TaxTMI 
TaxTMI 
2014 (9) TMI 317
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.... 19.10.2005 its return of income for the asst year 2005-06 declaring a loss of Rs. 28,93,900/- under the normal provisions of the Income-tax Act, 1961. The assessment u/s 143(3) was completed on 06.12.2007, determining the total income at Rs. 4,21,11,366/-, after making the following additions- S. No. Particulars Amount (Rs.) 1. Disallowance of internest on TDS 1,00,000 2. Disallowance of interest u/s. 40(a)(ia) 1,77,87,183 3. Disallowance of expenditure for earning dividend income estimated @ 10% of dividend income 3,39,000 4. Addition of notional interest computed on advances as interest accrued and not offered 2,76,38,140 4,58,64,323 4. The CIT(A), on appeal, confirmed the addition of notional interest computed on advances as interest accrued. With respect to disallowance u/s. 40(a)(ia) the CIT(A) gave partial relief and with respect to disallowance of expenditure for earning dividend income at 10% of dividend income, the CIT(A) directed the Assessing Officer to rework the same. Aggrieved, the assessee is in appeal before us. 5. The first issue involved in this appeal relates to the addition of R....
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....wn significant accounting policies followed in preparation of the accounts. The accounting policies, inter alia, laid the following ground rules for 'Revenue recognition': (i) The company follows mercantile system of accounting and recognizes income and expenditure on accrual basis. (ii) Revenue is not recognized on the grounds of prudence until realized in respect of liquidated damages, delayed payment charges, as recovery of the amounts are not certain. 9. In the present case, it was submitted before the CIT(A), the Assessing Officer did not state that the method followed by the assessee does not facilitate the finding out of correct income from the accounts, consistently maintained by the assessee. The only reason for such addition by the Assessing Officer is on account of the sworn statement made by the Managing Director of the assessee-company before the Astt. Director of Income-tax(Inv), Hyderabad. The test of mercantile method of accounting needs to be weighed with the fundamental and guiding principles of conservatism and prudence requiring caution in recognizing what is due, while taking care to provide for all liabilities other than contingent. The earnin....
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....mpany, in his sworn statement given before the DDIT (Inv), Hyderabad, has admitted accrual of interest on loans/advances given by it to different companies, for the previous year under consideration, i. e F. Y 2004-05. He has applied the ratio of the decisions of Hon'ble Supreme Court, and of Hon'ble Rajasthan High Court, and held that the Assessing officer was justified in taxing a sum of Rs. 2,76,38,140/- towards accrued interest in the hands of the assessee for the assessment year 2005-06. Accordingly, he confirmed the addition made by the Assessing Officer. Aggrieved, the assessee is in appeal before us. 13. Before us, the learned counsel for the assessee reiterated the submissions as made before the lower authorities and submitted that the assessee being an investment company had made loans/advances during the year on the basis of the sworn statements made by the MD of the assessee before the ADIT (Inv.) and loan agreements with few parties the Assessing Officer computed the interest income for the asst year 2005- 06 by applying interest rate at the rate of 14% on all the loans and advances. The interest income was determined at Rs. 2,76,38,140 and addition was made....
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....rual of interest and interest was not taxable in the hands of the assessee having regard to the principles of real income. In fact, there are no agreements with these parties even to enable the charging of interest for the amounts advanced. The assessee had further claimed even before the Assessing Officer that even in the succeeding assessment years, no principal was recovered owing to adverse financial circumstances and financial crunch faced by the parties. Hence it is totally unjustifiable on the part of the revenue to infer interest income in cases where the principal amount became doubtful to recover particularly when there are no agreements, and the assessee had no basis to claim any interest. The entire addition under this group (Rs.25,26,519 for A.Y. 2005-06 & Rs. 58,24,690 for AY. 2006-07 referred to in table above) is baseless and is only on assumptions. Hence it is prayed that the Tribunal be pleased to delete the above additions made as notional interest by the Assessing Officer. 16. Regarding Parties with agreement and partial recovery, the learned counsel submitted that in this group the loans are repaid without paying even single rupee interest and in certain oth....
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....iver of interest also. The assessee after several negotiations could recover interest amount of only Rs. 25 lakhs as full and final settlement. The same is offered to tax on receipt basis in the asst year 2006-07. The agreement of interest settlement dated 21.12.2005 is placed at pages 40 & 41 of paper Book 3, confirmation letter is placed at S. No. 37 of paper book-3. In these circumstances, learned counsel for the assessee requested for considering the realties with regard to recoveries while arriving at the taxable income. It is submitted at this juncture that the tax liability could not be attracted merely on the basis of mercantile accounting. Since it is an undisputed fact that the assessee had not received or even certain of receiving interest from the borrower in the asst year 2005-06, the realities of business, viz. there being defaults in repayment and the refusal of borrower to pay interest, application for waiver of interest and the financial crunch of the borrower needs to be appreciated in determination of the real income of the assessee. 19. The learned counsel for the assessee further submitted that in the case of Whitemoon Trading Co Pvt Ltd, the Assessing offic....
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....able with certainty. The interest income has been admittedly recognised only on receipt basis. The contention of the revenue that the loan agreements have interest clause permitting the assessee to charge interest at the rate of 14% is not tenable. The terms of the agreements, which enabled the assessee company to demand interest were only enabling provisions and those enabling provisions did not guarantee the collection of overdue interest. They only gave a cause of action to the applicant. 22. The method of accounting, as followed by the assessee, does not create any income; but the method of accounting only recognizes income. There is some merit in the submission of the assessee that when the principal itself is overdue and not collected, there is no basis for making out a case that interest income would be collectable with certainty. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax, that accrual is a matter to be decided on commercial belief having regard to the nature of business of the assessee and character of the transaction. Accordingly, for the purpose of determining whether there h....
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....sel for the assessee. In this case the assessee had given interest free loans to some persons. The Assessing Officer added certain sums as deemed interest on such loans. It was held that there was no agreement between the assessee and the persons to whom the money had been advanced regarding charges of interest and the assessee had actually not charged any interest and these loans were interest free loans. As there was no charge of interest it was held that the assessee was not entitled to any income and the deemed addition made by the Assessing Officer is to be deleted. 25. We may further refer to the decision of this Tribunal in CCI Finance V/s. ACIT (91 ITD 573), also relied upon by the learned counsel for the assessee, wherein it was held that accrual of interest income on non-performing assets account has to be judged from realistic point of view. Non recognition of interest income on the ground that the interest had not really accrued as the realisability of principal outstanding itself was doubtful was held to be legally correct under the mercantile system of accounting. 26. We may further refer to the decision of this Tribunal in the case of NSL Power Infrastructure L....
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....d by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act 15 of 1955, which came into force on April 1, 1955. The Government, however, realised that the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. Accordingly, a circular was issued by the Central Board of Revenue on May 10, 1955, pointing out to all Income-tax Officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers, therefore, were....
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....utory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C.B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as t....
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....K. Sen, AAC [1965] 56 ITR 198, or the subsequent decision in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute i....
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....are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a....
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....ficer to the CIT(A), the assessing officer's only objection was that the loss was converted into positive income due to the technical addition and hence, rebate under S. 88E is not allowable. The CIT(A) after detailed consideration of the matter, rejected the claim of the assessee for rebate under S.88E of the Act, for the reasons discussed in paras 14.1 to14.4 of the impugned order, relevant portion of which reads as follows: "14.2. In the Profit and Loss Account filed with the return, the appellant has shown income from capital market at Rs. 4,15,57,891 and dividend income at Rs. 33,09,372. In the statement of computation of total income, while claiming the income from dividend as exempt u/s. 10(33), the appellant has computed loss at Rs. 28,93,904. However, after making addition of Rs. 1,77,87,183, disallowance out of expenses amounting to Rs. 3,39,000 and addition of a sum of Rs. 2,76,38,140 towards accrued interest on loans, the Assessing Officer has arrived at gross income of Rs. 4,29,70,423, and after allowing set off of unabsorbed depreciation for an amount of Rs. 8,59,057, he has arrived at the taxable income of Rs. 4,21,11,366. After excluding the amount of Rs. 2,76,38....
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....me, evidence of payment of Securities Transaction Tax, in the prescribed form, no rebate can be allowed u/s. 88E of the Act for any tax claimed to have been paid towards Securities Transaction Tax. However, in the instant case, as verified by me, the appellant has not furnished any evidence of payment in the said prescribed form regarding payment of any Securities Transaction Tax during the previous year, alongwith the return of income filed by it on 19.10.2005. It may be mentioned here that alongwith the return, the appellant has filed a statement of computation of income, calculation of MAT working, report u/s. 115JB in form No.29B, Audit Reports in form No.,3CA and 3CD, and the 11th Annual Report for the year 2004-05, copy of audited Balance Sheet, Profit and Loss Account and the scheduled thereto. Since the appellant has not filed the require evidence in the prescribed form with the return of income, having regard to above proviso to section 88E of the Act, in my considered view, the appellant cannot be allowed any rebate u/s. 88E of the Act, notwithstanding the fact of payment for an amount of Rs. 27,07,315 made towards such tax during the previous year. Hence, the claim of th....
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....e the payment of an amount of Rs. 27,07,315 towards Securities Transactions Tax during the previous year, the claim of the assessee for allowance of rebate under S.88E of the Act has to be considered in the light of the evidence furnished in that behalf. The assessing officer is directed to allow the claim of the assessee after due verification of the evidence furnished by the assessee. Assessee's grounds on this issue are treated as allowed. 34. The next ground is with respect of disallowance of expenditure attributable to earning of dividend income of Rs. 33,09,372. 35. Facts of the case in brief in relation to this issue are that during the year under consideration, assessee had earned dividend income of Rs. 33,09,372. The assessee has not attributed any expenditure for earning this income on the ground that these dividends are directly credited into the bank account without any effort from the assessee. The assessing officer attributed an indirect expenditure of Rs. 3,39,000, by estimating the same adopting a rate of 10% of the dividend income earned during the year. He accordingly treating the said amount as expenditure incurred for earning such dividend income, made an ....
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....6. However, considering the volume of dividend income earned and the nature of the business of the assessee, we find that the disallowance made by the assessing officer estimating the expenditure relatable to dividend income at 10% of such income is quite reasonable. We accordingly sustain the disallowance made by the assessing officer and reject the grounds of the assessee on this issue. 39. The last issue involved in this appeal is with regard to disallowance of interest expenditure under S. 40(a)(ia) of the Act. 40. Facts in brief in relation to this issue are that during the previous year relevant to assessment year 2005-06, the assessee had incurred interest expenditure of Rs. 1,77,67,183/-. The assessee had deducted TDS and remitted the same before the due date for filing return of income u/s 139(1). The entire expenditure of Rs. 1,77,67,183 (wrongly typed as 1,77,87,183/- in the order u/s 143(3)) was disallowed by the Assessing officer for the reason that the TDS was not remitted within the time stipulated in S.200 of IT Act. Before the First Appellate Authority, the assessee had submitted that it had remitted Rs. 91,033/- pertaining to interest payment of Rs. 4,35,358....
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....13 dated 21.08.2013) (iii) DCIT V/s. IVRCL Infrastructure & Projects Ltd (ITA No. 1220/Hyd/2013 dated 20.12.2013) -held that amendment to Sec 40(a)(ia) is retrospective in nature. IV, In the case of ACIT vs Piyush C. Mehta (52 SOT 27 (Mum), it was held that amendment to provisions of section 40(a)(ia) by Finance Act, 2010 is retrospective and where assessee deducted tax at source from payment for works contracts during relevant assessment year and deposited same before due date of filing return under section 139(1), no disallowance could be made. 43. Learned Departmental Representative on the other hand, strongly supported the orders of the Revenue authorities. 44. We have heard both the parties and perused the material available on record. It is an undisputed fact that the assessee has remitted all the amounts of TDS effected from the interest payments in question before the due date for the filing of the return under S.139(1) of the Act. Following the consistent view taken by the coordinate benches of the Tribunal under identical circumstances where remittance of the TDS amounts were made into government account before the due date for the filing of the return unde....
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....elhi High Court in the cases of Kelvinator India Ltd. (256 ITR 1) among others, the CIT(A) held the reopening of assessment as not valid, and consequently held the re-assessment to be null and void. 49. Aggrieved by the above order of the CIT(A), Revenue is in appeal before us. 50. We heard both sides and perused material available on record including the impugned orders of the Revenue authorities. We find that the CIT(A) noted in the first place in the impugned order that the disallowance made under S.14A of the Act in the original assessment order dated 6.12.2007 was subject matter of adjudication by the CIT(A) vide his order dated 28.1.2009, and on that very issue further appeal against the disallowance sustained by the CIT(A) was also pending before the Tribunal. Thus, the reopening of the assessment in this case is based on the very same material which was already available on record at the time of completion of the original assessment. The CIT(A), after referring to the decision of the Full Bench decision of Delhi High Court in the case of Kelvinator India (256 ITR 1) and the subsequent decisions of the Madras High Court in the case of Apollo Hospital Enterprises Ltd. V....
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....ition of Rs. 82,59,078 made by the assessing officer and sustained by the CIT(A), allowing the grounds of the assessee on this issue. 54. The next effective grievance of the assessee in this appeal relates to interest amount of Rs. 60,65,569 offered to tax by the assessee in the year under appeal. This amount of Rs. 60,65,569, being part of the amount of interest added by the assessing officer in the preceding year, viz. assessment year 2005-06 on accrual basis, assessee pleaded for deleting this amount of Rs. 60,65,569. This claim of the assessee was not accepted either by the assessing officer or the CIT(A). In view of our decision, deleting the addition made by the assessing officer towards notional interest in the preceding year, viz. assessment year 2005-06, vide paras 21-27 hereinabove, we uphold this amount of Rs. 60,65,569 being assessed on receipt basis in the year under appeal. We accordingly reject the ground of the assessee on this issue. 55. The next issue involved in this appeal relates to disallowance of claim of loss of Rs. 1,85,07,916 as non-receipt of interest added one estimate basis in earlier assessment year. Admittedly, this issue also is inter-linked to....