JUNIPER HOTELS P.LTD, MUMBAI V. ADDL CIT WD 10(1)10(1), MUMBAI

ITA 100/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3033 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: J
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2015
• Court: TRIBUNAL
• Department Lawyers: ARJU GARODIA
• Assessee Lawyers: SUNIL BHANDARI
• Keywords: Depreciation; Rule of consistency; Earning of tax free income; Question of law; Wholly owned subsidiary; Notional interest; Revocable transfer; Capital expenditure
• Section: 143(3); 14A; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI BEFORE SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) I.T.A. NO.100/MUM/2015 (ASSESSMENT YEAR: 2009-10) M/S JUNIPER HOTELS P LTD OFF WESTERN EXPRESS HIGHWAY SANTACRUZ (E), MUMBAI VS ADDL CIT, WD.10(1), MUMBAI PAN : AAECS6336E (APPELLANT) (RESPONDENT) APPELLANT BY SHRI SUNIL BHANDARI RESPONDENT BY MS. ARJU GARODIA, DR DATE OF HEARING : 06-09-2016 DATE OF PRONOUNCEMENT : 21 -09-2016 O R D E R PER ASHWANI TANEJA, AM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT(A) DT 17-10-2014 PASSED AGAINST THE ASSESSMENT ORDER U/S 143(3) DT 05-03-2013 FOR A.Y. 2009-10 ON THE FOLLOWING GROUNDS: BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISS IONER OF INCOME-TAX (APPEALS) - 21 MUMBAI (HEREINAFTER REFER RED TO AS THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG THEM FOL LOWING GROUNDS FOR YOUR SYMPATHETIC CONSIDERATION :- 1. LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO OF NOT ALLOWING THE DEPRECIATION CLAIM OF RS. 16,49,070/- IN RESPEC T OF CAPITAL EXPENDITURE BEING TECHNICAL FEE AND OTHER EXPENSES, INCURRED 2 I.T.A. NO.100/MUM/2015 TOWARDS SETTING UP OF THE HOTEL PROJECT. 2. LD. CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF OTHE R EXPENSES U/S 14A AS PER RULE 8D AT 0.50% OF AVERAGE INVESTMENTS WITHOUT APPRECIATING THE FACT THAT ASSESSEE HAD MADE INVEST MENTS IN MUTUAL FUNDS WHEREIN NAV IS CALCULATED AFTER DEDUCT ING EXPENSES AND AS SUCH, BASED ON 106 TRANSACTIONS OF PURCHASE AND SALE, ASSESSEE HAD CORRECTLY ESTIMATED ADMINISTRATIVE EXP ENSES AT RS. 50,000/-. CONSEQUENTIALLY AO MADE SIMILAR ADDITION IN COMPUTATION OF BOOK PROFITS U/S 11 5JB WHICH ALSO DESERVES TO B E RESTRICTED TO RS. 50,000/-. 3. LD. CIT(A) ERRED IN CONFIRMING ADDITION OF RS. 53,4 3,800/- BEING UN- ACCRUED INTEREST ON LOAN EXTENDED TO APPELLANT'S WH OLLY OWNED SUBSIDIARY, IN THE COURSE OF CARRYING ON ITS BUSINE SS, APPLYING THE RULE OF CONSISTENCY EVEN THOUGH THE AO HAD INVOKED PROVI SIONS OF SECTION 61 FOR MAKING SAID ADDITION. 2. GROUND 1: IN THIS GROUNDS, THE ASSESSEE CHALLENGES THE ACTI ON OF LD. CIT(A) IN CONFIRMING THE ACTION OF AO IN NOT ALLOWI NG THE CLAIM OF DEPRECIATION OF RS.16,49,070/- IN RESPECT OF CAPITAL EXPENDITURE INCURRED ON ACCOUNT OF TECHNICAL FEE AND OTHER RELATED EXPENSES TOWARDS SE TTING UP OF THE HOTEL PROJECT. 3. DURING THE COURSE OF HEARING, IT WAS SUBMITTED AT T HE VERY OUTSET BY THE LD. COUNSEL THAT THIS ISSUE HAD COME UP BEFORE THE TRIBUNAL IN EARLIER YEARS ALSO WHEREIN THE TRIBUNAL HAD DECIDED THIS ISSUE IN FAVO UR OF THE ASSESSEE. 4. PER CONTRA, THE LD. DR DID NOT MAKE ANY DISTINCTION IN FACTS OR LEGAL POSITION WITH REGARD TO THE ORDER OF THE TRIBUNAL F OR EARLIER YEARS. 5. WE HAVE GONE THROUGH THE ORDERS OF LOWER AUTHORITIE S. IT IS NOTED THAT SIMILAR ISSUE HAD COME UP BEFORE THE TRIBUNAL IN A. YS. 2007-08 AND 2008-09 3 I.T.A. NO.100/MUM/2015 WHEREIN THE TRIBUNAL VIDE ITS ORDER DT 22-10-2014 I N ITA NO.344 & 4858/MUM/2012 DECIDED THIS ISSUE AS UNDER: 10. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT SOME OF THE EXPENDITURE INCURRED ON CONSTRUCTION OF HOTEL WAS N OT APPROVED BY THE PROJECTEE, THEREFORE, SAME WERE NEITHER PAID NO R BOOKED IN ACCOUNTS IN THE YEAR OF INCURRING. HOWEVER, IN THE PREVIOUS YEAR RELEVANT TO A.Y.2007-08 UNDER CONSIDERATION, A SETT LEMENT WAS REACHED WITH THE PROJECTEE, ASSESSEE COMPANY APPROV ED THE SAME AND AMOUNT WAS REMITTED AFTER DEDUCTING REQUIRED TA X AT SOURCE U/S.195. AS THE EXPENSES WERE CRYSTALLIZED DURING T HE YEAR ITSELF, THE ASSESSEE HAS CAPITALIZED THE SAME AND CLAIMED DEPRE CIATION THEREON WHICH WAS DISALLOWED BY THE AO ON THE PLEA THAT EXP ENSES WERE RELATED TO THE EARLIER YEAR. AS PER OUR CONSIDERED VIEW SINCE THE EXPENSES WERE CRYSTALLIZED ONLY DURING THE YEAR UND ER CONSIDERATION, THE ASSESSEE WAS ENTITLED TO CAPITALIZE THE SAME AN D CLAIM DEPRECIATION THEREON. SO FAR AS ISSUE OF BILLS IN T HE NAME OF SEAJULI PROPERTY & VINIYOG PVT. LTD. IS CONCERNED, WE FIND THAT AS PER REGISTRAR OF COMPANIESS LETTER, THE NAME OF ASSESS EE COMPANY WAS LATER ON CHANGED TO M/S JUNIPER HOTELS PVT. LTD.. A CCORDINGLY, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE LOWER AUTHO RITIES FOR DENIAL OF CLAIM OF DEPRECIATION IN RESPECT OF EXPENDITURE WHI CH WAS CRYSTALLIZED AND PAID DURING THE YEAR UNDER CONSIDERATION. IT IS ALSO NOT THE CASE OF THE AO THAT TAX WAS NOT DEDUCTED AT SOURCE IN RESPE CT OF SUCH PAYMENTS. KEEPING IN VIEW THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO IN BOTH THE YEARS WITH A DIRECTION TO VERIFY THE BILLS OF E XPENDITURE SO INCURRED AND CRYSTALLIZED DURING THE YEAR, AND IF THE AO FOU ND AFTER VERIFICATION OF BILLS THAT AFTER DEDUCTION OF TAX AT SOURCE U/S. 195, THE SAME HAS BEEN PAID DURING THE YEAR UNDER CONSIDERATION, HE S HOULD ALLOW ASSESSEES CLAIM OF DEPRECIATION ON SUCH CAPITALIZE D VALUE. WE DIRECT ACCORDINGLY. 