TaxTMI 
TaxTMI 
2011 (8) TMI 700
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.....C.No.1184 of 2008 was admitted on the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the sum of Rs.52,50,000/- accrued to the appellant towards the interest on mortgage loan of Rs.350 lakhs advanced to M/s.Sri Krishna Tiles and Potteries (Madras) (P) Limited, especially when the principal amount itself is doubtful of recovery on the basis of real income theory and the relevant accounting standards? (ii) Whether the Tribunal was right in holding that the sum of Rs.5,69,587/- accrued to the appellant towards interest on loan of Rs.25.27 lakhs advanced to M/s.S&S Industries and Enterprises Limited even though the assessee has complied with the Accounting Standards and the real income theory for not recognizing it as income? 4. T.C.No.502 of 2009 was admitted on the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the sum of Rs.52,50,000/- accrued to the appellant towards the interest on mortgage loan of Rs.250 lakhs ignoring the princip....
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....ises Private Limited, which is a group concern of the borrower, who stood as guarantor for repayment of the loan. The assessee company also advanced a sum of Rs.23,37,100/- to M/s.S&S Industries and Enterprises Private Limited. In respect of the said borrowing M/s.S&S Industries and Enterprises Private Limited created a second mortgage in respect of the property at Aarti Chambers, Anna Salai, Madras 6. The first charge was held by M/s.Lakshmi General Finance. 7. It is seen from the facts herein that till November, 2001, the principal borrower viz., M/s.Sree Krishna Tiles and Potteries (Madras) Private Limited did not register the mortgage with the Registrar of Companies. This led to the assessee filing a petition before the Company Law Board for a direction to the debtor company to register the mortgage. Thus, pursuant to the orders of the Company Law Board, the mortgage was registered with the Registrar of Companies. 8. It is seen from the records herein that, apart from this, the assessee had other dealings with M/s.S&S Industries and Enterprises Private Limited, as regards import of oil, in respect of which, the assessee had trading income of Rs.29,39,246/-. The ....
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.... company. Thus, the reliability of the financial strength of the company remaining highly doubtful, the Board of Directors were requested to consider the issue on certainty of recovery while finalizing the accounts of the company for the year ended 31.3.2000. Considering the uncertainty as regards recovery of the amount, the assessee felt that the income could not be offered as income in the Profit and Loss account. As regards the debit note raised to the extent of Rs.75,84,350/-, it was pointed out that since M/s.S&S Industries and Enterprises Limited was a sick company, the question of including the said amount also had to be considered by the Directors while finalizing the accounts. 10. It is seen from the facts projected before this Court that following the mercantile system of accounting, initially the assessee offered interest income earned on the loan advanced to M/s.Sri Krishna Tiles and Potteries (Madras) (P) Limited, on accrual basis. It is stated that the assessee, although initially offered interest income for the year 1999-2000, for the subsequent years from 2000-2001 till 2003-2004, the assessee did not show the accrued interest in its accounts. However, consi....
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....en though the assessee had given a loan of a sum of Rs.2.50 crores to M/s.Sree Krishna Tiles and Potteries (Madras) Private Limited, on the strength of security furnished by the said company in the form of immovable property, guaranteed by M/s.S&S Industries and Enterprises Private Limited, given the fact that the mortgagor had not paid any amount towards loan and the guarantor also had not taken steps to honour its commitment, the Board of Directors, in its meeting, took a decision to decide on the course of action to be taken on the said loan amount for the year ending 31.3.2000. 13. The assessee also pointed out to the financial status of M/s.S&S Industries and Enterprises Private Limited as well as to the two contradicting balance sheets of the said company and submitted that considering the sickness of the company, the recovery remained highly doubtful. Apart from that, with the fact that the enforceability of the mortgage as a mode of recovery also appeared a complicated process by reason of the suit proceedings taken by 20 persons claiming ownership over the portion of the property, the mortgaged property formed part of a larger extent of land owned by M/s.Sree Krish....
