The Assistant Commissioner of Income Tax, Circle-4(1), , Visakhapatnam V. Srivathsa Power Projects Private Limited, Visakhapatnam

ITA 467/VIZ/2019

AI Insights

The case revolves around the appeal by the Revenue against the order of the CIT(A) which had allowed the appeal of M/s. Srivathsa Power Projects Pvt Ltd., the assessee. The primary issue was the taxability of interest accrued on Inter Corporate Deposits (ICDs) made by the assessee to M/s. Coastal Infrastructure Limited (CIL). The Assessing Officer (AO) had added the interest income to the assessee's income for AY 2015-16, based on the mercantile system of accounting, despite the assessee not recognizing any interest income due to a board resolution waiving the interest. The CIT(A) reversed the AO's decision, leading to the Revenue's appeal to the Tribunal.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 128566 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 10-10-2022
• Assessment Year: misc
• Appeal Filed On: 02-11-2022
• Other Referred Cases: Hon'ble Supreme Court and Hon'ble High Courts decisions on real income and mercantile system of accounting
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FOLL OWING ME RCANTIL E ACCRU AL
• Assessee Lawyers: C.M. RAVI PRASAD
• Section: 143(3)

Judgement Text

आयकर अपीलȣयअͬधकरण, ͪवशाखापटणम पीठ, ͪवशाखापटणम IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM Įी दुåवूǽ आर एल रेɬडी, ÛयाǓयक सदèय एवं Įी एस बालाकृçणन, लेखा सदèय के सम¢ BEFORE SHRI DUVVURU RL REDDY, HON’BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON’BLE ACCOUNTANT MEMBER आयकर अपील सं./ I.T.A. No.467/Viz/2019 (Ǔनधा[रण वष[ / Assessment Year :2015-16) ACIT, Circle-4(1), Visakhapatnam. Vs. M/s. Srivathsa Power Projects Pvt Ltd., Visakhapatnam. PAN: AABCV 0045N (अपीलाथȸ/ Appellant) (Ĥ×यथȸ/ Respondent) अपीलाथȸ कȧ ओर से/ Assessee by : Sri C.M. Ravi Prasad, CA Ĥ×याथȸ कȧ ओर से / Revenue by : Sri ON Hari Prasada Rao, Sr. AR सुनवाई कȧ तारȣख / Date of Hearing : 11/10/2022 घोषणा कȧ तारȣख/Date of Pronouncement : 16/11/2022 O R D E R PER S. BALAKRISHNAN, Accountant Member : This appeal filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-6, Hyderabad [Ld. CIT(A)] in appeal no. 10593/2018-19/B3/CIT(A)-6, dated 12/3/2019 arising out of the order passed U/s. 143(3) of the Income Tax Act, 1961 [the Act] for the AY 2015-16. 2 2. Brief facts of the case are that the assessee is a Private Limited company engaged in the business of power generation; filed its return of income on 11/09/2015 admitting a total loss of Rs. 1,83,48,849/- for the AY 2015-16. The return of income was summarily processed accepting the returned loss. Subsequently, the case was selected for limited scrutiny under CASS and the assessment was completed U/s. 143(3) of the Act vide order dated 29/12/2017 determining the total income at Rs. 1,03,07,151/- against the loss admitted by the assessee. 3. During the course of assessment proceedings, the Ld. AO added a sum of Rs. 2,86,56,000 as interest accrued on Inter Corporate Deposit (ICD) to M/s. Coastal Infrastructure Limited (CIL). The Ld. AO observed that as per the terms of agreement 10% of interest would accrue to the assessee every year. Based on the submission of the assessee, the Ld. AO observed that the ICD as per the books of account was shown at Rs.15,92,00,000/- however the assessee has not offered any accrued interest income on such ICD in the impugned assessment year. On being asked to explain the reasons for not admitting the revenue on accrual basis, the assessee has produced Board Resolution dated 30/06/2012 wherein it was decided by the Board of Directors of 3 the assessee company to waive the interest component of the ICDs given to the M/s. CIL. The Ld. AO not accepting the Board Resolution, considering the Mercantile System of accounting followed by the assessee found that the interest for the FY 2014- 15 is liable for tax on accrual basis and decided to assess the interest at the rate of 18% on the ICDs outstanding on 31/3/2015 amounting to Rs. 2,86,56,000/-. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). 4. Before the Ld. CIT(A), the assessee’s Representative placed the Board Resolution and contested that the Ld. AO has erred in adopting the notional rate @ 18% as against 10% agreed between the parties of the transaction. Further, the ld. AR also submitted before the Ld. CIT(A) that the Board of Directors of the assessee company has waived the interest as per the request of M/s. CIL due to the reason that M/s. CIL is in the severe financial difficulties. The Ld. CIT(A) relied on various decisions of the Hon’ble Supreme Court and Hon’ble High Courts and allowed the appeal of the assessee relying on the ratio laid down in those cases. Aggrieved by the order of the Ld. CIT(A), the Revenue is in 4 appeal before the Tribunal by raising the following Grounds of Appeal: “1. The order of the Ld. CIT(A) is erroneous both on facts and in l aw. 2. The Ld. CIT(A) erre d in opining that the assessee comp any’s Bo ard Resol ution, dated 30/06/2012 is squarel y appl icabl e to the interest accrued pertaining to the FY 2014-15 relevant to the impugned AY 2015-16, in the absence of any specific mention to th at extent in the s aid board resol ution regarding its appl icabil ity for inte rest accruing in future as well . 3. The Ld. CIT(A) erred in concl uding that the decision taken by eh assessee comp any to waive the i nterest, was due to commerci al expediency rather th an to reduce its tax abl e profits, without appreci ating th at the board resol ution, if appl icabl e to the interest accrue in the subsequent financi al ye ars, is detrimental to the business as it is not onl y l osing revenue on loans adv an ced, but al so l eaving it at the wil l of the payee comp any to p ay inte rest in the future. 4. The Ld. CIT(A) erre d in appreci ating th at the Assessing Officer has grossl y f ail ed to understand the f acts of the case and terms of the resol ution, and therefore, misdirecte d himself to presume that the waiver granted by the Bo ard Resolution was appl icabl e onl y to the extent of interest accrued, by ignoring the facts th at th e Assessing Officer had specifical l y pointed out that the assessee is inconsistent with its state ment reg ardi ng not offering the interest income and is evidentl y to evade the taxes on the interest income. 5. The appell ant l eave to add or del ete or substitute or amend an y ground of appe al before and / or at the ti me of hearing of the appe al . For these and o ther ground th at may be urged at the time of he aring of the appe al , it is prayed th at the addi tion made by the Assessing Officer of Rs. 2,86,56,000/- on this ground be restored.” 5. The main crux of the Grounds of Appeal raised by the Revenue is pertaining to one issue ie., accrual of interest income in the books of accounts of the assessee. 5 6. Before us, the Ld. DR pleaded that the assessee is continuously accruing interest income from the AY 2007-08 to 2012-13. However, no interest has been accrued in the books of account of the assessee for the impugned assessment year. The Ld. DR further submitted that the Board Resolution stating that the waiver of interest can be applied to the interest accrued in the books of account till the date of Board Resolution and cannot be applied for the future date. The Ld. DR therefore pleaded that the order of the Ld. AO be upheld. 7. Per contra, the Ld. AR vehemently objected to the charging of interest rate @ 18% adopted by the Ld. AO instead of accrued interest rate @ 10% per annum. The Ld. AR further submitted that even the interest accrued during the earlier years ie., from the AY 2007-08 to 2012-13 were not received by the assessee and hence the assessee has decided to waive the interest on the ICDs given to M/s. CIL. The Ld. AR also further submitted that M/s. CIL is in great financial difficulties and also filed for petition for insolvency which is pending before the National Company Law Tribunal [NCLT]. The Ld. AR further submitted that the ICDs were given out of the own funds and not out of the borrowed 6 funds since the assessee is debt free company. The Ld. AR pleaded that the order of the Ld. CIT(A) be upheld. 8. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly, no interest has been accrued from the year 2012-13 onwards by the assessee company. It is also seen from the Board Resolution that the assessee company has waived the interest on ICDs given to M/s. CIL on their request that they are under severe financial difficulties. We also find merit in the argument of the Ld. AR that even though the interest was accrued in the earlier years in the books of account of the assessee that no interest has been actually received by the assessee against the accruals. It was also observed that no real income has been received by the assessee company with respect to the interest on ICDs from M/s. CIL. The Ld. CIT(A) has quoted various decisions of the Hon’ble Supreme Court where it has been judiciously held that only real income which is actually accrued in the facts and circumstances of the case would be considered and brought to tax, even though the assessee is maintaining the books of account on the basis of mercantile system of accounting. 7 The findings of the Ld. CIT (A) are extracted herein below for reference: “8.2.10. In al l the above mentioned decisions, it h as been judiciousl y hel d that onl y real income ie., which is actu al l y accrued in the f acts an d ci rcumstances of the case woul d be considered and brought to tax even in a case where the assessee is main taining the accounts and recognizing the revenue by foll owing me rcantil e / accru al method of accounting. In the instan t case, it is an admi tted f act th at, by virtue of Board Resolution dated 30/06/2012 wherein the board of directo rs had approved waiver of interest on ICDs with the borro wer comp any/s. Co astal Infras tructure Ltd., as the s aid comp any was f acing financi al difficul ties, there is no accru al of interst on ICDs during the FY 2014-15 rel evant to the impugned AY 2015-16. Accordingl y, the AO is directed to del ete the addi tion. Thus, the grounds of appe al filed by the assessee on this issue are al l owe d. 8.2.11. Coming to the al tern ative ground raise d by the assessee th at the AO h as computed notional interest @ 18% instead of 10% agree upon by the parties, prima facie, I am of the considered opinion that the action of the AO is not permissibl e in accordance wi th the provisions of the Act,. Howeve r, as I h ave al re ady decided the main issue of accru al of interest in favour of the assessee whe rein the AO has been directed to del ete the addition, the al tern ative ground raised by the assessee is al so considered as al l owed for statis tical purposes.” 9. The Ld. CIT(A) has rightly considered the above facts that M/s. CIL is facing severe financial difficulties and there is no real income accrued to the assessee for the relevant assessment year. We are therefore in concurrence with the findings of the Ld. CIT(A) and accordingly no interference is required in the order of 8 the Ld. CIT(A) on this issue. Thus, the grounds raised by the Revenue are dismissed. 10. In the result, appeal filed by the Revenue is dismissed. Pronounced in the open Court on the 16 th November, 2022. Sd/- Sd/- (दुåवूǽ आर.एल रेɬडी) (एस बालाकृçणन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) ÛयाǓयकसदèय/JUDICIAL MEMBER लेखा सदèय/ACCOUNTANT MEMBER Dated : 16.11.2022 OKK - SPS आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy of the order forwarded to:- 1. Ǔनधा[ǐरती/ The Assessee – M/s. Srivathsak Power Projects Pvt Ltd., Plot No. 41, Pandurangapuram, Visakhapatnam. 2. राजèव/The Revenue – ACIT, Circle-4(1), 3 rd Floor, Direct Taxes Building, MVP Colony, Visakhapatnam, Andhra Pradesh – 530017. 3. The Principal Commissioner of Income Tax-2, Visakhapatnam. 4. आयकर आयुÈत (अपील)/ The Commissioner of Income Tax (Appeals)-6, Hyderabad. 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण, ͪवशाखापटणम/ DR, ITAT, Visakhapatnam 6. गाड[ फ़ाईल / Guard file आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam