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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO, HON’BLE & SHRI D.S. SUNDER SINGH, HON’BLE
IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA Nos. 57 & 58/VIZ/2018 (Asst. Year : 2004-05 & 2005-06) M/s. Vasu Chits, vs. ITO, Ward-1, D.No. 4-13-28, Canal Road, Eluru. Agraharam, Eluru, West Godavari District. PAN No. AACFV 9843 C (Appellant) (Respondent)
Assessee by : Shri G.V.N. Hari, Advocate. Department By : Shri D.V. Subba Rao, Sr.DR
Date of hearing : 25/09/2018. Date of pronouncement : 05/10/2018. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER
These appeals by the same assessee are directed against the separate orders of Commissioner of Income Tax (Appeals), Tirupati, both dated 29/12/2017 for the Assessment Years 2004-05 & 2005-06. Since the facts ITA No. 57/VIZ/2018 2. Ground Nos. 2 to 5 are not pressed, therefore same are dismissed.
2 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
Ground No. 1 relates to addition of Rs. 2,51,030/- towards interest accrued on the amounts due. 4. Facts of this issue, in brief, are that assessee is a firm carrying business under the name and style of M/s. Vasu Chits, filed its return of income admitting total income of Rs. 27,960/-. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as "Act"). Subsequently, survey operation was conducted in the business premises of the assessee on 15/06/2014 along with its sister concern M/s. Vasu Builders. Thereafter, a notice under section 143(2) was issued to the assessee and assessment is completed under section 143(3) of the Act. In the assessment order, the Assessing Officer has noted as under:- “The assessee advanced loans to various persons and the total amount outstanding as on 31 -03-2004 was Rs. 16,05,663/-. on which according 10 assessee s on computation furnished during the assessment proceedings the amount of interest accrued is Rs.2,51,030/-. When the assessee was asked to explain why the interest accrued is not admitted as income, it explained that the interest is being admitted at the time of repayment of the loan by the debtors as in some cases recovery of the principal itself is doubtful. The assessee's claim cannot be accepted as the principal amount as not written off by the assessee in the books of account but only the accrued interest was not offered to tax. Further, it is noticed from the ledger that interest receipts and interest payments are credited to the parties account on accrual basis. For instance in the case of Basavaraju Auto Finance (LF 8), the brought forward credit balance was Rs.36,760/- and to this balance, interest accrued of Rs.6,617/- was added and the total credit balance of Rs.43.377/- was carried forward and the same was reflected in the trial balance filed with the return. Similarly, in case of Sri T.Satyanarayana (LF 61), the opening debit balance
3 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
was Rs.24.986/- and 10 this balance, interest accrued of Rs.5.9771- was added and the total debit balance of Rs.30,913/- was reflected in the trial balance. Thus, the interest receipts as well as interest payments are accounted on accrual basis and it is not the case of the assessee that cash system of accounting is being followed for all interest 'receipts and payments. Once accrual system of accounting is followed, the assessee cannot make a claim that interest i8 being admitted at the time of repayment of loan by the debtors on cash basis in some cases. Under section 145, income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee and the assessee cannot follow mercantile system of accounting for certain transactions and cash system of accounting for other transactions. On similar facts and circumstances, it has been held by the Tribunal, Hyderabad, in its order dated 10-08-2003 in ITA No.699/Hyd/2002 in the case of Shakuntala Raihi, that in the absence of any evidence to prove that the recovery of debt was in doubt, interest automatically accrues and is assessable to tax. Decision of the Calcutta Bench of the Tribunal in the case of Javanthi Commerce Ltd. Vs. ACIT 61 lTD 183 (Cal), and the decision of Hon'ble Calcutta High Court in CIT Vs. Hindustan Motors Ltd. 202 ITR 839 (Cal) and that of Hon'ble Rajasthan High Court in S.M.S. Investment Corporation (P) Ltd. Vs. CIT 113 CTR (Raj) 469: 203 ITR 1001 (Raj), also advance the same principle. In view of the above, the interest accrued of Rs. 2,51,030/- is added to the income returned.” 5. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. 6. Before us, ld. counsel for the assessee has submitted that ld.CIT(A) wrongly confirmed the order of the Assessing Officer. 7. On the other hand, ld. Departmental Representative strongly supported the orders of the authorities below. 8. We have heard both the parties, perused the material available on record and gone through orders of the authorities below.
