M/s State Farming Corporation of Kerala Ltd, Punalur V. ACIT, Kollam

ITA 100/COCH/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52313 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 22-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 08-02-2010
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: S S DANIEL MOBESH FCAAR
• Keywords: Capital asset
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND SANJAY AROR A, AM I.T.A NO. 100/COCH/2010 ASSESSMENT YEAR: 2004-05 THE STATE FARMING CORPORATION OF KERALA LTD., FARM HOUSE, VETTITHITTA P.O., ALIMUKKU, PUNALUR-689 696. [PAN:AAACT 8150F] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) ASSESSEE BY SHRI S.S. DANIEL MOBESH, FCA-AR REVENUE BY MS. S. VIJAYAPRABHA, JR.DR DATE OF HEARING 13/10/2011 DATE OF PRONOUNCEMENT 27/12/2011 O R D E R PER SANJAY ARORA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIVANDRUM (CIT(A) FOR SH ORT) DATED 04-11-2009, AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2004-05. 2. THE APPEAL RAISES PRINCIPALLY A SINGLE ISSUE, I. E., THE MAINTAINABILITY OF AN ADDITION IN THE SUM OF ` 123.53 LAKHS MADE BY THE ASSESSING OFFICER (A.O.) T O THE ASSESSEES ASSESSED INCOME (PER ORDER U/S. 143(3) DATED 22-12- 2006 FOR ` 262.75 LAKHS) VIDE ORDER U/S. 143(3) R.W.S. 147 OF THE INCOME-TAX ACT, 1961 ('THE ACT' HEREINAFTER) DATED 20-03- 2009, HAVING BEEN SUSTAINED BY THE FIRST APPELLATE AUTHORITY. 3. THE BRIEF FACTS OF THE CASE ARE THAT ON A PERUSA L OF THE ASSESSEES (A COMPANY OWNED BY THE GOVERNMENT OF KERALA) BALANCE-SHEET, I T WAS FOUND TO HAVE ADVANCED LOAN/S I.T.A. NO.100 /COCH/2010 STATE FARMING CORPORATION OF KERALA LTD. VS. ACIT, KOLLAM 2 OF ` 1235.26 LAKHS TO M/S. TRIVANDRUM RUBBER WORKS LTD., ANOTHER PUBLIC SECTOR UNDERTAKING OF THE STATE GOVT., AS ON 31-03-2004. THE AUDITORS, VIDE THEIR STATUTORY REPORT UNDER THE COMPANIES ACT, 1956, COMMENTED THE REON AS AN ADVANCE TO A COMPANY UNDER THE SAME MANAGEMENT BY WAY OF AN UNSECURED LO AN, REPAYMENT OF WHICH WAS NOT REGULAR, SO THAT ADEQUATE STEPS WERE BEING TAKEN BY THE ASSESSEE TO REGULARISE THE TRANSACTION. THE RATE OF INTEREST AND OTHER TERMS AND CONDITIONS OF THE LOAN WERE PRIMA FACIE PREJUDICIAL TO THE INTEREST OF THE COMPANY. SINCE THE ASSESSEE HAD NOT BOOKED ANY INTEREST ON THE SAID LOAN; IT ADMITTEDLY FOLLOWING MERCANTILE METHOD OF ACCOUNTING, INTEREST ACCRUED ON THE SAID LOAN, ESTIMATED AT 10% OF THE SUMS ADVANCED, WAS ADDED AS INTEREST ACCRUED THEREON, AND BROUGHT TO TAX AS `IN COME FROM OTHER SOURCES. THE ASSESSEES CLAIM THAT THE AMOUNT HAD BEEN ADVANCED ON THE DIRECTION BY THE GOVERNMENT OF KERALA; BOTH THE LENDER (ASSESSEE-COMPANY) AS WE LL AS THE LENDEE-COMPANY (TRIVANDRUM RUBBER WORKS LTD.) BEING THE UNDERTAKIN GS OF THE GOVERNMENT OF KERALA, WAS