DHANRAJ MILLS P.LTD,PALGHAR vs. ACIT (OSD-II) CR 7, THANE

1 Dhanraj Mills Pvt Ltd IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI Before Shri Saktijit Dey (JUDICIAL MEMBER) AND Shri G Manjunatha (ACCOUNTANT MEMBER) I.T.A Nos.1679 to 1682/Mum/2015 (Assessment years: 1993-94 to 1996-97) AND I.T.A Nos.1255 to 1258/Mum/2017 (Assessment years: 1993-94 to 1996-97)

Dhanraj Mills Pvt Ltd vs ACIT(OSD-II), CR-7, Mumbai A-604, 6th Floor, Pranik Chambers, Saki Vihar Road, Sakinaka, Andheri (E), Mumbai-72 PAN : AAACD5580D APPELLANT RESPONDEDNT

Appellant by Shri Deepak P Tikekar Respondent by Dr P Daniel

Date of hearing 01-11 -2017 Date of pronouncement 19-01-2018 O R D E R Per Bench : These eight appeals filed by the assessee, two each for

assessment years 1993-94 to 1996-97 against separate, but identical orders of the CIT(A)-52, Mumbai against consolidated order passed for each assessment year separately in respect of two appeals filed by the

assessee against the orders of AO passed u/s 143(3) & 143(3) r.w.s. 147 of the Income-tax Act, 1961. Since the facts and issues involved in

2 Dhanraj Mills Pvt Ltd these appeals are identical, for the sake of convenience, these appeals were heard together and are disposed of by this common order. 2. The assessee has raised more or less common grounds of appeal for all the assessment years. Therefore, for the sake of convenience, grounds of appeal raised for AY 1993-94 are reproduced below:- “1. The Learned CIT (A) has erred in not following Hon'ble ITAT, Mumbai direction for competing the assessment. The Learned CIT (A) has erred in confirming Rs 1,59,73,852/- on account of unexplained investment in Jewellery 3. The Learned CIT (A) has erred in directing to adopt the interest income at Rs 11,31,28,230/- 4. The Learned CIT (A) has erred in confirming Rs 7,11,531/- as a dividend income. 5. The Learned CIT(A) has erred in not reducing the interest income already shown in Profit and Loss account. The Learned CIT (A) has erred in law and in facts in rejecting the "-" contentions of the appellant company that no real income has become due to it from Cifco Group of Companies of Rs 2,57,60000/-. (The Learned CIT (A) has erred in law and in facts in rejecting the contentions of the appellant company about the taxability of interest come from M/s Excel & Co at Rs 2,31,00,000/-. The Learned CIT (A) has erred in law and in facts in not considering that no real income has become due to it from VKSA, and Swadeshi Enterprises 9. The Learned CIT (A) has erred in law and in facts in not considering the additional grounds that appellant prays that if non-accruability of interest allegedly due from VKSA, Swadeshi Enterprises and Cifco Group of Companies., is rejected , then the amount so assessable ought to be correspondly allowed as a deduction on the premises that the interest has not been actually and really received by the Appellant from VKSA, Swadeshi Enterprises and Cifco Group of Companies.

3 Dhanraj Mills Pvt Ltd interest u/s 234A, 234B and 234C of the Income Tax Act 1961. 11. The Learned CIT(A) has erred in confirming the initiation of penalty proceedings u/s 271 (1)(c) of the Income Tax Act 1961.

1258/Mum/2017. The assessee filed a condonation petition dated 22-

02-2017 praying for condonation of delay, which reads as under:- Date: 22nd February, 2017 To, Hon'ble"D" Bench ITAT, Mumbai Respected Sir, Sub: Request for condonation of delay in filing Income Tax Appeals for Ay 1993-94-PAN: AAACD5580D I, Rajendra Prasad Mehrotra, Director of the Dhanraj Mills Private Limited, hereby request to kindly condone the delay in filing Tax Appeal. We submit that Learned CIT(A) has passed the consolidate order dated 12-01-2015 for AY 1993-94 for order u/s 143(3) and Order u/s 143(3) r.w.s. 147 received on 09-02-2015, due to single order we inadvertently file single appeal bearing no. 1679/M/15. Recently it has been advised to file separate appeal for the both the order. Therefore, accordingly we are filing separate appeal for order u/s 143(3) r.w.s. 147. Kindly treat the appeal no. 1679/M/15 files for order u/s 143(3). * to inadvertent there is delay in filing appeal by 685 days. Kindly condone the delay. Sd/- For Dhanraj Mills Private Limited”

The above application of the assessee is duly supported by an affidavit

sworn in by the director of the company, which reads as follows:-

“AFFIDAVIT I, Rajendra Prasad Mehrotra, Director of the Dhanraj Mills Private Limited, do hereby solemnly state as under:

4 Dhanraj Mills Pvt Ltd That the Learned CIT(A) has passed the consolidate order dated 12-01-2015 for AY 1993-94 for order u/s 143(3) and Order u/s 143(3) r. w. s. 147 received on 09-02-2015, due to single order we inadvertently file single appeal bearing no. 1679/M/15. That the recently it has been advised to file separate appeal for the both the order. Therefore, accordingly we are filing separate appeal for order u/s 143(3) r. w. s. 147. Due to above verification of fact resulted in the cmiay in filing appeal by 684 days. That I state that there was no malafide intention to delay submission of appeals. Whatever stated above its true to the best of my knowledge 8i belief. Kindly condone the delay. (Mr. Rajendra Prasad Mehrotra ) Director Deponent”

The reasons for delay in filing the appels are convincing. Therefore, we admit the appeals for adjudication. 4. The assessee also filed a petition for admission of additional grounds vide application dated 21-10-2015 raising more or less common grounds of appeal for all the years under appeals. Therefore, for the sake of convenience, grounds of appeal raised for AY 1993-94 are reproduced below:-

1) The Learned CITA) has erred in computing the interest income of Rs 2,31,00,000/- from Excel & Co. 2) The Learned CITA) has erred in enhancing the interest income by Rs 2,12,03,280/- as receivable from Excel & Co. without issuing enhancement notice.

5 Dhanraj Mills Pvt Ltd 3) The Learned CIT (A) has no jurisdiction for enhancement in the appellate proceeding, which has to be completed as per direction given by Hon'ble ITAT.

4 The Appellant craves leave to add to and/or amend and/or modify and/or alter and/or delete the aforesaid additional ground of appeal.

additions made by the AO towards unexplained jewellery and accrued

interest on loans and advances receivable from CIFCO group of

companies, Excel & Co, VKSA & Swadeshi Enterprises. The assessee

also challenged additions made by the AO towards dividend income,

computation of interest income adopted from total loans and advances

and also levy of interest u/s 234A, 234B and 234C of the Income-tax

Act, 1961. Though the assessee has raised various grounds of appeal,

filed a chart and explained that the issue for consideration from these

grounds of appeal is for AY 1993-94 addition made by the AO towards

unexplained jewellery and interest income receivable from loans and

advances given to group companies. For rest of the assessment years,

the only issue to be decided is addition made by the AO towards interest

income receivable from CIFCO group of companies, Excel & Co, VKSA

& Swadeshi Enterprises. The remaining grounds are either

consequential in nature and / or not pressed. Therefore, the effective

grounds remain for adjudication from assessee’s ground of appeal in all

6 Dhanraj Mills Pvt Ltd these appeals is addition made by the AO towards unexplained jewellery and interest income from group companies. 6. The brief facts of the case extracted from ITA No.1679/Mum/2015

for AY 1993-94 are that the assessee company was engaged in financing business and is a notified entity under Special Court (TORTS) Act, 1992. The company filed its return of income for the year under 30th consideration on December, 1993 declaring a loss of Rs.2,99,23,297. The return was processed u/s 143(1)(a) of the Act and while doing so, the AO disallowed assessee’s claim of estimated liability of Rs.10,45,17,615/- on account of finance charges payable to A.D.

Narottam. Consequently, the total income was determined at Rs.7,45,44,318. Subsequently, the case has been selected for scrutiny and the assessment was completed u/s 143(3) on 27-03-1996

determining total income at Rs.12,56,69,558. The assessee has filed appeal against the order of the AO before the first appellate authority. The CIT(A), vide order dated 24th March, 2000, partly allowed appeal

filed by the assessee. In the meanwhile, the assessment was reopened u/s 147 of the Act on the ground that certain income was escaped assessment within the meaning of section 147 of the Income-tax Act,

1961 and the AO has completed assessment u/s 143(3) r.w.s. 147 of the Act on 27-03-2003 in which further addition of Rs.4,18,61,409 was made on account of interest from certain parties which was not considered in

7 Dhanraj Mills Pvt Ltd the original assessment. The appeal filed by the assessee against order

passed u/s 143(3) r.w.s. 147 has been dismissed by the first appellate

authority vide his order dated 28-09-2006 wherein he upheld the addition

made by the AO towards interest income of Rs.4,18,61,409. The

assessee has filed further appeal against order of CIT(A) before the ITAT. The ITAT, vide order dated 25th February, 2011 restored the

appeals filed by the assessee to the file of the CIT(A) with a direction to

decide it afresh. The CIT(A) in second round of litigation, after

considering the arguments of the assessee, partly allowed appeal filed

by the assessee against order of the AO passed u/s 143(3) of the Act

and dismissed appeal filed by the assessee against order of the AO

passed u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961. Aggrieved by

the order of CIT(A), assessee is in appeal before us. 7. The first issue that came up for our consideration from assessee’s

appeal for the assessment year 1993-94 is addition of Rs.1,59,73,852

on account of unexplained investment in jewellery. During the course of

assessment proceedings, the AO observed that during the course of

search u/s 132(1) conducted in the premises of the assessee on 23-06-

1992, certain jewellery was seized which was valued by departmental

valuer at Rs.2,00,72,477. During the course of assessment

proceedings, the AO asked the assessee to establish that the above

jewellery was acquired through explained sources and had been

8 Dhanraj Mills Pvt Ltd accounted for in the books of account. The assessee furnished

complete chart in respect of jewellery seized from assessee’s premises

as well as from the premises of its directors and explained that the

jewellery seized during the course of search had been purchased on the

occasion of marriage of Shri D.T. Ruia and some of the jewelleries had

already been declared in the wealth-tax returns of the family members

and also in the wealth-tax return of the assessee company. The AO,

however, observed that wealth-tax returns filed by the assessee coud

not be of any help as in respect of most of the jewelleries, the returns

had been filed after the search. He further observed that the jewellery

could be considered as explained only where it is supported by purchase

bills and / or bills for making charges. The AO further observed that the

assessee had got a rough valuation report prepared by M/s Shantikumar

Dwarkadas Jhaveri valuing the jewellery as on 10-10-1991 which had

also been seized during the course of search. The AO had compared

the jewellery items seized with the two valuation reports and wherever

the assessee could co-relate the items with purchase bills and also the

description given in the rough valuation report, such items were treated

as explained. The items of jewellery that could not be co-related with

valuation report has been treated as unexplained by the AO are given in

Annexure A-1 to the assessment order and the total value of such

jewellery was worked out at Rs.1,56,60,100. Similarly, the items of

9 Dhanraj Mills Pvt Ltd jewellery which were treated as unexplained by the AO are given in

Annexure A-2 to the assessment order and the total value of such items

was worked out at Rs.3,13,352. Thus, the AO has made total addition of

Rs.1,59,73,852 on account of unexplained jewellery. 8. The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred

in confirming additions made by the AO towards unexplained jewellery

despite assessee furnished various details to explain the jewellery with

wealth-tax returns filed in the name of the family members and also

explained the sources with jewellery which was recorded in the books of

account of the assessee. The Ld.AR further submitted that the AO

made additions towards unexplained jewellery on the basis of two

valuation reports, i.e. one obtained by the assessee in the year 1991

and the other valuation report obtained by the department after seizure

of jewllery during the course of search on account of minor difference in

description, weight and value of jewellery ignoring evidence filed by the

assessee to prove that all jewellery have been explained in the wealth-

tax returns filed and also the total value of jewellery seized during the

course of search is less than the jewellery declared in the books of

account of the assessee. The Ld.AR referring to the valuation reports

which were filed in paper book submitted that the assessee has

explained each and every item of jewellery with reference to purchase

bills and could able to match the jewellery seized with that of jewellery

10 Dhanraj Mills Pvt Ltd found in the valuation report except in a few cases where there is a

minor difference of less than one milligram which is on account of error

committed by the two valuers. The Ld.AR further submitted that the

valuer has his own style of describing an item of jewellery and also in

respect of weight where there is a milligram has been rounded off to the

nearest gram. The Ld.AR of the assessee referring to the reconciliation

statement of jewellery filed before the AO explained that except in two

cases there is absolutely a narrow difference in weight as well as in

value and the difference in two cases has been explained before the AO.

Therefore, the CIT(A) was totally incorrect in confirming addition made

by the AO by holding that the assessee could not able to explain certain

items of jewellery with bills and vouchers. He further submitted that the

AO had adopted a very rigid method while making the addition which is

evident from the fact that even where the description, weight, value, etc

of the items, as per rough valuation report where tallying, the AO treated

such items as unexplained on the ground that the description of items

did not tally with bills for purchasing / making charges. 9. On the other hand, Ld. Standing Counsel appearing for the revenue

submitted that the assessee has failed to explain jewellery with

reference to two valuation reports which is evident from the fact that the

AO has brought out clear incidence of huge difference in weight and

value of jewellery which is the reason in treating jewellery as

11 Dhanraj Mills Pvt Ltd unexplained. Therefore, there is no merit in the arguments of the

assessee that it has filed a reconciliation statement explaining jewellery

seized during the course of search. The Ld.Standing Counsel further

submitted that there is a difference in valuation report to the extent of

80% in which the assessee has not offered any explanation. The CIT(A)

has given ample opportunity to the assessee to file reconciliation

statement explaining the difference quantified by the AO with reference

to two valuation reports in which the assessee has failed to file any

evidence. Therefore, no relief could be given to the assessee. 10. We have heard both the parties, perused the materials available on

record and gone through the orders of authorities below. The AO has

made addition towards jewellery wherever the assessee has failed to

explain jewellery seized with two valuation reports, i.e. one obtained by

the assessee in the year 1991 and the second one obtained by the

department subsequent to the date of search. According to the AO,

there is variation in description, weight and value of the jewellery as per

two valuation reports. The AO has accepted jewellery as explained

wherever the assessee could able to file necessary bills for purchase of

jewellery and also match the weight, value and description of jewellery.

The AO has treated certain jewellery as unexplained wherever the

assessee could not able to match description, weight and value. The

AO has brought out number of instances where the assessee could not

12 Dhanraj Mills Pvt Ltd match the jewellery with that of valuation report and such list has been

furnished in Annexures A-1 & A-2 to the assessment order. It is the

contention of the assessee that jewellery found and seized during the

course of search is completely explained with known source of income

which is evident from the fact that the value of jewellery seized during

the course of search is less than value disclosed by the assessee in its

books of account in the relevant financial year. The assessee further

contended that no addition can be made based on the difference in two

valuation reports because each valuer has his own style of valuing

jewellery and also taking the weight in terms of milligrams may be

because of rounding off of the milligrams to the nearest grams.

Therefore, unless there is substantial difference in weight, description

and value, addition cannot be made, despite assessee has explained

the jewellery found and seized during the course of search. 11. Having heard both the sides, we find merits in the arguments of the

assessee for the reason that the total value of jewellery seized during

the course of search valued by the departmental valuers at

Rs.2,00,72,477, whereas the assessee has disclosed value 225,13,114.

The value of jewellery seized during the course of search is less than the

value declared by the assessee in its books of account. This fact has

not been disputed the fact that the assessee has disclosed jewellery in

the wealth-tax returns filed for the relevant assessment years on its own

13 Dhanraj Mills Pvt Ltd and in the case of its family members was not disputed by the revenue.

The AO made addition only on the ground that the assessee could not

match item-wise jewellery seized with reference to two valuation reports

in terms of description, weight and value. On the other hand, the

assessee has filed a reconciliation statement explaining the reasons for

such difference. On perusal of the reconciliation statement filed by the

assessee, we find that the AO has adopted a very rigid method while

making the addition which is evident from the fact that he did not even

consider minor variation in weight and description of the jewellery. The

assessee has explained the reasons for difference in description and

weight. According to the assessee, each valuer has his own method of

describing jewellery and also taking the weight and value. The

assessee has filed copies of valuation reports, list of inventory of

jewellery seized during the course of search and corresponding

purchase and / or making charges bill. Such details has been furnished

in paper book pages 27 to 72. The assessee has explained item-wise

jewellery seized with reference to two valuation reports and also

explained the difference. According to the assessee, there is a minor

difference in weight of the jewellery, that too, in milligrams which is very

minimal and also because of different method of valuation followed by

two different valuers. Insofar as difference in value quantified by two

valuers, the assessee has explained in the remarks column and stated

14 Dhanraj Mills Pvt Ltd that there is a timing gap between two valuation reports because of

which obviously, there will be an increase in / or decrease in value of

jewellery. Therefore, it cannot be the reasons for making addition when

the assessee was able to match item-wise jewellery of description and

weight. We find merit in the argument of the assessee on the ground

that first and foremost, the jewellery declared by the assessee in its

books of account is more than the value of jewellery determined by the

departmental valuer. However, we are not sure whether the assessee

has furnished these documents before the AO to explain the difference

quantified in terms of two valuation reports. Therefore, we are of the

view that the issue needs to be re-examined by the AO in the light of re-

conciliation statement filed by the assessee with reference to bills and

other details and hence, we set aside the issue to the file of the AO and

direct him to consider the evidence filed by the assessee and decide the

issue in the light of our observations in accordance with law. 12. The next issue that came up for our consideration for AYs 1993-94

to 1996-97 is on account of addition made by the AO towards interest

receivable from CIFCO group of companies,through Kenilworth

Investment Co. Pvt Ltd, Excel & Co, VKSA & Swadeshi Enterprises.

The assessee had given advances to CIFCO group of

companies,through Kenilworth Investment Co. Pvt Ltd, Excel & Co,

VKSA & Swadeshi Enterprises out of its interest bearing funds and no

15 Dhanraj Mills Pvt Ltd interest was charged on such loans. The petition filed by the custodian

for seeking direction from the Hon’ble Special Court in respect of such

loan / advances made by the assessee directing the concerned debtors

to make payments of the outstanding amounts along with the interest

thereon has been accepted by the Special Courts and has passed

orders on the petitions filed by the Custodian requiring the debtors to

make payment of the outstanding amount along with interest thereon.

The Special Court has passed separate orders making the debtors to

make payment of principal amount alongwith interest thereon at varying

rates. However, the assessee has not accounted for interest amount

receivable from these parties in respect of relevant previous years in its

books of account. The order passed by the Hon’ble Special Court

quantified the interest liability of the debtor alongwith principal amount.

Since the Special Court has passed orders directing these parties to

make payment of principal amount alongwith interest thereon at the rate

specified therein, the AO observed that interest on such loans accrued

to the assessee for the period from AY 1993-94 onwards. The AO has

quantified the interest on the basis of order passed by the Special

Courts and made additions in the assessment order passed u/s 143(3)

and also in the re-assessment order passed u/s 143(3) r.w.s. 147 of the

Act. The Special Court has passed order making the debtors to pay

interest ranging from 12% to 20%. The AO has quantified interest for

16 Dhanraj Mills Pvt Ltd the relevant period at the rates directed by the Special Courts and made

additions for the assessment years 1993-94 to to 1996-97. 13. The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred

in confirming addition made by the AO towards interest receivables from

CIFCO group of companies,through Kenilworth Investment Co. Pvt Ltd,

Excel & Co, VKSA & Swadeshi Enterprises even though the assessee

has not been able to recover any amount due from the debtors as the

matter is under the control of the Custodian of the Special Court. The

Ld.AR further submitted that though the SpecialCourt has passed order

decreeing loans alongwith interest payable by the debtors, the assessee

is not having any control over the recovery of debts due from the parties

and hence, wherever the Custodian has recovered the amount from the

debtors, the assessee has offered to tax interest received from those

debtors in the relevant financial year. The Ld.AR further submitted that

in respect of amount due from CIFCO group of companies,through

Kenilworth Investment Co. Pvt Ltd, it has received interest in the

financial year relevant to AYs 1996-97 and 1997-98 and the same has

been offered to tax. Similarly it has received interest in the financial year

relevant to AY 1996-97 and the same has been offered to tax for that

assessment year. Asfar as Swadesh Enterprises, the assessee has

received interest from the debtor in the financial year relevant to AYs

1997-98, 1998-99, 2007-08, 2012-13 and 2014-15 and the same has

17 Dhanraj Mills Pvt Ltd been offered for assessment. Insofar as VKSA Investment Pvt Ltd and

Excel & Co, the assessee could not able to realize any interest including

the principal amount which is evident from the fact that the Custodian in

his report submitted stated that there is no chance of recovery of due

from Excel & Co as the proprietor of the company is notified party,

whose dues to income-tax arrears are huge and hence, chance of

recovery of amount due to the assessee is very less. Insofar as VKSA

Investment Pvt Ltd, the report of the Custodian states that the Custodian

has recovered Silver articles worth Rs.15,35,400 and unquoted shares

belonging to the debtors. Except this, there is no chance of recovery of

amount due from the said party. Under these circumstances, making

addition towards interest receivable from the above parties on the basis

of order passed by the Special Court merely on the ground that the

assessee is following mercantile system of accounting ignoring the fact

that whether the interest receivable from the debtors is really accrued to

the assessee or not during the relevant financial year is incorrect. The

Ld.AR for the assessee referring to the decision of Hon’ble Supreme

Court in the case of Godhara Electricity Co Ltd vs CIT (1997) 225 ITR

746 (SC) submitted that the question whether there is real accrual of

income to the assessee in respect of interest receivable from those

debtors has to be considered by taking the probability or improbability of

realization in a realistic manner before making any additions. The AO, in

18 Dhanraj Mills Pvt Ltd a mechanical manner, without appreciating the facts, whether the

amount due from the debtors is recoverable or not, has made additions

on accrual basis only on the basis of assessee’s method of accounting

which is irrelevant insofar as interest receivable from those companies

as when the recovery of principal itself is in default, the question of

taxing interest on accrual basis is against the principles of law. In this

regard, he relied upon the following judgements:-

No.6166/Del/2012 14. The Ld.Standing Counsel appearing for revenue submitted that the

assessee has been given enough time to substantiate his case with

necessary evidences, but the assessee has failed to file any evidences.

Therefore, at this juncture the assessee’s argument that interest is not

accrued for the relevant financial year cannot be considered. The Ld.

Standing Counsel further submitted that the order passed by the Hon’ble

Special Court directing the debtor to pay the dues alongwith interest is

enough evidence to justify accounting interest on accrual basis. The

assessee failed to account interest receivable from parties even though

19 Dhanraj Mills Pvt Ltd such interest is accrued in the relevant financial year in terms of order of

Special Court. The Ld.Standing Counsel further submitted that insofar

as CIFCO group of companies, the argument of the assessee cannot be

accepted for the simple reason that the assessee could able to recover

interest amounting to Rs.11,37,51,284 from the assessment year 1996-

97 onwards which is evident from the fact that the assessee itself has

admitted interest income in those assessment years on receipt basis.

Similar is the case in the case of Swadesh Enterprises where the

assesse could recover interest of Rs.1640 lakhs which has been offered

to tax on receipt basis. Since the assessee could not controvert the fact

that these debtors could pay the dues and, therefore, the assessee

should have considered interest accrued for the relevant financial years

by following regular method of accounting followed in its business. The

assessee admittedly followed mercantile system of accounting and

hence, it is necessary to account interest receivable from those

companies on accrual basis which is certainly accrued on the basis of

order of the Special Court. In respect of other two debtors, though the

assessee claims that the chance of recovery of dues is very less, by the

order of the Special Court, the debtors are bound to pay the dues to the

company and hence, the interest receivable from those debtors is

accrued to the assessee. The AO as well as the CIT(A) has rightly dealt

with the issue in the light of the order of the Special Court which

20 Dhanraj Mills Pvt Ltd mandates the debtors to pay interest and hence, the interest is certainly

accrued to the assessee for the relevant financial year and hence, rightly

taxed on accrual basis. The Ld.Standing Counsel referring to the

decision relied upon by the Ld.AR of the assessee in the case of

Godhara Electricity Co Ltd vs CIT (supra) submitted that the case law

referred by the assessee are rendered in different set of facts and also in

many of the case are in the light of Non banking financial companies and

treatment of NPAs and interest accrued thereon which is not applicable

to the facts of the case of the assessee, as in the assessee’s case,

interest is certainly accrued to the assessee on the basis of order of the

Special Court. 15. We have heard both the parties, perused the material available on

record and gone through the orders of authorities below. The facts with

regard to amount due from CIFCO group of companies, through

Kenilworth Investment Co. Pvt Ltd, Excel & Co, VKSA & Swadeshi

Enterprises is not disputed by the assessee. The assessee has

advanced loans and advances to these companies in the financial year

relevant to assessment year 1992-93 and earlier years. It is also an

admitted fact that the Special Courts (TORTS) Act, 1992 at Mumbai has

passed orders decreeing amount due from those debtors alongwith

interest. The AO has made addition towards interest receivable from

CIFCO group of companies,through Kenilworth Investment Co. Pvt Ltd,

21 Dhanraj Mills Pvt Ltd Excel & Co, VKSA & Swadeshi Enterprises on the basis of order passed

by the Special Court wherein it has quantified interest payable to the

assessee. The AO has estimated interest at the rate prescribed by the

Special Court and made addition for each of the assessment years

starting from AYs 1993-94 to 1996-97. According to the AO, the

assessee is following mercantile system of accounting and hence,

necessarily to account all receipts on accrual basis, whether or not

received during the relevant period. The AO further observed that in

terms of order passed by Special Court, interest due from those debtors

is accrued to the assessee. 16. It is the contention of the assessee that the question whether there

was real income accrued to the assessee in respect of interest

receivable from those debtors in terms of order passed by the Special

Courts has to be considered by taking into account probability or

improbability of realization in a realistic manner. If the matter is

considered in this light, it is not possible to hold that there was a real

income accrued to the assessee in respect of interest receivable from

those debtors as the assessee is not having any control over recovery of

dues from those debtors which is under the control of Custodian

appointed by the government under the Special Courts (TORTS) Act,

1992. The assessee further contended that wherever it has received

amount from debtors, the same has been offered to tax which is evident

22 Dhanraj Mills Pvt Ltd from the fact that in the case of CIFCO group, it has received interest of

Rs.11,37,51,284 in 3 years, which has been offered to tax. Similarly, in

the case of Swadeshi Enterprises, it has received interest amount of

Rs.1640 lakhs and the same has been offered to tax in those

assessment years on receipt basis. The assessee further contended

that in respect of VKSA, as per the report of the Custodian appointed by

the Special Court(TORTS) Act, 1992,chance of recovery is very less.

As regards Excel & Co, the Custodian has categorically stated that the

proprietor of the company is a notified party and whose dues to income-

tax is huge and hence, there is no chance of recovery due to non

availability of assets with the Custodian on his behalf. Therefore, it is

highly incorrect on the part of the AO to tax interest income on accrual

basis, which is not really accrued to the assessee. The assessee further

contended that merely by following mercantile system of accounting, the

income cannot be taxed on accrual basis and the question whether such

income is accrued to the assessee or not has to be seen by taking the

probability or improbability of realization in realistic manner. If one look

into the matter in this light, it is incorrect to hold that the interest is

accrued to the assessee for the relevant assessment years. 17. Having heard both the sides and considered material on record, we

find that the AO has made addition towards interest receivable from

CIFCO group, VKSA Investments Pvt Ltd, Excel & Co and Swadeshi

23 Dhanraj Mills Pvt Ltd Enterprises on the basis of order passed by the Hon’ble Special Court

(TORTS) Act, 1992 which has passed order decreeing amount due to

the assessee by the above parties alongwith interest. The AO has

estimated interest at the rate quantified by the Special Court and made

additions in each of the assessment years under consideration.

Admittedly, the issue of recovery of dues from those debtors is not in the

control of the assessee as the matter is seized by the Custodian

appointed by the Government under the Special Courts (TORTS) Act,

1992. Therefore, under these facts and circumstances, one has to see

whether interest receivable from those debtors is accrued to the

assessee in the light of the order passed by the Special Court. No

doubt, the Special Court has passed order decreeing the amount due

from the above parties. As per the order of the Special Court, the

Custodian appointed by the government has to recover the amount due

from the parties. We further notice that in the case of CIFCO group of

companies, the assessee could able to recover amount from the party in

the financial year relevant to AY 1996-97, 1997-98 and 2007-08 totalling

Rs. 11,37,51,284. Similarly, in the case of Swadeshi Enterprises, the

assessee recovered an amount of Rs.1640 lakhs in 5 years which has

been accounted for on receipt basis and offered to tax. As far as other

two debtors, viz. VKSA Investment Pvt Ltd and Excel & Co, except to the

extent of Rs.15,35,400 the assessee could not able to recover any

24 Dhanraj Mills Pvt Ltd amount and this fact has been confirmed by the report of the Custodian

as per which, the chance of recvovery of amount due from those debtors

is very less as the proprietor of Excel & Co did not have any asset.

Similarly, in the case of VKSA Investments Pvt Ltd, the Custodian has

recovered certain assets to the extent of Rs.15,35,400 and further stated

that the chances of recovery of remaining amount is very less. Under

these circumstances, the issue has to be considered by taking the

probability or improbability of realization of amount due from those

debtors in a realistic manner. 18. Under the Income-tax Act, income is charged to tax, i.e. received or

is deemed to be received in India in the previous year relevant to the

year in which assessment is made or on the income that accrues or

arises or is deemed to accrue or arise in India during such year. The

computation of such income is to be made in accordance with the

method of accounting regularly employed by the assessee. It may be

either cash system where entries are made on the basis of actual

receipts or it may be mercantile system where entries are made on

accrual basis, i.e. accrual of the right to receive payment and the accrual

of the liability to disburse or pay. If the accounts are maintained under

the mercantile system what is to be seen is whether income can be said

to have been accrued to the assessee. Even though mercantile system

of accounting is followed, the question whether such income is accrued

25 Dhanraj Mills Pvt Ltd to the assessee or not has to be seen in view of the fact whether the

assessee is able to recover such income or the probability of recovering

such income is realistic or not. In the light of the above legal proposition,

if we examine the present case, whether interest due to the assessee

from those debtors is really accrued to the assessee or not has to be

seen. No doubt, the assessee is following mercantile system of

accounting. If any receipt is accrued or deemed to accrue for the

relevant financial year, the assessee has to consider those receipts for

the relevant financial year for the purpose of taxation. If the income or

receipt is merely accrued on account of method of accounting followed

by the assessee, but not really accrued, if you follow the real income

theory, then the question of taxing such receipts for the relevant financial

year is not correct. In this case, the Court has passed order decreeing

the amount due to the assessee on the petition filed by the Custodian.

In the case of CIFCO group of companies, the arguments of the

assessee cannot be accepted for the reason that interest is accrued for

the relevant assessment year, because in the subsequent financial year

the assessee has received interest which is evident from the fact that the

assessee has offered to tax interest on receipt basis. Similarly in the

case of Swadeshi Enterprises, the assessee has recovered interest

which has been offered to tax for the relevant assessment years on

receipt basis. Therefore, we are of the considered view that in respect

26 Dhanraj Mills Pvt Ltd of CIFCO group and Swadeshi Enterprises, interest receivable from the

debtors is accrued to the assessee by virtue of mercantile system of

accounting followed by the assessee and hence, the AO was right in

taxing receipt on mercantile basis. However, this finding cannot be

applied to the other two cases, viz. VKSA Investment Pvt Ltd and Excel

& Co. Though the debtors are liable to pay interest by virtue of order of

the Special Court, the Custodian of the Special Court in his report

categorically stated that the chances of recovery of amount due from

those two companies is very less because the proprietor of the company

is a notified party and his income-tax dues are huge and hence, there is

no chance of recovery due to non availability of assets. Since the

assessee did not have any control over the affairs of collection due from

those debtors and which has been under the control of custodian. The

report of the Custodian specifically states that the chance of recovery of

amount due from those parties is very less. Therefore, whether there

was real income accrued to the assessee in respect of interest has to be

considered by taking into account the probability or improbability of

realization in a realistic manner. If the matter is considered in this light, it

is not possible to hold that there was real accrual of income to the

assessee in respect of interest receivable from VKSA Investment Pvt Ltd

and Excel & Co. Therefore, we are of the considered view that the AO

was erred in making addition towards interest receivable from VKSA

27 Dhanraj Mills Pvt Ltd Investment Pvt Ltd and Excel & Co. However, the facts are not clear

whether the assessee has furnished this or not. Therefore, we are of the

view that the issue needs to be re-examined by the AO in the light of our

observations and also in the light of paper book filed by the assessee

containing report of the Custodian. Therefore, we set aside the issue to

the file of the AO and direct him to consider the issue in the light of our

findings as well as report of the Custodian in respect of interest

receivable from those two companies. Needless to say, the assesse is

directed to file all the evidences and also if necessary, obtain latest

report from the Custodian about the possibility of recovery of dues, from

those companies. 19. Coming to the case laws relied upon by the assessee, the assessee

has relied upon various decisions including the decision of Hon’ble

Supreme Court in the case of Godhara Electricity Co Ltd vs CIT (supra).

We have gone through the case laws relied upon by the assessee in the

light of the facts of the present case and find that the case law relied

upon by the assessee on different facts and also most of the cases are

in respect of treatment of non performing assets and also interest

accrued on NPAs except in the case of Godhara Electricity Co Ltd vs

CIT (supra). Therefore, we are of the considered view that the case law

relied upon by the assessee are not applicable to the facts of the present

case and hence, are not considered. In the case of Godhara Electricity

28 Dhanraj Mills Pvt Ltd Co Ltd vs CIT (supra), the issue was whether the enhanced electricity charges accrued to the assessee in the light of either by Court orders or by government orders and having been able to realize the enhanced

rates, still it was taken over by the electricity board. Under these facts and circumstances, the Hon’ble Supreme Court came to the conclusion that no real income accrued to the assessee and nothing on that could

be added even though the assessee is following mercantile system of accounting. In this case, facts are entire different and hence, the ratios of the above case laws are not applied to the facts of the assessee’s case. 20. In the result, the ground raised by the assessee in all the assessment years challenging additions made by the AO towards interest receivable from CIFCO group of companies, Excel & Co, VKSA

Investments P Ltd and Swadeshi Enterprises is restored back to the file of the AO. 21. The Ld.AR for the assessee, at the time of hearing, submitted that

the other grounds in all the assessment years are either consequential with reference to the addition made towards income from CIFCO group of companies, Excel & Co, VKSA Investments P Ltd and Swadeshi

Enterprises and are not pressed. Therefore, the other grounds raised by the assessee except grounds relating to unexplained jewellery and accrued interest from loans and advances are dismissed, as not

29 Dhanraj Mills Pvt Ltd pressed. 22. In the result, all the eight appeals filed by the assessee are treated as partly allowed, for statistical purpose. Order pronounced in the open court on 19th January, 2018.

Sd/- sd/- (Saktijit Dey) (G Manjunatha) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dt : 19th January, 2018 Pk/- Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR /True copy/ By order Asstt. Registrar, ITAT, Mumbai