4 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
We find that the assessee has advanced an amount of Rs.16,05,663/- and is following mercantile system of accounting. During the course of survey, the Assessing Officer has found that assessee is chagrining interest on the advances. The case of the assessee is that he is not charging any interest. When the Assessing Officer has established the fact that assessee is charging interest and following mercantile system of accounting, simply submitted that no interest is charged. The assessee has not filed any material to show that he is not charging any interest from the customers. Under these facts and circumstances of the case, we are of the opinion that the Assessing Officer has rightly made the addition on account of interest and the same is confirmed by the ld. CIT(A). For the sake of convenience, the relevant portion of the ld. CIT(A)’s order is extracted as under:- “5. I have considered the findings of the AO carefully. The appellant was issued notice of hearing dated 08.12.2017, fixing hearing on 18.12.207. An adjournment letter was received seeking hearing of the case in the next camp sitting. Accordingly, the appellant was informed that his case is adjourned to 28.12.2017 and final hearing is fixed. Therefore, the appeal is decided on the facts available on record. The appellant contended before the Hon'ble ITAT that it has not charged interest on the advances made to customers. However, the AO found from ledgers that interest receipts and interest payments are credited to the parties account on accrual basis. The AO pointed out two instances where in the interest was charged on advances on accrual basis. However, in the statement of facts, the appellant did not controvert the findings of the AO. In the course of survey action in the case of the appellant on 15.6.2004, incriminating material was found indicating charging of interest on advances on accrual
5 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
basis. The AO while making assessment for AY 2005-06 found that assessee has charged interest on advances made to several persons on accrual basis. However, the appellant failed to give any convincing explanation or give any contrary evidence against the findings of the AO in the of assessment AY 2004-05 that interest was not charged on accrual basis. The appellant did not file any evidence in support of claim of any doubtful advances. The assessee is following mercantile system of accounting in respect of interest charged. Therefore, I am convinced with the findings of the AO, that interest to the tune of Rs.2,51,030/- is accrued on the outstanding advance as on 31.3.2004 of Rs.16,05,553/-. While doing so, reliance is placed on the decision of the Calcutta Bench of the Tribunal in the case of Jayanti Commerce Ltd. Vs. ACIT, 61 ITD 183, decision of the Hon'ble Calcutta High Court in CIT Vs. Hindustan Motors Ltd., 202 ITR 839 and decision of the Rajasthan High Court in the case of SMS Investment Corporation Pvt. Ltd., vs. CIT, reported in 113 CTR 469, 203 ITR 1001 (Raj.). Thus, the addition is confirmed.” 10. Considering the above, we find no infirmity in the order passed by the ld. CIT(A). Thus, this appeal filed by the assessee is dismissed. ITA No.58/VIZ/2018 11. Ground Nos. 2 to 7 are not pressed, therefore same are dismissed. 12. Ground No. 1 relates to addition of Rs. 3,65,234/- towards interest accrued on the amounts advanced to the customers. 13. Facts of this issue in brief are that the Assessing Officer in the assessment order has noted that the assessee has made advanced to various persons and not admitted interest on such advances. The accrued interest on such advances outstanding as on 31/03/2005 is worked out at Rs. 3,65,234/-. The detailed
6 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
working in respect of each advance is given as Annexure-A to this order. Since the assessee is following mercantile system of accounting, the interest is to be offered on accrual basis. The assessee is asked to explain why the interest should not be assessed on accrued basis vide letter dated 10/12/2007. In response thereto, the assessee has filed explanation vide letter dated 17/12/2007. The sum and substance of the assessee is that due to heavy competition in chit fund business, the assessee has required to advance the loans without charging any interest. The Assessing Officer has considered the explanation and observed that as per the loose sheets found during the course of survey, the assessee has already charged interest from two persons viz., G. Yathiraj Kumar of Rs. 1,363/- and Smt. K.Seshavataram, therefore, he came to a conclusion that assessee is charging interest on advances. Hence, the Assessing Officer made the addition of Rs. 3,65,234/- towards accrued interest on the advances by the assessee and the same is added to the total income of the assessee. 14. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. 15. Before us, ld. counsel for the assessee has submitted that, only based on the material found in respect of two persons,
