AARSREE INVESTMENTS PRIVATE LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 1(1), CHENNAI

आयकर अपील सं./ Year: 2005-06 M/s. Aarsree Investments Pvt. Ltd., Vs. The ACIT, Meenakshi Towers, Corporate Circle 1(1), New No.13, Old No.6, 4th Floor, Chennai. Rajamannar Street, T. Nagar, Chennai – 600 017. PAN: AAACA 5345B (अपीलाथ�/Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से/ Appellant by : Shri L. Shibi, CS ��यथ� क� ओर से /Respondent by : Shri AR.V. Sreenivasan, JCIT सुनवाई क� तार�ख/Date of Hearing : 14.08.2019 घोषणा क� तार�ख /Date of Pronouncement : 05.11.2019 आदेश / O R D E R PER SHRI S. JAYARAMAN, ACCOUNTANT MEMBER:

The Assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-3, Chennai in 08/A-1 dated 28.09.2018 for the assessment year 2005-06.

2. While making the assessment for the assessment year 2005- 06, the Assessing Officer noticed that the assessee advanced Rs.1,10,00,000/- to M/s.Seahorse Hospitals Limited on 01.12.2004 at 2 -: the interest rate of 10.5%. However the assessee has not recognized any interest against this advance. The Assessing Officer found that the assessee is following accrual method of accounting. Therefore, following the decisions of the Hon’ble Supreme Court in the case of Indermani Jatia v. CIT, 35 ITR 298 (SC) and CIT v. Shiv Prakash Janak Raj and Co.P. Ltd., 222 ITR 583 (SC), treated the interest receivable at Rs.3,85,000/- at the rate of 10.5% as income and concluded the assessment. Aggrieved against that order, the assessee filed an appeal before the CIT(A). The ld.CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed this appeal with the following grounds:- 1. The Appellant challenges the order of the Commissioner of Income Tax (Appeals) ("CIT (A)") on the following grounds amongst others each without prejudice to the other or others.

3. The Respondent factually committed an error and has stated in his order that the Authorised Representative stated that the interest was not recognised in the books since the same was not received during the year while the fact remains that the Appellant had recognised the revenue on accrual basis as per the terms of the agreement and as per Accounting Standards and recorded the interest income soon after it became due in the financial year 2007- 08. The Learned CIT (A) failed to consider the arrangement entered into by the Appellant with the Borrower.

5. The learned CIT (A) completely ignored the fact that the interest income has been offered to tax in the financial year 2007-08 and has paid taxes on the same. Without prejudice to the fact that income is accrued in the financial year 2007-08, the CIT(A) ought to have given a direction/finding that if the interest income is brought to tax in financial year 2004-05, the same is to be eliminated from financial year 2007-08 and tax be computed accordingly and issue refund consequently in the financial year 2007-08. Therefore this warrants interference of this Hon’ble Tribunal.

4 -: 4. Per contra, the ld.DR supported the order of the ld.CIT(A) and hence the relevant portion is extracted as under:- “4.3. I have considered submissions of the ld.AR and perused assessment order. The admitted fact is that an advance of Rs.1,10,00,000/- had been given to M/s.Seahorse Hospitality Ltd. as a loan which carries interest rate of 10.5%. However, ld.AR says that appellant has not demanded interest during the financial year 2004-05 and 2005-06 and therefore, the same has not been recognized in its books of accounts. It is also stated that appellant has been following accounting standard 9 which has not been appreciated by the AO. Lastly, ld.AR has stated that the interest and principal amount was received in the FY 2007-08 and same was offered to tax in the A.Y.2008-09. In support of his arguments, he has also filed Form 26AS and bank statement, etc. On consideration of submissions of the ld.AR, I found that there is a contradiction in his own statements. In the written submissions, reproduced at supra, ld.AR himself has stated that revenue has to be recognized on accrual basis as per the accounting standard 9. However, he further says that it was mutually agreed upon not to recognize revenue on accrual basis because the appellant has not demanded for it. This argument, in my considered opinion, is baseless and without any substance. He himself admitted that interest income has to be recognized on accrual basis as per accounting standard 9 and appellant has been following mercantile system of accounting. This fact shows that appellant has to recognized interest income on accrual basis. Further, mutually agreeing not to demand interest for a certain period cannot be the basis for not recognizing the income as per the accounting standard 9. In my considered opinion, AO has rightly relied upon case laws cited at supra and brought the interest income to tax on accrual basis in appellant’s case. On the other hand, the submissions made by the ld.AR are contradictory and devoid of merits. In the circumstances, addition made by the AO is confirmed. The grounds taken by the appellant are dismissed.

4.2 Following my own decision in appellant’s own case, AO is directed to follow and apply the above decision for this A.Y.2005-06. The grounds taken on this issue are dismissed.”

5. We heard the rival submissions and gone through the relevant materials. The undisputed facts are that the assessee is a company and following mercantile assessment of accounting. The assessee primarily relied on the copy of the letter issued by M/s. Seahorse Hospitals Limited dated 01.12.2004, wherein M/s. Seahorse Hospitals Ltd., confirmed the receipt of Rs.1,10,00,000/- from the assessee company and also confirmed the terms of repayment of loan as under:-

1. 1. That the loan shall carry an interest at the rate of 10.5% per annum.

2. That the interest on loan together with the principal shall be repayable as and when demanded by your company but not earlier than two years from the date of receipt of the loan.

3. The interest on the loan shall become due as and when demanded by your company.

4. At the time of payment of interest, we shall deduct the tax at source as per the provisions of the Income Tax Act 1961.

From the above, it is clear that the loan carried interest at the rate of 10.5% per annum. Therefore, the interest accrues and arises as on the last day of the previous year in which the assessee’s accounts are closed. Once the interest is accrued, it has to be charged to tax in accordance with the method of accounting, i.e., mercantile system, employed by the assessee. The treatment between the parties or the 6 -: subsequent settlement between the assessee and the other party is not affecting the chargeability of tax. Therefore, the interest accrued at the rate of 10.5% on the impugned loan for the period 01.12.2004 to 31.03.2005 is assessable during the period relevant to this assessment year and accordingly the amount levied by the Assessing Officer and sustained by the appellate authority is held as in order. The assessee’s corresponding plea are dismissed.

Order pronounced in the Court on 5th November, 2019 in Chennai.