6. THUS, IT MAY BE NOTED FROM THE ABOVE THAT THE TRIBU NAL DECIDED THIS ISSUE PRINCIPALLY IN FAVOUR OF THE ASSESSEE AND HELD THAT ASSESSEE WAS ENTITLED TO CAPITALISE THE AMOUNT AND CLAIM DEPRECIATION THEREO N. BUT FOR THE PURPOSE OF VERIFICATION OF FACTS, THIS ISSUE WAS SENT BACK TO THE FILE OF THE AO WITH THE DIRECTION TO VERIFY THE AMOUNT OF EXPENDITURE AND A LLOWING DEPRECIATION 4 I.T.A. NO.100/MUM/2015 ACCORDINGLY. THUS, THIS YEAR ALSO WE SEND THIS ISS UE BACK TO THE FILE OF THE AO WITH DIRECTION TO FOLLOW THE ORDER OF THE TRIBUNAL FOR THE A.YS 2007-08 & 2008- 09 AND ACCORDINGLY ALLOW DEPRECIATION AFTER VERIFIC ATION OF REQUISITE FACTS. WITH THESE DIRECTIONS, THIS ISSUE IS SENT BACK TO THE FI LE OF THE AO AND MAY BE TREATED AS ALLOWED, FOR STATISTICAL PURPOSES. 7. GROUND 2 : IN THIS GROUND, THE ASSESSEE HAS CONTESTED THE ACTI ON OF LOWER AUTHORITIES IN MAKING DISALLOWANCE U/S 14A ON ACCOU NT OF ADMINISTRATIVE EXPENSES @0.50% OF AVERAGE INVESTMENT U/R 8D(2)(III ). 8. DURING THE COURSE OF HEARING IT HAS BEEN SUBMITTED BY THE LD. COUNSEL THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSE E SUBMITTED THAT THE ASSESSEE HAD MADE INVESTMENT MOSTLY IN MUTUAL FUNDS WHEREIN NO ACTIVE INVOLVEMENT OF ASSESSEES INFRASTRUCTURE WAS REQUIR ED. BUT, THE AO DID NOT RECORD ANY REASONS OR ANY KIND OF SATISFACTION IN A RRIVING AT A CONCLUSION THAT EXPENSES TO BE DISALLOWED U/S 14A ARE MORE THAN WHA T WAS OFFERED BY THE ASSESSEE AND HE SIMPLY PROCEEDED TO INVOKE RULE 8D( 2)(III) AND MADE DISALLOWANCE @0.50% WITHOUT GIVING ANY REASONING, W HATSOEVER. 9. PER CONTRA, THE LD. DR SUBMITTED THAT ADMITTEDLY, N O REASONING HAS BEEN GIVEN BY THE AO FOR MAKING DISALLOWANCE @0.50%, BUT SINCE THE RULE HAS PRESCRIBED DISALLOWANCE @0.50%, THE AO HAS FOLLOWED THE LAW BY APPLYING THE RATE OF 0.50%. 10. WE HAVE GONE THROUGH THE ORDER OF THE AO. IT IS NO TED BY US THAT ASSESSEE MADE SUBMISSIONS BEFORE THE AO WHEREIN IT WAS SUBMITTED IN DETAIL THAT INVESTMENT WAS MADE ONLY IN MUTUAL FUND AND ON LY FOR 7 8 TIMES DURING THE YEAR WHICH WAS AN AUTOMATIC PROCESS AND NO HEAV Y EXPENSES WERE INVOLVED AND THAT IS WHY ASSESSEE OFFERED A SUM OF RS.50,000 FOR THE PURPOSE OF 5 I.T.A. NO.100/MUM/2015 DISALLOWANCE OUT OF INDIRECT EXPENSES. IT IS NOTED BY US THAT THE AO HAS NOT MENTIONED EVEN A SINGLE LINE IN THE ASSESSMENT ORDE R AS TO WHY HE DID NOT ACCEPT THE DISALLOWANCE OFFERED BY THE ASSESSEE. H E HAS NOT RECORDED ANY FINDING THAT HAVING REGARD TO THE BOOKS OF ACCOUNT AND OTHER MATERIAL, MORE DISALLOWANCE WAS REQUIRED TO BE MADE. RELIANCE HAS BEEN PLACED IN THIS REGARD BY THE LD. COUNSEL ON THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS I.P. SUPPORT SERVICES INDIA PVT LTD 378 ITR 240 (DEL). WE FIND THE FOLLOWING OBSERVATIONS OF THE HONBLE HIGH COURT AR E WORTH REPRODUCING HEREUNDER: HAVING HEARD THE LEARNED COUNSEL FOR THE PARTIES, THE COURT FINDS THAT THE ASSESSING OFFICER HAS INDEED PROCEEDED ON THE ERRON EOUS PREMISE THAT THE INVOCATION OF SECTION 14A IS AUTOMATIC AND COMES IN TO OPERATION AS SOON AS THE DIVIDEND INCOME IS CLAIMED EXEMPT. IN MAXOPP IN VESTMENT LTD. (SUPRA) THIS COURT HELD: '30. SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PRO VISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF TH E ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS , THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESS ING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTER ING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUBSECTION (3) IS N OTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SEC TION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECT ION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUN T OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME 6 I.T.A. NO.100/MUM/2015 UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO C ASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCUR RED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER , IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RES PECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I N ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SEC TION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSE SSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDI CTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO S UCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIB ED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITUR E OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXE MPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REA SONS FOR THE SAME. IN CIT V. TAIKISHA ENGINEERING INDIA LTD. [2015] 370 I TR 338 (DELHI) , IN SIMILAR CIRCUMSTANCES, THE COURT DISAPPROVED OF AN ASSESSING OFFICER INVOKING SECTION 14A READ WITH RULE 8D(2) O F THE RULES WITHOUT RECORDING HIS SATISFACTION AND NOTED THAT THE RECOR DING OF SATISFACTION AS TO WHY 'THE VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY' IS A MANDATORY REQUIREMENT OF THE LAW. NO SUBSTANTIAL QUESTION OF LAW ARISES. THE APPEAL I S DISMISSED. 