TMI Blog2005 (9) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's claim of non-accrual of interest did not appear to be bona fide and correct. It is also the case of the Revenue that the CIT(A) ought to have ignored the agreement between the assessee and Reliance Industries Ltd. (RIL), Reliance Industrial Infrastructure Ltd. (RIIL) and Lavanya Holdings and Trading (P.) Ltd. (Lavanya), as the only purpose of so-called agreement was to transfer funds from the assessee-company to the above three companies all belonging to Reliance group of companies and these agreements were not at arms length. 4. The facts leading to the dispute, briefly, are as under: Assessee filed the return on 28th Nov.,1994, declaring taxable income at Nil. Assessee-company was incorporated on 3rd Sept., 1991, previously known as 'Reliance Refinery (P) Ltd.' Subsequently, its name was changed to 'Reliance Petroleum Ltd.' (RPL) from 16th April, 1993 onwards. 5. In the statement of income attached with the assessee's return for the asst. yr. 1994-95, income was shown at Nil, subject to notes. The notes read as under:- --------------------------------------------------- "(1) a. The company has shown Rs. in the accounts income towards interest on advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses and the income earned during construction period has to be capitalised. Andhra Pradesh High Court in the case of CIT vs. Andhra Farm Chemicals Corporation (1988) 171 ITR 660 (AP) and Delhi High Court in the case of Snam Progetti vs. Addl. CIT (1981) 132 ITR 70 (Del) have also held that the income during the construction period is to be capitalised:" 6. During the course of assessment proceedings, AO noticed, assessee has credited as income received/accrued, among other, the following three items: ---------------------------------------------- Interest accrued on deposit Rs. given to Reliance Industries Ltd. 42,60,92,054.79 Interest recoverable 1,55,04,657.54 on advances made to Reliance Industrial Infrastructure Ltd. Interest recoverable 2,58,90,410.96 on advances made to Lavanya Holdings Trading (P) Ltd. ---------------------------------------------- It was clarified by the assessee-company vide its letter dt. 18th Nov., 1996 that in the notes attached, the interest received from RIL is shown at Rs. 35,98,61,918; whereas the correct figure was Rs. 42,60,92,055. It was further clarified that a sum of Rs. 6,62,30,137 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble at all. AO further noted, as on the last day of the previous year, i.e. on 31st March, 1994 and in fact even upto September, 1994, i.e., the date of signing of the final accounts, the whole group along with the auditors, were clear in their minds and there was no doubt that interest had accrued to the assessee. AO further notes that even in the audit report dt. 24th Nov., 1994, against the column "Method of accounting employed", the auditor stated as under: "The company generally follows accrual system of accounting both as to income and expenditure except in respect of the following items which are generally accounted for on cash basis: Income Item Interest on calls in arrears". 9. AO has taken note of the fact that all these companies belong to Reliance Group of Companies promoted by RIL. He held that the same persons decided that interest has accrued and subsequently they themselves treat that no interest has accrued. He held, "in fact, if any such agreement as claimed had existed before the end of the previous year, i.e., before 31st March, 1994, the assessee ought not have credited the interest in the books of account and the auditors would not have certified t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest was considered by the board of directors and was decided to reverse the charge of interest made in the books for the year ended on 31st March, 1994. Entries were reversed on 31st Oct., 1994. It was also stated that the board of directors, while considering the contract, also had taken note of the fact that charging of interest was not specifically permitted. It was submitted, the action of the AO in not accepting the above facts was wrong, as such liable to be reversed. 11. The assessee relied upon the following decisions in support of assessee's case: (i) E.D. Sasoon Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) (ii) CIT vs. Nadiad Electric Supply Co. Ltd. (1971) 80 ITR 650 (Bom) (iii) CIT vs. Chanchani Bros. (Contractors) (P) Ltd. (1986) 53 CTR (Pat) 84 : (1986) 161 ITR 418 (Pat) (iv) CIT vs. Bharat Petroleum Corporation Ltd. (1992) 108 CTR (Cal) 140 : (1993) 202 ITR 492 (Cal) (v) Trikamlal vs. CIT (1982) 134 ITR 450 (MP) (vi) CIT vs. Smt. Geetha Sanghi (1983) 36 CTR (MP) 96 : (1983) 142 ITR 834 (MP) (vii) Beni Prasad Sidh Gopal vs. CIT (1983) 37 CTR (All) 35 : (1984) 148 ITR 760 (All) (viii) CIT vs. Hindustan Housing Land Development Trust Ltd. (1986) 58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt., 1993, wherein the question of interest was specifically ruled out and also considering the purchase orders placed with Lavanya and letter of intent issued to RIIL for supply of project material required for SBM project of Gulf of Kutch, wherein there was no provision of interest, he held that the claim of the assessee is on the right direction. He also noted that inspite of non-charging interest clause, assessee tried to charge interest and made entries in its books of account to that effect. A letter was written on 20th Oct., 1994 to all the above three companies, which was repudiated by them; letters falling beyond the date of finalisation of accounts on 23rd Sept., 1994. CIT(A), vide para 16 of his order, has