TaxTMI 
TaxTMI 
TaxTMI 
2012 (5) TMI 639
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....ssessment proceedings, the Assessing Officer found that the assessee company had significant investment in equity and preference share of HGPL in which management of company has active participation . The assessee did not charge any interest aggregating to Rs. 46.64 crores as pointed out by the auditors of the company on advances given to HPGL. The Assessing officer asked the assessee why interest was not charged on the interest free loan / advances given to M/s. HGPL. The assessee explained as under: "3.1 High Grade Pellets Limited (HGPL) is a company in which our Company has significant investment in the equity and preference share capital Further, they are the main source of one of our principal raw materials, pellets, which are required for the manufacture of steel in our plant on a regular basis without much interruption. Thus, in the interest of the business of our Company, it is essential that HGPL should be able to sustain and revive when it is in difficulty. When this company has incurred huge losses and is finding it difficult to carry on the normal operations, the charging of interest will only add to its unpaid liabilities. When this company is not in a position to pay....
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....terest accrued. The AO further observed that the assessee has diverted business funds for non business purposes and therefore the interest claimed by assessee is not allowable u/s. 36(1)(iii) of the Act. The AO added the interest portion relating to borrowed funds as under: 1.Average borrowed funds during the year (in crores) Opening balance 4,418.84 Closing balance 4,462.92 8,881.76 Average 4,440.88 2. Average total funds Opening balance 7,515.36 Closing balance 7,524.35 15,039.71 Average Average 3. Disallowance: Interest not charged x borrowed funds Total funds = 46,64,53,318x 4,440.88 7,519.85= 27,54,66,028 6. Accordingly, the AO proposed to add Rs. 27,54,66,028/- on this account. However, while computing assessee's total income for the year at clause (d) at page 29 of assessment order, the AO made an addition of Rs. 46,64,53,318/-. 7. Aggrieved, assessee took the matter before Ld. CIT(A). 8. Before the Ld. CIT(A) assessee strongly contended that the action of AO was against the facts of the case. It was pointed out by the assessee that HGPL is the supplier of one of the principal raw material i.e. pellets, which are required for the manu....
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....d on accrual basis and accordingly chargeable to tax it is now well settled that an income cannot be taxed on notional /presumptive basis unless it is earned. Further there was nothing in the agreement with the said HGPL that the interest was chargeable as such and thus in absence of any such understanding the same could not be said to have been accrued. Further As per the accounting principles and accounting standards, read with the judicial analysis, an income cannot be credited to the profit and loss account automatically on accrual basis even when the assessee is following mercantile system of accounting unless there is a certainty of its receipts as also in accrual resulting in debt due. In the instant case AO has not brought on record any material evidence to substantiate its claim that the appellant company was in fact entitled to interest from the said HGPL and therefore merely there was an outstanding it could not be said that the interest income had accrued to the appellant company. Thus considering these fact and also considering the real income theory the amount of Rs. 46,64,53,318/- cannot be added to the taxable income when it was not actually earned, accrued or rece....
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.... 14. The Ld. AR appearing for the assessee company reiterated his submissions on the lines as made before the Lower Authorities that the transaction was solely for business purpose. Therefore, it cannot be said that the money has been diverted for non business purpose. It was further pointed out by the Ld. AR that HGPL was going through huge losses and was not in a position to repay the principle amount lest interest. At the same time, the assessee could not have afforded any interruption in the supply of principal raw material i.e. pellets for its own manufacturing activity which clearly establishes commercial need of the assessee. It was submitted that applying the principle laid down by the Hon'ble Supreme Court in the case of SA Builders 288 ITR 1 (SC), the advance has to be considered as having been made owing to commercial expediency and therefore non charging of interest on such advances cannot be basis to treated interest income as accrued or to make disallowance of interest expenses as one incurred for non business purpose. Apart from the above, the learned counsel for the Assessee also pointed out that there were sufficient interest free funds available as accepted by th....