and submitted that the assessee was finance com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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