TaxTMI 
TaxTMI 
2011 (5) TMI 1013
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....assessee for rights assigned by a bank in a pending suit. 3. The facts of the case relevant to this issue as stated by the AO in the assessment order for assessment year 2005-06 are that Shri Budhidhan P. Takkar, Shri Pratap K. Takkar and Shri Jaysinh P. Takkar, the promoter directors of the assessee company, were also the directors in M/s International Cotton Corpn. Pvt. Ltd. and partners in M/s Karnataka Traders along with their other family members as well as members of Ashar family. The Bank of Baroda had provided various credit facilities to M/s International Cotton Corpn. P. Ltd. and M/s Karnataka Traders on the basis of surety given by the Takkar Brothers. The property, namely, "Madhav Kunj" owned by Takkar Brothers was also mortgaged to the Bank on 09- 08-1983 as a security for the credit facilities availed by M/s International Cotton Corpn. Ltd. and M/s Karnataka Traders. The said parties who had availed the loan/credit facilities defaulted in paying the same to the Bank. Consequently the bank started recovery proceedings against the defaulters as well as sureties by filing suit in the Bombay High Court. The property was also put to auction in the year 1999. Since the Tak....
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....ment year 2005- 06 was added by the AO to the total income of the assessee under the head "Income from other sources". He also reopened the assessments for assessment years 2000-01 to 2004-05 and interest stated to be accrued to the assessee for these years was added by him to its total income in the assessments completed u/s 143(3) read with section 147. 4. Additions made by the AO on account of interest allegedly accrued to the assessee in all the five years under consideration were challenged by the assessee in appeals preferred before the learned CIT(Appeals) and a detailed written submission was filed by the assessee in support of its case on this issue. A gist of the said submissions as summarized by the learned CIT(Appeals) in paragraph No. 4, 4.1 and 4.2 of his impugned order is extracted below : "4. In the written submission made, it is stated that on perusal of the Memorandum of Association and the main objects of the Company, it is clear that the business of the assessee is of an Investment Company which includes buying and selling of shares, stocks, etc., investment of money in immovable and immovable properties and investment of all kinds including that of purchasin....
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....hus no rights were available to the assessee company in the debt on the day of assignment of rights and even till date as the suit is still pending disposal and the assessee company has no right whatsoever to recover the debt. Consequently recovery of interest does not arise. Thus by no stretch of imagination can one say that legally the debt has become due for recovery from the defendants. Thus, the question of recovering the interest also does not arise. Consequently the interest also cannot be accrued even by following the mercantile system of accounting. As stated above, even the Bank has stopped accruing the interest from 1984 onwards because the debt itself had become doubtful of recover. In case of UCO Bank vs. CIT reported in 237 ITR page 889, the Supreme Court has held that no interest can accrue in the case of sticky loans i.e. doubtful for recovery." Without prejudice to the above submissions, it was also contended on behalf of the assessee company that interest income should be taxed in its hands as business income and not as income from other sources. The assessee also disputed the rate of interest at 18% adopted by the AO for working out the amount of interest accrue....
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....eration is a single instance of its own. The appellant has not refuted such an observation by bringing on record any material to show that similar transactions were entered either during the year or ever since its incorporation. Though it is claimed that business of the appellant inter alia comprises of investment in moveable and immovable properties, the question involves here is the right to debt acquired by the appellant in the present case which is not its business activity. In such a situation, the transaction under consideration cannot be considered as business activity and in such a situation, the interest accrued has to be treated as Income from Other Sources as rightly done by the AO. The same is liable to be taxed on accrual basis as the appellant is following mercantile system of accounting. In fact, perusal of the Balance Sheet clearly reveals that the appellant is already working out the interest accrued on the said transaction though the same is being capitalized. Thus the right to interest has been duly recognized in the books of account by the appellant itself. The books of account also reveal apparent contradiction in the approach of the appellant in the matter. ....
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....IT [1994] 206 ITR 359 (Bom.) held that in the mercantile system of accounting waiver of interest was not possible after it had accrued. In the case of Navin R. Kamani vs ITO 185 ITR 408 (Bom), again on the basis of this decision, it was held that under the mercantile system of accounting, diminished hope of recovery of interest and principal was not sufficient to negate the accrual on the basis of real income theory." The learned CIT(Appeals) thus confirmed the addition made by the AO on account of interest accrued to the assessee company and also upheld the rate of interest at 18% adopted by the AO for computing such interest income. He also upheld the action of the AO in bringing to tax the said interest income in the hands of the assessee company under the head "Income from other sources". He, however, accepted the alternative claim of the assessee for deduction on account of interest expenses incurred in respect of funds borrowed from the Directors for making payment to the Bank of Baroda. He held that whatever interest expense has been incurred which has a direct nexus with the interest income accrued to the assessee is allowable u/s 57 of the Act. He, therefore, directed the....
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.... which was assigned to us were pending and as such, we had no right of recovery of the debt in any manner. 7. On page 3 in para 3.2, it has been stated that we had not accounted for any interest on the debt though it was legally due to us. This is factually incorrect as we had no right of recovering the debt as the suit was pending. Consequently, the question of the interest being legally due to us also does not arise. 8. On page 3 in para 3.2, it has been stated that the debts were recoverable from two parties. This is factually incorrect as the debt was recoverable from more than two parties as is evident from the coy of pending suit on record. 9. On page 4 in para 3.2, it has been stated that we could have recovered the debt by enforcing the auction of mortgaged immovable property. This is factually incorrect as we had no right of recovery of the principal sum as the suit was pending. 10. On page 4 in para 3.2, it has been stated that we had paid a total consideration of ₹ 84,97,400/- inclusive of principal amount, interest, etc., for acquiring the rights in debs and properties. This is factually incorrect as the consideration of ₹ 84,97,400/- was paid for as....
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....gedly pointed out by the assessee in the assessment order passed by the AO go to the root of the matter and the same have a direct bearing on the main issue involved in these appeals relating to addition made on account of interest income stated to be accrued to the assessee. The learned representatives of both the sides have agreed that this issue needs to be sent back to the AO for deciding the same afresh after giving the assessee an opportunity of being heard on the issue of various factual mistakes claimed to be committed while framing the assessment which are crucial to decide the said issue. Accordingly the impugned orders of the learned CIT(Appeals) on this issue are set aside and the matter is restored to the file of the AO with a direction to decide the same afresh after giving the assessee an opportunity to put forth its contention on the factual mistakes committed in the assessment order which are crucial and which have a direct bearing on the ultimate decision. 7. Ground No.1a of the assessee's appeal for assessment year 2005-06 and ground No.2a of the assessee's appeal for assessment years 2001-02 to 2004-05 are accordingly treated as allowed for statistical purposes....
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....submitted that the quantum of such disallowance has been worked out by the authorities below by applying Rule 8D of Income-tax Rules, 1962. As held by the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom) 1, Rule 8D is applicable only from assessment year 2008-09 and prior to assessment year 2008- 09, the quantum of disallowance to be made u/s 14A has to be determined by adopting some reasonable method. Keeping in view the said decision of Hon'ble jurisdictional High Court, we set aside the impugned orders of the learned CIT(Appeals) on this issue and restore the matter to the file of the AO with a direction to determine the quantum of disallowance of expenses to be made u/s 14A by adopting some reasonable method. The relevant grounds of assessee's appeals are accordingly treated as partly allowed. 11. As regards the next common issue raised in ground No. 5 of the assessee's appeals for assessment years 2001-02 and 2002-03 and in ground No.4 of the assessee's appeal for assessment year 2003-04 relating to treatment given by the authorities below to the activity of the assessee of trading in shares as speculative activity and treating....