M/S MUTHOOT BANKERS & FINANCIERS vs. THE COMMISSIONER OF INCOME TAX
What did the High Court hold?
The High Court noted that the figures provided by the assessee in its Profit & Loss Account (Annexure-E) and the Chartered Accountant's Certificate (Annexure-F) did not precisely tally with the addition made by the Assessing Officer (Rs. 66,09,167/-). The certificate stated that Rs. 65,95,681.19 was offered as interest receivable and collected by the Company upon takeover, and that the Company had taken over Rs. 66,09,167/- as interest receivable, which was later collected and handed over to the firm. The Court expressed doubts about whether the interest credited to the P&L account and the interest receivable collected and handed over were one and the same. Considering this to be a question of fact requiring further examination, the Court refused to answer the questions of law. The matter was remanded to the Assessing Officer to verify if there was a duplication in the addition made.
What were the facts?
The assessee, M/s. Muthoot Bankers & Financiers, is challenging an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2005-06. The ITAT had restored an addition of Rs. 66,09,167/- representing the balance in the interest receivable on gold loan accounts as income, reversing the order of the First Appellate Authority. The assessee firm was taken over by M/s. Muthoot Fincorp Ltd. during the assessment year. The assessee contended that it followed the cash system of accounting and interest was taxable only upon actual receipt. The ITAT, however, held that there was constructive receipt of interest on the date of the agreement when the buyer agreed to compensate the assessee for accrued interest.
What were the issues?
1. Whether the Appellate Tribunal was justified in law in restoring the addition of Rs. 66,09,167/- as income for AY 2005-06 on a cash system of accounting? (Question of law) 2. Was the Appellate Tribunal's finding of "constructive receipts" of interest on the date of agreement legal and sustainable, given that interest receivable is subject to actual realization and governed by agreement clauses? (Question of mixed law and fact) 3. Should the Appellate Tribunal not have found that under the cash system of accounting, interest is taxable only on actual receipt, not on a "constructive receipt" basis, making its contrary finding erroneous? (Question of mixed law and fact) 4. Was the Appellate Tribunal's finding that the "interest receivable account" became an "interest received account" on the agreement date contrary to the agreement conditions and the assessee's accounting system? (Question of mixed law and fact) 5. Was the Appellate Tribunal's finding legally valid and sustainable on facts and in law? (Question of law) Assessee's Contentions: The assessee argued that it followed the cash system of accounting, and interest is taxable only upon actual receipt, not on a constructive receipt basis. The contrary finding by the Tribunal was erroneous and unsustainable, and the Tribunal's finding was contrary to the agreement conditions and the system of accounting followed. Revenue's Contentions: The revenue's contentions are not explicitly recorded in the judgment, but their appeal to the Tribunal was against the deletion of the addition of Rs. 66,09,167/- by the First Appellate Authority, implying they supported the addition.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
JUDGMENT K. Vinod Chandran, J. In the income-tax appeal, another Division Bench raised the following questions of law by order dated 05.11.2013: “1) Whether the Appellate Tribunal is justified and right in law in restoring the addition of Rs.66,09,167/- being the balance in the interest receivable in the gold loan account as the income for the Assessment Year 2005- 06 on cash system of accounting? 2) Is the Appellate Tribunal's finding and conclusions that there was “constructive receipts” of the interest amount on the date of the agreement Annexure-B, legal, is valid and sustainable,
when
the interest receivable account is subject to actual realization and governed by other clauses of agreement? 3) Should not the Appellate Tribunal have found that in the cash system of accounting followed by the appellant interest became taxable only on actual receipt basis and not on the basis of the so called constructive receipt basis and is not the contrary finding taken by the Appellate Tribunal, erroneous and legally unsustainable? 4) Is not the finding of the Appellate
Tribunal
that interest receivable account became an interest received account on the date of the agreement contrary to the conditions of the agreement and the system of accounting followed by the appellant? 5) Is the finding of the Appellate Tribunal disputed herein legally valid and sustainable on the facts and in law?”
All the questions of law concern one single credit made by the Assessing Officer of an amount of Rs.66,09,167/-. There were other additions made by the Assessing Officer, which were interfered with by the First Appellate Authority. The Tribunal also confirmed such order of the First Appellate Authority. The interference by the Tribunal in an appeal filed by the Revenue was only with respect to the interest receivable of Rs.66,09,167/-.
The assessment completed was for the year 2005-2006, when the assessee firm had been taken over by a Company, M/s.Muthoot Fincorp Ltd. The take over was on consideration paid to the firm. We are only concerned with the interest accrued in the loans granted by the assessee firm, which is said to have been taken over by the Company along with the assets and liabilities of the assessee firm. The assessee's contention was that the assessee had been following the cash system of accounting and for reason of the interest having not been received, the assessee was not liable to show it as income. However, the Tribunal found that the moment, the buyer agreed to compensate the assessee for the interest accrued in the loan accounts; up to the date of transfer, there is constructive receipt of the interest by the assessee, even in cash system of accounting. The addition to income made by the Assessing Officer was upheld, reversing the order of the First Appellate Authority. We agree with the reasoning of the Tribunal but the assessee points out a further fact, by way of additional documents.
The assessee produced the additional documents as Annexure-E to Annexure-G along with an affidavit dated 03.01.2019. The Profit & Loss Account for the year ended 31.03.2005 is produced as Annexure-E. There is a credit shown of interest on gold loans at Rs.65,95,681. 19. This is shown as interest received on gold loans. The assessee submits that the loss computed in the P&L account of the subject year was after crediting such interest. This is the interest income, now made addition of, is the argument.
At the outset, we have to notice that the figures do not tally, because the addition made
by the Assessing
Officer
is Rs.66,09,167/-. Further, we also notice a Certificate
produced
by the Chattered Accountant as seen at Annexure-F. Therein it is stated that Rs.65,95,681.19 has been offered as interest receivable on gold loan in the account of the assessee firm for the year ending 31.03.2005. It is also stated that this amount represents interest collected by the Company on take over of the business of the firm. Further, it is stated that the Company had taken over from the firm an amount of Rs.66,09,167/- as interest receivable, which was later collected and handed over to the firm by the Company.
Hence the duplication is not in the Assessing Officer having made the addition, but in the Company having received the payments in the course of the year in addition to the consideration. We have our own doubts about the interest credited to the P&L account and the interest receivable, collected and handed over to the firm by the Company; whether they are one and the same. This is essentially a question of fact and the assessing officer will examine whether there was a duplication in so far as the addition made. We hence refuse to answer the questions of law for reason of there existing a warrant for further examination of the figures as revealed from the P&L Account. We remand the matter for verification of this single aspect. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE sp/19.01.19 //// P.A. To Judge
Appendix — schedule of exhibits
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