11. THUS, FROM THE ABOVE OBSERVATIONS IT IS CLEAR THAT INVOCATION OF SECTION 14A IS NOT AUTOMATIC. THE AO IS BOUND TO RECORD HI S SATISFACTION BEFORE PROCEEDING TO MAKE DISALLOWANCE U/S 14A FOR MORE TH AN THE VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE. THE AO IN THE C ASE BEFORE US FAILED TO RECORD ANY REASONING WHATSOEVER OR SATISFACTION AND THUS HE DID NOT ASSUME JURISDICTION TO MAKE DISALLOWANCE U/S 14A READ WITH RULE 8D(2) (III) AS PER LAW. UNDER THESE CIRCUMSTANCES, RESPECTFULLY FOLLOWING T HE JUDGEMENT OF THE HONBLE DELHI HIGH COURT AND KEEPING IN VIEW THE FA CTS OF THIS CASE, WE DELETE THE DISALLOWANCE MADE BY THE AO U/S 14A. THIS GROU ND IS ALLOWED. 12. GROUND 3 : IN THIS GROUND, THE ASSESSEE HAS CONTESTED THE ACTI ON OF LOWER AUTHORITIES IN MAKING ADDITION OF R.53,43,800/- BEI NG THE AMOUNT OF NOTIONAL INTEREST ON THE LOAN GIVEN BY THE ASSESSEE TO ITS W HOLLY OWNED SUBSIDIARY, VIZ. 7 I.T.A. NO.100/MUM/2015 M/S MAHIMA HOLDINGS PVT LTD. THE BRIEF FACTS OF TH E CASE ARE THAT THE ASSESSEE HAD GIVEN LOAN TO ITS 100% SUBSIDIARY COMPANY, M/S MAHIMA HOLDINGS PVT LTD IN THE EARLIER YEARS. THE ASSESSEE HAD BOOKED INTERES T INCOME FROM THE SAID COMPANY IN THE PRECEDING TWO YEARS. BUT, IN THE YE AR UNDER CONSIDERATION, THE ASSESSEE DID NOT BOOK ANY INTEREST INCOME ON THE GR OUND THAT DURING THE YEAR, LOAN WAS CONVERTED INTO EQUITY AND THE SAID COMPANY HAD INCURRED HUGE LOSSES AND ITS NET WORTH HAD BEEN ERODED AND THE SAID COMP ANY WAS NOT IN A POSITION TO PAY ANY INTEREST, THEREFORE, THERE WAS NO CHANCE OF RECOVERY AND THERE WAS UNCERTAINTY IN REALISING INCOME AND, THEREFORE, NO PROVISION WAS MADE ON ACCOUNT OF INTEREST INCOME. BUT, THE AO DID NOT AG REE WITH THE APPROACH OF THE ASSESSEE AND HE HELD THAT INTEREST BECOMES ACCRUED WITH THE PASSAGE OF TIME AND, THEREFORE, TILL THE AMOUNT WAS CONVERTED INTO EQUITY, THE ASSESSEE WAS BOUND TO CHARGE INTEREST FROM THE SAID COMPANY AND, THEREFORE, ASSESSEE SHOULD HAVE BOOKED INTEREST INCOME IN ITS P&L ACCOU NT. UNDER THESE CIRCUMSTANCES, THE AO MADE ADDITION ON ACCOUNT OF N OTIONAL INTEREST FOR AN AMOUNT OF RS.53,43,800/-. 13. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE L D. CIT(A) AND MADE EXHAUSTIVE SUBMISSIONS, A PART OF WHICH IS REPRODUC ED HEREUNDER:- APPELLANT IS IN THE BUSINESS OF CONSTRUCTION AND R UNNING OF HOTELS AND HAS SET UP A FIVE STAR HOTEL AT VAKOLA IN SANTACRUZ (EAST), MUMBAI. APPELLANT HOLDING COMPANY HAD A VISION TO SET UP TR AINING INSTITUTE FOR THE HOTEL INDUSTRY WHICH COULD ALSO BE BENEFICI AL FROM THE POINT OF SOURCING NEW EMPLOYEES FOR ITS HOTEL BUSIN ESS AND COULD ALSO USE THE NAME FOR TRAINING OF ITS EXISTING EMPLOYEES . APPELLANT, THEREFORE, STARTED SCOUTING FOR A SUITABLE PLOT OF LAND AND FINALLY SUCCEEDED IN IDENTIFYING AND STRIKING THE DEAL. SIN CE SETTING UP AND RUNNING TRAINING INSTITUTE FOR HOTEL INDUSTRY IS QU ITE DIFFERENT FROM RUNNING OF HOTEL. APPELLANT COMPANY FORMED A SEPARA TE COMPANY AS ITS 100% SUBSIDIARY AND ACQUIRED THE PLOT IN THE SAID S UBSIDIARY FOR WHICH FUNDING WAS DONE BY THE HOLDING COMPANY BY WA Y OF LOAN. 8 I.T.A. NO.100/MUM/2015 LOAN GIVEN TO SUBSIDIARY WAS SUBSTANTIALLY UTILIZED FOR MEETING ITS ADMINISTRATIVE EXPENSES AND WORKING CAPITAL. A PERU SAL OF THE FINANCIAL STATEMENTS OF MAHIMA WOULD SHOW THAT LOAN RECEIVED FROM JHPL HAS BEEN FULLY UTILIZED IN THE BUSINESS OF MAH IMA AND NOT DIVERTED THEREFROM FOR ANY OTHER BUSINESS. HOWEVER, THE PROCESS OF CONVERTING THE LONG TERM VI SION OF SETTING UP TRAINING INSTITUTE IN TO A REALITY REQUIRED AN ELAB ORATE PLANNING AMONG OTHERS, IN TERMS OF INFRASTRUCTURE, IDENTIFYING TRA INING COURSES WHICH INCLUDED MARKET SURVEYS, FACULTIES, MARKETING AND F UNDING WHICH WAS A LONG DRAWN PROCESS. IN THE MEANTIME, SINCE PLOT O F LAND WAS AT ITS DISPOSAL, IT WAS DECIDED TO USE THE PLOT FOR HO LDING FUNCTIONS THROUGH HOTEL AND GENERATE REVENUE. THIS STREAM OF REVENUE OF THE SUBSIDIARY ALSO ENSURED PAYMENT OF INTEREST ON THE LOANS GIVEN BY HOLDING COMPANY. THIS CONTINUED TILL THE FY 2007-08 IT WAS THEN REALIZED THAT FOR SETTING UP TRAINING INSTITUTE, SU BSTANTIAL FUNDS WOULD BE REQUIRED THROUGH BANKS/FINANCIAL INSTITUTION. TH E PRE CONDITION FROM THE BANKS AND FINANCIAL INSTITUTIONS WAS THAT THE BORROWING MONEY SHOULD HAVE SIZEABLE EQUITY. APPELLANT COMPAN Y, THEREFORE, DECIDED TO CONVERT ITS LOAN INTO EQUITY AND AS OF 3 1 ST MARCH 2009, LOAN WAS CONVERTED INTO SHARE APPLICATION MONEY AND EQUITY SHARES WERE THEN ISSUED BY MAHIMA DURING FY 2009-10. DURIN G FY 2008-09, THERE WAS ONLY MARGINAL INCREASE OF AROUND 2% IN TH E AMOUNT OF LOAN GIVEN BY JHPL TO MAHIMA. ON JUSTIFICATION BEING SOUGHT BY AO APPELLANT COMPA NY BELIEVED THAT THE AO IS HARBOURING THE VIEW THAT PART OF THE INTE REST EXPENDITURE INCURRED BY JHP CALLS FOR DISALLOWANCE U/S.36(1)(II I). APPELLANT THEREFORE DEMONSTRATED THAT FUNDING OF MAHIMA WAS O UT OF OWNED FUNDS OF THE JHPL AND EVEN OTHERWISE BORROWALS OF J HPL WERE FULLY UTILIZED IN THE HOTEL BUSINESS. IT WAS FURTHER SUBM ITTED THAT FUNDS PROVIDED TO MAHIMA HAVE REMAINED UTILIZED IN BUSINE SS ASSETS OF THE COMPANY AND IN FACT NO LOAN IS GIVEN THERE FROM TO ANY INDIVIDUAL OR ENTITY. BUSINESS OF THE SUBSIDIARY BEING BUSINESS O F THE HOLDING COMPANY, INTEREST PAID ON BORROWALS MADE FOR THE FU NDING OF SUBSIDIARY DESERVES TO BE FULLY ALLOWED U/S.36(1)(I II) OF THE ACT. FOR THIS PROPOSITION APPELLANT ALSO RELIED ON THE DECIS ION OF THE HON'BLE APEX COURT IN THE CASE OF S. A. BUILDERS LTD. VS. C IT(A) CHANDIGARH REPORTED IN 288 ITR 1 (SC). AO OBVIOUSLY COULD NOT MAKE ANY DISALLOWANCE OF INTEREST U/S.36(I)(II) ON THE FACTS OF THE CASE BUT THEN INVOKED PROVISIONS OF SECTION 61. THE APPELLANT HAD DEMONSTRATED HOW THE AO HAS ERRED IN INVOKING 9 I.T.A. NO.100/MUM/2015 PROVISIONS OF SEC. 61 AND EXTRACT OF SEC. 61, 62 AN D 63 WAS ALSO SUBMITTED DURING APPELLATE PROCEEDINGS. THE PLAIN READING OF SECTION 61 SHOWS THAT EVEN IF ONE WERE TO APPLY SECTION 61 WHAT CAN BE TAXED IN THE HANDS OF TRANSF EROR IS 'ALL INCOME ARISING TO ANY PERSON BY VIRTUE OF A REVOCABLE TRAN SFER OF ASSETS.' OBVIOUSLY WHAT CAN BE BROUGHT TO TAX IS RE STRICTED TO INCOME ACTUALLY ARISING TO THE AND NOT ANY NOTIONAL OR FIC TITIOUS INCOME. INCOME MUST BE REAL MAKING THE TRANSFEREE RICHER IM MEDIATELY AND NOT PRESUMED INCOME WHICH MAY ARISE IN FUTURE. FROM THE AUDITED FINANCIAL STATEMENTS, IT CAN BE SEE THAT IN THE HAN DS OF MAHIMA NO REVENUE, WHATSOEVER, ACCRUED DURING FY 2008-09 AND ON THE DEBIT SIDE OF THE P&L A/C. IT INCURRED ADMINISTRATIVE EXP ENSES OF RS. 10,164/- AND THE RESULTANT LOSS OF RS. 10,164/- WAS CARRIED FORWARD. THE APPELLANT HAD DISCUSSED THE MEANING OF TRANSACT ION OF LOAN IN DETAIL AND RELIANCE WAS ALSO PLACED IN THE CASE OF S. A. BUILDERS LTD. VS. CIT 288 ITR 1 (SC). SECTION 61 IS PART OF THE SCHEME OF INCOME CLUBBING PROVISIONS CONTAINED IN CHAPTER V WHICH IS DESIGNED TO MEET TH E SITUATION ARISING OUT OF TENDENCY ON THE PART OF TAX PAYERS T O ENDEAVOUR TO AVOID OR REDUCE THE TAX LIABILITY. IN THE CASE OF Y OUR APPELLANT, LOAN WAS NEVER GIVEN TO TRANSFER INCOME TO SUBSIDIARY. IT ALSO NEEDS TO BE APPRECIATED THAT DURING THE SUCCEEDING FINANCIAL YE AR I.E. FY 2009-10 SAID LOAN AS CONVERTED INTO EQUITY AND HENCE IS NO MORE REVOCABLE EVEN FOR FY 2008-09. WE WOULD ALSO LIKE TO DRAW YOUR ATTENTION TO THE DE CISION OF THE HON'BLE SUPREME COURT IN THE CASE OF S. P. JAISWAL VS. CIT 224 ITR 619 (SC). THOUGH FACTS OF THE DECISION ARE QUITE DIFFER ENT (LOAN GIVEN BY FATHER TO CHILDREN WAS ROUTED BACK FOR THE BENEFIT OF FATHER) BUT IT IS A CASE WHERE CLUBBING PROVISION CAME UNDER THE SCANNE R OF THE HON'BLE APEX COURT AND ARGUMENTS, DISCUSSIONS AND CASE LAWS REFERRED TO IN THIS CASE FAVOUR OUR CASE. IN VIEW OF OUT ABOVE SUBMISSIONS ON FACTS AND THE L AW POINT INVOLVED, IT IS RESPECTFULLY SUBMITTED THAT AO FEEL IN GRAVE ERR OR IN INVOKING PROVISIONS OF SECTION 61 AND CONSEQUENTLY ADDITION OF RS.53,43,800/- DESERVES TO BE DELETED.' 14. LD. CIT(A) DID NOT FIND FORCE IN THE SUBMISSIONS OF THE ASSESSEE AND UPHELD THE ADDITION MADE BY THE AO WITH FOLLOWING O BSERVATIONS:- 10 I.T.A. NO.100/MUM/2015 5.3 I HAVE CONSIDERED APPELLANT'S SUBMISSION. THE APPELLANT HAD EXTENDED LOAN OF RS.5,04,70,700/- TO A 100% SUBSIDIARY COMPANY M/S. MAHIMA HOLDING PVT. LTD. TH E APPELLANT WAS CHARGING INTEREST OF RS.53,43,800/- T ILL THE LAST ASSESSMENT YEAR AND THIS INTEREST WAS OFFERED FOR I NCOME-TAX PURPOSES. HOWEVER, AT THE END OF THIS YEAR APPELLAN T HAD CONVERTED THIS LOAN INTO EQUITY AND NOT OFFERED ANY INCOME FOR THE LOAN WHICH WAS EXTENDED TO THE SUBSIDIARY COMPA NY FOR THE WHOLE YEAR. THE A.O. HAD ADDED THIS AMOUNT CONSIDER ED IT U/S.61 AS IRREVOCABLE TRANSFER OF ASSETS. THE A.O. CONSIDERED TRANSFER OF LOAN INTO EQUITY AS IRREVOCABLE TRANSFE R OF ASSETS AND ADDED INTO INCOME OF THE APPELLANT. ON EXAMINATION OF VARIOUS DETAILS OF THE APPELLANT AND ALSO EARLIER YEARS ASS ESSMENT IT WAS CLEAR THAT APPELLANT IS OFFERING THIS INCOME FOR TH E INCOME TAX PURPOSES FOR THE LOAN EXTENDED TO THE SUBSIDIARY CO MPANY. HOWEVER, THE LOAN WHICH WAS CONVERTED INTO EQUITY THIS YEAR, AT THE END OF THE YEAR APPELLANT HAD NOT OFFERED ANY INCOME. HERE IT CLEARLY SHOWS THAT APPELLANT'S LOAN WAS WITH THE SUBSIDIARY COMPANY THROUGHOUT THE YEAR, FOLLOWING THE RULE OF CONSISTE NCY AS HELD IN THE CASE OF CIT VS. PAUL BROTHERS 216 ITR 548 (BORN) AN D CIT VS. WESTERN OUTDOOR INTERACTIVE 80 DTR 246 (BORN). FOLLOWING TH E ABOVE RULE AS APPELLANT HAD FAILED TO OFFER THE INTEREST INCOME W HICH WAS OFFERED EARLIER HAS TO BE TREATED AS INCOME AND A.OS ADDITI ON OF RS.53,43,800/- IS CONFIRMED. 15. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE T HE TRIBUNAL. DURING THE COURSE OF HEARING, IT HAS BEEN SUBMITTED BY THE LD. COUNSEL, DRAWING OUR ATTENTION ON THE BALANCE-SHEET OF THE SUBSIDIARY CO MPANY THAT THE SAID COMPANY DID NOT MAKE ANY PROVISION OF INTEREST PAYA BLE TO THE ASSESSEE AND ITS BALANCE-SHEET SHOWING CONTINUOUS LOSSES, THE INCOME WAS NOT RECOVERABLE. THUS, A DECISION WAS TAKEN NOT TO CREDIT INTEREST I NCOME. AN AMOUNT CAN BE TAXED IN THE HANDS OF THE ASSESSEE ONLY IF IT IS IN THE NATURE OF INCOME. THE AO MADE NOTIONAL ADDITION ON ACCOUNT OF INTEREST WHICH WAS NEITHER RECOVERABLE NOR HAS EVER BEEN RECOVERED. THE AO DISREGARDED TH E WELL ACCEPTED CONCEPT OF 11 I.T.A. NO.100/MUM/2015 REAL INCOME THEORY. HE ALSO PLACED RELIANCE ON A CCOUNTING STANDARDE-9 ON REVENUE RECOGNITION ISSUED BY THE INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA. 16. PER CONTRA, THE LD. DR SUBMITTED THAT SINCE IN THE EARLIER TWO YEARS ASSESSEE HAD BOOKED INTEREST INCOME, THEREFORE, IN THIS YEAR ALSO, THE ASSESSEE IS BOUND TO BOOK THE INTEREST INCOME. 17. WE HAVE GONE THROUGH THE ORDERS PASSED BY THE LOWER AUTHORITIES AS WELL AS THE SUBMISSIONS AND EVIDENCES PLACED BEFORE US. THE ADMITTED FACTS ON RECORD ARE THAT THE INTEREST BOOKED IN EARLIER YEAR S HAS ALSO NEVER BEEN RECOVERED BY THE ASSESSEE. IT IS FURTHER NOTED THA T THE SAID COMPANY IN ITS BALANCE-SHEET AS ON 31-03-2009 DT 28-04-2009 CONTAI NED FOLLOWING NOTE IN THE NOTES FORMING PART OF BALANCE-SHEET UNDER SCHEDUL E A:- THE HOLDING COMPANY M/S JUNIPER HOTELS PRIVATE LTD HAS APPROACHED MAHIMA HOLDING PRIVATE LTD TO CONVERT OU TSTANDING UNSECURED LOAN AND INTEREST ACCRUED THEREON INTO EQ UITY TO THE EXTENT OF RS. 5,16,00,000 ; DUE TO MAHIRNA HOLDING PRIVATE LTD'S INABILITY TO REPAY THE SAID LOAN AND INTEREST ACCRU ED THEREON. THE RELEVANT DOCUMENTATION AND OTHER STATUTORY FORMALIT IES ARE UNDERWAY AND SAME SHALL BE COMPLETED DURING 2009-10 .PENDING COMPLETION OF THESE FORMALITIES, COMPANY HAS TRANSF ERRED AFORESAID LOAN OF RS.5,16,00000/- TO SHARE APPLICATION MONEY. THIS MONEY SHALL BE ADJUSTED AGA INST ALLOTMENT OF SHARES TO HOLDING COMPANY ON COMPLETIO N OF FORMALITIES. IT IS FURTHER NOTED BY US FROM THE PERUSAL OF THE P &L ACCOUNT OF THE SAID COMPANY THAT THERE WAS NO INCOME EARNED DURING THE YEAR UNDER CONSIDERATION AND EXPENSES INCURRED DURING THE YEAR WERE TRANSFERRED TO THE BALANCE SHEET AS LOSS. 18. THUS FROM THE ABOVE IT IS CLEAR THAT NEITHER THE S AID COMPANY HAD MADE ANY PROVISION OF INTEREST NOR IT HAD CAPACITY TO MA KE PAYMENT OF INTEREST OR REPAYMENT OF LOAN TO THE ASSESSEE COMPANY. UNDER T HESE CIRCUMSTANCES, THE ASSESSEE TOOK A DECISION TO NOT TO BOOK ANY INTEREST INCOME BY WAY OF JUST 12 I.T.A. NO.100/MUM/2015 CREATING AN ACCOUNTING ENTRY. IT IS FURTHER NOTED THAT DURING THE YEAR UNDER CONSIDERATION, THE LOAN WAS CONVERTED INTO SHARE AP PLICATION MONEY. UNDER THESE CIRCUMSTANCES, WE FIND THAT MERELY BECAUSE TH E ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND MERELY BECAUSE INTEREST ACCRUES WITH THE PASSAGE OF TIME, THE INTEREST INCOME WILL NOT A UTOMATICALLY ACCRUE TO THE ASSESSEE IN THE GIVEN FACTS OF THE CASE WHERE NEITH ER THE LIABILITY OF INTEREST HAS BEEN PROVIDED BY THE SAID COMPANY NOR ARE THERE ANY CHANCES OF RECOVERY OF THE INTEREST AMOUNT IN THE HANDS OF THE ASSESSEE COMPANY. THE INCOME OF AN ASSESSEE MUST BE COMPUTED FAIRLY AND IN ACCORDAN CE WITH REAL LIFE FACTS. THE INCOME SHOULD BE COMPUTED ON REALISTIC TERMS AN D SHOULD NOT BE BASED MERELY ON THEORETICAL IDEAS OR NOTIONS. THE ASSESS EE CAN BE MADE BOUND TO PAY TAX ONLY ON THE AMOUNT OF INCOME THAT HAS BEEN EARNED BY THE ASSESSEE AND NOT UPON ANY ARTIFICIAL OR HYPOTHETICAL INCOME. IN THE PECULIAR FACTS OF THIS CASE, THE DEPARTMENT CANNOT ASSESS THE INCOME OF TH E ASSESSEE BY IGNORING THE SOUND PRINCIPLES OF REAL INCOME THEORY. THE TAXABLE INCOME OF THE ASSESSEE MUST BE COMPUTED IN ACCORDANCE WITH SOUND JUDICIAL PRINCIPLES. IT WOULD BE TOO HARSH TO ASK THE ASSESSEE TO PAY TAX O N THE AMOUNT OF NOTIONAL INTEREST, WHICH THE ASSESSEE IS APPARENTLY NOT GOIN G TO RECEIVE / RECOVER. IN THE CASE OF CIT VS NEON SOLUTIONS PVT LTD, ORDER DT APRIL 5, 2016 IN ITA NO.2251 OF 2013 & 2300 OF 2013, HONBLE BOMBAY HIGH COURT HELD THAT INTEREST INCOME COULD NOT BE ADDED ON NOTIONAL BASI S BY THE AO WHERE THE PARTIES HAD AGREED NOT TO MAKE PROVISION FOR INTERE ST. THE OBSERVATIONS OF THE HONBLE HIGH COURT ARE RELEVANT TO THE ISSUE AN