TaxTMI 
TaxTMI 
TaxTMI 
2023 (6) TMI 389
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....bmissions and perused the material available on record. The assessee is engaged in the business of manufacturing the pharmaceutical products. The return of income for the A.Y.2002-03 was filed by the assessee on 31/10/2002 declaring loss of Rs.4,75,10,750/-. During the course of assessment proceedings, the ld. AO observed that assessee had given interest free loans and advances to various parties as under:- Sr. No. Name of the party Amount (Rs) Interest Received 1 Juzar Khorakiwala / Nishreen Khorakiwala 6,21,80,033 77,72,504 2 Akbarallys Furniture Centre 11,50,000 1,35,283 3 Fabliau Estate Development Private Limited 59,03,45,492 4 Tahseel Hire Purchase Co Private Limited 45,69,72,962 5 Zeigter Investment Private Limited 23,56,26,077 6 Zaahid Holdings & Investment Private Limited 12,61,37,495 7 Jinita Estate Development Private Limited 6,63,71,800 8 Palanpur Holdings & Investment Limited 3,57,53,086 9 Everest Construction 36,35,574 10 PYX Laboratories Limited 25,25,000 11 Filigree Estate Development Private Limited 30,12,721 12 Ernie Estate Development Private Limited ....
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....see placed on record the copy of the Board Resolution and correspondences from the borrowing parties in this regard before the ld. AO. The main crux of the submission of the assessee is that even the principal amount was doubtful of recovery and hence, the assessee was forced to decide not to charge any interest on the said loans during the year under consideration. Accordingly, the assessee defended that the observation of the ld. AO that borrowed funds were diverted for giving interest free advances is incorrect. The assessee also pleaded that there were fresh loans granted during the year to some of the parties to whom loans were given in earlier years, there were also substantial repayments made by those parties during the year. The assessee submitted the movement of loans given and repayment made during the year as under:- No. Party name Op. Bal Loan Given Repayment Cl. Bal 1 Juzar Khorakiwala / Nishreen Khorakiwala 6,21,80,033 NA NA 6,21,80,033 2 Akbarallys Furniture Centre 11,50,000 NA NA 11,50,000 Total of loan given where interest was charged (A) ....
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....n not to charge any interest income during the year under consideration only because of bad financial position of the borrowers. Hence, the ld. AO himself accepted up to A.Y.2001-02 that wherever interest income has been earned from the parties, those loans and advances were meant for business purposes of the assessee. The main submission of the assessee is that once the funds are used for business purposes how can there be disallowance u/s.36(1)(iii) of the Act. The assessee pleaded that only real income should be taxed and wherein in respect of loans and advances given to certain parties when recovery of principal itself is doubtful, there is no question of recovering any interest from those parties. Accordingly, there cannot be any proportionate interest disallowance u/s.36(1)(iii) on notional basis. Reliance in this regard was placed on the decisions of the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd., vs. CIT reported in 26 ITR 27; CIT vs. Shoorji Vallabhdas& Co., reported in 46 ITR 144; Godhra Electricity Co. Ltd., vs. CIT reported in 225 ITR 746; CIT vs. Bokaro Steel Ltd., reported in 236 ITR 315; CIT vs. Sarabhai Holdings Pvt. Ltd., reported in 307 ITR 89, a....
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....med any interest expenditure as deduction in their returns of income for A.Y.2002-03 to A.Y.2004-05. These additional evidences were duly admitted by the ld. CIT(A) and forwarded to the ld. AO for his comments. Since, no remand report was received from the ld. AO despite giving sufficient time, the ld. CIT(A) proceeded to adjudicate the said additional evidences on his own. The assessee submitted that from the financial statements of M/s. Dartmour Holdings Pvt. Ltd.,(merged entity) for A.Y.2006-07, an interest of Rs.3,18,54,320/- was reflected as interest payable to assessee company herein and that the assessee company had offered interest income from the said party from A.Y. 2006-07 onwards. 3.7. The ld. CIT(A) upheld the disallowance of interest in respect of loans/advances to the following parties in the same fashion as it was upheld in A.Y.2001-02:- (i) Everest Construction (Sr.No.9 of the table) (ii) Pyx Laboratories (Sr. No.10 of the table) (iii) Shravan Construction (Sr.No.14 of the table) (iv) Akbarallys Ebrahimji (Sr. No.15 of the table) 3.8. The ld. CIT(A) also observed that the assessee during the year had advanced fresh loan of Rs.8,50,000/- to Akbarallys Ebra....
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....uld be given credit while disallowing the proportionate interest expenditure. However, the ld. CIT(A) finally directed the ld. AO to restrict the disallowance of interest to Rs.3.21 Crores as against Rs.6.52 Crores made in the assessment. Aggrieved, both the assessee as well as the Revenue is in appeal before us for their respective portion of the grievances. 3.13. We find that in respect of interest income earned by the assessee in the sum of Rs.1.38 Crores to be given credit while disallowing the interest as directed by the ld. CIT(A), the Revenue has not preferred any appeal before us. Hence, that aspect had attained finality from the order of the ld. CIT(A). The Revenue has contested only the action of the ld. CIT(A) in granting relief to the extent of interest paid on term loan in the sum of Rs.1.93 Crores. 3.14. We find that in respect of loans given by the assessee to Everest Construction, Pyx Laboratories, Shravan Construction & Akbarallys Ebrahimji, these were subject matter of disallowance of interest u/s.36(1)(iii) of the Act by the ld. AO in A.Y.2001-02 itself vide order u/s.143(3) of the Act dated 18/03/2004. The ld. AR made a statement from the Bar that this assessm....
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....s vide their written request made by these parties to the assessee expressing their bad financial condition and accordingly expressing their inability to service the interest. These documents are enclosed in pages 44-46 of the paper book filed before us. Further, we find that these four companies had been subsequently merged with M/s. Dartmour Holdings Pvt. Ltd., It is a fact that M/s. Dartmour Holdings Pvt. Ltd., had started paying interest to the assessee from A.Y.2005-06 / A.Y.2006-07 onwards and assessee had duly offered the said interest income in subsequent years. We find that assessee had placed due evidences on record by furnishing the financial statements of all these four entities for the year under consideration before the ld. CIT(A). Considering the financial sickness of these four parties, the assessee had passed a Board Resolution dated 07/03/2002 and decided not to charge any interest from these four parties. When these evidences are staring on us, it is incorrect on the part of the ld. CIT(A) to say that no evidences were furnished by the assessee to prove the financial sickness of these four parties. The financial statements of these four parties are reflected from....
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....erefore, it could not be said that interest had accrued to assessee - Whether on facts, findings of Tribunal were correct in law - Held, yes HELD The genuine nature of the resolution was not and could not be disputed. It was found that the letter dated 15-6-1978 had been complied with by 'E Ltd.' in providing an adequate security of the payable amounts. There was nothing to dispute or suspect the genuineness of the transaction. The whole transaction would have to be viewed in that backdrop. In the commercial world, the parties are always free to vary the terms of the contract. Merely because by resolution dated 30-6-1978, the assessee had agreed to defer the payment of interest, it would not mean that it had tried to evade the tax. What is material in the tax jurisprudence is the evasion of the tax, not the beneficial lawful adjustment therefor. Considering the genuine nature of the transaction, based on the letter dated 15-6-1978 and the resolution dated 30-6-1978, it could not be said that the whole transaction was in order to evade the tax. [Para 23] There was also no dispute that the assessee was following the mercantile system of accounting, and that the accoun....
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....period from 1-7-1978 up to 30-6-1979 and, therefore, the reasoning of the Tribunal on that count appeared to be correct, as regards the assessment year 1980-81 was concerned was correct. Since no interest had accrued in the accounting year 1-7-1978 to 30-6-1979, there could arise no question of relinquishment of interest for any commercial expediency. There was no such question because a party could not relinquish income that had not accrued at all. The High Court had correctly found that in view of the categorical stipulation that interest would be payable on the deferred consideration amount in respect of the sale, which became effective from 1-3-1977, the interest started accruing on that time basis from 1-3-1977 determined by the amount outstanding from time-to-time and the rate applicable, which both were stipulated in clearest possible terms in the deed of assignment dated 28-6-1977 and the agreements which preceded it. The High Court had assessed the facts correctly and had further observed that what already accrued during the accounting year 1-7-1977 to 30-6-1978 could not be nullified by the resolution dated 30-6-1978. However, the same rule could not be applicable to the ....