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....e of the fact that the debtor company was subsequently referred to BIFR. Thus, the Tribunal rejected the assessee's claim that the interest income assessed at the hands of the assessee in respect of the loan given for the assessment year 2000-01 to 2003-04 was rightly assessed by the Assessing Officer. 16. As far as the trading income of Rs.29,39,246/- is concerned, the Tribunal pointed out that the assessee had admittedly raised debit note for the above-said sum, making various claims on loss sustained in respect of import of oil. Even though the assessee raised debit note for Rs.75,84,350/-, after mutual discussion and negotiation between the parties, it was agreed that the amount of debit note would be Rs.58,78,491/-. Once the said amount is mutually agreed, the claim of the assessee that 50% of the agreed amount as not accrued to the assessee could not be accepted. In the circumstances, the Tribunal confirmed the order of the lower authorities. Aggrieved by the same, the assessee is before us. 17. Learned counsel for the assessee drew our attention to the Director's note as well as to the balance sheets in respect of M/s.S&S Industries and Enterprises Private Li....
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....as well as learned Standing counsel appearing for the Revenue and perused the materials papers. 20. A perusal of the order of assessment in respect of the above said assessment years show that apart from assessing the interest income in the respective assessment years, the Assessing Authority levied penal interest in respect of all these years. Considering the above aspect, in order to bring a finality to the dispute and the fact that the assessee had already offered the entire interest income for assessment in the return for the assessment year 2003-04, the Revenue was directed to look into this aspect and report. In the letter dated 17.6.2011, addressed to the Standing Counsel, the Assistant Commissioner of Income Tax, however, pointed out that it was no doubt true that the interest on mortgage loan was assessed on accrual basis as well as on receipt basis, which is not a proper one. However, the interest income that is assessable at the hands of the assessee has to be assessed only on accrual basis, in which event, for the assessment year 2003-04, the amount of Rs.157.50 crores has to be reduced from the income assessed therein by taking a sum of Rs.52.50 lakhs to each o....
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....ge on all these facts even as early as 2000 as evident from the Director's note. Ultimately, only in the assessment year 2003-04 the assessee went in for tripartite agreement with the third party for the purpose of assignment of said mortgage. 22. The assessee does not deny as a matter of fact that it was maintaining a mercantile system for accounting and for the first time in the year 1999-2000, they offered interest income. Thus the reason given by the assessee in not accounting for the said interest income subsequent to this assessment year, does not appear to be an acceptable one, particularly in the background of the fact that so long as the assessee had the benefit of property security therein, there could be hardly any reason in the eye of law to suggest that the assessee was incapacitated in offering the interest income in its return for the assessment year starting from 2000-01 onwards. As rightly pointed out, the mere difficulty that the assessee may encounter in successfully enforcing the mortgage in the event of decree passed in its favour, does not make the debt bad. 23. A reading of the Tribunal's order shows that it adverted its attention mainly on th....
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....a hurdle that stood in the way of realising the money or in making the debt a bad debt. There is hardly any material to suggest that the assessee was prevented from enforcing the mortgage or in taking steps to realise the money immediately on coming to know about the circumstances pointed out to the legal hurdles in enforcing the subject matter of the mortgage. Thus the Tribunal rightly held that the facts pleaded by the assessee did not establish the fact that the interest accrued on the loan advanced could not be recovered. As far as the second debtor company is concerned, the situation that prevailed on the date of sanctioning the loan continued to remain the same during the assessment year under consideration. Yet, the assessee did not treat the interest as bad debt to be written off, nor was there any such contention that the assessee had given its claim on interest. The second debtor company going before the B.I.F.R. is a fact which came long after the loan was sanctioned. Even therein no action was taken by the assessee to defend its interest. There is hardly any material to suggest on the action taken on the security given by the second mortgagor company. Going by these fac....