Dy.CIT., Central Circle-9, Hyderabad V. M/s Madesvara Greenfields Private Limited, Hyderabad

ITA 1854/HYD/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77856 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 27-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K HARITA
• Assessee Lawyers: K C DEVADAS
• Section: 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. P.MADHAVI DEVI, JUDICIAL MEMBER I TA NO. ASSESSMENT YEAR APPELLANT RESPONDENT 1852 /HYD/2013 200 8 - 0 9 DY. COMMISSIONER OF INCOME - TAX, CENTRAL CIRCLE 9, HYDERABAD M/S. BANGANGA AGRO - FARMS PRIVATE LTD., HYDERABAD (PAN AABCB 5749 B) 1853 /HYD/2013 200 8 - 0 9 DY. COMMISSIONER OF INCOME - TAX, CENTRAL CIRCLE 9, HYDERABAD M/S. DHATU AGRO - FARMS PRIVATE LTD., HYDERABAD (PAN AA CCD 7486 N ) 1854 /HYD/2013 200 8 - 0 9 DY. COMMISSIONER OF INCOME - TAX, CENTRAL CIRCLE 9, HYDERABAD M/S. MODESVARA GREENFILEDS PVT. LTD., HYDERABAD (PAN AAECM 8676 M ) 1855 /HYD/2013 200 8 - 0 9 DY. COMMISSIONER OF INCOME - TAX, CENTRAL CIRCLE 9, HYDERABAD M/S. KOLAR GREENLAND PVT. LTD., HYDERABAD (PAN AACCK 9653 Q ) APPELLANTS BY : SMT. K.HARITA DR RESPONDENT BY : SHRI K.C.DEVADAS DATE OF HEARING 2 3 .04.2014 DATE OF PRONOUNCEMENT 0 1 . 0 5 . 2 0 1 4 O R D E R PER SMT. P.MADHAVI DEVI, JUDICIAL MEMBER: ALL THESE ARE REVENUES APPEALS FOR THE ASSESSMENT YEAR 2008 - 09 IN THE CASE OF GROUP CONCERNS. THEY ARE DIRECTED AGAINST SIMILAR, BUT SEPARATE 2 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD ORDERS OF THE COMMISSIONER OF INCOME - TAX(APPEALS) VII, HYDERABAD DATED 30.9.2013. SIN C E THE ISSUE HEREIN IS COMMON, THESE APPEALS WERE ALL HEARD TOGETHER AND ARE DISPOSED OF, BY THIS COMMON AND CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FOR THE SAKE OF BREVITY, ONLY T HE GROUNDS OF APPEAL RAISED BY TH E RE VENUE IN TH E CASE OF M/S. KOLAR GREENLANDS P. LTD. (ITA NO.1851/HYD/2013) ARE REPRODUCED HEREUNDER - 1. THE LEARNED CIT(A) VII, HYDERABAD HAS ER RED IN BOTH FACTS AND IN LAW. 2. THE LD. CIT(A) - VII, HYDERABAD OUGHT TO HAVE APPRECIATED THE FACT THAT UN D ER THE FACTS AND CIRCUMSTANCES OF TH E CASE, THE AO WAS RIGHT IN CHARGING INTEREST ON THE MONIES GIVEN BY IT AS ADVANCES. 3. THE LD. CIT(A) - VII, HYDERABAD OUGHT TO HAVE APPRECI A TED THE FACT THAT THE ASSESSEE COMPANY HAS NEITHER WRITTEN OFF THE ADVANCES NOR HAS MADE ANY PROVISION FOR DOUBTFUL DE BT S EVEN IN SUBSEQUENT Y E ARS. ALSO, THE ASSESSEE COMPANY HAS APP R O A CHED THE JUDICATURE FOR JUSTIF I CATION O F THEIR CL A IM OF HAVING AD V ANCED THE MONIES ALON G WITH INTEREST (TERMED BY THE COMPANY AS DAMAGES ) FROM THE RECIPIENT COMPANY, I.E. M/S. SCSL