2014 (10) TMI 214 - AT - Income Tax

Tribunal remits tax appeal, interest income requires contractual obligation

Dy. Commissioner of Income-tax Versus M/s. Malaprabha Greenfields Pvt. Ltd.

The Tribunal allowed the Revenue's appeal for statistical purposes, remitting the matter back to the AO for reconsideration. The Tribunal held that ... Accrual of interest - Chargeability of interest – uncertainty - Money given as advance - dispute between parties – Held that:- Following the decision in DEPUTY COMMISSIONER OF INCOME TAX Versus M/s MANASLU AGRO FARMS PVT LTD AND OTHERS [2014 (6) TMI 499 - ITAT HYDERABAD] - The assessees have advanced the loans/temporary advances, the assessees have also issued legal notices for the repayment of the loans and also filed civil suits for recovery of the loan amounts along with interest in the City Civil Court, Secunderabad - the assessees have stated before the CIT(A) that the amounts advanced are from out of the share application monies and temporary advances - It is so stated on the basis of entries in the Balance Sheet and the Profit & Loss Accounts of the respective assessees filed along with their returns of income. There is no certainty with regard to the said rate of interest - it cannot be presumed that the interest accrued to the assessee at the rate of 18% p.a. as claimed by the assessees in the suits filed for recovery of advances - unless and until the liability to pay the advances and the rate of interest at which the temporary advances are to be repaid is determined by the Civil Court, it cannot be said that the same has accrued or arisen to the assessees - if the assessees had advanced interest bearing funds as interest free advances, the interest paid by the assessees towards such borrowed funds would have to be disallowed and treated as the income of the respective assessees – the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh adjudication – Decided in favour of revenue. Issues Involved:1. Deletion of addition made by the AO on account of accrual of interest on advances made to M/s Satyam Computers Services Ltd. (SCSL).Issue-wise Detailed Analysis:1. Deletion of Addition Made by the AO on Account of Accrual of Interest on Advances Made to M/s Satyam Computers Services Ltd. (SCSL):The Revenue filed an appeal against the order of CIT(A)-VII, Hyderabad, dated 30/09/2013, for the assessment year 2008-09. The primary issue raised by the department pertained to the deletion of the addition made by the AO on account of accrual of interest on advances made to M/s Satyam Computers Services Ltd. (SCSL).During the scrutiny assessment, the AO noticed that the assessee had advanced Rs. 359,900,000 to SCSL during FY 2007-08 but did not show any accrued/received interest on such advances in its books of account. The AO concluded that interest @ 8% on the advances had accrued to the assessee, as it followed the mercantile system of accounting, and added Rs. 3,53,28,82/- as interest accrued. The assessee contested this addition, leading to an appeal before the CIT(A).Before the CIT(A), the assessee argued that the amount was a temporary advance not accounted for by SCSL, as evident from SCSL's financial statements for the year ended 31/03/2009. The assessee also highlighted that SCSL contested the claim in the City Civil Court. The assessee referenced AS-9, which prescribes that income should be recognized when it is reasonable to expect its collection, and argued that the concept of real income should be applied. The assessee also noted that the award of damages and the rate of interest are at the discretion of the Court, and no interest legally accrues until the Court decides the issue.The CIT(A) held that under the given facts and circumstances, it could not be said that interest income had accrued to the assessee on the amount advanced. The CIT(A) noted that since the matter was pending in the City Civil Court, the AO was wrong in taxing the interest income in the impugned assessment year. The CIT(A) directed the AO to initiate proceedings and take action once the Court pronounces its order.The Revenue, aggrieved by the CIT(A)'s order, appealed to the Tribunal. The learned AR submitted that the issue was covered by a decision of the coordinate bench in respect of 15 other companies in the same group, which upheld the CIT(A)'s order in deleting the addition made on account of interest income on advances to SCSL.The Tribunal, after considering the submissions and perusing the materials on record, noted that the coordinate bench had dealt with identical facts and issues. The Tribunal reiterated that the basis for taxing notional interest income on advances was the civil suits filed by the assessee companies for recovery of amounts along with interest. They observed that the advances were made without any contract for charging interest, and thus, it could not be said that the assessee had any right to receive interest or that interest income had accrued.The Tribunal referenced several legal principles, including the Supreme Court's decision in CIT V/s. Walchand & Co. P. Ltd. and High Court rulings, which collectively emphasized that notional interest could not be taxed unless there was a contractual obligation to receive such interest. They concluded that unless the liability to pay advances and the rate of interest were determined by the Civil Court, it could not be said that interest had accrued to the assessee.Consequently, the Tribunal remitted the matter back to the AO for de novo consideration in light of their observations and the directions of the coordinate bench in ITA Nos. 62 to 76/Hyd/2014.In the result, the appeal of the Revenue was allowed for statistical purposes.Pronounced in the open court on 28/08/2014.