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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI M. BALAGANESH (AM) & SHRI RAM LAL NEGI (JM)
O R D E R PER RAM LAL NEGI, JM These appeals have been filed by the revenue against the order dated 09.12.2016 passed by the Commissioner of Income Tax (Appeals)-5 (for short ‘the CIT(A), Mumbai, for the assessment years 2011-2012 and 2012-13, whereby the Ld. CIT(A) has partly allowed the appeals filed by the assessee against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’). Brief facts of the case are that the assessee a public Limited company registered with Reserve Bank of India as a Non-Banking, filed its return of income for the assessment year under consideration declaring the total income of Rs. 21,087/-. Since, the case was selected for scrutiny, the AO issued notice Assessment Years: 2011-12 & 2012-13 u/s 143 (2) and 142 (1) of the Act. In response thereof the authorized representative of the assessee appeared before the AO and furnished the details called for. The AO completed the assessment u/s 143 (3) of the Act determining the total income at Rs. 11,18,20,990/- after making addition of Rs. 11,17,99,900/- on account of notional interest computed on the secured debts of Swadeshi Cement Limited (SCL), which the assessee had acquired. M/s SCL had taken loan of Rs. 79 lakhs from Punjab National Bank (PNB) in May 1992 and Rs. 3.22 crores from Industrial Development bank of India (IDBI) in December 1982. After acquiring the secured loans, M/s SCL had turned sick and was under default for the said loans. IDBI and PNB sold the said secured debts of SCL to M/s Raghupati Cement P. Ltd. for a total consideration of Rs. 1.50 crores. It was noticed that loan payable to PNB as on 27.09.1994 was Rs. 3.90 crores and to IDBI as on 15.12.2006 was Rs. 87.92 crores. The AO further noticed that interest was thereafter not calculated on these loans. Accordingly, the AO holding that the business activity of the assessee is earning interest and profits through the activities of financing computed the interest accrued to it for 12 months and determined the total interest at Rs. 11,17,99,900/- and added the said amount to the total income of the assessee.
2. The assessee challenged the assessment order before the Ld.CIT (A). The Ld. CIT (A) after hearing the assessee allowed the appeal and deleted the addition made by the AO. The revenue is in appeal against the said findings of the Ld. CIT (A).
The revenue has challenged the impugned order passed by the Ld .CIT (A) on the following effective grounds:- 1. “Whether on the facts and to circumstances of the case and in law, the Ld. CIT (A) was right in deleting the addition made by AO of Rs. 11,17,99,900/- without appreciating the fact that the assessee had created right to receive interest by acquiring debt and as per the mercantile system of accounting such interest has been accrued to the assessee and hence taxable.
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) was right in deleting the addition Assessment Years: 2011-12 & 2012-13 made by AO of Rs. 11,17,99,900/- being accrued interest on a debt without appreciating the fact that the assessee is an investment/Non Banking Finance Company (NBFC) and its business activity is mainly earning interest and profits through the activity of Finance and maintain its books of accounts on mercantile system of accounting.”
At the outset, the Ld. counsel for the assessee submitted that this issue is covered in favour of the assessee by the order of the “B” Bench of the Tribunal in AY 2010-11. The Ld. counsel further submitted that since, the order passed by the Ld. CIT (A) is in accordance with the order of the ITAT rendered in the assessee’s own case for the AY 2010-11, there is no infirmity in the order passed by the Ld. CIT (A). Hence, there is no merit in the grounds of appeal
raised by the revenue.
5. On the other hand, the Ld. Departmental Representative (DR) admitted the fact that this issue has been decided by the Tribunal in favour of the assessee. However, the Ld. DR relying on the assessment order passed by the AO submitted that the Ld. CIT (A) has wrongly deleted the addition made by the AO without appreciating the fact that the assessee is an investment/Non Banking Finance Company and its business activity is mainly earning interest and profits through the activity of finance and maintains its books of account on mercantile system of accounting.
6. We have heard the rival submissions of the parties in the light of the rival contentions. We notice that the coordinate Bench has decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2010-11 (supra) vide order dated 10.10.2017. The findings of the coordinate Bench reads as under:- “5. The learned D.R. before us even though vehemently relied on the order of the AO but could not adduce any evidence or material which may prove that the interest income added by the AO has actually accrued to the assessee so that it can be added in the income of the assessee. It is not denied that the interest which has been computed by the AO on the debt the recovered of which itself is doubtful for the last several years. In view of this fact we are of Assessment Years: 2011-12 & 2012-13 the view that no interference is called for in the order of the CIT(A). In our opinion the issue involved is duly covered by the decision of the Hon'ble Supreme Court in the case of UCO Bank vs. CIT 237 ITR 889 in which it was held that in respect of sticky advances if the interests are not taken into the Profit & Loss Account but taken to the suspense account cannot be the income of the assessee and such interest is not actually received or accrued to the assessee. In the impugned case it is not denied that the debt which has been taken over by the assessee relate to SCL which has become sick industrial undertaking in the year 1987 itself and off these debts have become nonperforming assets. In the process IFIC and ICICI had sold their debts to Asset Care Enterprises Ltd. and the PNB and IDBI had assigned/sold their debts to Raghupati Cement Pvt. Ltd. which in turn sold the same to the assessee company by way of Registered Deed of Assignment dated 04.05.2009 for the full and final amount of `1.50 crores. In view of this fact we are of the view that the CIT(A) has correctly held that no notional interest on such debt can be charged to income tax. We accordingly confirm the order of the CIT(A).”
The Ld. CIT (A) has allowed the appeal of the assessee and deleted the addition made by the AO on account of notional interest holding as under:- “4.2 Before me, it has also been submitted that ultimately the movable and immovable assets of SCL were put to auction on 03.05.2010 by Asset Care Enterprises Ltd. [ to whom the other two banks IFCI & ICICI had assigned their debts] and that the assessee company had got the entire assets of SCL [ land, building Plant & machinery and scrape] on payment of Rs. 6.20 crore as full and final payment. The physical possession of SCL’s assets were received by assessee on 17.05.2010 and the sale deed was registered on 26.05.2010. Thus, the gain on the transactions needs to be assessed in the A.Y. 2011-12 based on the market value of those assets as on the date of its possession over SCL’s entire assets with reference to the cost [ including that of Rs. 1.50 crore which was paid by the assessee while the loans of PNB & IDBI was assigned to it from RCL vide the Registered deed of Assignment dated 04.05.2009 as well as the amount that it had paid on account of acquiring the entire assets by way of auction by the ACE]. The adjustment on Assessment Years: 2011-12 & 2012-13 account of the assesseee’s share of rights onto the SCL’s assets by way of acquiring the debts on payment of Rs. 1.50 crore of course needs to be adjusted for arriving at the gain in A.Y. 2011-12 on account of such transactions. It is also noted that the scrap out of SCL’s assets so acquired by the assessee was sold for Rs. 1.90 crore in the year relevant to A.Y. 2012-13, but the profit thereon amounting to Rs. 4,87,000/- only has been offered to tax. The adequacy and appropriateness of the gain and profit needs to be examined/ascertained by the AO in A.Y. 2011-12 and 2012-13. The AO may take note of these observations accordingly. As far as the issue of taxing the notional interest on accrual basis in the year under consideration, which is the subject matter of the appeal, is concerned the same stands allowed in favour of the assessee as discussed in para 4.1 above. Accordingly, the entire amount of addition of Rs. 10,23,83,242/- is deleted.” In the above order of my predecessor, he was of the view that though these debts were taken in 1982 by SCL, as SCL had become sick these debts were sold to RCL. Though the total amount of debt was Rs. 91,82,76,201/- along with principal and interest which has to be paid to PNB and IDBI, but appellant had paid consideration of Rs. 1.50 Crs. for purchase of above loans. This itself shows that there is no chance of recovery and according to CIT (A)’s order notional interest cannot be calculated on the total amount of debt which was taken by the appellant as there is no interest accrued to the appellant during the year. Neither he received the interest nor there is a right to receive to the appellant. According to the I.T. Act, interest income can be assessed to tax if it is received or accrued. Form the above facts it is clear that appellant has not received any interest from the debts purchased from PNB and IDBI. Further whether appellant had accrued the interest income, for accrual of income Supreme Court in the case of E.D. Sasoon vs. CIT [26 ITR 27] held that “a debt must have come into existence and he must have acquired the right to receive the payment unless and until any contribution is effective in bringing into existence a debt or right to receive the payment or in other words a debitum in presenta and obendeum in future”. It cannot be said that any income has accrued to him. From the above decision of the Supreme Court in the above mentioned Assessment Years: 2011-12 & 2012-13 case, it is clear that if any amount has to accrue to the appellant, a debt should have come into existence and by coming of this debt into existence which is the income of the appellant, appellant acquires the right to receive the payment. Here in this case AO is of the view that appellant is right to receive the payment. Here in this case AO is of the view that appellant is right to receive the interest income, hence, he added the notional interest on the debt to be received by the appellant. In order to get any amount right to receive, first there should be debt. Debut should come into existence means someone must agree to pay the interest to the appellant. So that forms a debt which can be paid now in the present or future. But, in this case if appellant has right to receive the interest amount, he has to receive from someone. There should be two entities, one is the receiver of the interest, and other is payer of the interest. On examination of the facts of this case, here appellant had purchased the loans from PNB and IDBI which had defaulted by earlier takers of loans and here there is no question of appellant receiving any interest from anyone and anyone even acknowledging that appellant will be paid interest. Hence here there is no right to receive any interest to the appellant. Hence, according to AO, AO’s argument that appellant has right to receive interest is not justified. Further Supreme Court also held that income can be assessed under the I.T. Act based on real income and not on notional basis, there cannot be any notional interest and total debt purchased by the appellant from PNB and IDBI. Hence in view of the above decision of the CIT (A), AO’s addition is deleted. Ground of appeal is allowed.”
8. We have carefully examined the order passed by the Ld. CIT (A). As pointed out by the Ld. counsel for the assessee, the order passed by the Ld. CIT (A) is in accordance with the settled principle of law and the evidence on record. The coordinate Bench has decided the identical issue in favour of the assessee in the assessee’s own case for the AY 2010-11 discussed above by upholding the findings of the Ld. CIT (A). The issue involved in the present case is identical to the issue involved in the assessee’s own case for the AY 2010-11. Since, the revenue has not pointed out any material change in the facts of the present Assessment Years: 2011-12 & 2012-13 case, we find no infirmity in the order passed by the Ld. CIT (A). Hence, respectfully following the decision of the coordinate Bench rendered in assessee’s case aforesaid, we uphold the findings of the Ld. CIT (A) and dismiss the appeal of the revenue. We accordingly direct the AO to delete the addition. The facts and the issue involved in the present case are identical to the facts and issue involved in assessee’s own case for the AY 2011-12. Hence, we do not consider it necessary to narrate the facts of the present case. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1. “Whether on the facts and to circumstances of the case and in law, the Ld. CIT (A) was right in deleting the addition made by AO of Rs. 15,07,02,377/- without appreciating the fact that the assessee had created right to receive interest by acquiring debt and as per the mercantile system of accounting such interest has been accrued to the assessee and hence taxable. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) was right in deleting the addition made by AO of Rs. 15,07,02,377/- being accrued interest on a debt without appreciating the fact that the assessee is an investment/Non-Banking Finance Company (NBFC) and its business activity is mainly earning interest and profits through the activity of Finance and maintain its books of accounts on mercantile system of accounting.”