WHICH HAS MERELY PL A CED TH E SE AMOUNTS UNDER SUSPENSE WITHOU T DENYING HAVING RECEIVED THESE M ONIES BY IT. 4 . . SIMILAR GROUNDS HAVE BEEN RAISED BY THE DEPARTMENT IN ALL THE OTHER APPEALS ALSO. 3 . BRIEF FACTS OF THE CASE ARE THAT ALL THE FOU R ASSESSEE COMPANIES HAVE FIL E D THEIR RETURNS OF IN C OM E FOR THE R E LEVANT ASSESSMENT YEAR . DURING THE ASSESSMENT PROCEED INGS UNDER S.143(3) OF THE ACT, NOTICES WERE ISSUED TO THE ASSESSEES HEREIN UN D E R S.143( 2 ) AND 142(1) OF THE ACT CALLING FOR CERTAIN IN F O R M A TION R E LEVANT FOR THE ASSESSMENT . THE LEARNED REPRE SE NTATIVE S O F THE ASSESSEE S APPEARED AND FURNISHED THE INFORM ATION C ALLED FOR. ON THE P ER USAL OF THE IN F O R M A TION FURNI S H E D DURING TH E COU R SE OF SCRUTINY PROCEEDINGS, THE ASSESSING OFFICER OB S ERVED THAT DURING THE ACCOUNTING YEAR 2007 - 08, THE ASSESSEE COMPANIES HAVE MADE ADVANCES TO M/S. SATYAM COMPU T ER S E R V ICES 3 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD LTD .(SCSL), BUT NO INTEREST IS SHOWN TO HAVE ACCRUED OR RECEIVED ON SUCH ADVANCES IN THE BOOKS OF ACCOUNT OF THE ASSESSEES . IT WAS ALSO FOUND THAT IN AUGUST, 2009, THE ASSESSEES HAVE MADE A CLAIM ON M/S. SCSL FOR REPAYM E NT OF THE ADVANCES ALON G WITH INTEREST AT THE RATE OF 18% PER ANNUM FROM THE DATE OF AD V ANCE IN THE FORM O F DAMAGES AND THAT THE ASSESSEES ALSO INITIATED LEGAL P R OCEE D IN G S TO RECOVER THE SAID ADVANCES ALON G WITH THE RIGHT TO RECEIVE IN T ER E ST BY FILING SUITS BEFOR E THE CITY CIVIL COURT S, SECUN D ERABAD. 4 . THE ASSESSING OFFICER OBSERVED T HAT THE ASSESSEE COMPANIES ARE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, AND SINCE THEY HAVE MA D E A CLAIM FOR RECOVERY O F ADVANCES ALON G WITH TH E RIGHT TO RECEIVE IN T ER E ST, INTER E ST ON SUCH AD V ANCES HAS ACC R UED TO THE ASSESSEE AS P E R THE TRADE, CUSTOM AND USAGE. IN VI E W OF TH E SAME, HE ISSUED SHOW CAU S E NOTICES TO THE ASSESSEE S SEEKING EXPLANATION AS TO WHY THE IN T ER E ST AT TH E RATE OF 1 8% PER ANNUM FROM THE DATE OF AD V ANCE SHOULD NO T B E ADDED TO THE TOT AL INCOME FOR THE RELEVANT ASSESSMENT YEAR, VIZ. ASSESSMENT YEAR 2008 - 09. THE ASSESSEES SUBMITTED DETAILED REPLIES STATING THE ERSTWHILE CHA I RMAN OF M/S. SCSL SH R I RAMALINGA RAJU, IN HIS LETTER DATED 78 TH JANUARY, 2009 HAS STA T ED THAT THE BALANCE SHEET OF THE M/S. SCSL AS ON S E PTEMB E R 30, 2008 CARRIED AN INTE RE ST LIABILITY OF R S .12,304 MILLIONS, ON AC C OUN T O F THE FUNDS ARRANGED BY HIM. ON JANU A RY 8 2009, THE SAID COMPANY , M/S. SCSL, R ECEIVED LETTER S FROM 37 COMPANIES, INCLU D IN G TH E F OU R ASSESSEES HEREIN , REQU E STING CONF I RMATION BY WAY OF ACKNOWLEDGE MENT OF THE ALLEGED AMOUNT S RECE IV ED AS ALLEGED ADVANCES. ALL TH E SE LE T TERS WERE FOLLOWED BY L E GAL NOTICES F R OM THESE COMPANIES DATED 4 TH /5 TH AUGUST, 2009. 5 . IT WAS SUBMITTED THAT THE M/S. SCSL HAS NO T ACKNOWLEDGED ANY OF ITS LIABILITY TO ANY OF TH E 37 COMPANIES AND HAS REPLIED TO THE LEGAL NO T ICES STATING THAT THE CLAIMS ARE LEGALLY UNTENABLE AND THAT THE EN F O R CEMENT DIRECTORATE IS INVESTIGATING THE MATTER UNDER THE PREVENTION OF M ONEY LAUNDERING ACT OF 2002 AND DIRECTED THE COMPANIES TO FURNI S H DETAILS WITH REGARD TO THE ALLEGED ADVANCES AND HAS FURTHER DIRECTED THE COMPANIES NOT TO 4 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD RETURN THE ALLEGED AD V ANCES UN T IL FURTHER INSTRUCTION S FROM THE ENFORCEMENT DIRECTORATE. IT WAS FUR T HER SUBMITTED T H A T THE ASSESSEE S HEREIN HAVE FILED SUITS FOR RECOVERY O F A D VANCES BEFORE THE CIT Y CIVIL COU R T, S E CUN D ERABAD ON NOVEMB E R 11, 2009 AND HAVE ALSO CL A I M ED INTER E ST AT THE RATE OF 18% PER ANNUM TOW A R D S DAMAGES. IT WAS ALSO REITERATED THAT TH E COMPANY M/S. SCSL HAVE DENIED LIABILITY TO REPAY THE ALLEGED AD V ANCES AND ALSO INTEREST THERE ON AND TH ERE FORE, TH E RE IS NO ADMISSION OF LIABILITY AND ACCRUAL OF INTEREST THEREON. 6 . AFTER CONSID E RIN G THE ASSESSEES SUBMI S SION S , THE ASSESSING OFFICER HELD T H A T SIN C E THE ASSESSEE COMPANIES ARE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEY OUGHT TO HAVE ACCOUNTED FOR THE IN TE R E ST ON ACCRUAL BASIS, AS THE ASSESSEES HAVE INHERENT RIGHT TO RECEIVE THE IN T EREST ON TH E SUM AD V AN C E D , AS EVIDENCED FROM I T S CLAIM. HE THER E FORE, BROU G HT TO TAX THE INTEREST INCOME WORKING OUT THE SAME AT THE RATE OF 18% P.A. ON THE ADVANCES GIVEN BY THE ASSESSEE COMPANIES. 7 . AGGRIEV E D, THE ASSESSEES PR E FE R RED APPEAL S B E FOR E T H E CIT(A) , REITERATING THE SUBMI S SION S MADE BY THE ASSE SSEE S BEFORE T H E ASSESSING OFFICER AND ALSO PLACING RELIANCE UPON THE DECI S IONS OF VARIOUS HIGH COU R TS WITH REGARD TO THE ACCRUAL OF INCOME. THE LEARNED CIT(A) AFTER CONSI DE RING THE ASSESSEES SUBMI S SIO N S AND PLACING RELIANCE UPON THE DECISION OF THE HO NBLE DELHI HIGH C OU R T IN TH E CASE OF PARAGON CONSTRU C TIONS (I)) P . LTD., REPO R T E D IN 274 ITR 413, HAS H E LD TH AT IT CANNOT B E HELD THAT INTEREST INCOME HAS DEFINITELY ACCR U ED AND ARISEN TO THE ASSESSEE AT THE RATE OF 18% AS HELD BY THE ASSESSING OFFICER, AND THAT AS AND WHEN THE C ITY CIVIL COU R T FINALISE D THE SAID INTER E ST RATE MENTIONED THEREIN, THE INTER E ST CAN BE TAXED IN THE Y E AR IN WHICH THE COU R T PRONOUNCES ITS ORDER ON THE C IVIL S UIT , PENDING B EFORE IT. THU S , TH E CIT(A) ALLOWED THE ASSESSEES APPEALS. 8 . AGGRIEVED BY THE RELEIF GIVEN BY THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 5 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD 9 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, SMT. HARITHA, SUBMITTED THAT THE ISSUE OF ADVANCES BY THE FOU R A SSESSEE COMPANIES TO M/S. SCSL WAS ADMITTED BY THE STATEMENT OF SHRI RAMALINGA R A JU ON 7 TH /8 TH JANU A RY, 2009. THE FURTHER FACT THAT THESE AMOUNTS H A VE BEEN ADV A NCED BY THE ASSESSEE COMPANIES TO M /S. SCSL THROUGH BANKING CHANNELS AND ALSO THAT TH E SE COMPANIES H A VE ISSUED LEGAL NOTICES FOR RECO V ERY OF AD V ANCES AND ALSO HAVE THEREAFTER FIL E D CIVIL SUITS FOR RECOVERY OF AD V AN C ES ALON G WITH INTER E ST P R OVES THE FACT THAT THE ASSESSEES HEREIN HAVE AD V ANCED THE AMOUNTS TO M/S. SCSL. SHE SUBMITTED HAT ON C E I T IS P R O V ED THAT THE ADVANCES HAVE BEEN M AD E BY THE ASSESSEE COMPANIES TO M/S. SCSL, THE COMPANIES FOLLOWING THE MERCANTILE SYSTEM OF AC C OUNTING, OUGHT TO H A VE ACCOUN T ED FOR THE IN T EREST INCOME IN THEIR BOOKS OF ACCOUNT FOR THE RELEV A NT ACCOU N TIN G Y E AR. SH E SUBMI T TED T H A T THE CIT(A) HAS ERRONEOUSLY H E L D TH A T THE IN T ER E ST INCOME IS TO B E BROUGHT TO TAX IN THE YEAR IN WHICH THE C ITY CIVIL COURT DECIDES THE MATTER AND PRONOUNCES ITS ORDER WITH REGARD TO RATE OF IN T ER E ST ON THE SUIT AMOUNT. SH E SUBMITTED T HAT THE INCOME O F THE RELEVANT ASSESSMENT YEAR HAS TO B E BROU G H T TO TAX IN TH A T Y EAR ONLY. SHE SUBMITTED THAT THE INCOME OR LIABILITY CANNOT B E PREPONED OR POSTPONED TO ANOTHER ASSESSMENT YEAR. THUS, ACCORD I NG TO HER, THE ORDER OF TH E CIT(A) IN TH E CA S E OF TH E ASSESSEE S IS ERRONEOUS AND HAS TO B E SET ASIDE AND THE ASSESSMENT ORDERS ON THIS ISSUE HAVE TO B E RESTORED. 10 . THE LEARNED COUN S EL F OR TH E ASSESSEE, SHRI DEVADAS, ON THE OTHER HAND, SUPPO R TED THE ORDERS OF THE CIT(A) AND SUBMITTED T HAT THE IMPO R TANT FACTOR TO B E CON S IDERED IS THAT T HE COMPANY, M/S.SCSL, HAS DENIED ITS LIA B ILITY TO PAY ANY AMOUNTS TO THE ASSESSEE COMPANIES, AND TH E R E FORE, THERE IS NO CERTAINTY OF RECO VE RY OF TH E TEMPORARY ADVAN C ES ITSELF GIVEN BY THE ASSESSEE COMPANIES. HE THEREFORE , SUBMITTED THAT DUE TO THE UNCERTAINTY OF THE RECOVERY O F TH E TEMPORARY AD V ANCES ITSELF , THERE IS NO CERTAINTY OF RECEIP T OF INTEREST INCOME ON SUCH TEMPORARY ADVANCES. IT IS FURTHER SUBMITTED T HAT THERE WAS NO CONTRACT BETWEEN THE ASSESSEE COMPANIES AND M/S. SCSL TO RECEIVE INTER E ST ON TH E SE TEMPORARY AD V ANCES AND IN THE ABSENCE OF SUCH 6 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD CON T R A CT, THE IN T EREST INCOME CANNO T B E DEEM E D TO HAVE ARISEN OR ACCRUED TO THE ASSESSEE S. HE FUR T H E R SUBMITTED THAT THE ADVANCES HAVE BEEN MADE OUT OF SHARE APPLIC ATION MONIES AND NO T OUT OF BORROWED FUNDS, AND THER EF OR E , IT CANNOT B E PRESUMED T H A T T H E ASSESSEE HAS INCURRED ANY INTER E ST EXPENDITURE BY AD V ANCING THE INTEREST FREE LOANS TO THE SISTER CONCERNS, AND TH E R E FORE, NO NOTIONAL INTER E ST CAN BE BROUGHT TO TA X EVEN ON THIS COUNT. 1 1 . HA V ING HEARD BOTH THE P A RTI E S AND H A VIN G CONSIDERED THE RIVAL CONTENTION S AND THE MATERIAL ON RECORD, WE FIND THAT THE BASIS FOR BRINGING TO TAX THE NO T IONAL INTEREST INCOM E ON A D VANCES ALLEGEDLY MADE BY THE ASSESSEE COMPA N Y TO M/S. SCSL ARE THE CIVIL SUITS FILED BY THE ASSESSEE COMPANIES FOR RECOVERY OF TH E SUI T AMOUNT S ALOGNWITH INTEREST AT TH E RATE OF 18% PER ANNUM. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE S HAV E AD V ANCED THE LOANS /TEMPORARY ADVANCES TO M/S. SCSL AND THIS FACT HAS COME TO LIGHT ONLY BY THE STATEMENT OF SHRI RAMA L INGA R AJU DATED 7 TH /8 TH OF JANU A RY, 2009. FURTHER, THE ASSESSEES HAVE A D VANCED THE LOANS OR TEMPORARY ADVANCES THROUGH BANKING CHAN N ELS AND IMMEDIATELY AFTER THE STATEMENT OF SHRI R A MA L INGA R A JU, THE ASS ESSEES HAVE ALSO I SSUED LEGAL NOTICES FOR THE REPAYMENT OF THE LOANS AND ALSO FILED CIVIL SUITS FOR RECOVERY O F THE LOAN AMOUNTS ALON G WITH INTER E ST IN THE CITY CIVIL COURT, S E CUN D ERABAD. TH E R E FORE, THE LIABILITY MAY HAVE BEEN DENIED BY M/S. SCSL, BUT AS FAR AS THE ASSESSEES ARE CONCERNED, THERE IS NO DISPUTE OR CONTROVERSY WITH REGARD TO THE LOANS ADVANCED BY THEM TO M/S. SCSL. THE ONLY DISPUTE NOW IS WITH RE G ARD TO THE LIABILITY OF M/S. SCS L AND THE RIGHT OF THE ASSESSEE TO RECEIVE INTER ES T AT THE RATE O F 18% PER ANNUM. ANOTHER UNDISPUTED FACT IS ALSO THAT THERE IS NO CONTRACT BETWEEN THE ASSESSEE AND SCSL WITH REGARD TO THE AD V ANCES AND THE IN T EREST THEREON. IN THE ABSENCE OF ANY SUCH CONTRACT TO RECEIVE THE INTEREST ON TH E ADV A NCES GIVEN BY THE ASSE SSEE C O MPANIES, I T CANNOT BE SAID THAT THE ASSESSEE C OMPANIES H A VE ANY RIGHT TO RE C EIVE SUCH AMOUNTS OF INTER E ST OR THAT THE IN T ER E ST IN C OM E HAS ACC R UED TO THE ASSESSEES. 7 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD 1 2 . LET US KNOW EXAMINE THE LEGAL PRINCIPLES GOVERNING SUCH ISSUES - 1. THE HONB L E SUPREME COURT IN THE CASE OF CIT V/S. WALCHAND & CO. P . LTD. (65 ITR 381) , WHILE CONSIDERING THE P R O V ISIONS OF S.10(2) (X V) AND S.33(IV ) OF THE INDIAN INCOM E - TAX ACT, 1922, HAS HELD TH A T IN APPLYING THE TEST OF COMMERCIAL EXPE D IENCY OR D ETERMININ G WHETHER AN EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, THE REASONABLENESS O F THE EXPENDITURE HAS TO BE JU D GED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE R E VENUE. 2. THE HONBLE BOMBAY HIGH COU R T IN TH E C ASE OF CIT V/S. RELIANCE UTILITIES AND POWER LTD. ( 313 ITR 340) HELD T H A T I F TH E RE WERE FUNDS AVAILABLE BOTH IN T ER E ST FREE AND OVERDRA FT AND /OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARI S E THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUN D S GENE R ATED OR AVAILABLE WITH THE ASSESSEE, IF INTER E ST FREE FUN D S W OULD BE SUFFICIENT TO MAKE THE INVESTMENTS. 3. THE HON'BLE G UJA RAT HIGH COU R T IN TH E CASE OF HIGHWAYS C ON S TRUCTIONS P. LTD. V/S. CIT (199 ITR 702 ) , WAS DEALIN G W ITH A CA S E OF AN ASSESSEE COMPA N Y W HICH HAD ADVANCED IN T ER E ST FREE LOANS TO DIRECTORS FROM AMOUNTS BORROWED ON IN T ER E ST. THE HONBL E HIGH C OU R T HELD THAT THERE WAS NO FIN D IN G OF FACT TO THE EFFECT THAT A CTUALLY LOAN HAD BEEN GRANTED TO THE MANAGIN G DIRECTOR OR ANY OTHER PERSON ON IN T ER E ST O R ANY INTER E ST HAD ACTUALLY BEEN COLLECTED, BUT THE COLLECTION OF THE IN T ER E ST WAS NO T REFLECTED IN TH E ACCOUNTS. THE HONBLE HIGH COURT AFTER OBSERVING THAT T H E FINDING OF THE ITO W AS THAT THE ASSESSEE SHOULD HAVE COLLECTED INTER E ST , HELD THAT I F THE ASSESSEE HAD NOT BARGAINED FOR IN T ER E ST OR HAD NO T COLLECTED THE SAME, THE INCOME TAX OFFICER COULD NO T FIX A NOTION AL I NTE RE ST AS DUE OR AS COLL E C T ED BY T H E ASSESSEE , AS T HERE WAS NO PROVISION IN THE I NCOME - TAX ACT, EMPOWERING THE INCOME - TAX AUTHORITY TO IN C LU D E IN THE TAXABLE INCOME, ANY IN T ER E ST WHICH WAS NOT DUE OR NOT COLL E C T ED BY THE ASSESSEE, AND THE ADDITION OF AN AMOUNT AS NOTIONAL INTER E ST WAS NOT JUSTIFIED. 8 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD 4. HONBLE PUNJAB & HARYANA HIGH COU R T IN THE C ASE OF CIT V/S. ABHISHEK INDUSTRIES LT D. ( 286 ITR 1 ) , WAS DEALING W ITH A CASE OF INTER E ST FREE ADVANCES GIVEN TO SISTER CONCERNS ON THE BASIS OF WHICH THE ASSESSING AUTHORITY HAS DISALLOWED IN T ER E ST PAID BY THE ASSESSEE ON BORROWED FUNDS. THE HONBLE HIGH COU R T HAS HELD TH A T THE NEXUS BETWEEN THE IN TE R E ST BEARING FUN D S AND THE AD V ANCES MADE TO THE SISTER CONCERNS IS NO T P R OVED AND THEREFORE, TH E RE CANNOT B E ANY DISALLO W ANCE OF IN T ER E ST EXPENDITURE. 1 3 . AP P LYING THE ABOVE RATIONALE PROPOUNDED BY THE HONBLE SUPREME COURT AS WELL AS THE HONBLE HIGH COURTS , IN THE CASES DISCUSSED ABOVE, WE OBSERVE THAT THE FOLLOWING POINTS E M ERGE ( A ) IT IS FOR THE ASSESSEE TO DECIDE HOW IT CONDUCTS ITS BUSINESS; ( B ) WHERE AN ASSESSEE ADVANCES INTEREST FREE LOANS TO ITS SISTER CONCERNS, UNLESS N EXUS BETWEEN INTEREST BEARING FUNDS AND THE INTEREST FREE ADVANCES IS PROVED, EXPENDITURE ON ACCOUNT OF INTEREST ON BORROWED FUNDS CANNOT BE DISALLOWED N OR IT CAN BE PRESUMED THAT THE ASSESSEE HAS COLLECTED INTEREST FROM ITS SISTER CONCERNS ON THE ADVANC ES GIVEN. ( C ) WHERE THE FUNDS HAVE BEEN ADVANCED OUT OF ANY INTEREST FREE FUNDS, THEN THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS CANNOT BE MADE; ( D ) UNLESS AND UNTIL THERE IS A CONTRACT BETWEEN THE PARTIES FOR CHARGING OF INTER E ST ON THE FUN D S AD V ANCED, THE NOTIONAL INTER E ST INCOME CANNOT B E BROUGHT TO TAX . 1 4 . APPLYING TH E SE PRINCIPLES TO THE FACTS OF THE CASE S BEFORE US, WE FIND THAT THE ASSESSEE S HAVE STATED BEFORE THE CIT(A) TH A T THE AMOUNTS AD V ANCED ARE FROM OUT OF THE SHA R E APPLICATION MONIES AND T EMPORARY A D V ANCES. IT IS SO STATED ON THE BASIS OF ENTRIES IN TH E BALANCE SHEET AND THE 9 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD PROFIT & LOSS ACCOUNT S OF THE RESPECTIVE ASSESSEES FILED A L ONGWITH THE IR RETURNS OF INCOME. I N TH E ABSENCE OF ANY CON T R A CT BETWEEN THE ASSESSEE COMPANIES AND M/S. SCSL FOR CHARGING OF INTEREST ON THE ADVANCES , THE ASSESSEES ARE NOT ENTITLED TO RECEIVE ANY INTE RE ST INCOME ON SUCH AD V ANCES. THEREFORE, MERELY BECAUSE THE ASSESSEE IS FOLLOWING MERCANTILE I S SYSTEM OF AC C OUNTIN G , I T CANNO T B E SAID THAT THE IN T E R EST HAS A CCRU ED TO THE ASSESSEES . FURTHER, MERELY BECAUSE THE ASSESSEE S HAVE CLAIMED INTER ES T AT THE RATE OF 18% PER ANN UM IN THE SUITS FILED FOR RECOVERY OF AD V AN C ES, IT CANNOT BE SAID THAT THE SAID RATE OF IN TE R E ST IS APPLICABLE AS M/S. SCSL HAS NO T ADMITTED T HE LIAB ILITY OF EVEN THE AMOUNTS OF ADVANCE . AS SUCH, WE FIND THAT THERE IS NO CERTAINTY WITH REGARD TO THE SAID RATE OF INTER E ST. TH E R E FORE, IT CANNOT B E PRESUMED T H A T THE INTEREST ACCRUED TO THE ASSESSEE AT THE RATE OF 18% P.A. AS CL A IM E D BY THE ASSESSEE S IN TH E SUI T S FILED FOR RECOVERY OF ADVANCES . THE CIVIL COU R T S WOULD CONSIDER AND DECIDE THE LIABILITY OF M/S. SCSL TO REPAY THE AMOUNTS OF AD V ANCE S AND WOULD ALSO CONSIDER THE LIABILITY OF M/S. SCSL TO PAY INTEREST THEREON AND TH E RATE OF IN T ER E ST AT WHICH THE AD V ANCES SHOULD B E REPAID. TH E R E FORE, UNLESS AND UNTIL THE LIABILITY TO PAY THE ADVANCES AND THE RATE OF IN T ER E ST AT WHICH THE TEMPORARY AD V ANCES ARE TO B E REPAID IS DETERMINED BY THE CIVIL COURT, IT CANNOT B E SAID THAT THE SAME HAS ACCRUED OR ARISEN TO THE ASSESSEES . HOWEVER, IF THE ASSESSEES HAD ADVANCED INTER E ST BEARING FUNDS AS INTEREST FREE ADVANC E S, THE IN T EREST PAID BY THE ASSESSEES TOWARDS SUCH BORROWED FUNDS WOULD HAVE TO B E DI S ALLOWED AND TR E ATED AS THE INCOME OF THE R E SPEC T IVE ASSESSEE S. THE HONBLE PUNJAB AND HARYANA HIGH COU R T IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) HAS HELD T H A T THE NEXUS BETWEEN THE IN T ER E ST BEARING FUN D S AND THE INTEREST FREE ADVANCES WILL HAVE TO B E P R OVED B EF ORE MAKING THE DISALLOWANCE OF INTEREST AND BRINGING IT TO TAX. WE FIND THAT NEITHER THE ASSESSING OFFICER NOR THE CIT(A) HA S EXAMINED THE ISSUE FROM THI S ANGLE. TH E R E FORE, THE ORDER S OF TH E CIT(A) AND T H E ASSESSING OFFICERS ARE SET ASIDE AND THE ISSUE IS REMITTED TO THE FILE O F THE ASSESSING OFFICER OF THE RESPECTIVE ASSESSEE S FOR DE NOVO CONSID E RATION IN THE LI G HT OF OUR OBSERVATIONS ABOVE. FURTHER, WE HOL D THAT IF THE AMOUNTS AD V ANCED TO M/S.SCSL BY THE RESPECTIVE ASSESSEE S ARE FROM THEIR OWN FUNDS, THE N THE INTER E ST EXPENDITURE 10 ITA NOS. 1852 TO 1855 /HYD/2013 M/S. BANGANGA AGRO FARMS PRIVATE LTD., HYDERABAD CANNO T BE DI S ALLO W ED AND BROUGHT TO TAX. NEEDLESS TO MENTION THAT THE ASSESSING OFFICER SHALL GIVE FAIR OPPORTUNITY OF HEARING TO THE ASSESSEES BEFORE PASSING ANY ORDERS IN THE LIGHT OF OUR ABOVE OBSERVATIONS AND IN ACCORDANCE W ITH LAW. 1 5 . IN THE RESULT, ALL THE FOUR APPEALS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE COURT ON 1 ST M AY, 2014 SD/ - SD/ - (CHANDRA POOJARI) (P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER DT/ - 1 ST MAY, 2014 COPY FORWARDED TO: 1. M/S. BANGANGA AGRO FARMS PRIVATE LTD., H.NO.1 - 11 - 195, FLAT NO.503, VERMA KAMALA TOWERS, BEGUMPET, HYDERABAD 72. 2 . M/S. DHATU AGRO FARMS PRIVATE LTD., H - 17, FLAT NO.201,TULSI APARTMENTS, MADHURANAGAR, SR NAGAR, HYDERABAD 500 038. 3. M/S. MODESVARA GREE NFIELDS PVT. LTD., B - 55, 202, SAI VAISHNAVI VIHAR, VENGAL RAO NAGAR, HYDERABAD 500 038. 4. M/S. KOLAR GREENLAND PRIVATE LTD., H.NO.1 - 11 - 195, FLAT NO.503, SHAMLAL BUILDINGS, BEGUMPET, HYDERABAD 500 072 5. 6. 7. 8 DY. COMMISSIONER OF INCOME - TAX , CENTRAL CIRCLE 9, HYDERABAD (FOUR COPIES) COMMISSIONER OF INCOME - TAX(APPEALS) VII , HYDERABAD (FOUR COPIES) COMMISSIONER OF INCOME - TAX CENTRAL, HYDERABAD (FOUR COPIES) DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD (FOUR COPIES) B.V.S