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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ : NEW DELHI
Before: SH. SHAMIM YAHYA & SH. ANUBHAV SHARMA
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’).
The facts of the case is that the assessee company had filed its return of income on 24.09.2015 declaring total loss of Rs.32,85,141/- for the assessment year 2015-16. The case was selected for limited scrutiny and a notice u/s 143(2) was issued on 26.09.2016 and was duly complied with. The assessee company had filed the various details, particulars and documents as asked for during the course of assessment proceedings. The assessment in this case was completed at a total income of Rs.44,28,723/- U/s 143(3) vide order dated 23.11.2017, thereby making an addition of Rs.77,13,864/ to the declared income of the assessee.
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.
The Ld. CIT(A) has sustained the same and adding further that “6.4 I have considered the balance sheet and financials of the appellant company. As on opening of the year under consideration, the appellant company did not have sufficient own capital to fund such inter corporate loan given to Parsvnath Developers Limited. Further, nowhere, the appellant before me or either before the AO furnished as to how advancing of loan to Parsvnath Developers Limited is pertaining to the business purpose of the appellant company or as to how there was any commercial expediency for such advance. In such a scenario, since the advance were given to Parsvnath Developers Limited out of loan funds, proportionate interest expense is being correctly disallowed and added back to the income of the appellant company. Thus, the addition made by the AO is correct. 6.5 Having decided above, even the plea of the appellant company that the case is of non-disclosure of income because the same never accrued to the appellant during the year under consideration is also not tenable. The case laws relied upon by the appellant is distinguishable on facts as in this case, Parsvnath Developers Limited duly recognised the interest expense in its financial statements and duly deducted the TDS on the same and paid to the revenue authorities. If the contention of the appellant is considered, then in such case there is double jeopardy to the revenue as on one hand Parsvnath Developer is treating such interest as expense and on the other hand the appellant company is not showing it as income. Furthermore, the right to receive interest was only waived off in the subsequent year. It is a trite law that each year is an independent year and hence, if the right to receive interest was waived off in the next year, the same would have an impact in the subsequent year and in this year the interest should be treated as income. Also, the appellant, on the one hand claims .Del.2019 M/s. Global Consultants & Designers P. Ltd. 5
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.
.Del.2019 M/s. Global Consultants & Designers P. Ltd. 6
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.
Ld. Counsel apprised the bench of the aforesaid facts and submitted that Ld. Tax authorities below have failed to appreciate that no real income had occurred and out of commercial and business expediency the assessee company had given up claim of interest to ensure that there is no bad debt. It was submitted that the relevant law cited to the Tax Authorities has not been considered and he relied following case laws :- Re: No Accrual of income if there is uncertainty in collection thereof 1. CIT v. Excel Industries Ltd. 358 ITR 295 (SC) 2. CIT v. Balbir Singh Maini:398 ITR 531(SC) 3. CIT v. Motor Credit Co. (P) Ltd. 127 ITR 572 (Mad.) [SLP filed by the revenue has been dismissed vide SLP (Civil) No. 2806 of 1981 (149 ITR (St. 93)] 4. CIT v. Ferozepur Finance (P) Ltd. 124 ITR 619 (P&H) [SLP filed by the revenue has been dismissed vide SLP (Civil) No. 8158 of 1981 [144 ITR (St.) 50]. Re: Interest on ICDs which had had become NPA could not be said to have been accrued to the assessee 5. CIT v. Vasisth Chay Vyapar Ltd. 330 ITR 440 (Del) Affirmed by the Hon’ble Supreme Court in 410 ITR 244 (SC) 6. CIT v. Brahmaputra Capital & Financial Services Ltd.: ITA 107/2012 (Del. HC) Re:Commercial or business expediency of incurring any expenditure is to be seen from the assessee’s point of view and the Revenue cannot justifiably put itself in the arm-chair of the businessman 9. SA Builders v. CIT : 288 ITR 1 (SC) 10. Hero Cycles Limited v. CIT (SC) : 379 ITR 347 (SC) 11. J.K. Woollen Manufacturers v. CIT : 72 ITR 612 (SC) Re: Tribunal can give finding or direction in relation to other assessment year 12. JCIT v. Mukund Ltd. : 291 ITR 249 (AT) (Mum) 13. Perfect Equipments v. DCIT : 85 ITD 50 (Ahd.) 14. MMTC Limited v. ACIT : 5166/Del/2016 (Del Trib.) .Del.2019 M/s. Global Consultants & Designers P. Ltd. 7 7.1. On the other hand, Ld. Sr. DR submitted that there is no error in the findings of Ld. Tax Authorities below.
Appreciating the matter on record, the bench is of considered opinion that the Ld. Tax Authorities below have failed to keep in mind the fundamental principles of taxation that only real income should be taxed and not the hypothetical income. What the Ld. Tax Authorities below have considered to be income arising from interest to be taxable on accrual basis would be a case where interest account is not settled, however when the loan account and interest account stand settled between the parties and a deed of settlement stands (page 29 to 32 of the paper book) then on the basis of accrual interest income cannot be attributed and only the actual interest received on that account, was liable to be shown in P& L account. As rightly done by the assessee company.
The response of borrower PDL was very crucial on notice u/s 133(6) where it categorically submit to the Ld. AO that ;
“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.
.Del.2019 M/s. Global Consultants & Designers P. Ltd. 8
The assessee being in the business of lending, if had borrowed any amount on interest that is not of much consequence in the present facts and circumstances as being watchful of it’s business interest and to secure the principal amount at least, the assessee gave up the claim of interest income. There is no allegation of untoward benefit to the borrower as the two entities were not known to each other. In similar circumstances, where what to talk of interest, even the principal amount itself had become doubtful to recover, Hon’ble Delhi High Court in DIT vs. Brahamputra Capital Financial Services Ltd. (supra) observed :-
“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.”
There is also force in the contention of Ld. Counsel for assessee that in any case, if shortfall in interest is adjusted from principal amount on principle of first appropriation towards interest before applying it to principal. Then being in lending business, the shortage towards principal would be allowable as bad debt. Which assessee prevented. Being in lending business the bad debt ratio is .Del.2019 M/s. Global Consultants & Designers P. Ltd. 10 crucial to the assessee and thus business expediency cannot be more justified then here.
Consequently, grounds are allowed in favour of the assessee and the appeal is allowed. Order pronounced in the open court on 25th January, 2023.