CONSIDERED AS OF NO CONSEQUENCE BY THE AO AS TH E GOVERNMENT OF KERALA HAD NOT ANYWHERE STATED THAT THE LOAN UNDER QUESTION WOULD BE A INTEREST-FREE LOAN, SO THAT THE COMPANY WAS LIABLE TO ACCOUNT FOR INTEREST ON ACCRU AL BASIS. IN APPEAL, THE MATTER WAS CONSIDERED IN MORE DETAIL BY THE LD. CIT(A), WITH T HE ASSESSEE ADDUCING BEFORE HER THE GOVERNMENT ORDER, I.E., G.O. (MS) NO. 31/94/AD DATE D 08-02-1994 (PB PGS. 14-16 ), WHERE-UNDER THE SAID LOAN/S WAS STATED TO BE ADVANC ED TO THE LENDEE-COMPANY. PER THE SAID ORDER, THE STATE GOVERNMENT, SUBJECT TO THE CO NDITIONS SPECIFIED THEREIN, HAD APPROVED THE TAKE-OVER OF THE LENDEE-COMPANY BY THE ASSESSEE AS ITS SUBSIDIARY. HOWEVER, NO LEGAL OR PROCEDURAL FORMALITIES IN THE MATTER HA D BEEN OBSERVED, OR EVEN INITIATED, SO THAT REFERENCE TO THE SAID ORDER WAS OF LITTLE MOME NT, AND NEITHER WOULD IT OPERATE TO ALTER THE CHARACTER OF THE AMOUNT ADVANCED AS AN INVESTME NT TOWARD ACQUISITION OF A CAPITAL ASSET, AS CONTENDED BY THE ASSESSEE. THE ADVANCE, A CCORDINGLY, STOOD CORRECTLY CATEGORISED AS A LOAN IN THE ASSESSEES BALANCE-SHE ET/S, WITH THE AUDITORS ALSO TREATING IT AS SUCH AND, FURTHER, MAKING THEIR COMMENTS THEREON. THE ADDITION ON ACCOUNT OF INTEREST RECEIVABLE, CONSIDERING THE RATE AT WHICH IT WAS RE CKONED, I.E., 10%, AS REASONABLE, WAS, ACCORDINGLY, UPHELD BY THE LD. CIT(A). AGGRIEVED, THE ASSESSEE IS IN APPEAL. I.T.A. NO.100 /COCH/2010 STATE FARMING CORPORATION OF KERALA LTD. VS. ACIT, KOLLAM 3 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. 4.1 WE FIRSTLY OBSERVE THAT IT IS NOT A CASE OF DISALLOWANCE OF INTEREST BY INVOKING S. 36(1)(III) OF THE ACT, I.E., AS DIVERSION OF BORROW ED CAPITAL FOR NON-BUSINESS PURPOSES, AS WHERE THE IMPUGNED LOAN IS CONSIDERED AS HAVING BEE N ADVANCED FOR NON-BUSINESS PURPOSE/S OR EVEN TOWARDS ACQUISITION OF A CAPITAL ASSET, TO WHICH THE PROVISION HAS SINCE, I.E., W.E.F. A.Y. 2004-05, BEEN MADE SPECIFICALLY A PPLICABLE BY INSERTION OF A PROVISO THERE-TO. THE REVENUES CASE IS THAT IT IS A CASE O F INTEREST HAVING ACCRUED, SO THAT ITS NON- BOOKING BY THE ASSESSEE-COMPANY, ADMITTEDLY FOLLOWI NG MERCANTILE METHOD OF ACCOUNTING, WHICH IS RATHER MANDATORY FOR IT TO FOL LOW IN TERMS OF ITS GOVERNING ACT, I.E., THE COMPANIES ACT, 1956, WOULD BE OF NO AVAIL, AND THE SAME IS LIABLE TO BE ASSESSED U/S. 56 OF THE ACT. 4.2 ACCURAL (OR OTHERWISE) OF AN INCOME IS ESSE NTIALLY A MATTER OF FACT, TO BE DETERMINED ON THE BASIS OF THE CONSIDERATION OF THE ENTIRETY O F THE RELEVANT FACTS AND CIRCUMSTANCES. FIRSTLY, THERE IS NO MENTION WHATSOEVER OF ANY LOAN BY THE ASSESSEE-COMPANY TO THE LENDEE-COMPANY IN THE STATE GOVERNMENT ORDER DATED 08/2/1994. THE SAME ONLY CONTEMPLATES AND APPROVES THE ACQUISITION OF THE LE NDEE-COMPANY BY THE ASSESSEE- COMPANY SUBJECT TO THE SATISFACTION OF SOME CONDITI ONS, INCLUDING THE VIABILITY (POST ACQUISITION) OF THE ACQUIRED (LENDEE) COMPANY, AS S PECIFIED THEREIN FOR THE PURPOSE. EVEN IF THE IMPUGNED AMOUNT IS CONSIDERED AS ADVANCED IN CONTEMPLATION OF THE PROPOSED TAKE- OVER, AS BEING CLAIMED BY THE ASSESSEE, AND WHICH D EFINITELY APPEARS TO BE THE CASE IN THE ABSENCE OF ANY OTHER BASIS OR MATERIAL OR CONSIDERA TION FOR THE SAID TRANSFER OF FUNDS, WE ARE UNABLE TO APPRECIATE OR COMPREHEND AS TO HOW TH E SAME COULD BE CONSIDERED AS AN `INTEREST BEARING LOAN. IN FACT, THIS IS ALL THE M ORE SO AS, ADMITTEDLY, THE LENDEE-COMPANY IS A SICK AND DEFUNCT COMPANY, WITH ITS PROPOSED TA KEOVER BEING MOOTED BY THE STATE GOVERNMENT WITH A VIEW TO REVIVE IT. THE ULTIMATE R EALIZABILITY OF ANY INCOME, WHICH BY DEFINITION IS AN ACCRETION TO CAPITAL, IS AN ESSENT IAL INGREDIENT IN DECIDING ITS ACCRUAL, INASMUCH AS IT IS ONLY THE REAL AND NOT NOTIONAL OR HYPOTHETICAL INCOME THAT IS UNDER CONTEMPLATION FOR, OR COULD BE THE SUBJECT MATTER O F, ACCRUAL. ACCOUNTING STANDARDS 1 & 2 (AS 1, 2) ISSUED BY THE CBDT U/S. 145 OF THE ACT, A ND WHICH ARE MANDATORY IN THEIR I.T.A. NO.100 /COCH/2010 STATE FARMING CORPORATION OF KERALA LTD. VS. ACIT, KOLLAM 4 APPLICATION, GIVE FULL PLAY AND CREDENCE TO THE FUN DAMENTAL ACCOUNTING PRECEPTS OF `CONSERVATISM AND `PRUDENCE, SO THAT IT IS ONLY W HAT CAN IN REALITY BE REASONABLY CONSIDERED AS HAVING `ARISEN THAT CAN BE RECOGNISE D AS `INCOME. REFERENCE IN THIS CONTEXT MAY ALSO BE MADE TO AS 9 (RECOGNITION OF IN COME) ISSUED BY THE ICAI, NEW DELHI, WHICH IS, INTER ALIA , PER LAW (THE COMPANIES ACT) STATUTORILY APPLICABL E TO COMPANIES, AS THE ASSESSEE, AND EMPHASIZES THE ABSE NCE OF ANY UNCERTAINTY IN THE REALIZABILITY OF INCOME AS A CONDITION FOR ITS RECO GNITION AS SUCH. IN THE FACTS OF THE INSTANT CASE, AS EXPLAINED BY THE LD. AR DURING HEARING, EV EN THE FEASIBILITY OF THE PROPOSED TAKEOVER STANDS SERIOUSLY JEOPARDISED AS THE SAME W AS ON THE BASIS OF 14 ACRES OF HIGHLY VALUED LAND BELONGING TO THE LENDEE-COMPANY (REFERR ED TO IN THE G.O.), AND WHICH IS NOW BEING CONSIDERED FOR BEING ACQUIRED FOR AN AIRPORT. THIS COULD BE THE, OR AMONG OTHERS THE, REASON WHY NO HEADWAY STANDS MADE IN THE MATTE R OF TAKE-OVER DESPITE LAPSE OF A NUMBER OF YEARS. WHATEVER MAY BE THE FATE OF THE S AME OR THE ASSESSEES IMPUGNED LOAN, IT IS AN ADMITTED FACT THAT THE AMOUNT WAS TRANSFER RED TO THE LENDEE-COMPANY TO ENABLE IT TO MEET ITS DAY TO DAY WORKING CAPITAL REQUIREMENTS (EXPENSES); ITS ACCUMULATED LOSSES, EVEN AS BACK AS ON 31-03-1992 BEING AT ` 18.45 CRORES, SO THAT EVEN THE PRINCIPAL AMOUNT IS IN JEOPARDY, WE FIND NO LEGAL OR CONTRACTUAL BAS IS TO HOLD THAT ANY INTEREST OR RIGHTS IN ITS RESPECT HAVE INURED TO THE