M/s Rajesh Exports Limited , Bangalore V. The Assistant Commissioner of Income Tax Central Circle-1(2), Bangalore

ITA 340/BANG/2023

AI Insights

The case involves M/s. Rajesh Exports Ltd., which appealed against the order of the CIT(A) upholding the AO's decision to add interest income from ICDs to the assessee's income for the Assessment Year 2015-16. The primary contention was whether the interest on ICDs had accrued and was taxable under the mercantile system of accounting. The Tribunal noted that similar issues had been previously addressed in the assessee's own case for earlier assessment years, where it was decided that the matter should be remanded to the AO for factual verification. The Tribunal found that the CIT(A) had incorrectly relied on a Supreme Court decision that was not applicable to the facts of this case.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124287 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-07-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 25-04-2023
• Other Referred Cases: Pr. Commissioner of Income Tax 6 vs Khyati Realtors Pvt. Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts; Tax effect; Provision of bad debts; Capital expenditure
• Section: 143(2); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 340/Bang/2023 Assessment Year : 2015-16 M/s. Rajesh Exports Ltd., No. 4, Batavia Chambers, Kumara Park Road, Kumara Park East, Bangalore – 560 001. PAN: AAACR8642N Vs. The Assistant Commissioner of Income Tax, Central Circle – 1(2), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Surya Tejas, Advocate Revenue by : Shri D.K. Mishra, CIT DR Date of Hearing : 25-07-2023 Date of Pronouncement : 25-08-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 22.02.2023 for A.Y. 2015-16 on following grounds of appeal: GROUNDS OF APPEAL Tax Effect relating to each Ground of appeal 1. The learned CIT(A) erred on facts and law in upholding the decision of the AO. General 2. The CIT(A) has upheld the decision of addition of interest when in fact the same was not accrued all and hence the addition is liable to be deleted. General Page 2 of 15 ITA No. 340/Bang/2023 3. The learned CIT(A) erred in upholding the decision of AO by addition of interest when the same was never accrued. Rs. 29,04,03,076/- 4. The learned CIT(A) failed to appreciate that the interest did not accrue since the ICDs were incapable of paying the interest. Rs. 29,04,03,076/- 5. The learned CIT(A) ought to have appreciated that the accrual of interest was not automatic and in the given circumstances no interest had accrued to the appellant and consequently no interest income was rightly offered to tax by the appellant. Rs. 29,04,03,076/- 6. The learned CIT(A) ought to have accepted the explanation offered by the appellant and ought to have refrained from upholding the impugned addition. Rs. 29,04,03,076/- 7. The learned CIT(A) has wrongly inferred that the appellant was using two systems of accounting for the same year. The appellant has done all its accounting only in mercantile accounting system. Rs. 29,04,03,076/- 8. The learned CIT(A) has not appreciated that the appellant had constructed all the accounts in the correct manner. The learned CIT(A) is incorrect in assuming that the accounting system was incorrect. Rs. 29,04,03,076/- 9. The learned CIT(A) has failed to appreciate that all the income either already accrued or to be accrued in future has been correctly and fully subjected to Tax. Rs. 29,04,03,076/- Page 3 of 15 ITA No. 340/Bang/2023 10. The entire order of the learned CIT(A) is relying on the judgment of the Hon'ble Supreme Court in the case of Pr. Commissioner of Income Tax 6 vs Khyati Realtors Pvt. Ltd. The learned CIT(A) has ignored the basic fact that the relied upon judgment is absolutely not applicable to the facts of the case of the appellant. General 11. The judgment of the Hon'ble Apex Court relied upon by the learned CIT(A) is with regard to provision of bad debts, which is not the case of the appellant. General 12. The learned CIT(A) has incorrectly pointed out that the appellant has not submitted the list of the Inter Corporate Deposits, the appellant has submitted all the details along with all documents including the Court documents to the learned Assessing Officer at the time of Assessment. General 13. The learned CIT(A) erred in sustaining the addition made by the learned AO when the income has not accrued nor was realised by the appellant and hence the said addition is bad in law and liable to be deleted. Rs. 29,04,03,076/- 14. The Hon'ble ITAT has set aside the addition made by the learned AO in exactly the same matter of the appellant for the A.Y 2009-10 to 2014- 15. The learned CIT(A) was duty bound to follow the orders of the Hon'ble ITAT. General 15. The learned CIT(A) erred in upholding the interest u/s 234D of the Act. ---- 16. For these and such other grounds that may be urged at the time of hearing the Appellant prays that the appeal may be allowed. General TOTAL TAX EFFECT Rs. 18,29,25,281/- Page 4 of 15 ITA No. 340/Bang/2023 2. At the outset, the Ld.AR submitted that there is delay of 2 days in filing the present appeal. 2.1 The assessee has filed condonation petition vide affidavit dated 24.05.2023 seeking the delay to be condoned. 2.2 The assessee has submitted as under: “3. In this connection it is brought to the notice of the Hon'ble Tribunal that the impugned order of the CIT(A) was received on 22/02/2023 and not on 2/2/2023 as stated in the Defect Notice e-mailed on 04.05.2023. Further, the appeal against the said order was filed on 25/04/2023 and not on 26/04/2023 as stated in the Defect Notice. The Tribunal has acknowledged the receipt of the appeal filed before it on 25.04.2023. Thus, there was delay of 02 days only and not 23 days as stated in the Defect Notice. There appears to be a typographical error which has crept in while the Defect Notice was issued. Therefore, the mistake which is apparent in the Defect Notice is required to be rectified. 4. Further, it is respectfully submitted that the delay of 2 days in filing the appeal has occurred on account of the fact that I was out of station in connection with business commitments even though the appeal was prepared in advance to be filed before the Tribunal and the appeal papers were kept ready for my signature and only on my return from out station, the appeal was signed by me and immediately without further loss of time the appeal was filed before the Tribunal on 25.04.23, causing a delay of 2 days. Thus, the delay in filing the appeal is not intentional and it was on account of bona fide reason stated above.” 2.3 In view of the above, the assessee could not file the appeal before this Tribunal well in time and by the time the appeal papers were prepared for filing, there arose delay of about 2 days in filing the present appeal before this Tribunal. The reason for the delay in filing the present appeal was due to reason beyond the control of the assessee. He thus prayed for the delay to be condoned. Page 5 of 15 ITA No. 340/Bang/2023 2.4 The Ld.DR though objected however could not controvert the reasoning given by the Ld.AR for the delay that was caused in filing the present appeal. We have perused the submissions advanced by both sides in the light of records placed before us. 2.5 In our opinion there is a sufficient cause for condoning the delay as observed by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 in support of his contentions. 2.6 It is also submitted by the Ld.AR that there is no malafide intention on behalf of assessee in not filing the present appeal within time. The Ld.DR on the contrary opposed the delay to be condoned. 2.7 Considering the circumstances under which the delay was caused in filing the present appeal before this Tribunal we are of the opinion that there was no malafide intention of the assessee in causing the delay to file the present appeal. It is also that nothing contrary could be established by the revenue before us. 2.8 We place reliance on following observations by Hon’ble Supreme Court in case of Collector Land Acquisition Vs. Mst. Katiji & Ors., reported in (1987) 167 ITR 471 wherein, Hon’ble Court observed as under:- “The Legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits". The expression “sufficient cause” employed by the Legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life-purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message Page 6 of 15 ITA No. 340/Bang/2023 does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that : 1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. ......................................................1.Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.” 2.9 Considering the submissions by both sides and respectfully following the observation by Hon’ble Supreme Court, we find it fit to condone the delay caused in filing the present appeal as it is not attributable to the assessee. Accordingly, the delay in filing the present appeal stands condoned. 3. Brief facts of the case are as under: 3.1 Assessee filed its return of income on 30.09.2015 declaring total income of Rs.330,33,40,230/-. The case was selected for scrutiny and notices u/s. 143(2) of the act was issued in response to which representative of assessee filed necessary details as called for. The Ld.AO noted that there was a specified domestic transaction between assessee and its AE and accordingly a reference was made to the transfer pricing officer. The Ld.TPO passed u/s. 92CA of the act determining no additions to the arms length price. The Ld.AO thereafter while scrutinising the proceedings and the documents filed, observed Page 7 of 15 ITA No. 340/Bang/2023 that assessee has advanced loans to various individuals and companies as inter corporate deposits. It was noticed by the Ld.AO that interest income accrued to assessee against such ICDs did not reflect in the P&L account. The Ld.AO tabulated the details as under: AY Amount of interest income (Rs.) 2009-10 14,72,595 2010-11 28,79,68,656 2011-12 29,73,46,928 2013-14 43,72,04,622 2014-15 45,02,26,725 2015-16 29,04,03,076 3.2 The Ld.AO also noted that assessee was not following the mercantile system of accounting in regards to ICDs. However in respect of the overall business, assessee followed mercantile system. The Ld.AO thus rejected such system of accounting and called upon assessee to explain as to why the accrued interest on the ICDs for the year under consideration should not be denied. The assessee filed various details in respect of the same and after considering the same, the Ld.AO denied the claim of assessee by observing as under: “The procedure to claim bad debt is by disclosure in the profit & loss account by way of writing off a debt as an expenditure corresponding to an amount which has been already offered as an income in the same or an earlier previous year. The assessee has not disclosed the same in the profit & loss account either this year or in any of the earlier years. Therefore, the assessee's claim of bad debt is disallowed and the accrued interest of Rs. 29,04,03.076/- is added to the total income of the assessee.” Page 8 of 15 ITA No. 340/Bang/2023 3.3 Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) upheld the order of the Ld.AO by observing as under: “5.4 From the above judgement it is clear that unless proper accounting of bad debts amount is done. It is not allowable as bad debt merely because the appellant has made such a claim in the relevant previous year. During the course of appellate proceedings the appellant has also not provided the breakup of inter corporate deposit which are litigated and which are not litigated. The appellant has also not clarified that why the debt amount (Principal debt amount) has not been written off despite litigation and only interest amount has been written off. Which interoperate deposit is under litigation and which deposit is not under litigation has not been described. l don't find the amount of bad debt which is interest in this case is taken to income side in the profit and loss account and then claimed as bad debt. 6. The case decided by honourable Supreme Court as mentioned above is completely applicable in the case of the appellant. In view of the above the ground number 1,2,3,4 and 5 are dismissed and the other grounds are consequential in nature hence not discussed here.” 3.4 The Ld.CIT(A) dismissed the appeal of the assessee by relying on the decision of Hon’ble Supreme Court in case of Pr.CIT 6 vs. Khyati Realtors Pvt. Ltd. reported in (2022) 141 taxmann.com 461. 3.5 Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal. 4. At the outset, the Ld.AR submitted that all the grounds raised are in respect of one single issue. He also submitted that similar issue was considered by Coordinate Bench of this Tribunal for A.Ys. 2008-09 to 2014-15 in ITA Nos. 928 to 931/Bang/2017 and 174 to 176/Bang/2018 by order dated 27.11.2018. 5. He submitted that all the observations of the Ld.CIT(A) and Ld.AO has been dealt with based on the mercantile system of accounting followed by the assessee in respect of ICDs and Page 9 of 15 ITA No. 340/Bang/2023 regular business activities. He submitted that this Tribunal remanded the issue back to the Ld.AO by observing as under: “20. Now, we decide the issues on merit. First issue on merit is about the addition made by the AO in respect of interest accrued on ICDs. This issue is raised by the assessee in five Assessment Years i.e. Assessment Years 2009-10, 2010-11, 2011-12, 2013-14 &2014-15. The submission of the assessee on this issue is already reproduced above and the main thrust of the assessee is on this that the assessee is not following dual accounting system and all its accounting including the accounting of interest on ICDs was under the mercantile accounting system. As against this, it is the stand of the AO that the assessee is following cash system of accounting in respect of accounting of interest on ICDs. In order to decide this issue we have to examine the factual aspects on this issue. Hence we have gone through the annual reports of the assessee company made available before us. As per the Annual Report for the year ending as on 31.03.2009 relevant to Assessment Year 2009-10, it has been stated in Schedule ‘S’ that as per significant accounting policies followed by the assessee, the accounts have been prepared on accrual basis. Similarly as per annual reports for the year ending as on 31.03.2010 relevant to Assessment Year 2010-11 also significant accounting policies are stated in Schedule ‘S’ as clause 6 thereof is the statement regarding the revenue recognition. For ready reference the same is reproduced herein below. “6. Revenue recognition: Sales are recorded net of trade discounts, rebates and value added tax, if any and are inclusive of foreign currency fluctuation. Some of the goods have been imported on provisional basis without fixing the gold price. Some of the goods have also been exported on provisional basis without fixing the price of gold. All the provisional imports and exports have been accounted for as per the custom's assessment of the goods. When the price of import shipment is fixed or when the price of the export shipment is fixed, the final invoice is submitted to the customs; the differential is accounted for as purchase or sales. However during the year the management has changed the accounting policy and accounted for the additional liability on account of increase in gold price as prevalent on 31st March 2010 in the case of all outstanding provisional imports and Page 10 of 15 ITA No. 340/Bang/2023 due to this change in accounting policy the profit for the year has been understated by Rs. 31,93,21,126. Making charges income is recognized on dispatch of goods. Interest on bank deposits and other interest bearing loans are accounted on accrual basis. However during the year the management has changed the accounting policy with regard to accounting of interest income on interest bearing loans other than bank deposits to cash basis due to which the profit for the year has been has been understated by Rs. 14,82,02,244/- Dividend income on investments is accounted for when the right to receive the payment is established.” 21. From the above, it is seen that as per the assessee itself, the management in the present year has changed the accounting policy with regard to accounting of interest income on interest bearing loans other than bank deposits and the changed system is cash basis and due to this, the profit for the year ending as on 31.03.2010 has been stated to be underreported by Rs. 14,82,02,244/-. Hence it is seen that the assessee itself has admitted in annual report that from accounting year 2009-10, in respect of interest on ICDs, the assessee is following cash system of accounting and because of that, the profit of the assessee was underreported in that year by an amount of Rs. 14,82,02,244/-. Now we examine the annual report for the year ending as on 31.03.2011. In this year also, it has been stated in Para 6 of significant accounting policies in respect of revenue recognition that interest on bank deposits and other interest bearing loans is accounted on accrual basis. But since from previous Financial Year, the company has adopted the accounting policy with regard to accounting of interest income on interest bearing loans other than bank deposits to cash basis instead of accrual basis and for this reason, the profit for the year ending as on 31.03.2011 has been understated by Rs. 33,08,58,068/-. 22. In the year ending as on 31.03.2012, the assessee has reported regarding revenue recognition in Note No. 24 that interest on bank deposits and other interest bearing loans is accounted for on accrual basis. Similar is the observation for annual accounts for the year ending 31.03.2013 that the interest on bank deposits and other interest bearing loans is accounted on accrual basis and identical note is there in annual report for the year ending as on 31.03.2014. In course of hearing before us, this Page 11 of 15 ITA No. 340/Bang/2023 query was made by the bench whether there is any change in the accounting system regarding revenue recognition in respect of interest on ICDs and in reply, it was submitted by ld. AR of assessee being Director of the assessee company that the method adopted is same in all the years but the reporting in the two years i.e. year ending as on 31.03.2011 and 31.03.2012 is different because of some confusion. Hence it is seen that the method of accounting adopted by the assessee for accounting of interest on ICDs is same in all these years and at least in two years, the assessee itself has accepted that the assessee is accounting for the interest on ICDs on cash basis.Now the question is whether such reporting in these two years is correct or not. This is the submission of the assessee that the assessee has written off the interest accrued but not received in the same year and therefore, it should be accepted that the assessee is following mercantile system of accounting in respect of accounting of interest on ICDs also in all the years. 23. In our considered opinion, before holding that the assessee is adopting cash system of accounting in respect of interest income on ICDs as stated by the assessee in the Annual reports of two years i.e. Accounting year ended on 31.03.2011 & 31.03.2012, it has to be ascertained that the interest income has really accrued by applying real income theory as approved by Hon'ble apex court in the case of State Bank of Travancore vs. CIT as reported in 158 ITR 102. In this case, it was held that the concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income may have to be given precedence in computation of income in a particular case but accrued income cannot be waived as not having accrued to the assessee. In this case, the issue was decided against the assessee and in favour of the revenue because of the facts of that case. As per the facts of that case, it was seen that the assessee neither decided to treat interest income on sticky advances as bad debt nor claims deductions under s. 36(2) but still enters the same with a diminished hope of recovery in the suspense account. Hence, as per this judgment, it was held that real income theory has to be considered but this has to be examined from the facts of each case as to whether the real income has accrued or not and if the real income has accrued Page 12 of 15 ITA No. 340/Bang/2023 then the same has to be brought to tax and the assessee can claim deduction u/s 36 (2) as per law after writing off the same in its books but if it has not accrued and has become irrecoverable even before its accrual, then even under mercantile system of accounting, it cannot be brought to tax because no real income has accrued to the assessee. In the present case, the conduct of the assessee is different. As against debiting the account of the debtor by interest amount and crediting interest suspense account instead of interest receipt account, in the present case, the assessee has neither debited the account of the debtor nor credited interest account or interest suspense account or any other account by whatever name. In the present case, the case of the assessee is this that the interest income is not receivable at all and therefore, the assessee has passed entries in memorandum books by debiting the debtor and crediting the interest account and before the year end, such entries were reversed and as a result, at the year end, no debit remains in the accounts of the debtors and no credit remains in any account being interest receipt account or interest suspense account or any other account by whatever name. But this claim of the assessee was not examined by the lower authorities that the income has not accrued or arisen and it is irrecoverable since very beginning. Under these facts, we feel it proper that the matter should go back to the file of the AO for a fresh decision. We order accordingly and we set aside the order of CIT (A) on this issue and restore this issue back to the AO for a fresh decision with the direction that the AO should first examine this aspect as to whether the interest income has arisen/accrued or not in the facts of the present case. If the assessee is able to establish that the interest has become irrecoverable before its accrual than it should be accepted that the interest has not accrued and consequently, it cannot be brought to tax even under mercantile system of accounting. But if it becomes irrecoverable after accrual of the income than the same has to be brought to tax in the year of accrual and the assessee may claim deduction as per law u/s 36 (1) (vii) in any year afterwards by writing of the same in its books.” On the contrary, the Ld.DR submitted that no details were filed before the Ld.CIT(A) and therefore the claim of the assessee should not be considered. Page 13 of 15 ITA No. 340/Bang/2023 We have perused the submissions advanced by both sides in the light of records placed before us. 6. We note that the Ld.CIT(A) has disallowed the claim of assessee as bad debts by relying on the decision of Hon’ble Supreme Court in case of Pr.CIT 6 vs. Khyati Realtors Pvt. Ltd. (supra). On perusal of the said decision, it is found that Hon’ble Supreme Court rejected the claim contention of assessee by observing that the claim of the amount advanced by the assessee therein to a developer for acquiring an immovable property was in the nature of capital expenditure as the assessee had not brought any evidence or material to show that the advance was made in its ordinary course of business. In the present facts of the case, there is no dispute in respect of the accrual of the interest and that assessee had followed mercantile system of accounting for the ICDs. Further the Ld.AO has not questioned that the ICDs was not made in the regular course of the business. We therefore do not find any force in the observations of the Ld.CIT(A) in placing reliance on the above decision for not considering the claim of assessee. 6.1 It is a settled position that the levy of income tax on the income is directed either on the accrual or on its receipt. Hon’ble Supreme Court while considering this concept in case of CIT vs. Shoorji Vallabhdas & Co. reported in (1962) 46 ITR 144 held as under: “Income-tax is a levy on income. Though the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in books- keeping, an entry is made about a 'hypothetical Page 14 of 15 ITA No. 340/Bang/2023 income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of accounts.” 7. We refer to the observations of Coordinate Bench of this Tribunal in assessee’s own case reproduced hereinabove in para 23 wherein this Tribunal remanded the issue to the Ld.AO to examine the claim of the assessee that the interest income was not at all receivable and therefore the assessee has passed entries in the books of accounts by debiting the debtor and crediting the interest account before the year end and such entries were reversed either on receipt of the interest or in suspense account as the case may be. Even for the year under consideration, similar entries were made. As observed by Coordinate Bench for the preceding assessment years, verification needs to be carried out whether the interest is income has arisen or accrued in the present facts. Further the assessee also will have to establish that the interest has become irrecoverable before its accrual. In the event the assessee is able to establish the above fact, the interest income cannot be notionally brought to tax. On the contrary, if the assessee is establishing that the amount has become irrecoverable after accrual, then the same will have to be considered in the year of accrual and appropriate deduction will have to be computed as per section 36(1)(vii) in any years afterwards by writing of its same in its books of account. With the above directions and respectfully following the view taken by this Tribunal in assessee’s own case, we remit the Page 15 of 15 ITA No. 340/Bang/2023 issue back to the Ld.AO to verify the interest on ICDs based on the real income theory observed by this Tribunal in para 23 hereinabove. Accordingly, the grounds raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 25 th August, 2023. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 25 th August, 2023. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order Assistant Registrar, ITAT, Bangalore