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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Before: Shri P K Bansal & Shri Amarjit Singh
O R D E R Per P K Bansal, Vice-President:
This appeal has been filed by the assessee against the order of the CIT(A)-14, Mumbai, dated 29.01.2016, for A.Y.2009-10. The only issue involved in this appeal relates to the sustenance of the addition by the CIT(A) in respect of the interest amounting to ` 1,05,30,822/-.
The brief facts of the case are that the assessee had made Inter- corporate deposits amounting to ` 6,70,00,000/-, on various dates, in Ordyn Technologies Private Limited @15% p.a.. The interest for the impugned assessment year comes to ` 45,30,822/-. The assessee has also advanced loan amounting to ` 4 crore to Shri Sateesh Kumar @ 15% interest and the interest thereon was ` 60 lacs. In both the cases due to commercial consideration and financial position of the borrower, the assessee did not recognize any interest in its books of account. The assessment u/s. 143(3) was completed but the Assessing Officer did not make any addition in the income of the assessee. The CIT-7 vide his order, dated 09.01.2013, passed u/s. 263 of the Income tax Act, remanded the matter back to the Assessing Officer for the limited issue of non-recognition of the interest income on investment made by the assessee in Inter-corporate deposits and loan given to Shri Sateesh Kumar. The Assessing Officer therefore, conducted fresh assessment proceedings and made an addition of ` 1,05,30,822/- for non- recognition of the interest income vide order passed u/s. 143(3) r.w.s.263.
Aggrieved, the assessee filed appeal before the CIT(A). Before the CIT(A), the assessee contended that similar issue has arisen for A.Ys 2010-11 and 2011-12 and during those assessment years also, the orders were passed in favour of the assessee. However, the CIT(A) dismissed the appeal and confirmed the order of the Assessing Officer.
None appeared on behalf of the assessee. We, therefore, proceed to dispose off the appeal after hearing the learned DR and on the basis of the material available on record. We noted that the assessee has invested ` 6,70,00,000/- on various dates as Inter-corporate deposits in Ordyn Technologies Private Limited for interest @ 15%. The assessee has also advanced loan amounting to ` 4 crore to Shri Sateesh Kumar @15%. But the interest on these amounts has not been shown by the assessee as according to the assessee interest has not accrued. From the submissions made by the assessee before the authorities below, we noted that the Statutory Auditors of Ordyn Technologies Private Limited in their report has observed as under:
“(x) In our opinon, the Company’s accumulated losses at the end of the financial years are more than fifty percent of its net worth. The company has incurred cash losses during the year and the immediately preceding financial year.
(xi) The company has defaulted in repayment of dues to optionally convertible debenture twitters. Debentures amounting to Rs. 200,000,000 which became due for redemption on 21 November 2008 has not yet been redeemed by OK company and the interest (including default interest for non-redemption of debentures and non-payment of interest) due an such debentures amounting to Rs. 64,823,474/- has also not been paid. Further, the due date for redemption of debentures amounting to Rs. 32,000,000/- which fell due between 31st March 2008 and 31st March 2009, has been extended to 31st March 2010 by the debenture holder after the year end. The company has no dues payable to financial institutions.
Statutory auditors of Ordyn have commented in Clause 5 of their report as explained below:
"We draw attention to Note 2 in Schedule 21 to the financial statements As at 31 March 2009, the carrying value of investments in the Company's subsidiaries amounted to Rs. 139,136,461/- in addition to Rs, 18,183,276/- advanced to these subsidiaries. As indicated therein, the net worth of the company's subsidiaries has substantially eroded. Because of the uncertainty involved in the plans given by the management, we are unable to comment on the carrying value of the investments and advance given to the subsidiaries."
Further to that, even the auditors have taken note of this fact of non-payment of interest as per its report for year ending 31/03/2009 in Clause iii(g) which is extracted as under:
In respect of loans taken, the principal amounts are repayable on demand and there is no repayment schedule. Some of the debentures are interest free and fully convertible, hence this clause is not applicable. Some of the debenture issued which were due for redemption, the dates of redemption have been extended by those debenture holders. The payment of interest with respect to these debentures has not been regular. “ From the observations of the auditor, it is apparent that the company in which the assessee has made Inter corporate deposits has incurred heavy loss and the accumulated losses were very high. The company was not even able to repay its debenture. The assessee has also submitted before the authorities below that it has not received any interest or refund of the said amount till the date of making submissions. The interest income, in fact, has not accrued to the assessee. We noted that income tax is leviable on the real income and if no income has accrued to the assessee income tax cannot be levied. The question therefore arises whether any income has accrued during the year. It is not denied that the assessee being private limited company was following mercantile system of account as provided u/s. 145(1) of the Income tax Act. Section 145(2) empowers the Central Government to notify Accounting Standard in the Financial Gazette by any class of the assessee or in respect of any class of income in case the assessee did not comply with the Accounting Standard, could invoke the provisions of section 145(2). By invoking the power conferred u/s. 145(2), the Central Government has notified two Accounting Standards. Accounting Standard 1 relate to the Disclosure of the Accounting policies. Clause 4 of the said Accounting Standard states that accounting policy adopted by the assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purposes, the major considerations are (i) Prudence; (ii) Substance over form and (iii)
Materiality. Prudence requires that provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. Clause 5 of this Accounting standard also states that the fundamental accounting assumptions relating to going concerns, consistency and accrual are followed in financial statements. Accrual has been defined under sub clause (c) of clause 6 refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred.
Consistency has also been one of the basic assumptions, which has to be followed.
Keeping in view the financial strength of the company, it is not denied that the Inter-corporate deposits made by the assessee were not recoverable from the company then what to talk of interest. When the recovery of the money advanced itself is doubtful, the question of accrual of interest, in our opinion, would not arise. Interest would have accrued to the assessee if it got enforceable right and interest would have been received by it. On the same analogy the interest in respect of the non-performing assets in the case of the bankers are not taken to be their income. Even otherwise also since the Revenue has not made any addition in the A.Y. 2010-11 and 2011-12 on the basis of these facts in respect of interest and on the principle of consistency, we are of the view that it cannot be said that interest has accrued to the assessee during the year when the Inter-corporate deposits is equivalent to non-performing assets in the case of the assessee.
Now coming to the non-recognition of interest on loan advanced to Shri Sateesh Kumar. We noted that the assessee company had granted loan amounting to ` 4 crore to Shri Sateesh Kumar on 30.01.2008. Shri Sateesh Kumar is Chief Executive Officer and Managing Director of Enzen Global Solutions Private Limited. The loan was granted to him for the purpose of buying the shares of Enzen Global Solutions Private Limited from an angel investor and has approached the assessee to grant him a loan for such purpose against security and upon the terms and conditions as per the loan agreement. For this purpose, the borrower has taken loan by way of pledge 1,26,540 shares of Enzen Global Solutions Private Limited owned by him having face value of ` 12,65,400/- along with a demand promissory note and two post dated cheques of ` 4,05,00,000/-. The assessee has recognized interest amount of ` 10,19,178/- during the F.Y 2007-08 for sixty two days but the said interest was also not recovered. The borrower did not own up the commitment. The borrowers company was performing badly. Under these circumstances also and since the recovery of the original amount itself is doubtful, the interest income in our view can also not be added as income of the assessee. When the principal amount itself is a non-performing asset, interest cannot be said to have accrued to the assessee. We, therefore, in the light of the aforesaid discussions, set aside the order of the CIT(A) and delete the addition of ` 1,05,30,822/-..
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 27th day of November, 2017.