Harihar Finance Corporation, V. Asstt. CIT,Cir 1(1), Pune,

ITA 602/PUN/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3147 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 06-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A S SINGH

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER & SHRI G.S.PANNU ACCOUNTANT MEMBER ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION APPELLANT 1436, KASBA PETH, PUNE - 411 011 PAN AAAFH7353P VS. ASSTT. CIT, CIR. 1(1),PUNE RESPONDENT APPELLANT BY : SMT. DEEPA KHARE, C.A. RESPONDENT BY : SHRI. A.S.SINGH/ PANKAJ GARG, CIT,D R ORDER PER G.S.PANNU, AM THIS APPEAL OF THE ASSESSEE PERTAINING TO ASSESSMEN T YEAR 2005-06 IS DIRECTED AGAINST THE ORDER OF THE CIT (A) DATED 20 -02-2008, WHICH IN TURN HAS ARISEN FROM AN ORDER PASSED BY THE ASSESSING OFFICE R DATED 31/08/2007 U/S.143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT T HE ACT). 2. THE SOLITARY DISPUTE RAISED BY THE APPELLANT IS IN RELATION TO AN ADDITION OF RS.5,13,195/- RETAINED BY THE CIT(A), ON ACCOUNT OF INTEREST INCOME ON LOAN, ADVANCED BY THE ASSESSEE IN EARLIER YEARS TO ONE, SHRI YOGESH SHAH. 3. IN BRIEF, THE FACTS RELEVANT TO THE DISPUTE ARE AS FOLLOWS. THE ASSESSEE FIRM IS IN THE BUSINESS OF FINANCE & INVESTMENT AND IT HAD ADVANCED A SUM OF RS.50 LAC TO SHRI. YOGESH SHAH IN THE ASSESSMENT YE AR 2000-01. INTEREST INCOME ON THIS SUM WAS ACCOUNTED FOR BY THE ASSESSEE ON AC CRUAL BASIS UPTO THE ASSESSMENT YEAR 2004-05. IN THE ASSESSMENT YEAR UN DER CONSIDERATION, ASSESSEE DID NOT ACCOUNT FOR INTEREST INCOME ON SUC H LOAN. ON BEING ASKED TO EXPLAIN, ASSESSEE SUBMITTED THAT NEITHER IT HAD REC EIVED ANY AMOUNT OF INTEREST AND NOR WAS IT HOPEFUL OF RECOVERING THE OUTSTANDIN G PRINCIPAL AND INTEREST, ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION . 1998 2 THEREFORE IT HAD NOT PROVIDED FOR INTEREST INCOME O N THIS LOAN. THE ASSESSING OFFICER CONSIDERED THE EXPLANATION OF THE ASSESSEE AND DID NOT FIND IT ACCEPTABLE. AS PER THE ASSESSING OFFICER, ASSESSEE HAD RAISED U NSECURED LOANS WHICH WERE INTEREST BEARING. ACCORDING TO HIM, NON-CHARGING O F INTEREST ON LOAN TO SHRI YOGESH SHAH SHOWED THAT INTEREST BEARING LOANS WERE NOT USED FOR EARNING OF INTEREST INCOME AND THEREFORE THE PROPORTIONATE INT EREST PAID BY THE ASSESSEE WAS NOT AN ALLOWABLE EXPENDITURE U/S. 36(1)(III) OF THE ACT. THE ASSESSING OFFICER WORKED OUT THE AVERAGE INTEREST COST AND COMPUTED A SUM OF RS.3,18,145/- AS REPRESENTING INTEREST EXPENDITURE ON THE AMOUNT ADV ANCED TO SHRI. YOGESH SHAH. SUCH AN AMOUNT HAS BEEN DISALLOWED OUT OF THE TOTAL INTEREST EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT, IN TERMS OF S ECTION 36(1)(III) OF THE ACT. 4. IN APPEAL BEFORE THE CIT(A), ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS WRONG IN DISALLOWING A PORTION OF THE I NTEREST EXPENDITURE. IT WAS CONTENDED THAT THE ASSESSEE HAS UTILISED THE BORROW INGS FOR THE PURPOSES OF THE BUSINESS OF THE FIRM AND THE NON-CHARGING OF INTERE ST FROM SHRI YOGESH SHAH DID NOT MEAN THAT FUNDS HAVE BEEN TAKEN OUT OF BUSINESS . IT WAS EXPLAINED THAT INTEREST WAS PROVIDED FOR AND OFFERED FOR TAXATION IN THE PAST YEARS AND IT WAS NOT ACCOUNTED FOR IN THIS YEAR AS A PRUDENT POLICY SINCE IT WAS CERTAIN THAT RECOVERY OF INTEREST FROM SHRI YOGESH SHAH WAS NOT POSSIBLE. THUS, IT WAS CLAIMED THAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR BUSINESS AND THE ASSESSING OFFICER WAS WRONG IN DISALLOWING A SUM OF RS.3,18,145/- UNDER SECTION 36 (1) (III) OF THE ACT. THE CIT(A) WAS OF THE OP INION THAT ON THE GIVEN FACTS OF THE CASE, THE ASSESSING OFFICER MISDIRECTED HIMSELF IN DISALLOWING INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. INSTEAD, ACCO RDING TO HIM, INTEREST INCOME ON LOAN ADVANCED TO SHRI YOGESH SHAH HAD ACCRUED AS PER THE MERCANTILE SYSTEM OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE AND ME RE FOREGOING OF SUCH INCOME BY THE ASSESSEE WOULD NOT AFFECT THE TAXABILITY OF THE SAME. AS PER THE CIT(A), INTEREST CHARGEABLE ON AMOUNT OUTSTANDING FROM SHRI YOGESH SHAH WAS ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION . 1998 3 RS.5,13,195/-, WHICH HAS BEEN HELD TAXABLE BY HIM. IN THE RESULT, THE CIT(A) ENHANCED THE ADDITION TO A SUM OF RS.5,13,195/- INS TEAD OF RS.3,18,145/- MADE BY THE ASSESSING OFFICER. AGAINST THE AFORESAID, A SSESSEE IS IN APPEAL BEFORE US. 5. BEFORE US, IT IS CONTENDED BY THE APPELLANT THAT THE CIT(A) FAILED TO APPRECIATE THAT NO REAL INCOME HAD ACCRUED ON ACCOU NT OF INTEREST FROM SHRI YOGESH SHAH SINCE SUCH AMOUNT WAS NOT RECOVERABLE. IT WAS POINTED OUT THAT INTEREST INCOME ACCOUNTED FOR ON ACCRUAL BASIS IN T HE PAST YEARS WAS OFFERED FOR TAXATION BUT THE SAME HAS NOT BEEN ACTUALLY RECEIVE D BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THERE HAS BEEN A SETTLEMENT WIT H THE PARTY IN TERMS OF WHICH RS.39 LACS AND RS.11 LACS HAVE BEEN RECEIVED IN THI S YEAR AND THE SUBSEQUENT YEAR RESPECTIVELY AGAINST THE OUTSTANDING PRINCIPAL AMOUNT OF LOAN AND NO AMOUNT ON ACCOUNT OF INTEREST HAS BEEN RECOVERED. IT IS ALSO POINTED OUT THAT NO ADDITION HAS BEEN MADE ON THIS COUNT IN THE ASSESSM ENT YEAR 2006-07 AND THE EXPLANATION OF THE ASSESSEE HAS BEEN ACCEPTED BY TH E ASSESSING OFFICER, AND IN THIS REGARD, COPY OF THE ORDER PASSED U/S.143(3) OF THE ACT DATED 14.11.2008 HAS BEEN PLACED ON RECORD. 6. ON THE OTHER HAND, LD. DR APPEARING FOR THE REVE NUE HAS REITERATED THE STAND OF CIT(A) BY PLACING RELIANCE ON THE IMPUGNED ORDER. THE LD. DR REFERRED TO THE REASONING TAKEN BY THE CIT(A), WHICH HAS ALR EADY BEEN NOTED BY US IN PARA 4 ABOVE AND IS ACCORDINGLY NOT BEING REPEATED FOR THE SAKE OF BREVITY. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CARE FULLY. IN THIS CASE, AS PER THE REVENUE, THE ASSESSEE HAS INCORRECTLY NOT OFFERED F OR TAXATION A SUM OF RS.5,13,195/- REPRESENTING INTEREST ACCRUED ON LOAN TO SHRI. YOGESH SHAH, SINCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACC OUNTING. AS PER THE REVENUE, THIS IS A CASE WHERE THE INCOME HAS ACCRUE D BECAUSE OF THE MERCANTILE SYSTEM OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE AND THE SUBSEQUENT ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION . 1998 4 FOREGOING OF THE INCOME DOES NOT AFFECT ITS TAXABIL ITY. ON THE OTHER HAND, AS PER THE APPELLANT, INCOME HAS NOT ACCRUED TO IT, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. IN THIS CONTEXT, IT WOULD BE PERTINENT TO OBSERV E THAT INCOME TAX IS A LEVY ON THE REAL INCOME AND NOT ON A HYPOTHETICAL INCOME . HOWEVER, COMPUTATION OF SUCH INCOME IS TO BE MADE IN ACCORDANCE WITH THE ME THOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT MAY BE EIT HER THE CASH SYSTEM OF ACCOUNTING WHERE ENTRIES ARE MADE ON THE BASIS OF A CTUAL RECEIPTS AND ACTUAL OUTGOINGS OR IT MAY BE THE MERCANTILE SYSTEM WHERE ENTRIES ARE MADE ON ACCRUAL BASIS. HOWEVER, IN BOTH THE SITUATIONS THE SUBSTAN CE OF THE MATTER IS INCOME. IF REAL INCOME DOES NOT RESULT AT ALL, THERE WOULD NOT BE ANY TAX AND SUCH A PRINCIPLE IS APPLICABLE WHETHER THE ACCOUNTS ARE MA INTAINED ON CASH SYSTEM OR MERCANTILE SYSTEM, AS HELD BY THE HONBLE SUPREME C OURT IN THE CASE OF GODHRA ELECTRICITY CO.LTD. VS. 225 ITR 746 (SC). ACCORDI NG TO THE HONBLE SUPREME COURT, IF THE ACCOUNTS ARE MAINTAINED UNDER THE MER CANTILE SYSTEM WHAT HAS TO BE SEEN IS WHETHER INCOME CAN BE SAID TO HAVE REALL Y ACCRUED TO THE ASSESSEE- COMPANY. 9. THE HONBLE SUPREME COURT IN THE CASE OF POONA E LECTRIC SUPPLY CO.LTD., VS. CIT 57 ITR 521 (SC) APPROVED THE DECISION OF TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF H.M.KASHIPAREKH & CO. LTD. VS. CIT, 39 ITR 706 ON THE ASPECT OF THE PRINCIPLE OF REAL INCOME. AS PER THE HONBLE COURT, IN EXAMINING ANY TRANSACTION, REGARD HAS TO BE GIVEN TO REALITIES OF THE SITUATION RATHE R THAN PURELY THEORETICAL ASPECT OF IT. IN DETERMINING TH E QUESTION WHETHER IT IS HYPOTHETICAL INCOME OR WHETHER ANY REAL INCOME HAS MATERIALIZED, VARIOUS FACTORS ARE REQUIRED TO BE TAKEN INTO ACCOUNT. IN THIS CON TEXT THE HONBLE SUPREME COURT APPROVED THE POINT OF VIEW THAT THE REAL INC OME IS TO BE GAUGED AFTER TAKING THE PROBABILITY OR IMPROBABILITY OF REALIZAT ION IN A REALISTIC MANNER. IN THE ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION . 1998 5 CASE OF GODHRA ELECTRICITY CO. LTD. (SUPRA) EVEN TH E EVENTS OCCURRING AFTER THE CLOSE OF THE ACCOUNTING YEAR WERE TAKEN INTO CONSID ERATION TO EXAMINE WHETHER OR NOT ANY REAL INCOME HAD ACCRUED TO THE ASSESSEE. 10. CONSIDERED IN THIS LIGHT IN THE PRESENT CASE TH E IMPUGNED INCOME CANNOT BE ASSESSED TO TAX MERELY BECAUSE THE ASSESSEE IS F OLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN FACT, THE ASSESSEE HAS SHOWN THA T IT HAS NOT RECOVERED ANY INTEREST FROM SHRI YOGESH SHAH EITHER IN THE PAST O R EVEN DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE HAS ALSO SHOWN THAT IT HAS RECOVERED ONLY THE PRINCIPAL AMOUNT OF LOAN, PARTLY IN THIS YEAR AND P ARTLY IN THE SUBSEQUENT YEAR. A CERTIFICATE FROM BORROWER SHRI YOGESH SHAH HAS ALSO BEEN FURNISHED WHICH IS PLACED AT PAGE 16 OF THE PAPER BOOK TO THE EFFECT T HAT NO INTEREST HAS BEEN RECOVERED BY THE ASSESSEE. THE ASSESSEE HAS SHOWN THAT AS PER SETTLEMENT WITH THE BORROWER, ONLY PRINCIPAL AMOUNT OF LOAN HAS BEE N RECOVERED AND NO INTEREST HAS BEEN RECEIVED. IN THE PAST YEARS, THE ASSESSEE HAD OFFERED FOR TAX THE INTEREST INCOME ON ACCRUAL BASIS WITHOUT ACTUAL REC EIPT. QUITE CLEARLY THE FACTUAL POSITION PLEADED BY THE ASSESSEE REMAINS UNCONTROVE RTED, AND IT HAS BEEN RATHER ACCEPTED BY THE ASSESSING OFFICER IN THE COU RSE OF ASSESSMENT PROCEEDINGS IN ASSESSMENT YEAR 2006-07. IN THIS FA CTUAL BACKDROP, WE FIND THAT THE ASSESSEE MADE NO MISTAKE IN NOT ACCOUNTING FOR SUCH INTEREST INCOME IN THE YEAR UNDER CONSIDERATION SINCE NO REAL INCOME CAN B E SAID TO HAVE ACCRUED TO IT. THE IMPROBABILITY OF THE RECOVERY OF INTEREST STAND S ESTABLISHED ON RECORD ESPECIALLY WHEN THE ASSESSING OFFICER IN THE ASSESS MENT PROCEEDING U/S. 143 OF THE ACT DATED 14.11.2008 FOR THE ASSESSMENT YEAR 2006-07, HAS ACCEPTED THE SAME. THUS, EVEN THOUGH THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING NO REAL INCOME CAN BE SAID TO HAVE ACCRU ED TO IT IN RESPECT OF IMPUGNED INTEREST INCOME IN VIEW OF THE FACT THAT T HERE WAS IMPROBABILITY OF RECOVERY. THEREFORE, IN OUR VIEW, THE CIT(A) ERRED IN SUSTAINING THE IMPUGNED ITA NO.602/PN/08 (A.Y. 2005-06) HARIHAR FINANCE CORPORATION . 1998 6 ADDITION. AS A RESULT, WE SET-ASIDE THE ORDER OF TH E CIT(A) AND THE IMPUGNED ADDITION IS DELETED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 19 TH NOVEMBER, 2010. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S .PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED THE 19 TH NOVEMBER , 2010 ASHWINI TRUE COPY COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ASSTT.CIT, CIR.1(1), PUNE 3. CIT(A)-I, PUNE 4. CIT- I, PUNE , 5. D.R. ITAT B BENCH 6. GUARD FILE BY ORDER ASSTT. REGISTRAR I.T.A.T PUNE