TaxTMI 
TaxTMI 
2026 (4) TMI 777
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....Ltd, filed return of income for the Assessment Year 2003-2004, admitting a loss of Rs. 174,21,40,971/-. The return was processed under Section 143(1) of the Act. Later, it was taken up for scrutiny after causing notice under Section 143(2). On hearing the assessee, the Assessing Officer passed order on 31.03.2006 computing the income as below:- Computation of Income Income returned (-) Rs. 174,21,40,971/- Add: Disallowances (as discussed above) 1. Deduction under Section 35D Rs.2,63,54,045/- 2. Interest not recognised: (a) M/s.Industrial Chemicals Monomers Ltd Rs.1,62,01,890/- (b) ICL International Ltd Rs.1,50,68,835/- (c) ICL Sugars Ltd Rs.5,56,91,955/- (d) ICL Shipping Ltd Rs.4,69,19,385/- Total Rs.13,38,82,065/- 3. Bad Debt Rs.8,18,65,744/- 4. Entertainment Rs.5,52,306/- 5. Guest House Rs.12,44,760/- 6. Provident Fund Rs.3,44,49,930/- 7. ESI Rs.46,332/- Rs.27,83,95,182/- Assessed Loss (-) Rs.146,37,45,789/- 3. Against the above Assessment, the assessee went on appeal before t....
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....s their goodwill had increased substantially. The assessee, in the earlier years, following the Mercantile System of Accounting and Charging Interest on advances to its subsidiaries/associates. Therefore, the addition made on the interest on advances is correct. 6. The Tribunal, after considering the material available got satisfied that the assessee had commercial angle in its favour behind such advances. Relying on the dictum laid in S.A.Builders Ltd vs. Commissioner of Income-Tax (Appeals), Chandigarh reported in [2007] 288 ITR 1 (SC), it decided in favour of the assessee saying, financial health of a company is not proportionate to its goodwill. Therefore, the decision not to collect interest for the advance made, when the recovery of principle itself doubtful, no notional interest can be added. 7. Regarding the issue of bad debts, the Tribunal opined that the finding of the Appellate Authority cannot be faulted. The bad debt has been written off in the books of account of the assessee for claiming benefit under Section 36(1)(vii). The Assessing Officer had no doubt about the bad debt. He disputes the manner in which the debt been written off. Mere written off is sufficie....
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....are issue expenses disallowed as discussed @ Para No.1 Rs.2,04,81,875/- 2. Interest debited to share premium account, disallowed, as discussed @ Para No.2 Rs.17,72,00,000/- 3. Depreciation on electrical items, restricted to 15% as discussed @ Para No.3 Rs.53,52,147/- 4. Interest not recognised by the assessee, now assessed on accrual as discussed @ Para No.4 Rs.16,73,13,00/- Rs.37,03,47,022 Rs.21,89,17,638/- Rounded to Rs.21,89,17,640/- (B) Capital Gains: Long-Term Capital Loss, as returned (-) Rs.6,80,92,998/- Assessed Income Rs.21,89,17,640/- Income-Tax thereon Rs.7,66,21,174/- Add: Surcharge Rs.19,15,529/- Rs.7,85,36,703/- Less: TDS Rs.5,92,566/- Rs.7,79,44,137/- Add: Interest u/s 234B Rs.2,57,21,553/- Demand Payable Rs.10,36,65,690/- 10. The assessee went on appeal before the Commissioner of Income Tax (Appeals) in ....
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....tune of Rs. 16,73,13,000/- departing suddenly from the practice followed hitherto without any change in the circumstances? 2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessee was justified in not showing the interest accrued on advances to subsidiary companies on the basis of wrong assumptions such as no fresh advances having been made during the year? 3. Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in holding that the decision of the Supreme Court in 288 ITR 1 was applicable to the assessee's case without appreciating that in each case the assessee had to establish commercial expediency especially when the assessee was paying huge amounts of interest on its borrowings? 4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the disallowance of Rs. 17.72 Crores being interest debited to share premium account amounted to double disallowance on the grounds that the assessee had not claimed it in the profit & loss account and had claimed it only in the sta....
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....agreed to infuse fresh funds of Rs. 800 crores and Rs. 40 crores to sale of non-core assets, the decision not to charge interest cannot be for any commercial expediency. Without charging interest on accrual basis, by change of accounting practise from mercantile system of income accrued to actual receipt to evade tax not been considered by the Tribunal. The conclusion of the tribunal that the subsidiaries /associate company of the assessee were not doing well is contrary to the annual accounts which discloses the goodwill on net capital reserve arising on account of investment in associate company at Rs. 2325.73 lakhs. (Rs.2626.73 lakhs as against Rs. 611.40 lakhs as on 31.03.2002). 17. The Learned Counsel for the appellant/revenue submitted that the facts in S.A Builder's case and the facts of the case in hand are different. Therefore, the observations in S.A. Builders case have no relevance to the case in hand. Even otherwise, the Hon'ble Supreme Court consisting three Judges Bench in Addl. Commissioner of Income Tax -vs- Tulip Star Hotels Ltd., had opined the view expressed in S.A.Builders by two judges bench needs reconsideration. Therefore, the S.A.Builder's case cannot be ....
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.... write off first effected on a consolidated basis at the Head Office and reflected in the printed financial statements. Thereafter, corresponding entries are passed in the individual debtor accounts at various regional offices. During the particular year of assessment at the year end i.e., 31st March, the assessee write off the receivables as bed debts and claimed the same as deduction under Section 36(1)(vii). The corresponding entries are passed in the individual accounts at regional office the following year. The entries in the individual account relates back to the 31st March of the previous year. The reasoning of the Assessing Officer to disallow the claim solely on his misunderstanding of the accounting procedure. Whereas, the CIT(A) and the ITAT had accepted the assessee claim. For the first time in the appeal the department had raised the ground that the details of debtor not furnished despite the fact that the Books of Account maintained and produced in support of the write-off to the satisfaction of the ITAT. 22. In T.R.F Ltd vs. Commissioner of Income Tax reported in [2010] 323 ITR 397(SC) read with C.B.D.T Circular No.12/2016 dated 30.05.2016, it is clarified that on....
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.... arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 26. In the case in hand, the assessee, being a Company incorporated in India, it has to follow the mercantile system of accounting, which means the income accrued, even if not actually received, is deemed to be received and to be brought under the head 'Total Income.' However, while computing the total income, certain income such as income from agricultural do not form part of total income. The list of exempted sources of income are mentioned in Chapter-III of ....
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.... is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) but the [Assessing Officer] had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year [(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the [Assessing Officer] is satisfied that such debt or part became a bad de....
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....nces of the case. No businessman can be compelled to maximise its profit. The Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 37. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, it is obvious that a holding company h....
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....Prasad Tiwari [(1953) 24 ITR 537 (Bom)] and Vithaldas H. Dhanjibhai Bardanwala v.CIT [(1981) 130 ITR 95 (Guj)]) Such state of law prevailed up to and including Assessment Year 1988-1989. However, by insertion (w.e.f. 1-4-1989) of a new Explanation to Section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before 1-4-1989, even a provision could be treated as a write-off. However, after 1-4-1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after 1-4- 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand 'how to write-off'. If an assessee debits an amount of doubtful debt to the P&L account and credits the asset account like sundry debtor's account, it would constitute a write-off of an actual debt. However, if an assessee debits 'provision for doubtful debt' to the P&L account and makes a corresponding credit to the 'current liabilitie....
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....deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flip side to the argument of the Department. The assessee has instituted recovery suits in courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed. 9. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the Department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the Department, in cases where a borrower's account is written off by debiting profit and loss account and by crediting loans and advances or debtors accounts on the asset side of the balance sheet, then, as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans and advances account and not to the profit and loss account which would result in escapement of income from assessment. On the other hand, if bad debt is written....
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....ision is deducted from sundry debtors. As stated above, the assessing officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the assessing officer. Hence, the matter is remitted to the assessing officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off." 35. The Commissioner of Income Tax, Ahmedabad vs. M/s.Gujarat Cyproment Ltd, (2019) 308 CTR 309 (SC) order dated 21.02.2019 is in respect of interest liability which accrued during the relevant assessment year but not actually paid back by the assessee rather was sought to be adjusted in the future loan of Rs 8.crores. In this contest, the Hon'ble Supreme Court referring Section 43 B and the earlier judgment of the Apex Court in Eicher Motors Ltd vs. Commissioner of Income Tax [(2009) 315 ITR 312], held as below:- "14. In so concluding, this Court is supported by the decision of the Madhya Pradesh High Court in Eicher Motors Ltd. v. CIT [Eicher Motors Ltd. v. CIT, 2006 SCC OnLine MP 731: (2009) 315 ITR 312] and subsequently, the judgment of the High Court of....
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....uction of any sum, being interest payable under clause (d) of Section 43-B of the Act, shall be allowed if such interest has been actually paid and any interest referred to in that clause, which has been converted into a loan or borrowing, shall not be deemed to have been actually paid. Thus, the doubt stands removed in view of Explanation 3-C. This provision was considered by the Madhya Pradesh High Court in Eicher Motors Ltd. v. CIT [Eicher Motors Ltd. v. CIT, 2006 SCC OnLine MP 731: (2009) 315 ITR 312] to hold that in view of Explanation 3-C appended to Section 43-B with retrospective effect from 01-04-1989, conversion of interest amount into loan would not be deemed to be regarded as actually paid amount within the meaning of Section 43-B of the Act. 12. In light of the introduction of Explanation 3-C, this Court does not consider it necessary to discuss the precedents relied upon by the assessee delivered prior to the enactment of the Finance Act, 2006. As regards the decision in Shakti Spring Industries [CIT v. Shakti Spring Industries (P) Ltd., 2013 SCC OnLine Jhar 18], the interest due in that case was offset against a subsidy which the assessee was entitled to, an....
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....ng for the subsequent Assessment Years under consideration. Whereas, the Tribunal had erred by treating the advance to the Industrial Chemicals & Monomers Ltd (ICMR) as not an advance but an undeniable capital subscription. In respect of another subsidiary Company, namely ICL International Ltd, the Tribunal has held that the advances to this subsidiary, which provided logistic support services to the cement transport of the assessee company and advances were only running accounts in the ordinary course of business. Hence, no notional interest can be added, even if the assessee follow the mercantile system of accounting. 39. In our considered view, the Appellate Authority as well as the Tribunal badly erred in misapplying the judgment of S.A.Builders, which is not similar to the facts of the case in hand. Further invented new reasons for deciding in favour of the assessee, which is neither pleaded nor supported by records. 40. The unique dispute in respect to the assessment for the Assessment Year 2004-05, is with regard to the disallowance of interest amount Rs. 17.72 crores debited to the share premium account, we find that the assessee company had redeemed Deep Discount Bon....
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....satisfied them to hold the addition of Rs. 17.72 crores by Assessing Officer is erroneous and is not a justifiable finding on fact, since the Appellate Authority CIT(A) as well as the Tribunal had consciously omitted to take into consideration that the assessee, in its Audit Report Annexure-V, had not included Rs. 17.72 crores in the disallowance under Section 43B. 45. If at all there is any necessity to reappreciate the facts is view of new plea or document raised in the appeal, in all fairness, the matter should have been remitted back to Assessing Officer for fresh consideration of the deduction claimed. Instead, without indicating which document provided satisfaction for them to reverse the finding of the Assessing Officer and without any plausible explanation from the assessee for not disclosing this amount in Annexure-V of the Audit Report, the appeal of the assessee was allowed by CIT (A) and the same was confirmed by the ITAT. 46. To sum up, the above discussion leads to the following irresistible conclusion:- (a) The assessee's claim before the Assessing Officer regarding noncharging of interest on advances to subsidiaries, deviating from the prevailing acco....