AI Drafter 
TaxTMI 
TaxTMI 
2014 (6) TMI 499
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated the fact that under the facts and circumstances of the case, the AO was right in charging interest on the monies given by it as advances. 3. The Ld. CIT(A)-VII, Hyderabad ought to have appreciated the fact that the assessee company has neither written off the advances nor has made any provision for doubtful debts even in subsequent years. Also, the assessee company has approached judicature for justification of their claim of having advanced the monies along with interest (termed by the company as "Damages") from the recipient company i.e. M/s. SCSL which has merely placed these amounts under "Suspense" - without denying having received these monies by it. 4. The facts, in brief, are that the assessee company is one of the 37 companies which was under the control of Sri B Ramalinga Raju and his family members and had transactions with M/s. Satyam Computer Services Ltd. (for short SCSL). Sri B Ramalinga Raju was the erstwhile Chairman of M/s. SCSL. On 7th January, 2009, Sri B. Ramalinga Raju, lifted the veil of secrecy on the affairs of the company M/s. SCSL and made a confessional statement addressed to the Board of Directors of the Co., M/s. SCSL. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....00 35.97 15 Koel Agro Farms Pvt ltd 35.98 0.00 35.98 0.00 35.98 16 Saravati Green Lands Pvt Ltd 36.23 0.00 36.23 0.00 36.23 17 Ahar Green Fields Pvt Ltd 36.24 0.00 36.24 0.00 36.24 18 Balaghat Green Fields Pvt Ltd 36.25 0.00 36.25 0.00 36.25 19 Kolar Green Fields Pvt Ltd 36.23 0.00 36.23 0.00 36.23 20 Atreyee Agro Farms Pvt Ltd 30.00 5.00 35.00 0.00 35.00 21 Dhatu Agro Farms Pvt Ltd 30.00 5.00 35.00 0.00 35.00 22 Hakra Agro Farms Pvt Ltd 30.00 10.00 40.00 0.00 40.00 23 Bahudhanya Agro Farms Pvt Ltd 30.00 10.00 40.00 0.00 40.00 24 Manaslu Agro Farms Pvt Ltd 32.00 8.00 40.00 0.00 40.00 25 Trishul Green Fields Pvt Ltd 33.00 7.00 40.00 0.00 40.00 26 Kanigiri Agro Farms Pvt Ltd 30.00 10.00 40.00 8.00 32.00 27 Pingala Agro Farms Pvt Ltd 20.00 17.00 37.00 25.00 12.00 28 Bilgiri Agro Farms Pvt Ltd 25.00 15;00 40.00 15.00 25.00 29 Kalindi Green Fields Pvt Ltd 20.00 20.00 40.00 24.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessment and filed a detailed reply to the show cause notice issued. 7. The Assessing Officer observed that the assessee companies are following mercantile system of accounting, and since they have made a claim for recovery of advances along with the right to receive interest, interest on such advances has accrued to the assessee as per the trade, custom and usage. In view of the same, he issued show cause notices to the assessees seeking explanation as to why the interest at the rate of 18% per annum from the date of advance should not be added to the total income for the relevant assessment year, viz. assessment year 2008-09. The assessees submitted detailed replies stating the erstwhile Chairman of M/s. SCSL Shri Ramalinga Raju, in his letter dated 78th January, 2009 has stated that the Balance Sheet of the M/s. SCSL as on September 30, 2008 carried an interest liability of Rs. 12,304 Millions, on account of the funds arranged by him. On January 8, 2009, the said company, M/s. SCSL, received letters from 37 companies, including the four assessees herein, requesting confirmation by way of acknowledgement of the alleged amounts received as alleged advances. All these letters....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' appeals. Aggrieved by the relief given by the CIT(A), the Revenue is in appeal before us. 11. The Learned Departmental Representative, Sri Solgy Jose T. Kottaram, submitted that the issue of advances by the four assessee companies to M/s. SCSL was admitted by the statement of Shri Ramalinga Raju on 7th/8th January, 2009. The further fact that these amounts have been advanced by the assessee companies to M/s. SCSL through banking channels and also that these companies have issued legal notices for recovery of advances and also have thereafter filed civil suits for recovery of advances along with interest proves the fact that the assessees herein have advanced the amounts to M/s. SCSL. He submitted hat once it is proved that the advances have been made by the assessee companies to M/s.SCSL, the companies following the mercantile system of accounting, ought to have accounted for the interest income in their books of account for the relevant accounting year. He submitted that the CIT(A) has erroneously held that the interest income is to be brought to tax in the year in which the City Civil Court decides the matter and pronounces its order with regard to rate of interest on the su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....led civil suits for recovery of the loan amounts along with interest in the City Civil Court, Secunderabad. Therefore, the liability may have been denied by M/s. SCSL, but as far as the assessees are concerned, there is no dispute or controversy with regard to the loans advanced by them to M/s. SCSL. The only dispute now is with regard to the liability of M/s. SCSL and the right of the assessee to receive interest at the rate of 18% per annum. Another undisputed fact is also that there is no contract between the assessee and M/s. SCSL with regard to the advances and the interest thereon. In the absence of any such contract to receive the interest on the advances given by the assessee companies, it cannot be said that the assessee companies have any right to receive such amounts of interest or that the interest income has accrued to the assessees. 14. Let us know examine the legal principles governing such issues- 1. The Hon'ble Supreme Court in the case of CIT V/s. Walchand & Co. P. Ltd. (65 ITR 381), while considering the provisions of S.10(2)(xv) and S.33(iv) of the Indian Income-tax Act, 1922, has held that in applying the test of commercial expediency o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ussed above, we observe that the following points emerge - (a) It is for the assessee to decide how it conducts its business; (b) Where an assessee advances interest free loans to its sister concerns, unless nexus between interest bearing funds and the interest free advances is proved, expenditure on account of interest on borrowed funds cannot be disallowed nor it can be presumed that the assessee has collected interest from its sister concerns on the advances given. (c) Where the funds have been advanced out of any interest free funds, then the disallowance of interest on borrowed funds cannot be made; (d) Unless and until there is a contract between the parties for charging of interest on the funds advanced, the notional interest income cannot be brought to tax. 16. 14. Applying these principles to the facts of the cases before us, we find that 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 ....