D, THEREFORE, REPRODUCED BELOW: 6. ON FURTHER APPEAL, THE TRIBUNAL BY THE IMPUGNED OR DER TAKES INTO ACCOUNT THE FACT THAT EVEN IN MERCANTILE SYSTEM OF ACCOUNTING AN ITEM WOULD BE REGARDED AS ACCRUED INC OME ONLY IF THERE IS CERTAINTY OF RECEIVING IT AND NOT WHEN IT HAS BEEN WAIVED. THE 13 I.T.A. NO.100/MUM/2015 TRIBUNAL HAS IN THE IMPUGNED ORDER VERY SUCCINCTLY SET OUT THE PRINCIPLES TO BE APPLIED WHILE RECOVERING INCOME IN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING :- '(A) THAT MERELY BECAUSE ASSESSEE WAS FOLLOWI NG MERCANTILE SYSTEM OF ACCOUNTING, IT COULD NOT BE HELD THAT INC OME HAD ACCRUED TO IT. (B) EARNING OF THE INCOME, WHETHER ACTUAL OR NOTIONAL, HAS TO BE SEEN FROM THE VIEWPOINT OF A PRUDENT ASSESSEE. IF I N GIVEN FACTS AND CIRCUMSTANCES THE ASSESSEE DECIDES NOT TO CHARGE IN TEREST IN ORDER TO SAFEGUARD THE PRINCIPAL AMOUNT AND ENSURE ITS RECOV ERY, IT CANNOT BE SAID THAT HE HAS ACTED IN A MANNER IN WHICH NO REAS ONABLE PERSON CAN ACT. (C) THE GUIDANCE NOTE ON ACCRUAL OF INCOME ON ACCOUNTIN G ISSUED BY THE ICAI LAYS DOWN THAT WHERE THE ULTIMATE COLLE CTION WITH REASONABLE CERTAINTY IS LACKING, THE REVENUE RECOGN ITION IS TO BE POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN TERMS OF THE GUIDANCE NOTE, IT IS APPROPRIATE TO RECOGNIZE REVEN UE IN SUCH CASES ONLY WHEN IT BECOMES REASONABLY CERTAIN THAT ULTIMA TE COLLECTION WILL BE MADE. (D) NON-RECOGNITION OF INCOME ON THE GROUND THAT THE IN COME HAD NOT REALLY ACCRUED AS THE REALISABILITY OF THE PRIN CIPAL OUTSTANDING ITSELF WAS DOUBTFUL, IS LEGALLY CORRECT UNDER THE M ERCANTILE SYSTEM OF ACCOUNTING, WHEN THE SAME IS IN ACCORDANCE WITH AS-1 NOTIFIED BY THE GOVERNMENT. (E) IT IS ONE OF THE FUNDAMENTAL PRINCIPLES OF ACCOUNTI NG THAT, AS A MEASURE OF PRUDENCE AND FOLLOWING THE PRINCIPLE O F CONSERVATISM, THE INCOMES ARE NOT TAKEN INTO ACCOUNT TILL THE POI NT OF TIME THAT THERE IS A REASONABLE DEGREE OF CERTAINTY OF ITS RE ALIZATION, WHILE ALL ANTICIPATED LOSSES ARE TAKEN INTO ACCOUNT AS SOON A S THERE IS A POSSIBILITY, HOWSOEVER UNCERTAIN, OF SUCH LOSSES BE ING INCURRED. (F) THE PROVISIONS OF SECTION 145(1) ARE SUBJECT TO, IN TER ALIA, MANDATE OF AS-1 WHICH ALSO PRESCRIBES THAT ACCOUNTI NG POLICIES ADOPTED BY AN ASSESSEE SHOULD BE SUCH SO AS TO REPR ESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINE SS, PROFESSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND P RESENTED ON THE BASIS OF SUCH ACCOUNTING POLICIES. 'IN THE NAME OF COMPLIANCE WITH SECTION 145(1), IT CANNOT BE OPEN TO ANYONE TO FORC E ADOPTION OF ACCOUNTING POLICIES WHICH RESULT IN A DISTORTED VIE W OF THE AFFAIRS OF THE BUSINESS. THEREFORE, EVEN UNDER THE MERCANTILE METHOD OF ACCOUNTING, AND, ON PECULIAR FACTS OF INSTANT CASE, THE ASSESSEE WAS JUSTIFIED IN FOLLOWING THE POLICY OF NOT RECOGNIZIN G THESE INTEREST REVENUES TILL THE POINT OF TIME WHEN THE UNCERTAINT Y TO REALIZE THE REVENUES VANISHED.' THE TRIBUNAL FURTHER REFERRED TO THE FACT THAT THE VARIOUS RESOLUTIONS 14 I.T.A. NO.100/MUM/2015 WHICH WERE PASSED BY THE COMPANY AS WELL AS THE COM MUNICATION EXCHANGED BETWEEN THE PARTIES WOULD ESTABLISH ON FA CTS THAT INTEREST HAS BEEN WAIVED. FURTHER ON FACTS IT HOLDS THAT THE RE IS NO REASON TO DISBELIEVE THE RESOLUTION PASSED BY THE RESPONDENT- ASSESSEE WAIVING INTEREST. THE TRIBUNAL FURTHER ADVERTED TO THE FACT THAT SUBSEQUENTLY, M/S, MARKETING & BRAND SOLUTIONS (I) PVT. LTD. HAD AMALGAMATED WITH THE RESPONDENT-ASSESSEE WHICH WOUL D ALSO ESTABLISH THAT THE DEBENTURES ISSUING COMPANY WAS I N SERIOUS FINANCIAL DIFFICULTIES WHICH WAS INCIDENTALLY A GRO UP COMPANY OF THE RESPONDENT. THE DECISION RENDERED BY THE TRIBUNAL I N THE IMPUGNED ORDER IS A DECISION ON FACTS AND NOTHING H AS BEEN SHOWN TO US WHICH COULD WARRANT INTERFERENCE BY THI S COURT ON ACCOUNT OF ANY FINDING BEING PERVERSE OR ARBITRARY. 19. FURTHER, IN THE CASE OF CIT VS EXCEL INDUSTRIES LTD 358 ITR 295(SC), THE REVENUE RAISED THE QUESTION OF TAXABILITY OF BENEFI TS ACCRUING TO THE SAID ASSESSEE ON ACCOUNT OF DUTY ENTITLEMENT PASSBOOK BE NEFITS ARISING OUT OF EXPORTS MADE BY THE ASSESSEE. ACCORDING TO THE ASS ESSEE, THE AMOUNTS OF BENEFITS WERE EXCLUDED FROM ITS TOTAL INCOME SINCE IT COULD NOT BE SAID TO HAVE ACCRUED UNLESS IMPORTS WERE MADE AND RAW MATERIALS CONSUMED. BUT THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSEES CLA IM ON THE GROUND THAT SUCH BENEFITS WERE COVERED U/S 28(IV) AND, THEREFORE, AL ONG WITH THE FULFILLMENT OF OBLIGATION OF EXPORT COMMITMENT, THE ASSESSEE GETS THE BENEFIT OF IMPORTING RAW MATERIAL DUTY FREE. THUS, WHEN EXPORTS WERE MA DE, THE OBLIGATION OF THE ASSESSEE WAS FULFILLED AND THE RIGHT TO RECEIVE THE BENEFIT BECAME VESTED AND ABSOLUTE, AT THE END OF THE YEAR. HOWEVER, THE CIT (A) DID NOT AGREE WITH THE ASSESSING OFFICER AND ALLOWED THE RELIEF TO THE ASS ESSEE WHICH WAS CONFIRMED BY THE TRIBUNAL AS WELL AS HONBLE HIGH COURT. THE REVENUE CARRIED THE MATTER BEFORE HONBLE SUPREME COURT. WHILE ANSWERING THIS QUESTION IN FAVOUR OF THE ASSESSEE AND DISMISSING THE PLEA OF THE REVENUE, HO NBLE APEX COURT ANALYSED LAW IN THIS REGARD AND FACTS OF THIS CASE AND HELD AS UNDER: 15. IT WAS SUBMITTED BEFORE US BY LEARNED COUNSEL FOR THE REVENUE THAT IN VIEW OF THE PROVISIONS OF SECTION 2 8(IV) OF THE ACT, THE 15 I.T.A. NO.100/MUM/2015 VALUE OF THE BENEFIT OBTAINED BY THE ASSESSEE IS IT S INCOME AND IS LIABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. WE ARE UNABLE TO ACCEPT THE CONTENTION OF LEARNED COUNSEL FOR THE REVENUE FOR SEVERAL REASONS. 16. SECTION 28(IV) OF THE ACT READS AS FOLLOWS: 'PROFITS AND GAINS OF BUSINESS OR PROFESSION 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INC OME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON' (IV) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHE R CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXE RCISE OF A PROFESSION; . 17. FIRST OF ALL, IT IS NOW WELL SETTLED THAT INCOME-TA X CANNOT BE LEVIED ON HYPOTHETICAL INCOME. IN COMMISSIONER OF INCOME TAX V. SHOORJI VALLABHDAS AND CO. [1962] 46 ITR 144 (SC) I T WAS HELD AS FOLLOWS:- INCOME-TAX IS A LEVY ON INCOME. NO DOUBT, THE INC OME-TAX TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY T O TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK-KEEPING, AN ENTRY IS MAD E ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALISE. WHERE INCOME HAS, IN FACT, BEEN RECEIVED AND IS SUBSEQUENTLY GIV EN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE REC IPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HO WEVER, THE INCOME CAN BE SAID NOT TO HAVE RESULTED AT ALL, THE RE IS OBVIOUSLY NEITHER ACCRUAL NOR RECEIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE BEEN M ADE IN THE BOOKS OF ACCOUNT. 18. THE ABOVE PASSAGE WAS CITED WITH APPROVAL IN MORVI INDUSTRIES LTD. V. COMMISSIONER OF INCOME- TAX (CEN TRAL), [1971] 82 ITR 835 (SC) IN WHICH THIS COURT ALSO CONSIDERED TH E DICTIONARY MEANING OF THE WORD 'ACCRUE' AND HELD THAT INCOME C AN BE SAID TO ACCRUE WHEN IT BECOMES DUE. IT WAS THEN OBSERVED TH AT: ..........THE DATE OF PAYMENT .......DOES NOT AFFECT THE ACCRUAL OF INCOME. THE MOMENT THE INCOME ACCRUES, THE ASSESSEE GETS VESTED WITH THE RIGHT TO CLAIM THAT AMOUNT EVEN THOUGH IT MAY NOT B E IMMEDIATELY.' 19. THIS COURT FURTHER HELD, AND IN OUR OPINION MORE IM PORTANTLY, THAT INCOME ACCRUES WHEN THERE 'ARISES A CORRESPOND ING LIABILITY OF THE OTHER PARTY FROM WHOM THE INCOME BECOMES DUE TO PAY THAT AMOUNT.' 16 I.T.A. NO.100/MUM/2015 20. IT FOLLOWS FROM THESE DECISIONS THAT INCOME ACCRUES WHEN IT BECOMES DUE BUT IT MUST ALSO BE ACCOMPANIED BY A CO RRESPONDING LIABILITY OF THE OTHER PARTY TO PAY THE AMOUNT. ONL Y THEN CAN IT BE SAID THAT FOR THE PURPOSES OF TAXABILITY THAT THE I NCOME IS NOT HYPOTHETICAL AND IT HAS REALLY ACCRUED TO THE ASSES SEE. 21. IN SO FAR AS THE PRESENT CASE IS CONCERNED, EVEN IF IT IS ASSUMED THAT THE ASSESSEE WAS ENTITLED TO THE BENEFITS UNDE R THE ADVANCE LICENCES AS WELL AS UNDER THE DUTY ENTITLEMENT PASS BOOK, THERE WAS NO CORRESPONDING LIABILITY ON THE CUSTOMS AUTHORITI ES TO PASS ON THE BENEFIT OF DUTY FREE IMPORTS TO THE ASSESSEE UNTIL THE GOODS ARE ACTUALLY IMPORTED AND MADE AVAILABLE FOR CLEARANCE. THE BENEFITS REPRESENT, AT BEST, A HYPOTHETICAL INCOME WHICH MAY OR MAY NOT MATERIALISE AND ITS MONEY VALUE IS THEREFORE NOT TH E INCOME OF THE ASSESSEE. 22. IN GODHRA ELECTRICITY CO. LTD. V. COMMISSIONER OF I NCOME TAX, [1997] 225 ITR 746 (SC) THIS COURT REITERATED THE VIEW TAKEN IN SHOORJI VALLABHDAS AND MORVI INDUSTRIES. 23. GODHRA ELECTRICITY IS RATHER INSTRUCTIVE. IN THAT C ASE, IT WAS NOTED THAT THE HIGH COURT HELD THAT THE ASSESSEE WO ULD BE OBLIGED TO PAY TAX WHEN THE PROFIT BECAME ACTUALLY DUE AND THA T INCOME COULD NOT BE SAID TO HAVE ACCRUED WHEN IT IS BASED ON A M ERE CLAIM NOT BACKED BY ANY LEGAL OR CONTRACTUAL RIGHT TO RECEIVE THE AMOUNT AT A SUBSEQUENT DATE. THE HIGH COURT HOWEVER HELD ON THE FACTS OF THE CASE THAT THE ASSESSEE HAD A LEGAL RIGHT TO RECOVER THE CONSUMPTION CHARGE IN DISPUTE AT THE ENHANCED RATE FROM THE CONSUMERS. 24. THIS COURT DID NOT ACCEPT THE VIEW TAKEN BY THE HIG H COURT ON FACTS. REFERENCE WAS MADE IN THIS CONTEXT TO COMMIS SIONER OF INCOME TAX V. BIRLA GWALIOR (P.) LTD., [1973] 89 ITR 266 ( SC) WHEREIN IT WAS HELD, AFTER REFERRING TO MORVI INDUSTRIES THAT REAL ACCRUAL OF INCOME AND NOT A HYPOTHETICAL ACCRUAL OF INCOME OUG HT TO BE TAKEN INTO CONSIDERATION. FOR A SIMILAR CONCLUSION, REFERENCE WAS MADE TO POONA ELECTRIC SUPPLY CO. LTD. V. COMMISSIO NER OF INCOME TAX, [1965] 57 ITR 521 (SC) WHEREIN IT WAS HELD THA T INCOME TAX IS A TAX ON REAL INCOME. 25. FINALLY A REFERENCE WAS MADE TO STATE BANK OF TRAVA NCORE V. COMMISSIONER OF INCOME TAX, [1986] 158 ITR 102 (SC) WHEREIN THE MAJORITY VIEW WAS THAT ACCRUAL OF INCOME MUST BE RE AL, TAKING INTO ACCOUNT THE ACTUALITY OF THE SITUATION; WHETHER THE ACCRUAL HAD TAKEN PLACE OR NOT MUST, IN APPROPRIATE CASES, BE J UDGED ON THE PRINCIPLES OF REAL INCOME THEORY. THE MAJORITY OPIN ION WENT ON TO SAY 'WHAT HAS REALLY ACCRUED TO THE ASSESSEE HAS TO BE FOUND OUT AND WHAT HAS ACCRUED MUST BE( CONSIDERED FROM THE POINT OF VIEW OF REAL INCOME TAKING THE PROBABILITY OR IMPROBABILITY OF 17 I.T.A. NO.100/MUM/2015 REALISATION IN A REALISTIC MANNER AND DOVETAILING O F THESE FACTORS TOGETHER BUT ONCE THE ACCRUAL TAKES PLACE, ON THE C ONDUCT OF THE PARTIES SUBSEQUENT TO THE YEAR OF CLOSING AN INCOME WHICH HAS ACCRUED CANNOT BE MADE 'NO INCOME'. 26. THIS COURT THEN CONSIDERED THE FACTS OF THE CASE AN D CAME TO THE CONCLUSION (IN GODHRA ELECTRICITY) THAT NO REAL INCOME HAD ACCRUED TO THE ASSESSEE IN RESPECT OF THE ENHAN CED CHARGES FOR A VARIETY OF REASONS. ONE OF THE REASONS SO CONSIDERE D WAS A LETTER ADDRESSED BY THE UNDER SECRETARY TO THE GOVERNMENT OF GUJARAT, TO THE ASSESSEE WHEREBY THE ASSESSEE WAS 'ADVISED' TO MAINTAIN STATUS QUO IN RESPECT OF ENHANCED CHARGES FOR AT LEAST SIX MONTHS. THIS COURT TOOK THE VIEW THAT THOUGH THE LETTER HAD NO LEGAL B INDING EFFECT BUT 'ONE HAS TO LOOK AT THINGS FROM A PRACTICAL POINT O F VIEW.' (R.B. JODHA MAL KUTHIALA V. COMMISSIONER OF INCOME TAX, [ 1971] 82 ITR 570 (SC)). THIS COURT TOOK THE VIEW THAT THE PROBAB ILITY OR IMPROBABILITY OF REALISATION HAS TO BE CONSIDERED I N A REALISTIC MANNER AND IT WAS HELD THAT THERE WAS NO REAL ACCRU AL OF INCOME TO THE ASSESSEE IN RESPECT OF THE DISPUTED ENHANCED CH ARGES FOR SUPPLY OF ELECTRICITY. THE DECISION OF THE HIGH COURT WAS, ACCORDINGLY, SET ASIDE. 27. APPLYING THE THREE TESTS LAID DOWN BY VARIOUS DECIS IONS OF THIS COURT, NAMELY, WHETHER THE INCOME ACCRUED TO T HE ASSESSEE IS REAL OR HYPOTHETICAL ; WHETHER THERE IS A CORRESPONDING LIABILITY OF THE OTHER PARTY TO PASS ON THE BENEFITS OF DUTY FREE IM PORT TO THE ASSESSEE EVEN WITHOUT ANY IMPORTS HAVING BEEN MADE; AND THE PROBABILITY OR IMPROBABILITY OF REALISATION OF THE BENEFITS BY THE ASSESSEE CONSIDERED FROM A REALISTIC AND PRACTICAL POINT OF VIEW ( THE ASSESSEE MAY NOT HAVE MADE IMPORTS), IT IS QUITE CLEAR THAT IN FACT NO REAL INCOME BUT ONLY HYPOTHETICAL INCOME HAD ACCRUED TO THE ASSESSE E AND SECTION 28(IV) OF THE ACT WOULD BE INAPPLICABLE TO THE FACT S AND CIRCUMSTANCE OF THE CASE. ESSENTIALLY, THE ASSESSIN G OFFICER IS REQUIRED TO BE PRAGMATIC AND NOT PEDANTIC. 20. THUS, FROM THE ABOVE OBSERVATIONS OF HONBLE SUPREM E COURT, IT IS NOTED THAT WELL ACCEPTED PRINCIPLES UNDER THE INCOME-TAX LAW HAVE BEEN AGAIN RE- ITERATED LAYING DOWN THAT INCOME-TAX CANNOT BE LEVI ED ON HYPOTHETICAL INCOME. HONBLE APEX COURT FURTHER OBSERVED THAT WHEN WE TA LK ABOUT ACCRUAL OF INCOME, WE MEAN REAL ACCRUAL OF INCOME AND NOT HYPO THETICAL ACCRUAL OF INCOME. THUS, ACCRUAL OF INCOME MUST BE REAL, TAKI NG INTO ACCOUNT THE ACTUALITY OF SITUATION CONSIDERED FROM A REALISTIC AND PRACTICAL POINT OF VIEW. THUS, 18 I.T.A. NO.100/MUM/2015 WHETHER THE ACCRUAL HAD TAKEN PLACE OR NOT, MUST IN APPROPRIATE CASES, BE JUDGED ON THE PRINCIPLES OF REAL INCOME THEORY. FINALLY, THE HONBLE APEX COURT SUGGESTED THAT UNDER SUCH CIRCUMSTANCES, ESSE NTIALLY, THE ASSESSING OFFICER IS REQUIRED TO BE PRAGMATIC AND NOT PEDANTI C. 21. FURTHER, APART FROM THE ABOVE REASONING, THE ASSES SEE IS A COMPANY AND IS BOUND TO FOLLOW THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WHILE MAINTAINING ITS FINAL AC COUNTS. AS PER ACCOUNTING STANDARDS-9 PERTAINING TO REVENUE RECOGNITION, IF THERE IS UNCERTAINTY WITH REGARD TO COLLECTION OF THE AMOUNT, THEN RECOGNITIO N OF SAME AS INCOME SHOULD BE DEFERRED IN THE BOOKS OF ACCOUNT. 22. COMING BACK TO THE FACTS OF THIS CASE, THE FACT THA T THE SAID COMPANY AS WELL AS THE ASSESSEE NEVER RECORDED THE IMPUGNED AM OUNT IN ITS BOOKS OF ACCOUNT SHOWS THAT NONE OF THE PARTIES CONSIDERED THE AMOUN T OF INTEREST FOR THE YEAR UNDER CONSIDERATION AS EXPENSES / INCOME. THE ASSE SSEE COMPANY TOOK A DECISION FOR NOT BOOKING THE INTEREST INCOME IN VIE W OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS HAVE BEEN DISCUSSED IN DETAIL IN ABOVE PART OF OUR ORDER. THUS, IN THE GIVEN FACTS OF THIS CASE, THE I MPUGNED AMOUNT OF INTEREST WAS MERELY A HYPOTHETICAL INCOME, THEREFORE IT CANNOT B E CONSIDERED AS INCOME AS PER PRINCIPLES OF REAL INCOME THEORY. THE AO HAS WRO NGLY ADDED IT AS PART OF INCOME ON NOTIONAL BASIS AND THE SAME IS DIRECTED T O BE DELETED. THIS GROUND IS ALLOWED. 23. AS A RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED, FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE COURT ON THIS 9 TH DAY OF SEPTEMBER, 2016. SD/- SD/- (C.N. PRASAD) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 9 TH SEPTEMBER, 2016 19 I.T.A. NO.100/MUM/2015 PK/- COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE , J-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES