2003 (11) TMI 34 - HC - Income Tax

Court Upholds Deletion of Notional Interest; Supports Hybrid Accounting

The High Court dismissed the appeal, upholding the Tribunal's decision to delete notional interest on debit balances of sister concerns due to business ... Whether the Assessing Officer has rightly made addition on account of notional interest on the debit balances of M/s. Jai Mangal Investment and Trading Co. and M/s. Banswara Textile Mills Ltd.? - As the finding reached by the Tribunal is a finding of fact about the existence of circumstances which would have caused genuine difficulty to the payee and such finding is ordinarily a finding of fact which does not give rise to a question of law. As the condition envisaged u/r 6DD(j) as was operating during the relevant assessment year has been shown to exist by the assessee and found by the Commissioner of Income-tax (Appeals) as well as the Tribunal to exist on cogent material that payment in the manner prescribed u/s 40A(3) would have caused many difficulties to the payee, is not vitiated on any ground and does not give rise to a substantial question of law for consideration in this appeal. Issues:1. Addition of interest on debit balances of two companies owned by the same group.2. Accounting method for interest payments to creditors.3. Disallowance under section 40A(3) for payments made in cash.4. Exception under rule 6DD(j) for payments exceeding a certain amount.Issue 1:The appeal questioned the addition of notional interest on the debit balances of two companies owned by the same group. The Assessing Officer contended that non-charging of interest was a waiver in favor of sister concerns. However, the Commissioner of Income-tax and the Tribunal found that the waiver was in the interest of business due to the poor financial position of the companies. The Tribunal upheld the deletion of notional interest, stating that the assessee followed a hybrid method of accounting and did not charge interest until realized. The Tribunal's findings were based on facts, and it was concluded that the waiver was due to business expediency, not a simple waiver in favor of the sister concern.Issue 2:The second issue pertained to the accounting method for interest payments to creditors. The Tribunal found that the assessee maintained a hybrid accounting system, following the mercantile system for most cases and cash basis for interest on trade debts. As per Section 145 of the Income Tax Act, the assessee was not required to maintain accounts exclusively on a cash or mercantile basis during the relevant assessment period. The Tribunal concluded that the method of accounting employed by the assessee justified not including notional interest in the income for the assessment year.Issue 3:Questions 3 and 4 related to disallowance under section 40A(3) for payments made in cash to a company. The Assessing Officer disallowed the amounts, but the Commissioner of Income-tax (Appeals) deleted the additions based on an exception under rule 6DD(j). The Tribunal upheld the deletion, considering the financial difficulties faced by both the assessee and the payee company, leading to genuine difficulty in making payments through banking channels. The Tribunal found that the circumstances met the conditions under rule 6DD(j), justifying the payments made in cash.Conclusion:The High Court dismissed the appeal, stating that the Tribunal's findings were based on facts and did not give rise to substantial questions of law. The judgment highlighted the importance of business expediency, the hybrid method of accounting, and the genuine difficulties faced by the parties involved in making payments, ultimately leading to the dismissal of the appeal.