The DCIT, Central Circle-1(4), Ahmedabad V. Safari Biotech Pvt. Ltd., Ahmedabad

ITA 284/AHD/2021

AI Insights

The case involves the Deputy Commissioner of Income-tax, Central Circle-1(4), Ahmedabad as the appellant and M/s. Safari Biotech Pvt. Ltd. as the respondent. The core issue was the disallowance of interest expenses amounting to Rs.5,72,21,840 under Section 36(1)(iii) of the Income Tax Act, 1961, by the Assessing Officer, which was later deleted by the CIT(A). The Revenue appealed against this deletion, arguing that the CIT(A) erred in applying AS-9, which allowed for the recognition of interest income only when it was certain to be collected, contrary to the mercantile system of accounting followed by the assessee. The Tribunal examined whether the CIT(A) correctly applied AS-9 in the context of the mercantile system of accounting and the specific circumstances of the case.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134491 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 12-04-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 31-10-2021
• Other Referred Cases: Maruti Securities Ltd. (ITA No. 468/Hyd/2009)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Notional interest
• Section: 13; 20

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद ायपी ‘बी’ अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE MRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No. 284/Ahd/2021 िनधा榁रणवष榁/Assessment Year: 2015-16 Dy. Commissioner of Income-tax, Central Circle-1(4), Ahmedabad Vs. M/s. Safari Biotech Pvt. Ltd., 1/B, Natraj Society, Gulbai Tekra, Ambawadi, Ahmedabad PAN : AAJCS 5842 C अपीलाथ牸 अपीलाथ牸अपीलाथ牸 अपीलाथ牸/ (Appellant) 灹瀄 灹瀄 灹瀄 灹瀄 यथ牸 यथ牸यथ牸 यथ牸/ (Respondent) Assessee by : Shri P.D. Shah, AR Revenue by : Shri Sudhendu Das, CIT-DR सुनवाई क琉 तारीख/Date of Hearing : 13.04.2023 घोषणा क琉 तारीख /Date of Pronouncement: 12.07.2023 आदेश आदेशआदेश आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: The present appeal has been filed by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-11, Ahmedabad [hereinafter referred to as “CIT(A)” for short] dated 13.08.2021 passed under Section 250(6) of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short] for the Assessment Year (AY) 2015-16. 2. The grounds raised are as under: “1. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the disallowance u/s 36(1)(iii) of Rs.5,72,21,840/- following AS-9, without appreciating the fact that the assessee was following Mercantile System of Accounting hence the interest income accrued on the advances is taxable. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.” 2 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 3. As is evident from the above, the grievance of the Revenue is relating to the deletion by the Ld.CIT(A) of the disallowance made by the Assessing Officer (AO) of Rs.5,72,21,840/- under Section 36(1)(iii) of the Act. And as transpires from the grounds raised before us, the Revenue is aggrieved by the deletion of disallowance for the reason that the ld. CIT(A) has allowed application of Accounting Standard (AS)-9 for accounting income being interest accrued on advances , without ,allegedly, appreciating the fact that the assessee was following Mercantile System of Accounting . Therefore the narrow compass in which the issue for adjudication before us can be put is whether the Ld.CIT(A) has rightly held AS-9 applicable to accounting for income earned from advances, while deleting the disallowance of interest made by the AO u/s 36(1)(iii) of the Act . 4. The facts relating to the issue, as transpires from the orders of the authorities below, are that the Assessing Officer made disallowance of interest expenses incurred by the assessee under Section 36(1)(iii) of the Act amounting to Rs.5,72,21,840/- noting that while the assessee had taken huge amount of unsecured loans and claimed interest expenditure to the tune of Rs.8,15,65,221/-, it had advanced loans to parties ,either charging no interest thereon or charging nominal rate of interest. With respect to the following parties, the Assessing Officer noted that on the loans advanced to them by the assessee, though interest was agreed to be charged at the rate of 10/12%, the assessee had charged interest at very nominal rate:- Name of the party Average amount of loan Interest credited by the assessee Rate of interest Actual interest due Difference Icon Infrastructure [12%] 99400000 3000000 12 11928000 8928000 Prime Housing 50948904 1350000 12 6113868 4763868 Siwana Agri Marketing Ltd 67136035 149823 10 6713603 6563780 Total suppressed interest 20255648 3 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 4.1 With respect to the following advances, the Assessing Officer noted that the assessee had charged no interest at all:- Name of the party Average amount of loan Interest credited by the assessee Interest @ 12% Difference Arihant Estates Pvt. Ltd. 22350219 - 2682026 2682026 Dhaval Vijay Kamdar 71514478 - 8581737 8581737 Mihirbhai Desai 17182329 - 2061879 2061879 Shukan Corporation P. Ltd 29650000 - 3558000 3558000 Shukan Finance & Investment Services 2036505 - 244380 244380 Shukan Palace Infrastructure 101660000 - 12199200 12199200 Vijay C Kamdar 63658089 - 7638970 7638970 Total 308051620 - 36966192 36966192 4.2 Accordingly, the short interest charged by the assessee and the interest not charged by the assessee amounting in all to Rs.5,72,21,840/- ( Rs. 20255648 +Rs. 36966192) was treated as amount to be disallowed under Section 36(1)(iii) of the Act. 5. The ld. CIT(A) deleted the disallowance finding merit in the reasoning given by the assessee before it for the short charging of interest or non- charging of interest on the impugned advances, as there was no possibility of collecting the same since the principal amount of advance itself was overdue and not being collected . That therefore the assessee had stopped charging interest on the same or was booking only the amount of interest actually received from the said parties. The assessee had contended that as per AS-9 only income which was certain for recovery could be recognized as revenue. With respect to each party the assessee gave explanation for short charging/non charging of interest. The contention of the assessee in this regard are reproduced at page nos. 25 to 28 of the ld. CIT(A)’s order as under:- 4 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 “a) Arihant Estates Private Limited- During the course of business to earn interest income, the appellant has advanced loan of Rs. 2,00,00,061/- to the said party during Feb 13 and March 13 and the company has also booked interest income on such advances during F.Y. 2012-13 and F.Y. 2013-14. However due to financial crises of the said company, there was no recovery up to FY 2014- 15 of the said interest income. In the subsequent years the appellant could recover only the principal amount and interest for F.Y. 2012-13 only. Interest of F.Y. 2013-14 could not be recovered till date. In view of said facts and circumstances and on prudence basis the appellant had not recognized interest income on the said advances during FY 2014-15. In support of the contention, the copy of ledger accounts were submitted. b) Dhaval Vijay Kamdar and Vijay C Kamdar- During the course of business to earn interest income, the appellant had granted advances to the above assessees in January 2013. However at the time of granting advances to secure the advances given, appellant company has entered into an agreement to acquire the flats mortgaged in case the above parties defaults in repayment of the advances. Initially on the said advances the appellant has received interest income up to F.Y. 2012-13. Thereafter, the appellant has also booked interest income for the F.Y. 2013- 14 but the same was not received. As the assesses have defaulted in repayment of interest and principal amount, the flats mortgaged against such advances were acquired by the appellant company and purchase deed was executed. In view of said facts and circumstances and prudence norm the appellant has not recognized interest income on the said advances during FY 2014-15. In support of contention, the copy of ledger accounts were submitted. c) Mihirbhai Desai- During the course of business to earn interest income, the appellant had granted advances to the above assessee and had also earned interest income on the same in the earlier years. Later the above party has defaulted in payment of interest. After a strong follow up for recovery the appellant could recover Principal portion in the current and subsequent year and had to reverse part of the unrecovered interest pertaining to F. Y. 2013- 14. Copy of ledger account was submitted in support. In view of above facts and circumstances and prudence norm the appellant has not recognized interest income on the said advances. 5 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 d) Shukan Corporation Private Limited- The appellant company has made payment for 20 units in Shukan Smile City project to Shukan Corporation Private Limited. Against the said advances only 10 units were allotted to the appellant and against the remaining advance for 10 units neither units were allotted, nor the amount has been refunded back to appellant till date. Granting of such advance was not a loan transaction to earn interest income but it is advance for purchase of flats. The said fact is also reflected in note no. 13.08 of the financial statements. Accordingly, no such interest income arises on such advance. Copy of ledger account is submitted in support. Interest free fund at the time of such advance is Rs. 2,02,17,748/-. Accordingly, the action of AO in disallowing of interest expense on account of non- charging of interest on such advances is bad in law. e) Shukan Finance & Investment Services- The appellant company has advanced loan to the company during F.Y. 2012- 13 and 2013-14 and has shown interest income up to 2012-13. However the assessee has not received interest for the F.Y. 2012-13 and the principal amount till date. Copy of ledger account is submitted in support. In view of above facts and circumstances and prudence norm the appellant has not recognized interest income on the said advances f) Shukan Palace Infrastructure- The appellant company has advanced Rs. 20 Crores in September 2012 against mortgage of land on which the partners of the partnership have decided to build a scheme of 20 bungalows and with a condition that interest on the said advances will be paid monthly. The appellant company received interest regularly on the said advances till December 2013. But from January 2014 the cheques received from the party were dishonored and the party started defaulting in repayment of interest and principal. Also the partners of the firm have sold all the bungalows under the scheme without getting the consent of the appellant company. So the appellant company decided to take legal action against Shukan Palace Infrastructure and filed FIR with Police. The said facts were also published in one of the Gujarati Newspaper. In view of above facts and circumstances and prudence norm the appellant has not recognized interest income on the said advances. Further 6 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 the amount of Rs. 10.16 Crores outstanding since April 2014 is outstanding till date also. Copy of ledger account is submitted in support. Accordingly, the action of AO in disallowing of interest expense on account of non-charging of interest on advances is not as per law. g) Icon Infrastructure- The appellant has granted loan to Icon Infrastructure against mortgage of land in the normal course of its business. In the initial years the appellant received regular interest income on monthly basis. But during the year under consideration the assessee defaulted in payment of interest. So according to prudence norm the appellant has recognized interest income to the extent received by it i.e Rs. 30,00,000/-. As the assessee defaulted in repayment of interest income and principal amount in A.Y. 2016-17 the appellant has purchased the land which was earlier mortgage with the appellant. Copy of ledger account is submitted in support. h) Prime Housing- The appellant company has advanced Rs. 5,00,00,000/- in February 2013 and has earned interest income up to F. Y. 2013-14 on regular basis. However in F.Y. 2014-15 the company received only part interest of Rs. 13,50,000 and after that prime Housing defaulted in repayment of interest. Later the party has defaulted in payment of interest and principal and the said amount is outstanding till date. Copy of ledger account is submitted in support. In view of above facts and circumstances and prudence norm the appellant has not recognized interest income on the said advances. i) Siwana Agri Marketing Limited - During the course of assessment proceedings the appellant has stated that it has charged erroneously assumed that the average amount of loan advanced during the year was Rs. 6, interest income of Rs. 1,49,823/- @ 10% from Siwana Agri Marketing Limited. However the AO has 71,36,035/- and has accordingly disallowed interest expense of Rs. 65,63,780/- . However, the appellant submitted the copy of the account of the above assessee in its books of account which is a current account i.e. the debit and credit balances change on regular basis and accordingly interest is to be calculated. The appellant also submitted calculation of interest @ 10% from tally software and submitted that the appellant has charged proper interest only and there is no case of charging of interest at lower rate. 7 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 8.1 In view of the above facts, the appellant submitted that as per the accounting policies, inter alia laid the following rules for "Revenue recognition" “Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured." 2) Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions a. The revenue is measurable b. The revenue is collectable with certainty. 3) When the principal itself is overdue and not collected, there is no basis for making out a case that interest income would be collectable with certainty. 4) Regarding the disputed advances appropriate disclosures were also made in the financial statements. 5) In support of above contention reliance has been placed on the Judgment of Hon’ble Hyderabad Tribunal in the case of Maruti Securities Ltd. (ITA No. 468/Hyd/2009) wherein the Hon’ble ITAT has deleted the addition of notional interest income.” 5.1 The findings of the ld. CIT(A), after noting the above contentions of the assessee as above, at paragraph no. 8.2 of his order are as under:- “8.2 In view of above facts and circumstances action of AO in disallowing of interest expense on account of non-charging of interest and also taxing the differential interest rate is not in accordance with provisions of law. Since the appellant is granted the business advances as per its mandate and accordingly non-charging of interest of lower rate of interest charged as per the facts of each of the borrowers is justified. Further, the notional interest income could be brought to tax as per the decisions/judgements of the Hon dig Court. The AO’s objection that the appellant has carried out the finance business without the NBFC approval. In this regard, it has been noticed that the appellant has submitted that it had the registration certificate issued by the Govt. of Gujarat. However, the AO has not rebutted the authenticity of this registration certificate. Moreover, the disallowance of interest on the above reasons could not be based upon the finding that the appellant did not have any certificate from RBI to carry out the NBFC business. If at all as per the 8 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 view of the AO, the appellant was not authorized to carry out such finance business, even then the disallowance of interest could not be contemplated irrespective of any breach of law if any on the part of the appellant. In view of the above discussion, the disallowance of interest made by the AO is deleted.” 6. As is evident from the above, the ld. CIT(A) took note of the principle for recognition of revenue laid down by the Accounting Standard-9 of ICAI that revenue shall be treated as accrued only when it is measurable and collectable with certainty. Applying this principle to the facts of the case before it, where the assessee had demonstrated that the recovery of loans/ advances itself was not being made in the impugned cases and therefore the assessee had accounted for the interest income earned on these advances as per Accounting Standard-9, only when there was certainty in collection of the revenue. 6.1 The grievance of the revenue before us in the grounds raised is that the AS-9 has been incorrectly applied by the ld. CIT(A) for deleting disallowance under Section 36(1)(iii) of the Act and since the assessee was following Mercantile System of Accounting therefore the entire interest income ought to be treated as accrued and disallowance made of the entire interest income accrued as done by the Assessing Officer. 6.2 We find no merit in this contention of the Revenue since it is a self- defeating argument. AS-9, issued by the Institute of Chartered Accountants of India, which is the parent body of the Chartered Accountant professionals, guiding and governing the professionals, prescribes manner of recognition of Revenue and it categorically states that revenue can be said to be accrued only when there is certainty of collection of the same. Therefore, where there is no certainty of collection, revenue cannot be said to 9 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 be accrued at all. Therefore, as per the Mercantile System of Accounting also, which follows accrual method of accounting, where there is no certainty of collection of revenue, income cannot be recognized. AS-9 is for the purpose of accounting for income on mercantile basis only. Therefore, the contention of the ld. DR that AS-9 had been incorrectly applied by the ld. CIT(A), while the mercantile system should have been applied is completely contradictory contention. Since the revenue has not challenged before us the facts appreciated by the ld. CIT(A) that the recovery of interest on the impugned advances given by the assessee had become virtually impossible since the said parties were not paying back the principal amount also for the very long time and there is no dispute with the interpretation of AS-9 by the ld. CIT(A) also that revenue is to be recognized only when there is certainty of collection, we do not find any infirmity in the order of the ld. CIT(A) in holding that the short charging of interest on certain loan/advances given by the assessee and also non-charging of interest on certain other loans/advances was as per the Mercantile System of Accounting; and, therefore, there was no case for making any disallowance under Section 36(1)(iii) of the Act. The appeal filed by the Revenue is accordingly dismissed. 7. In effect, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 12/07/2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad; Dated 12/07/2023 **bt 10 ITA No. 284/Ahd/2021 DCIT Vs. Safari Biotech Pvt Ltd AY : 2015-16 आदेश आदेशआदेश आदेश क琉 क琉क琉 क琉 灹ितिलिप 灹ितिलिप灹ितिलिप 灹ितिलिप अ灡ेिषत अ灡ेिषतअ灡ेिषत अ灡ेिषत/Copy of the Order forwarded to : 1. अपीलाथ牸 अपीलाथ牸अपीलाथ牸 अपीलाथ牸 / The Appellant 2. 灹瀄यथ牸 灹瀄यथ牸灹瀄यथ牸 灹瀄यथ牸 / The Respondent. 3. संबंिधत संबंिधतसंबंिधत संबंिधत आयकर आयकरआयकर आयकर आयु猴 आयु猴आयु猴 आयु猴 / Concerned CIT 4. आयकर आयकरआयकर आयकर आयु猴 आयु猴आयु猴 आयु猴)अपील अपीलअपील अपील (/ The CIT(A)- 5. िवभागीय िवभागीयिवभागीय िवभागीय 灹ितिनिध 灹ितिनिध灹ितिनिध 灹ितिनिध ,आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण,राजोकट राजोकटराजोकट राजोकट/DR,ITAT, Ahmedabad, 6. गाड榁 गाड榁गाड榁 गाड榁 फाईल फाईलफाईल फाईल /Guard file. आदेशानुसार आदेशानुसारआदेशानुसार आदेशानुसार/ BY ORDER, TRUE COPY सहायक सहायकसहायक सहायक पंजीकार पंजीकारपंजीकार पंजीकार (Asstt. Registrar) आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण ITAT, Ahmedabad 1. Date of dictation ......11.07.2023........ 1. Date on which the typed draft is placed before the Dictating Member :..... 12.07.2023.......... 2. Other Member......... 12.07.2023............... 3. Date on which the approved draft comes to the Sr.P.S./P.S..........12.07.2023................ 4. Date on which the fair order is placed before the Dictating Member for pronouncement.....12.07.2023. 5. Date on which the fair order comes back to the Sr.P.S./P.S...12.07.2023............. 6. Date on which the file goes to the Bench Clerk......12.07.2023....... 7. Date on which the file goes to the Head Clerk....... 8. The date on which the file goes to the Assistant Registrar for signature on the order............ 9. Date of Despatch of the Order..................