ASSESSEE, LENDER-COMPANY . THERE IS NO REFERENCE TO ANY LOAN AGREEMENT OR EVEN TO ANY RESOLUTION BY THE RESPECTI VE BOARDS OF THE TWO COMPANIES TO THAT EFFECT. MERELY BECAUSE THE BALANCE-SHEET CLAS SIFIES THE AMOUNT AS AN UNSECURED LOAN, AND IN OUR VIEW NOT INCORRECTLY, WITHOUT ANYTHING M ORE, WOULD NOT BY ITSELF CLOTHE THE ASSESSEE WITH THE RIGHT TO RECEIVE INTEREST, CONSID ERING THAT THERE IS, AS AFORESAID, NO OTHER LEGAL OR CONTRACTUAL BASIS FOR CONTENDING SO. IT I S NOT THE CASE THAT THE INTEREST HAS BEEN PROVIDED IN ITS BOOKS BY THE LENDEE-COMPANY. WE COU LD UNDERSTAND SCOPE FOR SOME CONTROVERSY WHERE THE TERMS OF THE TRANSFER/ADVANCE PROVIDED FOR INTEREST. IN FACT, EVEN IN SUCH A CASE, GIVEN THE PRECARIOUS FINANCIAL POSITIO N OF THE LENDEE-COMPANY, WHERE EVEN THE PRINCIPAL AMOUNT/S, BEING ADVANCED SINCE AS FAR BACK AS IN 1994, IS UNLIKELY TO BE REPAID, IN OUR VIEW IT WOULD NOT BE CORRECT TO SAY THAT THERE HAS BEEN ACCRUAL OF INTEREST, WHICH IS A MATTER OF FACT RATHER THAN OF LAW. INCOM E, IT MUST BE APPRECIATED, HAS TO FLOW FROM SOMEBODY OUTSIDE ONESELF, SO THAT IT INHERENTL Y INVOLVES AT LEAST TWO PARTIES, AND I.T.A. NO.100 /COCH/2010 STATE FARMING CORPORATION OF KERALA LTD. VS. ACIT, KOLLAM 5 CANNOT ARISE OUT OF A UNILATERAL ACTION. IT IS ALSO NOT THE REVENUES CASE THAT ANY INTEREST HAS BEEN RECEIVED ON THE SAID LOAN EVEN ON A SUBSEQ UENT DATE, SO AS TO CONSIDER IT AS HAVING BEEN ACCRUED, INCLUDING FOR THE RELEVANT YEA R. THERE IS, AS SUCH, NEITHER ANY OBLIGATION TO PAY NOR ANY INCLINATION NOR CAPACITY TO PAY INTEREST. WE, THEREFORE, FIND NO LEGAL OR FACTUAL BASIS TO CONFIRM ANY INTEREST AS R ECEIVABLE FROM THE LENDEE COMPANY, SO AS TO CONSIDER IT AS HAVING ACCRUED, AND THE IMPUGNED INCOME ONLY REPRESENTS A HYPOTHETICAL/IMAGINARY INCOME. REFERENCE IN THIS CO NTEXT IS ALSO DRAWN TO THE DECISIONS BY THE APEX COURT IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC) AND GODHRA ELECTRICITY CO. LTD. V. CIT (1997) 225 ITR 746 (SC). THE TRIBUNAL IN THE CASE OF ASST. CIT V. TRANVANCORE TITANIUM PRODUCTS LTD ., 121 ITD 513 (COCHIN)(TM) HAS, UNDER SIMILAR CIRCUMSTANCES, ALSO HELD LIKE-WISE, FORTIFY ING OUR DECISION. 4.3 IN VIEW OF THE FOREGOING, IN OUR VIEW, THE REVENUES CASE IS WHOLLY WITHOUT MERIT. WE, ACCORDINGLY, VACATE THE FINDINGS OF THE AUTHORI TIES BELOW, AND DIRECT THE DELETION OF THE IMPUGNED ADDITION FOR ` 123.53 LAKHS. WE DECIDE ACCORDINGLY. 5. IN THE RESULT THE ASSESSEES APPEAL IS ALLOW ED SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 30TH DECEMBER, 2011 GJ COPY TO: 1. THE STATE FARMING CORPORATION OF KERALA LTD., FA RM HOUSE, VETTITHITTA P.O., ALIMUKKU, PUNALUR-689 696. 2. THE ASSISRTANT COMMISSIONER OF INCOME-TAX, CIRCL E-1, KOLLAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .