Dy.CIT, Central Circle-9, Hyderabad V. M/s Biligiri Agro Farms Pvt. Ltd, Hyderabad

ITA 68/HYD/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77904 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-05-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 17-01-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts; Notional interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SL. NO. ITA NO. A.Y. APPELLANT RESPONDENT 1. 62/HYD/2014 200809 THE DCIT CENTRAL CIRCLE9, HYDERABAD M/S. MANASLU AGRO FARMS PVT. LTD., HYDERABAD PAN: AAFCM3723J 2. 63/HYD/2014 201011 DO DO 3. 64/HYD/2014 200809 DO M/S. TRISHUL GREENFIELDS PVT. LTD., HYDERABAD PAN: AACCT8481F 4. 65/HYD/2014 201011 DO DO 5. 66/HYD/2014 200809 DO M/S. KANIGIRI AGRO FARMS PVT. LTD., HYDERABAD PAN: AADCK2607H 6. 67/HYD/2014 201011 DO DO 7. 68/HYD/2014 201011 DO M/S. BILIGIRI AGRO FARMS PVT. LTD., HYDERABAD PAN: AADCB3655N 8. 69/HYD/2014 201011 DO M/S. BAHUDHANYA AGRO FARMS P. LTD., HYDERABAD PAN: AADCB3016F 9. 70/HYD/2014 201011 DO M/S. DHATU AGRO FARMS PVT. LTD., HYDERABAD PAN: AACCD7486N 10. 71/HYD/2014 201011 DO M/S. HAKRA AGRO FARMS PVT. LTD., HYDERABAD PAN: AABCH9513R 11. 72/HYD/2014 201011 DO M/S. KOLAR GREENLANDS PVT. LTD., HYDERABAD PAN: AACCK9653Q 12. 73/HYD/2014 201011 DO M/S. SARAVATI GREENLANDS PVT. LTD., HYDERABAD PAN: AAKCS4594C 13. 74/HYD/2014 201011 DO M/S. ATREYEE AGRO FARMS PVT. LTD., HYDERABAD PAN: AACGA7006B 14. 75/HYD/2014 200809 DO M/S. BALAGHAT GREENFIELDS PVT. LTD., HYDERABAD PAN:AADCB0292R 15. 76/HYD/2014 201011 DO M/S. KOEL AGRO FARMS PVT. LTD., HYDERABAD AACGK9656M REVENUE BY: SRI SOLGY JOSE T. KOTTARAM ASSESSEE BY: SRI K.C. DEVDAS DATE OF HEARING: 08.05.2014 DATE OF PRONOUNCEMENT: 28.05.2014 2 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== ORDER PER BENCH: ALL THE ABOVE APPEALS ARE BY THE REVENUE DIRECTED AGAINST DIFFERENT ORDERS OF CIT(A)-VII, HYDERABAD D ATED 30.10.2013 IN RESPECT OF DIFFERENT ASSESSEES FOR A. YS. 2008-09 AND 2010-11. SINCE THE ISSUES INVOLVED IN ALL THES E APPEALS ARE IDENTICAL, THEY ARE CLUBBED TOGETHER, HEARD TOGETHE R AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. AS THE ISSUES AND FACTS ARE COMMON, FOR THE SAKE OF BREVITY, WE ARE NARRATING THE GROUNDS AND FACTS AS IN ITA NO. 62/HYD/2014 IN RESPECT OF M/S. MANSLU AGRO FARMS PV T. LTD., FOR A.Y. 2008-09. 3. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1. THE LD. CIT(A)-VII, HYDERABAD HAS ERRED IN BOTH FACTS AND IN LAW. 2. THE LD. CIT(A)-VII, HYDERABAD OUGHT TO HAVE APPRECIATED THE FACT THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE AO WAS RIGHT IN CHARGING INTEREST ON THE MONIES GIVEN BY IT AS ADVANCES. 3. THE LD. CIT(A)-VII, HYDERABAD OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE COMPANY HAS NEITHER WRITTEN OFF THE ADVANCES NOR HAS MADE ANY PROVISION FOR DOUBTFUL DEBTS EVEN IN SUBSEQUENT YEARS. ALSO, THE ASSESSEE COMPANY HAS APPROACHED JUDICATURE FOR JUSTIFICATION OF THEIR CLAIM OF HAVI NG ADVANCED THE MONIES ALONG WITH INTEREST (TERMED BY THE COMPANY AS 'DAMAGES') FROM THE RECIPIENT COMPANY I.E. M/S. SCSL WHICH HAS MERELY PLACED THESE AMOUNTS UNDER 'SUSPENSE' - WITHOUT DENYING HAVING RECEIVED THESE MONIES BY IT. 3 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== 4. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE COMPANY IS ONE OF THE 37 COMPANIES WHICH WAS UNDER THE CONTROL OF SRI B RAMALINGA RAJU AND HIS FAMI L Y MEMBERS AND HAD TRANSACTIONS WITH M/S. S ATYAM C OMPUTER S ERVICES L TD . (FOR SHORT SCSL). SRI B RAMALINGA RAJU WAS THE ERSTWHILE CHAIRMAN OF M / S . SCSL . ON 7TH JANUARY, 2009, SRI B. RAMALINGA RAJU, LIFTED THE VEIL O F SECRECY ON THE AFFAIRS OF THE COMPANY M / S . SCSL AND MADE A CONFESSIONAL STATEMENT ADDRESSED TO THE BOARD OF DI RECTORS OF THE CO., M / S . SCSL. THE SAME WAS MARKED TO VARIOUS AUTHORITIES LIKE SEBI AND STOCK EXCHANGES. IN THIS STATEMENT, A KEY ITEM WAS REGARDING THE BALANCE SHEET OF THE COMPANY M / S SCSL AS ON 30.09.2008, HAVING AN UNDERSTATED LIABILITY OF R S. 1230 CRORES ON ACCOUNT OF THE FUNDS ARRANGED BY HIM. IT WAS STATED THAT THIS AMOUNT OF RS. 1230 CRORES WAS ARRANGED TO M / S SATYAM (NOT REFLECTED IN THE BOOKS OF SATYAM) TO KE EP THE OPERATIONS GOING ON BY RESORTING TO PLEDGING OF ALL THE PROMOTERS SHARES AND RAISING FUNDS FROM NBFCS ETC. HE HAD ALSO ENCLOSED TO HIS CONFESSIONAL STATEMENT BY WAY OF ANNEXURE, A STATEMENT SHOWING THE AMOUNTS GIVEN TO M / S SCSL BY THESE 37 COMPANIES. THE TOTAL AMOUNT GIVEN WAS RS. 142S C R ORES AND AFTER REDUCING AN AMOUNT OF RS. 194.60 CRORES (DETAILS OF WHICH WAS ALSO GIVEN) RECEIVED BY VARIO US COMPANIES FROM M /S SCSL, NET AMOUNT GIVEN TO M / S SCSL WAS QUANTIFIED AT RS. 1230.40 CRORES. A SUMMARY OF THE AMOUNTS GIVEN BY VARIOUS COMPANIES IS AS HEREUNDER: 4 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== TABLE SHOWING NET AMOUNT OF RS. 1230 CRORES GIVEN T O SATYAM AS SUMMARIZED FROM THE STATEMENT OF SRI B. RAMALING A RAJU. S. NO. COMPANY AMOUNT GIVEN TO SCSL (IN CRORES) AMOUNT RECD. FROM SCSL (IN CRORES) NET AMOUNT GIVEN TO SCSL (IN CRORES) UP TO FY 2007-08 FY 2008-09 TOTAL FY 2008- 09 1 AMARAVATI GREENLANDS PVT LTD 104.22 0.00 104.22 0.00 104.22 2 BANGAR AGRO FARMS PVT LTD 10.00 0.00 10.00 0.00 10.00 3 PAVITRAVATI GREEN FIELDS PVT LTD 80.78 0.00 80.78 0.00 80.78 4 VAMADEVA GREENLANDS PVT LTD 10.00 0.00 10.00 0.00 10.00 5 HIMAVAT GREEN FIELDS PVT LTD 36.95 5.00 41.95 0.00 41.95 6 KAILASH GREEN FIELDS PVT LTD 34.40 6.00 40.40 0.00 40.40 7 MAHAKALI GREEN FIELDS PVT LTD 36.00 0.00 36.00 0.00 36.00 8 MEGHANA AGRO FARMS PVT LTD 35.95 0.00 35.95 0.00 35.95 9 SURASA GREENLANDS PVT LTD 34.72 1.00 35.72 1.00 34.72 10 MADESWARA GREEN FIELDS PVT LTD 34.43 1.00 35.43 0.00 35.43 11 TEEPA AGRO FARMS PVT LTD 34.83 6.00 40.83 1.00 39.83 12 MALAPRABHA GREENFIELDS PVT LTD 35.99 0.00 35.99 0.00 35.99 13 NETRAVATI GREEN FIELDS PVT LTD 34.83 6.00 40.83 1.00 39.83 14 BANGANGA AGRO FARMS PVT LTD 35.97 0.00 35.97 0.00 35.97 15 KOEL AGRO FARMS PVT LTD 35.98 0.00 35.98 0.00 35.98 16 SARAVATI GREEN LANDS PVT LTD 36.23 0.00 36.23 0.00 36.23 17 AHAR GREEN FIELDS PVT LTD 36.24 0.00 36.24 0.00 36.24 18 BALAGHAT GREEN FIELDS PVT LTD 36.25 0.00 36.25 0.00 36.25 19 KOLAR GREEN FIELDS PVT LTD 36.23 0.00 36.23 0.00 36.23 20 ATREYEE AGRO FARMS PVT LTD 30.00 5.00 35.00 0.00 35.00 21 DHATU AGRO FARMS PVT LTD 30.00 5.00 35.00 0.00 35.00 22 HAKRA AGRO FARMS PVT LTD 30.00 10.00 40.00 0.00 40.00 23 BAHUDHANYA AGRO FARMS PVT LTD 30.00 10.00 40.00 0.00 40.00 24 MANASLU AGRO FARMS PVT LTD 32.00 8.00 40.00 0.00 40.00 25 TRISHUL GREEN FIELDS PVT LTD 33.00 7.00 40.00 0.00 40.00 26 KANIGIRI AGRO FARMS PVT LTD 30.00 10.00 40.00 8.00 32.00 27 PINGALA AGRO FARMS PVT LTD 20.00 17.00 37.00 25.00 12.00 28 BILGIRI AGRO FARMS PVT LTD 25.00 15;00 40.00 15.00 25.00 29 KALINDI GREEN FIELDS PVT LTD 20.00 20.00 40.00 24.50 15.50 30 PANCHAKALYANI AGRO FARMS PVT LTD. 0.00 47.90 47.90 22.65 25.25 31 PANCHAMUKHI AGRO PVT LTD 0.00 45.20 45.20 19.66 25.54 32 PARVATAGIRI AGRO FARMS PVT LTD 0.00 42.90 42.90 20.82 22.08 33 SAPTASWARA AGRO FARMS PVT LTD 0.00 35.00 35.00 15.25 19.75 34 EKADANTA GREEN FIELDS PVT LTD 0.00 36.50 36.50 17.92 18.58 35 GIRIPUTRA GREEN FIELDS PVT LTD 0.00 36.50 36.50 17.85 18.65 36 ARANYA AGRO FARMS PVT LTD 0.00 14.50 14.50 3.95 10.55 37 EKALAVYA AGRO FARMS PVT LTD 0.00 14.50 14.50 1.00 13.50 TOTAL 1020.00 405.00 1425.00 194.60 1230.40 5. AS CAN BE SEEN FROM THE ABOVE TABLE, THE ASSESSEE, GAVE AN AMOUNT OF RS. 32.00 CRORES TO M /S SCSL DURING THE YEAR 2 0 08-09. THE SOURCE FOR GIVING THIS AMOUNT WAS ON ACC OUNT OF SHARE APPLICATION M ONEY RECEIVED. THE ASSESSEE, GAVE THE AMOUNT OF RS. 32.00 CRORES TO M / S SCSL AS A TEMPORARY 5 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== ADVANCE ON VARIOUS DATES. THE BALANCE SHEET AND P&L A /C FILED ALONG WITH THE RETURN SHOWS THE AMOUNTS AS SHARE AP PLICATION MONEY AND TEMPORARY ADVANCE. NO INCOME IS SHOWN DUR ING THE YEAR. IN THE ASSESSMENT ORDER, THE AO CALCULATED INTEREST ON THESE ADVANCES GIVEN FOR THE YEAR ON THE NUMBER OF DAYS FOR WHICH THE TEMPORARY ADVANCE WAS GIVEN AND BROUG HT SUCH AMOUNTS TO TAX ON ACCRUAL BASIS AS PER TABLE BELOW AND AS MENTIONED IN PARA 3 OF THE ASSESSMENT ORDER. THE AO COMPUTED INTEREST ON THESE ADVANCES @ 18% BECAUSE T HE COMPANY MADE A CLAIM ON M/S SCSL FOR REPAYMENT OF T HESE ADVANCES ALONG WITH DAMAGES C LAIMED AT 18% PER ANNUM FROM THE DATE OF ADVANCE. DATE OF ADVANCE BANK ADVANCE AMOUNT (RS.) NO. OF DAYS UP TO 31.3.08 INTEREST 31/01/2008 HDFC BANK LTD 50,00,000 61 1,50,411 31/01/2008 HDFC BANK LTD 5,75,00,000 61 17,29,726 31/01/2008 HDFC BANK LTD 5,75,00,000 61 17,29,726 28/02/2008 HDFC BANK LTD 4,50 00,000 33 7,32,329 28/02/2008 HDFC BANK LTD 4,50 00,000 33 7,32,329 28/02/2008 HDFC BANK LTD 6,00,00,000 33 9,76,438 28/03/2008 HDFC BANK LTD 5,00,00,000 4 98 630 TOTAL 32,00,00,000 61,49,589 6. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESS EE STRONGLY OBJECTED TO SUCH AN ASSESSMENT AND FILED A DETAILED REPLY TO THE SHOW CAUSE NOTICE ISSUED. 7. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE COMPANIES ARE FOLLOWING MERCANTILE SYSTEM OF ACCOUN TING, AND SINCE THEY HAVE MADE A CLAIM FOR RECOVERY OF ADVANC ES ALONG WITH THE RIGHT TO RECEIVE INTEREST, INTEREST ON SUC H ADVANCES HAS ACCRUED TO THE ASSESSEE AS PER THE TRADE, CUSTOM AN D USAGE. IN VIEW OF THE SAME, HE ISSUED SHOW CAUSE NOTICES TO T HE 6 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== ASSESSEES SEEKING EXPLANATION AS TO WHY THE INTERES T AT THE RATE OF 18% PER ANNUM FROM THE DATE OF ADVANCE SHOU LD NOT BE ADDED TO THE TOTAL INCOME FOR THE RELEVANT ASSES SMENT YEAR, VIZ. ASSESSMENT YEAR 2008-09. THE ASSESSEES SUBMITT ED DETAILED REPLIES STATING THE ERSTWHILE CHAIRMAN OF M/S. SCSL SHRI RAMALINGA RAJU, IN HIS LETTER DATED 78TH JANUA RY, 2009 HAS STATED THAT THE BALANCE SHEET OF THE M/S. SCSL AS O N SEPTEMBER 30, 2008 CARRIED AN INTEREST LIABILITY OF RS. 12,304 MILLIONS, ON ACCOUNT OF THE FUNDS ARRANGED BY HIM. ON JANUARY 8, 2009, THE SAID COMPANY, M/S. SCSL, RECEIVED LETT ERS FROM 37 COMPANIES, INCLUDING THE FOUR ASSESSEES HEREIN, REQ UESTING CONFIRMATION BY WAY OF ACKNOWLEDGEMENT OF THE ALLEG ED AMOUNTS RECEIVED AS ALLEGED ADVANCES. ALL THESE LET TERS WERE FOLLOWED BY LEGAL NOTICES FROM THESE COMPANIES DATE D 4TH/5TH AUGUST, 2009. 8. IT WAS SUBMITTED THAT THE M/S.SCSL HAS NOT ACKNOWLEDGED ANY OF ITS LIABILITY TO ANY OF THE 37 COMPANIES AND HAS REPLIED TO THE LEGAL NOTICES STATING THAT T HE CLAIMS ARE LEGALLY UNTENABLE AND THAT THE ENFORCEMENT DIRECTOR ATE IS INVESTIGATING THE MATTER UNDER THE PREVENTION OF MO NEY LAUNDERING ACT OF 2002 AND DIRECTED THE COMPANIES T O FURNISH DETAILS WITH REGARD TO THE ALLEGED ADVANCES AND HAS FURTHER DIRECTED THE COMPANIES NOT TO RETURN THE ALLEGED AD VANCES UNTIL FURTHER INSTRUCTIONS FROM THE ENFORCEMENT DIR ECTORATE. IT WAS FURTHER SUBMITTED THAT THE ASSESSEES HEREIN HAV E FILED SUITS FOR RECOVERY OF ADVANCES BEFORE THE CITY CIVIL COUR T, SECUNDERABAD ON NOVEMBER 11, 2009 AND HAVE ALSO CLA IMED 7 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== INTEREST AT THE RATE OF 18% PER ANNUM TOWARDS DAMAG ES. IT WAS ALSO REITERATED THAT THE COMPANY M/S. SCSL HAVE DEN IED LIABILITY TO REPAY THE ALLEGED ADVANCES AND ALSO IN TEREST THEREON AND THEREFORE, THERE IS NO ADMISSION OF LIA BILITY AND ACCRUAL OF INTEREST THEREON. 9. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE COMP ANIES ARE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEY OUG HT TO HAVE ACCOUNTED FOR THE INTEREST ON ACCRUAL BASIS, AS THE ASSESSEES HAVE INHERENT RIGHT TO RECEIVE THE INTEREST ON THE SUM ADVANCED, AS EVIDENCED FROM ITS CLAIM. HE THEREFORE , BROUGHT TO TAX THE INTEREST INCOME WORKING OUT THE SAME AT THE RATE OF 18% P.A. ON THE ADVANCES GIVEN BY THE ASSESSEE COMP ANIES. 10. AGGRIEVED, THE ASSESSEES PREFERRED APPEALS BEFORE T HE CIT(A), REITERATING THE SUBMISSIONS MADE BY THE ASS ESSEES BEFORE THE ASSESSING OFFICER AND ALSO PLACING RELIA NCE UPON THE DECISIONS OF VARIOUS HIGH COURTS WITH REGARD TO THE ACCRUAL OF INCOME. THE LEARNED CIT(A) AFTER CONSIDERING THE AS SESSEES SUBMISSIONS AND PLACING RELIANCE UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF PARAGON CON STRUCTIONS (I)) P. LTD., REPORTED IN 274 ITR 413, HAS HELD THA T IT CANNOT BE HELD THAT INTEREST INCOME HAS DEFINITELY ACCRUED AN D ARISEN TO THE ASSESSEE AT THE RATE OF 18% AS HELD BY THE ASSE SSING OFFICER, AND THAT AS AND WHEN THE CITY CIVIL COURT FINALISED THE SAID INTEREST RATE MENTIONED THEREIN, THE INTEREST CAN BE TAXED IN THE YEAR IN WHICH THE COURT PRONOUNCES ITS ORDER ON THE CIVIL SUIT, PENDING BEFORE IT. THUS, THE CIT(A) ALLOWED T HE ASSESSEES 8 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== APPEALS. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT( A), THE REVENUE IS IN APPEAL BEFORE US. 11. THE LEARNED DEPARTMENTAL REPRESENTATIVE, SRI SOLGY JOSE T. KOTTARAM, SUBMITTED THAT THE ISSUE OF ADVAN CES BY THE FOUR ASSESSEE COMPANIES TO M/S. SCSL WAS ADMITTED B Y THE STATEMENT OF SHRI RAMALINGA RAJU ON 7TH/8TH JANUARY , 2009. THE FURTHER FACT THAT THESE AMOUNTS HAVE BEEN ADVAN CED BY THE ASSESSEE COMPANIES TO M/S. SCSL THROUGH BANKING CHANNELS AND ALSO THAT THESE COMPANIES HAVE ISSUED LEGAL NOTICES FOR RECOVERY OF ADVANCES AND ALSO HAVE THER EAFTER FILED CIVIL SUITS FOR RECOVERY OF ADVANCES ALONG WITH INT EREST PROVES THE FACT THAT THE ASSESSEES HEREIN HAVE ADVANCED TH E AMOUNTS TO M/S. SCSL. HE SUBMITTED HAT ONCE IT IS PROVED TH AT THE ADVANCES HAVE BEEN MADE BY THE ASSESSEE COMPANIES T O M/S.SCSL, THE COMPANIES FOLLOWING THE MERCANTILE SY STEM OF ACCOUNTING, OUGHT TO HAVE ACCOUNTED FOR THE INTERES T INCOME IN THEIR BOOKS OF ACCOUNT FOR THE RELEVANT ACCOUNTI NG YEAR. HE SUBMITTED THAT THE CIT(A) HAS ERRONEOUSLY HELD THAT THE INTEREST INCOME IS TO BE BROUGHT TO TAX IN THE YEAR IN WHICH THE CITY CIVIL COURT DECIDES THE MATTER AND PRONOUNCES ITS ORDER WITH REGARD TO RATE OF INTEREST ON THE SUIT AMOUNT. HE SUBMITTED THAT THE INCOME OF THE RELEVANT ASSESSMEN T YEAR HAS TO BE BROUGHT TO TAX IN THAT YEAR ONLY. HE SUBMITTE D THAT THE INCOME OR LIABILITY CANNOT BE PREPONED OR POSTPONED TO ANOTHER ASSESSMENT YEAR. THUS, ACCORDING TO HIM, TH E ORDER OF THE CIT(A) IN THE CASE OF THE ASSESSEES IS ERRONEOU S AND HAS TO 9 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== BE SET ASIDE AND THE ASSESSMENT ORDERS ON THIS ISSU E HAVE TO BE RESTORED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI DEVDAS, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE CIT(A) AND SUBMITTED THAT THE IMPORTANT FACTOR TO BE CONSIDERE D IS THAT THE COMPANY, M/S.SCSL, HAS DENIED ITS LIABILITY TO PAY ANY AMOUNTS TO THE ASSESSEE COMPANIES, AND THEREFORE, T HERE IS NO CERTAINTY OF RECOVERY OF THE TEMPORARY ADVANCES ITS ELF GIVEN BY THE ASSESSEE COMPANIES. HE THEREFORE, SUBMITTED THA T DUE TO THE UNCERTAINTY OF THE RECOVERY OF THE TEMPORARY AD VANCES ITSELF, THERE IS NO CERTAINTY OF RECEIPT OF INTERES T INCOME ON SUCH TEMPORARY ADVANCES. IT IS FURTHER SUBMITTED TH AT THERE WAS NO CONTRACT BETWEEN THE ASSESSEE COMPANIES AND M/S. SCSL TO RECEIVE INTEREST ON THESE TEMPORARY ADVANCE S AND IN THE ABSENCE OF SUCH CONTRACT, THE INTEREST INCOME CANNOT BE DEEMED TO HAVE ARISEN OR ACCRUED TO THE ASSESSEES. HE FURTHER SUBMITTED THAT THE ADVANCES HAVE BEEN MADE OUT OF S HARE APPLICATION MONIES AND NOT OUT OF BORROWED FUNDS, A ND THEREFORE, IT CANNOT BE PRESUMED THAT THE ASSESSEE HAS INCURRED ANY INTEREST EXPENDITURE BY ADVANCING THE INTEREST FREE LOANS TO THE SISTER CONCERNS, AND THEREFORE, N O NOTIONAL INTEREST CAN BE BROUGHT TO TAX EVEN ON THIS COUNT. 13. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, W E FIND THAT THE BASIS FOR BRINGING TO TAX THE NOTIONAL INTEREST INCOME ON ADVANCES ALLEGEDLY MADE BY THE ASSESSEE COMPANY TO M/S. SCSL ARE THE CIVIL SUITS FILED BY THE ASSESSEE COMP ANIES FOR 10 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== RECOVERY OF THE SUIT AMOUNTS ALONG WITH INTEREST AT THE RATE OF 18% PER ANNUM. THE UNDISPUTED FACTS ARE THAT THE AS SESSEES HAVE ADVANCED THE LOANS/TEMPORARY ADVANCES TO M/S. SCSL AND THIS FACT HAS COME TO LIGHT ONLY BY THE STATEME NT OF SRI RAMALINGA RAJU DATED 7TH/8TH OF JANUARY, 2009. FUR THER, THE ASSESSEES HAVE ADVANCED THE LOANS OR TEMPORARY ADVA NCES THROUGH BANKING CHANNELS AND IMMEDIATELY AFTER THE STATEMENT OF SRI RAMALINGA RAJU, THE ASSESSEES HAVE ALSO ISSUED LEGAL NOTICES FOR THE REPAYMENT OF THE LOANS AND ALSO FILED CIVIL SUITS FOR RECOVERY OF THE LOAN AMOUNTS ALONG WITH INTEREST IN THE CITY CIVIL COURT, SECUNDERABAD. THE REFORE, THE LIABILITY MAY HAVE BEEN DENIED BY M/S. SCSL, BUT AS FAR AS THE ASSESSEES ARE CONCERNED, THERE IS NO DISPUTE OR CON TROVERSY WITH REGARD TO THE LOANS ADVANCED BY THEM TO M/S. S CSL. THE ONLY DISPUTE NOW IS WITH REGARD TO THE LIABILITY OF M/S. SCSL AND THE RIGHT OF THE ASSESSEE TO RECEIVE INTEREST A T THE RATE OF 18% PER ANNUM. ANOTHER UNDISPUTED FACT IS ALSO THAT THERE IS NO CONTRACT BETWEEN THE ASSESSEE AND M/S. SCSL WITH REGARD TO THE ADVANCES AND THE INTEREST THEREON. IN THE A BSENCE OF ANY SUCH CONTRACT TO RECEIVE THE INTEREST ON THE AD VANCES GIVEN BY THE ASSESSEE COMPANIES, IT CANNOT BE SAID THAT T HE ASSESSEE COMPANIES HAVE ANY RIGHT TO RECEIVE SUCH AMOUNTS OF INTEREST OR THAT THE INTEREST INCOME HAS ACCRUED TO THE ASSE SSEES. 14. LET US KNOW EXAMINE THE LEGAL PRINCIPLES GOVERNING SUCH ISSUES- 1. THE HONBLE SUPREME COURT IN THE CASE OF CIT V/S . WALCHAND & CO. P. LTD. (65 ITR 381), WHILE CONSIDER ING THE PROVISIONS OF S.10(2)(XV) AND S.33(IV) OF THE I NDIAN 11 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== INCOME-TAX ACT, 1922, HAS HELD THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY OR DETERMINING WHETHER AN EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, THE REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. 2. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V/S. RELIANCE UTILITIES AND POWER LTD. (313 ITR 340 ) HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST FR EE AND OVERDRAFT AND /OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INT EREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE , IF INTEREST FREE FUNDS WOULD BE SUFFICIENT TO MAKE THE INVESTMENTS. 3. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF HIGHWAYS CONSTRUCTIONS P. LTD. V/S. CIT (199 ITR 70 2), WAS DEALING WITH A CASE OF AN ASSESSEE COMPANY WHIC H HAD ADVANCED INTEREST FREE LOANS TO DIRECTORS FROM AMOUNTS BORROWED ON INTEREST. THE HONBLE HIGH COUR T HELD THAT THERE WAS NO FINDING OF FACT TO THE EFFEC T THAT ACTUALLY LOAN HAD BEEN GRANTED TO THE MANAGING DIRECTOR OR ANY OTHER PERSON ON INTEREST OR ANY INT EREST HAD ACTUALLY BEEN COLLECTED, BUT THE COLLECTION OF THE INTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE HON BLE HIGH COURT AFTER OBSERVING THAT THE FINDING OF THE ITO WAS THAT THE ASSESSEE SHOULD HAVE COLLECTED INTERES T, HELD THAT IF THE ASSESSEE HAD NOT BARGAINED FOR INT EREST OR HAD NOT COLLECTED THE SAME, THE INCOME TAX OFFIC ER COULD NOT FIX A NOTIONAL INTEREST AS DUE OR AS COLL ECTED BY THE ASSESSEE, AS THERE WAS NO PROVISION IN THE INCOME-TAX ACT, EMPOWERING THE INCOME-TAX AUTHORITY TO INCLUDE IN THE TAXABLE INCOME, ANY INTEREST WHIC H WAS NOT DUE OR NOT COLLECTED BY THE ASSESSEE, AND THE ADDITION OF AN AMOUNT AS NOTIONAL INTEREST WAS NOT JUSTIFIED. 4. HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V/S. ABHISHEK INDUSTRIES LTD. (286 ITR 1), WAS DEALING WITH A CASE OF INTEREST FREE ADVANCES GIVEN TO SISTER CONCERNS ON THE BASIS OF WHICH THE ASSESSING 12 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== AUTHORITY HAS DISALLOWED INTEREST PAID BY THE ASSES SEE ON BORROWED FUNDS. THE HONBLE HIGH COURT HAS HELD THAT THE NEXUS BETWEEN THE INTEREST BEARING FUNDS A ND THE ADVANCES MADE TO THE SISTER CONCERNS IS NOT PRO VED AND THEREFORE, THERE CANNOT BE ANY DISALLOWANCE OF INTEREST EXPENDITURE. 15. APPLYING THE ABOVE RATIONALE PROPOUNDED BY THE HONBLE SUPREME COURT AS WELL AS THE HONBLE HIGH C OURTS, IN THE CASES DISCUSSED ABOVE, WE OBSERVE THAT THE FOLL OWING POINTS EMERGE (A) IT IS FOR THE ASSESSEE TO DECIDE HOW IT CONDUCT S ITS BUSINESS; (B) WHERE AN ASSESSEE ADVANCES INTEREST FREE LOANS TO ITS SISTER CONCERNS, UNLESS NEXUS BETWEEN INTEREST BEAR ING FUNDS AND THE INTEREST FREE ADVANCES IS PROVED, EXPENDITURE ON ACCOUNT OF INTEREST ON BORROWED FUND S CANNOT BE DISALLOWED NOR IT CAN BE PRESUMED THAT TH E ASSESSEE HAS COLLECTED INTEREST FROM ITS SISTER CON CERNS ON THE ADVANCES GIVEN. (C) WHERE THE FUNDS HAVE BEEN ADVANCED OUT OF ANY INTEREST FREE FUNDS, THEN THE DISALLOWANCE OF INTER EST ON BORROWED FUNDS CANNOT BE MADE; (D) UNLESS AND UNTIL THERE IS A CONTRACT BETWEEN TH E PARTIES FOR CHARGING OF INTEREST ON THE FUNDS ADVAN CED, THE NOTIONAL INTEREST INCOME CANNOT BE BROUGHT TO T AX. 16. 14. APPLYING THESE PRINCIPLES TO THE FACTS OF THE C ASES BEFORE US, WE FIND THAT THE ASSESSEES HAVE STATED B EFORE THE CIT(A) THAT THE AMOUNTS ADVANCED ARE FROM OUT OF TH E SHARE APPLICATION MONIES AND TEMPORARY ADVANCES. IT IS SO STATED ON THE BASIS OF ENTRIES IN THE BALANCE SHEET AND THE PROFIT & LOSS ACCOUNTS OF THE RESPECTIVE ASSESSEES FILED ALONG WI TH THEIR RETURNS OF INCOME. IN THE ABSENCE OF ANY CONTRACT B ETWEEN THE 13 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== ASSESSEE COMPANIES AND M/S. SCSL FOR CHARGING OF IN TEREST ON THE ADVANCES, THE ASSESSEES ARE NOT ENTITLED TO REC EIVE ANY INTEREST INCOME ON SUCH ADVANCES. THEREFORE, MEREL Y BECAUSE THE ASSESSEE IS FOLLOWING MERCANTILE IS SYSTEM OF A CCOUNTING, IT CANNOT BE SAID THAT THE INTEREST HAS ACCRUED TO THE ASSESSEES. FURTHER, MERELY BECAUSE THE ASSESSEES HAVE CLAIMED INTEREST AT THE RATE OF 18% PER ANNUM IN THE SUITS FILED FOR RE COVERY OF ADVANCES, IT CANNOT BE SAID THAT THE SAID RATE OF I NTEREST IS APPLICABLE AS M/S. SCSL HAS NOT ADMITTED THE LIABIL ITY OF EVEN THE AMOUNTS OF ADVANCE. AS SUCH, WE FIND THAT THERE IS NO CERTAINTY WITH REGARD TO THE SAID RATE OF INTEREST. THEREFORE, IT CANNOT BE PRESUMED THAT THE INTEREST ACCRUED TO TH E ASSESSEE AT THE RATE OF 18% P.A. AS CLAIMED BY THE ASSESSEES IN THE SUITS FILED FOR RECOVERY OF ADVANCES. THE CIVIL COURTS WO ULD CONSIDER AND DECIDE THE LIABILITY OF M/S. SCSL TO REPAY THE AMOUNTS OF ADVANCES AND WOULD ALSO CONSIDER THE LIABILITY OF M /S. SCSL TO PAY INTEREST THEREON AND THE RATE OF INTEREST AT WH ICH THE ADVANCES SHOULD BE REPAID. THEREFORE, UNLESS AND UN TIL THE LIABILITY TO PAY THE ADVANCES AND