JAYESH V. SHAH, MUMBAI V. ITO 25(1)(1), MUMBAI

ITA 5858/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7371 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 17-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 22-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MADHUK
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, J, MUMBAI BEFORE SHRI R V EASWAR, SENIOR VICE PRESIDENT AND SHRI R K PANDA, ACCOUNTANT MEMBER I T A NO: 5858/MUM/2008 (ASSESSMENT YEAR: 2005-06) JAYESH V SHAH, MUMBAI APPELLANT (PAN: ALPPS9831B) VS INCOME TAX OFFICER 25(1)(1), MUMBAI RESPONDENT APPELLANT BY: SHRI K GOPAL RESPONDENT BY: SHRI S K MADHUK O R D E R R V EASWAR, SENIOR VICE PRESIDENT: THIS APPEAL BY THE ASSESSEE RELATES TO THE ASSESSM ENT YEAR 2005-06 AND ARISES OUT OF THE ASSESSMENT MADE UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, BY ORDER DATED 14 TH DECEMBER 2007. 2. THE ASSESSEE IS AN INDIVIDUAL AND WAS CARRYING O N THE BUSINESS OF ASSORTING DIAMONDS FOR THE PAST 17 YEARS. DURIN G THE YEAR ENDED 31.03.2005, HE ALSO STARTED TRADING IN DIAMONDS. H E PURCHASED DIAMONDS FOR RS.7,52,54,703/- AND SOLD THEM FOR RS. 7,57,78,120/-, THEREBY EARNING A GROSS PROFIT OF RS.5,23,417/-. F ROM THE SALE PROCEEDS HE ADVANCED LOANS TO THE FOLLOWING THREE P ERSONS: - (1) M/S ABHAY EXPORTS RS. 37,19,000/- (2) KAMLESH R SHAH RS.2,19,00,000/- (3) SUNITA K CHHABRIA RS. 5,00,000/- --------------------- TOTAL RS.2,61,19,000/- --------------------- NO INTEREST WAS CHARGED ON THE AFORESAID LOANS. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER CALLED UPON THE 2 ASSESSEE TO EXPLAIN WHY INTEREST ON THE AFORESAID L OANS SHOULD NOT BE ADDED ON ACCRUAL BASIS AT THE RATE OF 15% PER ANNUM . THE ASSESSEE, BY LETTER DATED 16 TH JANUARY 2007 (COPY FILED) STATED THAT THE FINANCIA L WORTH OF THE AFORESAID PARTIES WAS BAD AND, THEREFO RE, THERE WAS NO STIPULATION FOR CHARGING INTEREST. BY LETTER DATED 3 RD DECEMBER 2007, THE ASSESSEE ALSO EXPLAINED THAT BECAUSE THE ASSESS EE COULD NOT RECOVER THE LOANS HE COULD NOT ALSO PAY HIS TRADE C REDITORS. IT WAS EXPLAINED THAT THERE WAS NO POINT IN CHARGING INTER EST WHEN THE PRINCIPAL AMOUNTS WERE DOUBTFUL OF RECOVERY. THESE SUBMISSIONS DID NOT FIND FAVOUR WITH THE ASSESSING OFFICER, WHO EST IMATED ACCRUED INTEREST ON THE LOANS AT RS.15,92,324/- AND ADDED T HE SAME TO THE BUSINESS INCOME DECLARED BY THE ASSESSEE. THE ASSE SSEES APPEAL TO THE CIT(A) WAS UNSUCCESSFUL AND HENCE THE PRESENT A PPEAL. 3. THE PRINCIPAL CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US IS BASED ON THE REAL INCOME THEORY ADUMBR ATED BY THE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLAB HDAS & CO. (1962) 46 ITR 144 (SC) AND REITERATED IN GODHRA ELECTRICIT Y CO. LTD. VS. CIT (1997) 225 ITR 746 (SC). IT IS SUBMITTED THAT EVEN THOUGH THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING, BUT SINCE THERE WAS NO STIPULATION FOR CHARGING INTEREST, IT IS NOT OPEN TO THE ASSESSING OFFICER TO SAY THAT INTEREST HAD ACCRUED TO THE ASSESSEE AT THE RATE OF 15% PER ANNUM ON THE LOANS. IT WAS ALS O POINTED OUT THAT IN ANY CASE THE LOANS THEMSELVES BEING DOUBTFUL OF REC OVERY BECAUSE OF THE PRECARIOUS FINANCIAL CONDITIONS OF THE DEBTORS, THERE CAN BE AND IN FACT THERE NEVER WAS ANY RECEIPT OF INTEREST. ON B EHALF OF THE 3 DEPARTMENT IT WAS POINTED OUT THAT THE ASSESSEE WOU LD NOT HAVE ADVANCED THE MONIES TO THE THREE PARTIES IN THE FIR ST PLACE IF THEIR FINANCIAL POSITION WAS PRECARIOUS AND, THEREFORE, T HIS ARGUMENT WAS WITHOUT FORCE. IT WAS FURTHER SUBMITTED THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING THE ASSESSEE IS DUTY BOUND TO ACCOUNT FOR THE INCOME ON ACCRUAL BASIS AND THUS NO FAULT CAN BE FO UND WITH THE ORDERS OF THE DEPARTMENTAL AUTHORITIES. 4. ON A CAREFUL CONSIDERATION OF THE FACTS AND THE RIVAL CONTENTIONS, WE ARE OF THE VIEW THAT THE ADDITION SHOULD BE DELE TED. IT IS TRUE THAT THE ASSESSEE WOULD NOT HAVE VENTURED TO ADVANCE SUC H HUGE AMOUNTS TO THE THREE PARTIES IF THEIR FINANCIAL CONDITION W AS PRECARIOUS. HOWEVER, LEGALLY SPEAKING, IN THE ABSENCE OF ANY ST IPULATION FOR INTEREST WHILE ADVANCING THE LOANS, THE MERE FACT THAT THE A SSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING CANNO T LEGALLY JUSTIFY THE ADDITION OF INTEREST INCOME. ADVANCING LOANS IS A MATTER OF CONTRACT BETWEEN THE PARTIES AND IF THERE IS NO STIPULATION FOR INTEREST, THERE CAN BE NO ACCRUAL OF INTEREST INCOME AND THE ASSESSEE W AS RIGHT IN NOT DECLARING ANY INCOME BY WAY OF INTEREST. THE DEPAR TMENTAL AUTHORITIES HAVE NOT BROUGHT ANY MATERIAL OR EVIDENCE ON RECORD TO SHOW THAT THE ASSESSEES PLEA THAT THERE WAS NO STIPULATION FOR I NTEREST WAS FALSE OR INCORRECT. IN THAT CASE, THERE CAN BE NO ACCRUAL O F INTEREST INCOME. WE MAY ALSO ADD THAT THE ASSESSEE HAS NOT CLAIMED ANY INTEREST AS A DEDUCTION AS WE CAN SEE FROM THE PROFIT AND LOSS AC COUNT PLACED AT PAGE 29 OF THE PAPER BOOK. ON THE OTHER HAND, BECA USE OF THE UTILIZATION OF THE SALE PROCEEDS OF THE DIAMONDS FO R THE PURPOSE OF 4 MAKING THE INTEREST FREE ADVANCES, THE ASSESSEE WAS LIABLE TO PAY RS.5,24,82,728/- TO THE PERSONS FROM WHOM THE DIAMO NDS WERE ACQUIRED, AS SEEN FROM THE BALANCE SHEET AS ON 31.0 3.2005 AT PAGE 28 OF THE PAPER BOOK. THE SUNDRY CREDITORS FOR GOO DS HAVE NOT CLAIMED ANY INTEREST FROM THE ASSESSEE. EVEN THE U NSECURED LOAN OF RS.5,00,000/- TAKEN FROM RIDDHI JEWELLERY PVT. LTD. AND SHOWN IN THE BALANCE SHEET DOES NOT CARRY ANY INTEREST. THEREFO RE, IT CANNOT ALSO BE STATED THAT THERE WAS ANY DIVERSION OF THE INTER EST BEARING FUNDS FOR NON-BUSINESS PURPOSES. WHICHEVER WAY THE MATTER IS LOOKED AT, WE ARE OF THE VIEW THAT LEGALLY NO ADDITION CAN BE MAD E FOR ACCRUED INTEREST IN THE ABSENCE OF ANY STIPULATION FOR INTE REST MADE BETWEEN THE PARTIES AT THE TIME OF ADVANCING THE LOANS. IN THI S VIEW OF THE MATTER, WE DELETE THE ADDITION OF RS.15,92,324/- AS NOTIONA L INTEREST AND ALLOW THE APPEAL OF THE ASSESSEE WITH NO ORDER AS TO COST S. ORDER PRONOUNCED ON 18 TH MARCH 2010. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER SENIOR VICE PRESI DENT MUMBAI, DATED 18 TH MARCH 2010 SALDANHA COPY TO: 1. JAYESH V SHAH C/O B S VASA, ADVOCATE 213/215, JOLLY BHAVAN NO.1 10, NEW MARINE LINES, MUMBAI 400 020 2. ITO 25(1)(1) 3.CIT-25 4.CIT(A)-XXV 5.DR J BENC H TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI