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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI SANJAY GARG
O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the Revenue is preferred against the order of the Ld. CIT(A)-7, Mumbai dated 24.9.2012 pertaining to Assessment year 2009-10.
2. The grievances of the Revenue read as under:
“ Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 2,81,39,521/- made on account of non recognition of interest income by the assessee on the funds deployed in optionally convertible debenture of M/s. Ordyn Technologies Pvt. Ltd., without appreciating the fact that M/s. Ordyn Technologies Pvt. Ltd. has debited the interest payable in its books of accounts and further as per clause 16.13 of the agreement, M/s. Ordyn Technologies was also liable to issue additional equity shares to compensate for any non-payment of interest on OCD until the conversion of OCD.
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in placing reliance in the case of Kerala State Industrial Products Trading Corpn. Ltd. Vs ACIT Cir. 1(1), Trivandrum (ITAT Cochin Bench), Apex Court’s decision in the case of Godhra Electricity Co. Ltd. Vs CIT (SC) and in the case of CIT Vs Shoorji Vallabhdas & Co. without appreciating that the facts of the case relied upon are distinguishable from the facts of the assessee’s case.”
The assessee is in the business of providing investment advice to domestic investors. The return for the year was filed on 29.9.2009 declaring total loss of Rs. 2,44,49,685/-. The return was selected for scrutiny assessment.
3.1. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has invested in debentures and inter-corporate deposits from which no income was recognized during the year. The AO further observed the note to the annual account which read as under:
“Income Recognition- The company recognizes its income on accrual basis, however interest amounting to Rs. 2,81,39,521/- has not been recognized in the books on debentures, deposits and loans of Rs. 27,35,21,918/- in view of uncertainty in realizing the amount, following the principle of prudence. Expenses : All expenses are accounted for on due basis.”
3.2. The AO further found that the assessee has debited interest of Rs. 2,43,40,725/- towards interest on loans which was taken from M/s. India Infoline Investment Services Ltd. (IIISL). The AO was of the opinion that since the interest have been debited to the profit and loss account and interest income has not been recognized, therefore, the net result is loss.
3.3. The assessee was asked to explain and justify its stand. In its letter dated 7.10.2011 the assessee explained that it got an opportunity for deploying funds at Rs. 22,40,21,918/- in optionally convertible debentures OCD) of M/s. Ordyn Technologies Pvt. ltd., which was to yield 16% interest per annum. The said fund was to be financed by IIISL @ 15.75% per annum. It was brought to the notice of the AO that due to heavy financial crisis M/s. Ordyn Technologies Pvt. Ltd., did not pay the interest on debentures issued by them and there is no certainty whether the company would be in a position to pay the interest, therefore interest on debentures was not recognized in the books though the liability to pay interest to IIISL was a certain liability and therefore interest on loan has been charged to the profit and loss account. This submission of the assessee did not find any favour with the AO who was of the firm belief that no sane investor would acquire an asset which has already gone bad and there is no reason to believe the reasons given by the assessee for non- recognition of interest income on the OCD till 31.3.2009. The AO added the interest on the OCD at Rs. 2,40,21,918/-.
3.4. The AO further found that the assessee had given loan to Shri Satish Lade amounting to Rs. 1 crore @ 9% per annum. Vide letter dated 18.11.2011, the assessee explained that on loan given to Shri Satish Lade, the company recognized Rs. 9,00,000/- as interest in financial year 2007-08 which was received in financial year 2009-10. In F.Y. 2008-09, no interest was received as the borrower could not pay interest due to tight liquidity position. This explanation of the assessee was rubbished by the AO. The AO computed the addition of interest and finally made a total addition of Rs. 2,81,39,521/-.
Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) and vehemently submitted that in so far as interest on debentures is concerned, since the company M/s. Ordyn Technologies Pvt. ltd., has suffered great financial crisis, there was no certainty in receiving the interest therefore the same has not been recognized in the books and it has been clearly explained by way of note to the accounts.
4.1. After considering the facts and the submissions, in the light of the documentary evidences placed before the First Appellate Authority, the FAA was of the opinion that the principle amount itself was in doubt, there was no logic in crediting interest by the assessee. The FAA further drew support from the decisions of the Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. Vs CIT 225 ITR 746 and CIT Vs Shoorji Vallabhdas and Co. 46 ITR 144 wherein the Hon’ble Apex Court has held that:
“Income tax is levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability of tax is attracted viz., the accrual of income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize.”
4.2. The Ld. CIT(A) was convinced that the AO was not correct in his action in taxing the interest income of Rs. 2,81,39,521/- as the said income was not received by the assessee company and directed the AO to delete the impugned addition.
Aggrieved by this, the Revenue is before us.
The Ld. Departmental Representative strongly supported the findings of the AO. It is the say of the Ld. DR that the entire deployment of fund to purchase the OCD of M/s. Ordyn Technologies Pvt. Ltd, is nothing but a colorable device by which the assessee not only did not account for the credit of interest but at the same time claimed the payment of interest as expenditure thereby reducing its liability for income-tax.
Per contra, the Ld. Counsel for the assessee reiterated what has been stated before the lower authorities.
We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the OCD of M/s. Ordyn Technologies Pvt. ltd., worth Rs. 20 crores were purchased by the assessee for a total consideration of Rs. 22,40,21,918/-. It is also an undisputed fact that the consideration was financed by IIISL. Obviously, the face value of the debentures was Rs. 20 crores and by paying Rs. 22,40,21,918/-, the assessee has purchased the debenture cum interest. Thus one thing is clear that on maturity of OCD, the assessee is entitled to receive the interest. However, facts on record show that M/s. Ordyn Technologies Pvt. ltd., went into heavy financial crisis by which it was not in a position to pay the principle amount of debentures least to talk about interest on the said debentures. The assessee purchased the OCDs heavily banking upon the future prospects of M/s. Ordyn Technologies Pvt. ltd. However, it turn out to be that all the Government orders successfully bided by M/s. Ordyn Technologies Pvt. ltd. have been cancelled and the said company ran into deep financial crisis . There is no evidence on record brought by the AO to suggest that the assessee has actually received any interest from M/s. Ordyn Technologies Pvt. ltd. There is also no evidence on record which could suggest that there is any possibility of getting interest on debentures from the said company.
8.1. Assuming for a moment that the assessee has purchased debentures cum interest and therefore the assessee must account for the interest, but at the same time there being no possibility of receiving interest, the same is allowable as a write off in the books. Therefore, we do not find any logic in making the addition of interest accrued and then allowing the same as a deduction as a bad debt. Considering the facts of the case from all possible angle, we do not find any reason to interfere with the findings of the Ld. CIT(A). To this extent, findings of the Ld. CIT(A) are confirmed.
8.2. However, we do not find any findings given by the Ld. CIT(A) in respect of money lended to Shri Satish Lade, there is not even a whisper of any finding by the Ld. CIT(A) in respect of interest income added by the AO in respect of the loan given to Shri Satish Lade. We, therefore only to this limited extent, restore the issue to the file of the Ld. CIT(A). The CIT(A) is directed to decide the taxability or other wise of the interest on loan given to Shri Satish Lade after giving reasonable and fair opportunity of being heard to the assessee.
8.3. The appeal filed by the Revenue is allowed in part for statistical purpose.
Order pronounced in the open court on 21st October, 2015