7 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
addition cannot be made and in respect of other persons, where no interest is charged. Therefore, he prayed for deletion of addition. 16. On the other hand, ld. Departmental Representative strongly supported the orders passed by the Assessing Officer. 17. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. 18. The assessee has advanced various amounts to the customers which is attached with Annexure-A of the assessment order. The case of the assessee is that he has not charged any interest, however, the Assessing Officer has pointed out from the material collected during the course of survey, the assessee has charged interest from two persons, namely Sri G. Yathiraj Kumar and Smt. K.Seshavataram. This fact has not been disputed by the assessee. It is also a fact that the assessee is following mercantile system of accounting. The assessee simply submitted that due to heavy competition in the business, funds advanced to the customers and no interest is charged from them, but he has not filed any supportive evidence to substantiate his argument. It is also a fact that assessee is charging interest. It is also a fact that same submission is made even in the earlier years. By
8 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
considering all the facts and circumstances of the case, we are of the opinion that ld. CIT(A) correctly confirmed the order of the Assessing Officer. For the sake of convenience, the relevant portion of the ld. CIT(A)’s order is extracted as under:- “5. I have considered the findings of the AO carefully. The appellant was issued notice of hearing dated 08.12.2017, fixing hearing on 18.12.207. An adjournment letter was received seeking hearing of the case in the next camp sitting. Accordingly, the appellant was informed that his case is adjourned to 28.12.2017 and final hearing is fixed. Nobody attended for hearing on 28/12/2017 also. Therefore, the appeal is decided on the facts available on record. The AO found from ledgers that interest receipts and interest payments are credited to the parties account on accrual basis. In the course of survey action in the case of appellant on 15/06/2004, incriminating material was found indicating charging of interest on advances on accrual basis. The AO while making assessment for AY 2005-06 found from the impounded material during the course of survey action that assessee has charged interest on advances made to several persons like Sri B. Pradeep Kumar, Sri G. Yatiraj Kumar, on accrual basis. The Assessing Officer also gave a categorical finding in the order of assessment that assessee-firm offered interest on advances made to Smt. K. Seshavataram. However, in the statement of facts, the appellant did not controvert the findings of the AO. The appellant did not file any evidence in support of claim of any doubtful advances. The assessee is following mercantile system of accounting in respect of interest charged. The averment of the appellant that it has not charged interest on advances is factually incorrect. Therefore, the ratio of the decision relied by the appellant are not applicable to facts of the case. Therefore, I am convinced with the findings of the AO, that interest to the tune of Rs.3,65,234/- is accrued on the advance made. While doing so, reliance is placed on the decision of the Calcutta Bench of the Tribunal in the case of Jayanti Commerce Ltd. Vs. ACIT, 61 ITD 183, decision of the Hon'ble Calcutta High Court in CIT Vs. Hindustan Motors Ltd., 202 ITR 839 and decision of the Rajasthan High Court in the case of SMS Investment Corporation Pvt. Ltd., vs. CIT reported in 113 CTR 469, 203 ITR 1001 (Raj.). Thus, the addition is confirmed.
9 ITA Nos.57 & 58/VIZ/2018 (M/s. Vasu Chits)
By considering the totality of the facts and circumstances of the case, we find no infirmity in the order passed by the ld.CIT(A). Thus, this appeal filed by the assessee is dismissed. 20. In the result, both the appeals filed by the assessee are dismissed. Order Pronounced in open Court on this 05th day of Oct., 2018.
Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 05th Oct., 2018. vr/- Copy to: 1. The Assessee - M/s. Vasu Chits, D.No. 4-13-28, Canal Road, Agraharam, Eluru, West Godavari District. 2. The Revenue – ITO, Ward-1, Eluru. 3. The Pr.CIT, Rajahmundry. 4. The CIT(A), Tirupati. 5. The D.R., Visakhapatnam. 6. Guard file. By order
(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.