drawn the issues needed to be decided before him. These are us under: (i) Is there a right in the appellant company for interest on the advances made to RIL, Lavanya and RIIL? (ii) Is the company entitled to take its stand in its return of income contrary to its own books of account? (iii) Can corporate veil be lifted in the facts and circumstances of the case? and (iv) What are the consequences of the lifting of corporate veil? 15. The CIT(A) noted that as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties repudiated the claim for interest made on them by the assessee. In the light of the above facts, the CIT(A) held that the assessee has no right to charge interest on the advances made to RIL, Lavanya and RIIL. 17. With reference to the AO' s stand that the assessee is bound by the entries made in the books of account and it is not open for the assessee to take a contrary position from that of the entries made in the books of account, CIT(A) held that this is incorrect. Particularly relying upon the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd., he held, "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter". He held, though the above observation of the Hon'ble Supreme Court was in a different context, i.e., of deduction claimed; the proposition very well applies in the instant case of the assessee, where the income has been accounted for in the books of account but was not offered to tax, as for example in West ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the public. There are nominee directors of the financial institutions on the board of RIL and also of the assessee. Only four of the Directors are common in both the companies. In these circumstances, he held, it appears that the suggestion made by the AO is far-fetched. He held that RIL is the promoter of the assessee, but that by itself does not lead to a conclusion that the assessee is a front company of RIL. He records, the Courts have often lifted the corporate veil for the benefit of members of the company, in criminal or quasi-criminal cases, trust matters and to ascertain whether an agreement is void for being against the public policy of the country. In the instant case, none of these conditions, he held, exists. He held, RIL and the assessee are independent companies and have independent entity. Just because RIL used the funds of the assessee, AO cannot lift the corporate veil and compute interest against the decisions of various Courts on this point. With the above observation, CIT(A) held, the interest held to be accrued but not received has not really accrued to the assessee. Hence he deleted the addition made on this account. Being aggrieved, Revenue is in appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, once the auditor certified and board of directors ratified the accounts, the company cannot go back from its responsibility. The learned senior Departmental Representative, getting support from the decision of the Tribunal, Mumbai Bench, in the case of ITO vs. Shreyas Shipping Ltd. (2002) 76 TTJ (Mumbai) 11 : (2003) 86 ITD 556 (Mumbai), submitted that the method of accounting followed by the assessee in writing his books of account has to be compulsorily taken as basis of computation of income in assessment proceedings and such method is equally binding on the assessee inasmuch as he cannot follow one method or system of accounting for writing his books of account and yet another method or system of accounting for return of income, which virtually now the assessee is trying to adopt. The learned senior Departmental Representative submitted, once the assessee adopted that the income accrued, then it cannot go back and say that the income has not accrued subsequently. The assessee has to discharge the onus that the entries were incorrectly made or were not in accordance with the provision of law to go back from the stand it has taken first. Hence the learned senior Departmental Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned senior Departmental Representative objected to the finding of the CIT(A) and contended that the agreement dt. 29th Sept., 1993 itself is suspicious. CIT(A) was not correct in holding that no right to receive interest vested in the assessee and, therefore, it cannot be said that there was a legally enforceable right to claim interest from RIL and the other two companies. He held, CIT(A)'s reliance in the case of E.D. Sasson Co. Ltd., Nadiad Electric Supply Co. Ltd., Bharat Petroleum Corpn. Ltd.'s case, Chanchani Bros. Contractors (P) Ltd.'s case and Godhra Electricity Co. Ltd.'s case, is of no relevance. He further submitted, the reasoning of the CIT(A) that the three companies never acknowledged their liability nor made corresponding entries in the books has also no relevance. 23. Again the learned senior Departmental Representative objected to the reasoning of the CIT(A) that the AO had no right nor it is open to the AO to rewrite an agreement and substitute it on his own terms. He again submitted, the mere fact that RIIL and Lavanya have subsequently made huge supplies to the assessee on the basis of orders placed on them and not so done is also immaterial. Again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts due to contractors/vendors, which is to be paid to RIL on behalf of the assessee. Finally, sub-cl. (d) of cl. 9 requires that advances made by the assessee to RIL be secured through deposit of marketable securities. Throughout the assessment and appellate proceedings, the assessee has not given the details of the securities deposited by RIL with the assessee. The learned senior Departmental Representative further submitted, there is no independent evidence on record to prove that the agreement was indeed entered in September, 1993 and no dates have been given in the signatures made on behalf of the assessee and RIL at p. 8 of the agreement. 