The DCIT, Circle-1(1), Guntur V. Sri E Bapanaiah, Kolluru

ITA 240/VIZ/2003

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7067 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 6 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2001-2002
• Appeal Filed On: 13-06-2003
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHRIG S S GOPINATH
• Keywords: Bad and doubtful debts; TDS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI D.MANMOHAN, VICE P RESIDENT A ND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER I.T.A. NO.240/VIZAG/2003 ASSESSMENT YEAR :2001-2002 D.C.I.T., CIRCLE 1(1), SRI EDUPUGANTI BAP ANAIAH GUNTUR VS. KOLLUR (PAN NO.AAAHE 0505 N) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRIG.S.S. GOPINATH, DR RESPONDENT BY: SHRI P. BALA SRINIVAS, C A C.O. NO.58/VIZAG/200 4 ( IN I.T.A. NO.240/VIZAG/2003) ASSESSMENT YEAR :2001-2002 SRI EDUPUGANTI BAPANAIAH D.C.I.T., CIRCLE 1(1), KOLLUR VS. GUNTUR (PAN NO.AAAHE 0505 N)) (CROSS-OBJECTOR) (RESPONDENT) CROSS-OBJECTOR BY: SHRI P. BALA SRINIVAS , CA RESPONDENT BY: SHRIG.S.S. GOPINATH, D R ORDER PER SHRI B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJEC TION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 17.4. 2003 PASSED BY LD CIT(A), GUNTUR AND THEY RELATE TO THE ASSESSMENT YEAR 2001- 02. 2. THE INTEREST INCOME OF RS.11,91,314/- ASSESS ED BY THE AO, HAVING BEEN DELETED BY THE LD CIT(A), THE REVENUE IS IN APPEAL BEFORE US. THE ASSESSEE IS SUPPORTING THE ORDER OF LD CIT(A) BY FILING THE CRO SS OBJECTION. ITA 240/V/2003 2 3. THE FACTS ARE STATED IN BRIEF. THE ASSESSEE MADE A DEPOSIT OF RS.40.00 LAKHS ON 28.7.1997 IN THE FIXED DEPOSIT (CUMULATIVE) SCHE ME OF A FINANCE COMPANY NAMED M/S NAGARJUNA FINANCE LTD. (HEREINAFTER FINA NCE COMPANY). THE MATURITY DATE OF THE SAID DEPOSIT WAS 28.4.2001. S INCE THE DEPOSIT WAS MADE UNDER CUMULATIVE SCHEME, THE INTEREST ACCRUED ON THE SAID DEPOSIT IS PAYABLE ONLY ON THE DATE OF MATURITY. THE ASSESSEE FOLLOW ED MERCANTILE SYSTEM FOR THE PURPOSE OF OFFERING THE INTEREST ACCRUED ON THE ABO VE SAID DEPOSIT. ACCORDINGLY HE OFFERED THE INTEREST INCOME EVERY YEAR AS DETAILED BELOW, ON THE BASIS OF TDS CERTIFICATE SENT BY THE SAID COMPANY. ASSESSMENT YEAR INCOME OFFERED 1998-99 2,67,342 1999-00 9,07,836 2000-01 10,10,016 HOWEVER, THE ASSESSEE DID NOT OFFER ANY INTEREST IN COME FOR THE ASSESSMENT YEAR 2001-02. IN THIS REGARD, THE ASSESSEE ATTACHED FOL LOWING NOTE TO THE RETURN OF INCOME FILED BY HIM FOR THE ASSESSMENT YEAR 2001-02 . .. THE COMPANYS FINANCIAL POSITION IS IN VERY B AD SHAPE. THE SHARE OF THE COMPANY IS NOT QUOTING IN STOCK EX CHANGES. THE COMPANY IS NOT ABLE TO REPAY THE MATURED FIXED DEPO SITS TO THE CUSTOMERS AND OBTAINED EXTENSION OF TIME TO REPAY T HE MATURED FIXED DEPOSITS FROM THE COMPANY LAW BOARD. RECENTL Y, RESERVE BANK OF INDIA HAS REJECTED THE APPLICATION FILED BY M/S NFL TO CARRY ON THE BUSINESS OF NON-BANKING FINANCIAL INSTITUTIO NS. OUR FIXED DEPOSIT WAS MATURED ON 28-04-2001. SO FAR, WE HAVE NOT RECEIVED ANY AMOUNT OR COMMUNICATION FROM THE COMPANY. WE H AVE SENT A NOTICE TO THE COMPANY THROUGH OUR ADVOCATE FOR REPA YMENT OF OUR FIXED DEPOSIT. WE HAVE NOT RECEIVED ANY REPLY FROM THE COMPANY TO OUR NOTICE. IN THE ABOVE CIRCUMSTANCES, IT IS D OUBTFUL WHETHER WE WILL GET BACK AT LEAST OUR PRINCIPAL AMOUNT. THE C OMPANY HAS NOT SENT THE INTEREST ACCRUAL CERTIFICATE OR TDS CERTIF ICATE FOR THE AY 2001-02. SINCE GETTING BACK THE PRINCIPAL AMOUNT I TSELF IS DOUBTFUL, WE ARE NOT OFFERING ANY INTEREST ON ACCRUAL BASIS F OR THE AY 2001-02 ON THE ABOVE FIXED DEPOSIT. IF AT ALL WE RECEIVE TH E INTEREST IN FUTURE, WE WILL OFFER IT AS INCOME IN THE YEAR OF R ECEIPT. ITA 240/V/2003 3 4. THE AO DID NOT ACCEPT THE EXPLANATIONS OF THE ASSESSEE AND BY PLACING HIS RELIANCE ON THE FOLLOWING CASE LAW, ESTIMATED THE I NTEREST INCOME AT RS.11,91,314/- AND ASSESSED THE SAME. (A) CIT V CHUNILAL V MEHTA & CONS (P) LTD. : (82 ITR 54)(SC) (B) M/S ED SASOON & COMPANY LTD. V CIT : (26 ITR 27)(SC) (C) CIT V ABV GOWDA : (157 ITR 697)(KAR) (D) CIT V GOVIND PRASAD PRABHUNATH : (171 ITR 417)(ALL) (E) WESTERN INDIA OIL DISTRIBUTING COMPANY V CIT: (206 ITR 359)(BOM) (F) STATE BANK OF TRAVANCORE V CIT : (158 ITR 102)(SC) 5. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE LD CIT(A). THE FIRST APPELLATE AUTHORITY TOOK THE VIEW THAT THE AS SESSEE DID NOT EARN ANY REAL INCOME DURING THE YEAR TO THE EXTENT OF THE DISPUTE D SUM. ACCORDINGLY LD CIT(A) DELETED THE INTEREST INCOME ASSESSED BY THE AO. 6. WE HAVE HEARD THE PARTIES AND ALSO PERUSED TH E RECORD. WE NOTICE FOLLOWING FACTS FROM THE ASSESSMENT ORDER:- (A) BEFORE THE AO, IT WAS EXPLAINED THAT THE FINANCE CO MPANY WAS NOT ABLE TO REPAY THE FIXED DEPOSITS TO THE CUSTOMERS AND HE NCE THE COMPANY OBTAINED EXTENSION OF TIME TO REPAY THE MATURED DEP OSITS FROM THE COMPANY LAW BOARD (CLB) AND THE CLB, VIDE ITS ORDER DATED 29-02-2000 DIRECTED THE COMPANY TO REPAY THE DEPOSIT ALONG WIT H INTEREST WITHIN 36 MONTHS IN THREE ANNUAL INSTALMENTS. THIS SUBMISSIO N OF THE ASSESSEE SHOWS THAT THE COMPANY HAS DEFAULTED EVEN DURING TH E FINANCIAL YEAR RELEVANT TO THE ASST. YEAR 2000-01 ALSO. IT IS TO B E NOTED THAT THE ASSESSEE HAS OFFERED INTEREST INCOME OF RS.10,10,01 6/- DURING THE ASSESSMENT YEAR 2000-01. (B) THE ASSESSEE HAS SENT A LEGAL NOTICE TO THE FINANCE COMPANY THROUGH HIS ADVOCATE WITH REGARD TO THE REPAYMENT OF THE DE POSIT. LD CIT(A) HAS OBSERVED THAT THE ASSESSEE ALSO MOVED THE COMPA NY LAW BOARD AND THE CLB, VIDE ITS ORDER DATED 21.8.2001, DIRECT ED THE FINANCE ITA 240/V/2003 4 COMPANY, WITHIN 30 DAYS FROM THE DATE OF RECEIPT OF THE ORDER, TO PAY 30% OF THE DEPOSIT AMOUNT TOGETHER WITH INTEREST AT THE CONTRACTED RATE UP TO THE DATE OF MATURITY, AND THEREAFTER, TILL TH E DATE OF ACTUAL REPAYMENT AT THE RATE OF 14.5%. IF THE COMPANY FAIL S TO ADHERE TO THE ORDER OF THE CLB, THE ASSESSEE WAS GIVEN LIBERTY TO MOVE THE COURT. THUS THE ASSESSEE WAS SEEKING LEGAL REMEDY ONLY BEC AUSE OF THE RIGHT ACCRUED TO HIM OVER THE INTEREST AMOUNT. 7. THE SUBMISSION OF THE LD AR WAS THAT THE ABO VE SAID FINANCE COMPANY HAS FAILED TO HONOUR THE ORDERS OF THE COMPANY LAW BOA RD AND TILL DATE THE ASSESSEE HAS NOT RECEIVED THE INTEREST AND PRINCIPAL PORTION . ACCORDINGLY LD AR CONTENDED THAT THE IMPUGNED INTEREST IS NOT ASSESSABLE SINCE IT NEVER ACCRUED TO THE ASSESSEE. ON THE CONTRARY, LD DR SUBMITTED THAT TH ERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE FOLLOWED MERCANTILE S YSTEM OF ACCOUNTING IN THE EARLIER YEARS. ACCORDING TO HIS METHOD OF ACCOUNTI NG, THE IMPUGNED INTEREST INCOME IS ASSESSABLE DURING THE YEAR UNDER CONSIDER ATION AND HENCE THE AO IS RIGHT IN ASSESSING THE SAME IN THE HANDS OF THE ASS ESSEE. SINCE THE IMPUGNED INTEREST HAS ALREADY ACCRUED IN THE HANDS OF THE AS SESSEE, THE LD DR CONTENDED THAT THE LD CIT(A) IS NOT CORRECT IN LAW IN APPLYIN G THE REAL INCOME PRINCIPLE TO GRANT RELIEF TO THE ASSESSEE. 8. LD AR RELIED UPON THE DECISION OF HONBLE MA DRAS HIGH COURT IN THE CASE OF CIT V JAYALAKSHMI TRADING COMPANY (1999) 214 ITR 66 0. IN THAT CASE, THE ASSESSEE DID NOT ACCOUNT FOR INTEREST ACCRUED ON TH E LOANS WHICH HAVE BECOME STAGNANT. THE SAID SYSTEM WAS ACCEPTED BY THE DEPA RTMENT IN EARLIER YEARS. ACCORDINGLY THE HIGH COURT HELD THAT THE INCOME IS NOT ASSESSABLE ON SUCH LOANS ON ACCRUAL BASIS. THE FACTS OF THE SAID CASE BEING ENTIRELY DIFFERENT, IN OUR OPINION, THE ASSESSEE COULD NOT PLACE HIS RELIANCE ON THE ABOVE SAID CASE LAW. BY PLACING RELIANCE ON THE ACCOUNTING STANDARD -9 REV ENUE RECOGNITION ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, LD AR SUBMITTED THAT THE REVENUE RECOGNITION SHOULD BE POSTPONED IF THERE IS UNCERTA INTY OVER ITS REALIZATION. ITA 240/V/2003 5 HOWEVER THE MATERIAL DATE FOR THE INSTANT ASSESSMEN T YEAR IS 31.3.2001. IT WAS NOT SHOWN THAT ON THAT DATE THERE WAS UNCERTAINTY O VER THE REALIZATION OF THE INTEREST. FURTHER THE ASSESSEE STARTED PURSUING TH E LEGAL REMEDY FOR THE REALIZATION OF THE IMPUGNED INTEREST ALSO. HENCE, IN OUR OPINION, THE ASSESSEE CANNOT HAVE RECOURSE TO THE ACCOUNTING STANDARD 9, REFERRED SUPRA. 9. THE LD CIT(A) HAS GONE BY THE REAL INCOME PRINCIPLE TO GRANT RELIEF TO THE ASSESSEE. HOWEVER, THE FACT REMAINS THAT THE SINCE FINANCE COMPANY HAS DEFAULTED IN MAKING REPAYMENT OF THE DEPOSIT ALONG WITH INTEREST, THE ASSESSEE WAS PURSUING FOR THE RECOVERY BY INVOKING THE AVAIL ABLE LEGAL REMEDY. ACCORDINGLY THE ASSESSEE GOT AN ORDER FROM CLB FOR REPAYMENT OF DEPOSIT ALONG WITH INTEREST. THE CLB, IN ITS ORDER, HAS SPECIFICALLY MENTIONED T HAT THE ASSESSEE CAN SEEK LEGAL REMEDY IF THE IMPUGNED COMPANY FAILS TO HONOUR THE ORDER OF CLB. THE FINANCE COMPANY ALSO GOT PERMISSION FROM THE COMPANY LAW BO ARD FOR REPAYMENT OF MATURED DEPOSITS IN INSTALMENTS WAY BACK IN FEB., 2 000. THE ASSESSEE HAS OFFERED INTEREST INCOME FOR THE ASSESSMENT YEAR 200 0-01 EVEN THOUGH THE IMPUGNED COMPANY WAS IN TROUBLE IN THAT YEAR ALSO. 10. FIXED DEPOSITS ARE MADE WITH A COMPANY UNDER CERTAIN TERMS AND CONDITIONS. IT IS A CONTRACT BETWEEN THE COMPANY A ND THE DEPOSITOR. HENCE THE ASSESSEE COULD PURSUE THE LEGAL REMEDIES FOR RECOVE RY OF THE DEPOSIT MADE BY HIM. IN VIEW OF THE SAID CONTRACT ONLY, THE ASSESS EE HAS DECLARED INTEREST INCOME IN EARLIER YEARS ON ACCRUAL BASIS, EVEN THOUGH HE D ID NOT RECEIVE THE SAID INTEREST INCOME. HENCE THE ASSESSEE HAS GAINED AN ENFORCEAB LE RIGHT OVER THE FINANCE COMPANY FOR THE INTEREST ACCRUED ON THE DEPOSIT MAD E BY HIM. THE AO HAS EXTRACTED FOLLOWING OBSERVATIONS OF HONBLE SUPREME COURT IN THE CASE OF M/S ED SASSOON & COMPANY LTD. V CIT, SUPRA,:- IT IS CLEAR THEREFORE THAT INCOME MAY ACCRUE TO AN ASSESSEE WITHOUT THE ACTUAL RECEIPT OF THE SAME. IF THE ASSE SSEE ACQUIRES A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM, THOUGH IT MAY BE RECEIVED LATER ON. THE BA SIC CONCEPTION IS THAT HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE I NCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBODY. UNLESS AND UNTIL THERE ITA 240/V/2003 6 IS CREATED IN FAVOUR OF THE ASSESSEE, A DEBT DUE BY SOMEBODY, IT CANNOT BE SAID THAT HE HAS ACQUIRED A RIGHT TO RECE IVE THE INCOME OR THAT THE INCOME HAS ACCRUED TO HIM. 11. THE LD CIT(A) HAS EXTRACTED FOLLOWING OBSER VATIONS OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF JAYALAKSHMMI TRADING CO., SUPRA, WHICH CASE LAW WAS RELIED UPON BY THE ASSESSEE, THE TAXABLE INCOME HAS TO BE REACHED IN ACCORDANC E WITH THE PROVISIONS OF THE I.T. ACT. IN A CASE WHERE THE INCOME HAS ACCR UED BUT ITS RECEIPT HAS BEEN DELAYED THERE MAY BE JUSTIFICATION FOR THE DEPARTME NT TO INCLUDE THE SAME IN THE TAXABLE INCOME. THIS, HOWEVER, CAN BE DONE ONLY IF THE INCOME HAS REALLY ACCRUED OR ARISEN TO THE ASSESSEE AND NOT OTHERWISE. 12. THE LD DR RELIED UPON THE DECISION OF ITAT CHENNAI BENCH IN THE CASE OF JCIT V INDIA EQUIPMENT LEASING LTD. (2007) 111 ITD 3 7. THE TRIBUNAL AT PARA 24 HAS OBSERVED AS UNDER:- FURTHER IT HAS BEEN SUBMITTED THAT WHEN THERE WAS UNCERTAINTY OF RECOVERY, THE CONCEPT OF REAL INCOME IS TO BE APPLI ED AND THEREFORE, NO INCOME HAS ACCRUED TO THE ASSESSEE IN VIEW OF TH E DECISION OF HONBLE SUPREME COURT IN THE CASE OF GODHRA ELECTRI CITY CO. LTD. VS. CIT (1997) (225 ITR 746 ). THIS CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. HONBLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK VS. CIT (1999) 156 CTR (SC) 380; (1 999) 240 ITR 355 (SC) HELD THAT THE CONCEPT OF REAL INCOME IS CE RTAINLY APPLICABLE IN JUDGING WHETHER THERE HAS BEEN INCOME OR NOT, BU T, IN EVERY CASE, IT MUST BE APPLIED WITH CARE AND WITHIN THEIR RECOG NIZED LIMITS. RBI HAS ISSUED GUIDELINES NON ONLY IN THE CASE OF NBFCS BUT ALSO IN THE CASE OF BANKS. THE BANKS WERE CREDITING THE INTERE ST ON BAD AND DOUBTFUL DEBTS TO STICKY LOAN ACCOUNTS BUT THE INTE REST ACCRUED ON SUCH ASSETS WAS NOT CREDITED TO P & L A/C. PRIOR TO INSERTION OF S. 43D, SUCH INTEREST WAS ASSESSED TO TAX AS REQUIRED BY CI RCULAR DT. 9 TH OCT., 1984. SINCE THE ASSESSEE IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING, THE INTEREST HAS ACCRUED ON NPAS. (NON PERFORMING ASSETS). MERELY BECAUSE RBI HAS ISSUED GUIDELINES, IT WILL NOT BE PROPER TO HOLD THAT INTEREST HAS NOT ACCRUED. 13. IN VIEW OF THE FOREGOING DISCUSSIONS, IN OU R OPINION, THE ASSESSEE HAS GAINED AN ACTIONABLE RIGHT TO RECEIVE THE INTEREST INCOME THAT ACCRUED DURING THE YEAR UNDER CONSIDERATION. HENCE, IN OUR OPINION, T HE ASSESSING OFFICER IS RIGHT IN ASSESSING THE INTEREST INCOME THAT HAS ACCRUED ON T HE FIXED DEPOSIT MADE BY THE ASSESSEE WITH THE FINANCE COMPANY. ACCORDINGLY WE REVERSE THE ORDER OF LD ITA 240/V/2003 7 CIT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFIC ER. SINCE THE FIXED DEPOSITS ARE MADE UNDER A CONTRACT WITH A PREDETERMINED INTE REST RATE, THE ASSESSEE SHOULD BE AWARE OF THE AMOUNT OF INTEREST THAT HAS ACTUALLY ACCRUED TO HIM DURING THE INSTANT YEAR. AS THE ASSESSEE HAS FAILED TO SU BMIT THE CORRECT FIGURE OF INTEREST INCOME, THE AO HAS ESTIMATED THE INTEREST @ 20% OF THE OUTSTANDING DEPOSIT AMOUNT. IN THE INTEREST OF SUBSTANTIAL JUS TICE, WE DIRECT THE ASSESSEE TO FURNISH THE CORRECT AMOUNT OF ACCRUED INTEREST TO T HE ASSESSING OFFICER AND THE ASSESSING OFFICER, ON BEING SATISFIED WITH THE INFO RMATION FURNISHED BY THE ASSESSEE, IS DIRECTED TO SUBSTITUTE THE SAME TO THE ESTIMATE MADE BY HIM. 14. IN THE RESULT, THE APPEAL FILED BY THE REVE NUE IS ALLOWED AND THE CROSS- OBJECTION OF THE ASSESSEE IS DISMISSED. PRONOUNCED ACCORDINGLY ON 04-03-2010. SD/- SD/- (SUNIL KUMAR YADAV) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 4 TH MARCH, 2010 COPY TO 1. THE D.C.I.T., CIRCLE 1(1), GUNTUR 2. SRI EDUPUGANTI BAPANAIAH, KOLLUR, KOLLUR MANDAL, TENALI TALUK, GUNTUR DIST. 3. THE COMMISSIONER OF INCOME TAX, GUNTUR 4. THE COMMISSIONER OF INCOME TAX (APPEALS), GUNTUR 5. THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., VISAKH APATNAM. 6. GUARD FILE BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM