GLOBAL CONSULTANTS & DESIGNERS PVT. LTD.,NEW DELHI vs. ITO WARD 11(4), NEW DELHI

The appeal has been filed by the Assessee against order dated 20.12.2018 in Appeal No. 190/17-18/CIT(A)-4 assessment year 2015-16 passed by Commissioner of Income Tax (appeals)-4, New Delhi (hereinafter referred to as the First Appellate Authority or in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 23/11/2017 u/s 143(3) of the .Del.2019 M/s. Global Consultants & Designers P. Ltd. 2 Income Tax Act, 1961 passed by ITO, Ward – 11(4), New Delhi (hereinafter referred to as the Assessing Officer or ‘AO’).

2.1 The dispute hovers around the fact that during the year under consideration the assessee company advanced a sum of Rs. 6,00,00,000/- to M/s Parsvnath Developers Ltd. ( also refered here after as PDL) refundable by 24.09.2014. M/s Parsvnath Developers Ltd. Defaulted in payment of principal and interest paid by the agreed date i.e. 24.09.2014. The assessee company claims to have persuade hard for recovery of principal as well as interest and with great persuasion it was able to recover Rs.2,00,00,000/- by the end of the previous year. The assessee company further asked for payment of balance amount and interest due, but M/s Parsvnath Developers Ltd. agreed to pay principal only on the condition of waiver of interest due. In the month of April 2015 M/s Parsvnath Developers Ltd. paid a sum of Rs.3,80,00,000/- out of principal and balance amount of Rs.20,00,000/- was paid in the month of June,2015. However, it has deposited TDS amounting to Rs.8.57,096/- on interest payable to the assessee company. As agreed earlier in April 2015, interest was waived off and a formal agreement was entered, vide Settlement Deed dated 14.07.2015. Thus the assessee claims to have only received interest to the extent of TDS deposited by M/s Parsvnath Developers Ltd., which have .Del.2019 M/s. Global Consultants & Designers P. Ltd. 3 been duly accounted for in the books of account and shown as interest received from M/s Parsvnath Developers Ltd. Copy of account of M/s Parsvnath Developers Ltd. in the books of assessee company as well as Inter Corporate Deposit agreement and Settlement deed were duly submitted during the course of assessment proceedings. Since M/s Parsavnath Developers Ltd. has accounted for interest expense and paid TDS it was appearing in Form 26AS gross interest of Rs.85,70,960/- has been shown as interest paid / credited by M/s Parsvnath Developers Ltd., whereas settlement deed was entered into on 14.07.2015 i.e. prior to finalization of balance sheet of the assessee company and as per settlement deed no interest was receivable by the assessee company. Therefore the assessee company has not credited the interest of Rs.85,70,960/- in its profit & loss account but credited only TDS deducted amounting to Rs.8,57,096/- being real income received / receivable by the company on inter corporate deposit given to M/s Parsvnath Developers Ltd. 2.2 It is pertinent to mention here that Ld. Assessing Officer has issued notice u/s 133(6) to M/s Parsvnath Developers Ltd. and it was duly complied with. M/s Parsvnath Developers has written back its liability to pay interest in the immediately succeeding year.

2.3 Assessee claims that no real income accrued to the company and merely as the assessee is following mercantile system of accounting it does not result in accrual of income from interest when there is no interest in real terms and the statement of the accounts of the assessee also did not reflect any credit entry in respect of interest receipt from the borrower. In absence of realization of real income and there being no accrual of such income subsequent to the aforesaid settlement deed, interest income could not be added to the income of the assessee. .Del.2019 M/s. Global Consultants & Designers P. Ltd. 4 2.4 The Ld. AO had however observed that income of expenditure have been recognized on accrual basis and assessee is following the mercantile system of accounting in the previous year and observing that the assessee has shown interest income of Rs. 8,57,096/- and also claimed TDS of 8,57,096/- thus, he assumed that the interest income that has accrued should be 85,70,960/- and accordingly added the balance 77,13,864/- to the income of assessee.

that interest never accrued and on the other hand it claims the benefit of TDS deducted on such interest in entirety which is against the provisions of the Act.” 5. Assessee has come in appeal raising following grounds;

“1. That on the law, facts and in the circumstances of the case, the Learned Commissioner of Income-tax (A) has erred in upholding additions of Rs.77,13,864/- made by Ld. Assessing Officer on account of interest waived off by the company on the ground of commercial expediency to recover the principal amount. That on the law, facts and in the circumstances of the case, 1.1 the Learned Commissioner of Income-tax (A) has erred in confirming the action or Ld. Assessing Officer for addition, on account of waiver of interest on loan advanced to M/s Parsvnath Developers Ltd without considering the fact that the borrower company has written back the interest expense claimed during the year in the immediately succeeding year and this fact was duly brought to the notice of Ld. CIT(A) as well as of the AO during the course of appellate proceedings as well as in assessment proceedings respectively. On the facts and in the circumstances of the case as well as 1.2 in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making an addition of Rs.77,13,864/- without considering the fact that since the assessee has waived off the interest priorto finalization of its accounts and has rightly not considered it as its interest income on the basis of accounting standard prescribed by the Institute of Chartered Accountants of India and followed by the company. That all the above grounds and sub-grounds have to be 2. read conjunctively and also independent of each other. That the above ground(s) of appeal are to be considered 3. separately and without prejudice to one another. That the appellant assessee craves, leaves to add, alter, 4. amend, substitute, withdraw or forego any of the ground(s) of appeal before or at the time of hearing.

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That the order of Learned CIT (A) is bad in law and wrong 5. on facts of the case and is in violation of the principles of natural justice, as passed without providing reasonable opportunity to the appellant assessee to meet the merits of its case.” 6. Heard and perused the record.

“Also provide a copy of ledger account of our assessee till date. In this regard we would like to submit that M/s Parsvnath Developers Limited has debited interest of Rs 85,70,957/- in respect of inter corporate deposit taken from M/s Global Consultants & Designers Private Limited during the financial year 2014 - 15 on which tax deducted at source was Rs 8,57,096/- and the net interest payable was Rs. 77,13,861/-as on 31/03/2015. Further our company M/s Parsvanth Developers Limited has reversed the interest of Rs. 77,13,861/- in next financial year i..e. 2015 - 16 and repaid the principal amount. The balance of M/s. Global Consultants & Designers Private Limited in the books of accounts of our company M/s. Parsvnath Developers Limited as on 31/03/2016 is Rs. Nil. Copy of Ledger Account of M/s. Global Consultants & Designers’ Private Limited in the books of M/s. Parsvnath Developers Limited for the financial year 2015-16 is enclosed herewith as Annexure-1.” However, the same was left out of consideration with any reasoned findings by Ld AO.

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“5. Identical issue came up before this Court in batch of appeals leading case being Commissioner of Income Tax V. M/s Vasisth Chay Vypapar Ltd. [2011] 196 Taxman 169], this theory of “real income” was discussed in detail. That was also a case of NBFC where loan/advance given by the said assessee had become NPA and keeping in view the guidelines of RBI interest was not treated as accrued. After taking note of various judgments on the subject, the question was answered in favor of the assessee and against the Revenue. The legal position is summarized in para 17 of the said judgment which reads as under:-

“In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income Tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give the following reasons in support:-

(1) First of all we would discuss the matter in the light of the provisions of Income Tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the .Del.2019 M/s. Global Consultants & Designers P. Ltd. 9 said ICD placed with Shaw Wallce since the assessment year 1996-97 as it had become NPAs in accordance with the Prudential norms which was entered in the books of accounts as well. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment years 2006- 07. Reason was adverse financial circumstances and the financial crunch faced by Shaw Wallace. So much so, it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty in so far as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”. We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above.

(2) In the instant case, the assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favor of the assessee.”