26. The learned senior Departmental Representative thus submitted, the order of the CIT(A) is liable to be reversed for the following reasons:- "(a) The CIT(A) has not dealt with the question as to when an assessee has shown an income as accrued in its final accounts, which has been audited by the statutory auditors and has been adopted by the board of directors, whether it is possible for the assessee to repudiate the fact of accrual. (b) When the amount accrued has been shown in the final accounts as income earned on temporary deploym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly subterfuge to demonstrate to authorities a situation that did not exist in reality. Therefore, no reliance can be placed on this agreement to contend that the assessee had no enforceable right to interest particularly when the annual accounts unequivocally treated it as an income in its final accounts on temporary deployment of funds. For similar reasons, reliance placed by the assessee on other case laws is misplaced. (e) It has been held by a number of judgments of Hon'ble Supreme Court and High Court that colourable transactions and arrangements should be probed to find the reality or substance of the matter. Reference is invited to the decisions in the case of Jiyajeerao Cotton Mills Ltd. vs. CIT (1958) 34 ITR 888 (SC); Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC); G. Venkatswami Naidu Co. vs. CIT (1959) 35 ITR 594 (SC); Juggilal Kamlapat vs. CIT (1969) 73 ITR 702 (SC); CIT vs. Durgaprasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC) and finally McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC)" 27. The assessee has submitted written submissions, briefly stating as under: The assessee-company made a public issue of Triple Option Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to charge interest on the money made available, by virtue of cl. 9 of the agreement with RIL, This was beneficial agreement to both the sides and in the best interest of both the parties. 29. Assessee also placed a purchase order for supply of various materials on 2nd March, 1994 with Lavanya, Supply contemplated included structural steel, steel plates, enforcement steel and pipes etc, The value of the total purchase order was about Rs, 590,16 crores, In the purchase order issued to Lavanya, there was no clause by which the assessee could also charge interest Assessee provided advances against the agreement purchase order/letter of intent to RIL, Lavanya and RIIL. It passed entries in the books of account crediting interest as income on such advances on the last day of the accounting year. The statutory auditors and the board of directors approved the final accounts on 23rd Sept, 1994, Overlooking the specific prohibition in cl. 9(a) of the agreement dt. 29th Sept., 1993, assessee made a claim for a sum of Rs. 42,60,92,054,79 towards interest upto the period ended 31st March, 1994, The claim made by the assessee was rejected by RIL vide their letter dt. 21st Oct., 1994, i.e. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were not accepted by the AO for the reason that the accounts were signed by the managing director and approved by the auditors as well. He held, assessee belongs to Reliance Group and the same set of persons decided that interest accrued first and subsequently held not accrued; which is not acceptable. The rate of interest was pre-determined. The interest foregone was an afterthought. 33. When the matter was carried before the CIT(A), the CIT(A) accepted assessee's contention. He agreed with the assessee's contention that assessee had no right to receive interest as there was no legally enforceable right to claim interest from RIL, Lavanya and RIIL. Other parties never acknowledged the liability/debt nor had they made corresponding entries in their books of account to that effect. Merely the assessee made entries in the books is not the determining factor. Only the provisions of law relating thereto determines the taxability AO cannot rewrite an agreement and substitute terms of agreement. Coming to the lifting of corporate veil, CIT(A) held, more than 50 per cent of the shares of the assessee-company were held by financial institutions/banks and nominee directors of such inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him. 37. Relying upon the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd., learned counsel submitted, the question whether there is real accrual income or not need to be considered by taking the probability or improbability or realisation in a realistic manner. Again relying upon the decision of the Hon'ble Supreme Court in the case of Hindustan Housing Land Development Trust Ltd., learned counsel submitted, there is a clear distinction between the cases, such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and, cases, where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. Learned counsel also relied upon the following decisions: (a) CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC) (b) Nadiad Electric Supply Co. Ltd.'s case (c) Chanchani Brothers (Contractors) (P) Ltd's case (d) Bharat Petroleum Corporation Ltd.'s case (e) Trikamlal's case (f) Geeta Sanghi's case (g) Beni Prasad Sidh Gopal's cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve in assessee's favour. 42. Learned counsel submitted, it is well settled principle that the entries made in the books of account is not final and determinative factor and it alone cannot be the basis for taxing an amount. He submitted, Companies Act lays down provisions for maintaining books of account based on norms and standards and cast a responsibility on the board of directors and the auditors to disclose the trading results truly and fairly; but the provisions of Companies Act or the conduct of the board of directors, shareholders and auditors do not make an income taxable. Taxability or non-taxability depends on the right to receive the amount but not whether the board of directors, auditors and shareholders approved it. Hence, the learned counsel submitted, the order of the learned first appellate authority is to be upheld. 43. Hearing the rival submissions and going through the orders of the Revenue authorities and the decisions cited by the contending parties, we are of the view that no interference is warranted in the order of the learned first appellate authority. The main thrust of the argument of the Revenue is that the assessee had shown certain interest as acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was finalised prior to the claim of the assessee as mentioned above, no interest is provided as payable to the assessee. This crucial fact has to be kept in mind while considering whether unilateral claim of the assessee of interest will amount actually accrual of interest to the assessee only because the auditors certified it and the board of directors approved it. As rightly contended by the assessee, in the case reported in Godhra Electricity Co. Ltd. the Hon'ble Supreme Court held: "if income does not result at all, there cannot be a tax even though in book-keeping, an entry is made about a hypothetical income, which does not materialise". This was a case wherein the assessee unilaterally increased the rate of electricity supplied for lights and fans to 70 paise per unit with a minimum of Rs. 5 for every installation w.e.f. 1st July, 1963. It was contended that under the Electricity (Supply) Act, 1948, as amended in 1956, assessee-company was entitled to enhance the charges unilaterally subject to the conditions prescribed in the Sixth Schedule to the said Act, i.e., Electricity (Supply) Act, 1948. The Hon'ble Supreme Court held, approving the view of their Lordships' earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest either. The Revenue, in such a case, at the the most can treat this amount as advance made for non-business purposes. There is no such case for the Revenue. The case of the Revenue is that since all the companies are controlled by (late) Shri Dhirubhai Ambani, Shri Mukesh Ambani and Shri Anil Ambani; the credibility of the explanation advanced by the assessee with regard to dispute between the assessee and the three companies is also to be highly suspected. This assertion of the Revenue is not entirely correct. As rightly contended by the assessee, in addition to these individuals; financial institutions/banks/nominee directors of such institutions are on Board of the assessee. More than 50 per cent of the shares of the assessee-company are held by financial institutions banks. The companies are different entities. Therefore, the companies are to be treated as independent entities. 47. Another contention of the Revenue is that as per s. 211 of the Companies Act and specifically sub-s. (1) thereof, every balance sheet of a company "shall give true and fair view of the state of affairs of a company as at the end of the financial year"; therefore, as certified by the audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l agreement ceased to be operative ab initio. The entry in the books, which was made, was about a hypothetical income, which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the Hon'ble High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax. The Hon'ble Supreme Court held "in the present case also the entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax." 49. The decision of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. vs. CIT 1974 CTR (SC) 149: (1971) 82 ITR 835 (SC) strictly does not apply to the facts of the instant case. This was a case where the agreed managing agency commission was relinquished by a subsequent resolution. In this case the Hon'ble Supreme Court held as under: "Income accrues when it becomes due. The postponement of the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an interest bearing loan. The second circumstances to be noticed was that the resolution waiving interest was passed after the expiry of the relevant accounting year in the case of the three subsequent assessment years, viz. asst. yrs. 1969-70, 1970-71 and 1971-72. Only in the case of the asst. yr. 1968-69, was the resolution passed before the expiry of the accounting year. Thirdly, the assessee-company was maintaining its accounts on the mercantile basis. Yet another circumstance to be noticed was that the Tribunal had found as a fact that the waiver was not based upon any commercial considerations. Therefore, the Tribunal was right in taking the view it did in respect of the asst. yrs. 1969-70, 1970-71 and 1971-72. In the case of the asst. yr. 1968-69, however, the resolution was passed before the expiry of the accounting year and though the finding of the Tribunal was that the said waiver was not actuated by any commercial considerations, the Revenue did not press the case so far as this assessment year was concerned." 51. Considering the above facts and the decisions cited supra, we are of the view that no interference is called for in the order of the CIT(A). Hence, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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