THE RATE OF INTER EST AT WHICH THE TEMPORARY ADVANCES ARE TO BE REPAID IS DETERMIN ED BY THE CIVIL COURT, IT CANNOT BE SAID THAT THE SAME HAS AC CRUED OR ARISEN TO THE ASSESSEES. HOWEVER, IF THE ASSESSEES HAD ADVANCED INTEREST BEARING FUNDS AS INTEREST FREE AD VANCES, THE INTEREST PAID BY THE ASSESSEES TOWARDS SUCH BORROWE D FUNDS WOULD HAVE TO BE DISALLOWED AND TREATED AS THE INCO ME OF THE RESPECTIVE ASSESSEES. THE HONBLE PUNJAB AND HARYAN A HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) HA S HELD THAT THE NEXUS BETWEEN THE INTEREST BEARING FUNDS AND TH E INTEREST 14 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== FREE ADVANCES WILL HAVE TO BE PROVED BEFORE MAKING THE DISALLOWANCE OF INTEREST AND BRINGING IT TO TAX. WE FIND THAT NEITHER THE ASSESSING OFFICER NOR THE CIT(A) HAS EX AMINED THE ISSUE FROM THIS ANGLE. THEREFORE, THE ORDERS OF THE CIT(A) AND THE ASSESSING OFFICERS ARE SET ASIDE AND THE ISSUE IS REMITTED TO THE FILE OF THE ASSESSING OFFICER OF THE RESPECTIVE ASSESSEES FOR DE NOVO CONSIDERATION IN THE LIGHT OF OUR OBSERVATI ONS ABOVE. FURTHER, WE HOLD THAT IF THE AMOUNTS ADVANCED TO M/ S. SCSL BY THE RESPECTIVE ASSESSEES ARE FROM THEIR OWN FUNDS, THEN THE INTEREST EXPENDITURE CANNOT BE DISALLOWED AND BROUG HT TO TAX. NEEDLESS TO MENTION THAT THE ASSESSING OFFICER SHAL L GIVE FAIR OPPORTUNITY OF HEARING TO THE ASSESSEES BEFORE PASS ING ANY ORDERS IN THE LIGHT OF OUR ABOVE OBSERVATIONS AND I N ACCORDANCE WITH LAW. 17. FURTHER, SAME VIEW WAS TAKEN BY THIS TRIBUNAL IN TH E CASE OF OTHER ASSESSEES VIZ., M/S. BANGANGA AGRO FA RMS PVT. LTD., & OTHERS IN ITA NOS. 1852 TO 1855/HYD/2013. ACCORDINGLY, ON SIMILAR LINES, WE ARE INCLINED TO R EMIT THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION. 18. IN THE RESULT, ALL THE APPEALS OF THE REVENUE ARE A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 28 TH MAY, 2014 SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 28 TH MAY, 2014 TPRAO 15 ITA NO. 62/HYD/2014 & ORS. M/S. MANASLU AGRO FARMS PVT. LTD. & ORS. =============================== COPY TO: 1. THE DEPUTY CIT, CENTRAL CIRCLE-9, 8 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD-500 004. 2. M/S. MANASLU AGRO FARMS PVT. LTD., R.K. RESIDENCY, H. NO. 8-3-229/D/32, III FLOOR, VENKATGIRI, YOUSUFGUDA, HY DERABAD. 3. M/S. TRISHUL GREENFIELDS PVT. LTD., R.K. RESIDENCY , H. NO. 8- 3-229/D/32, III FLOOR, VENKATGIRI, YOUSUFGUDA, HYDE RABAD. 4. M/S. KANIGIRI AGRO FARMS PVT. LTD., R.K. RESIDENCY , H. NO. 8-3-229/D/32, III FLOOR, VENKATGIRI, YOUSUFGUDA, HY DERABAD. 5. M/S. BILIGIRI AGRO FARMS PVT. LTD., FLAT NO. 102, D HANUNJAYA NAGAR, RAJIV NAGAR, YOUSUFGUDA, HYDERABAD-45. 6. M/S. BAHUDHANYA AGRO FARMS P. LTD., H-17, FLAT NO. 201, TULSI APTS., MADHURA NAGAR, SR NAGAR, HYDERABAD-38. 7. M/S. DHATU AGRO FARMS PVT. LTD., H-17, FLAT NO. 201 , TULSI APTS., MADHURA NAGAR, SR NAGAR, HYDERABAD-38. 8. M/S. HAKRA AGRO FARMS PVT. LTD., H-17, FLAT NO. 201 , TULSI APTS., MADHURA NAGAR, SR NAGAR, HYDERABAD-38. 9. M/S. KOLAR GREENLANDS PVT. LTD., H. NO. 1-11-195, F LAT NO. 503, SHAMLAL BUILDINGS, BEGUMPET, HYDERABAD-72. 10. M/S. SARAVATI GREENLANDS PVT. LTD., H. NO. EWS 1040 , III PHASE, KPHB COLONY, KUKATPALLY, HYDERABAD-72. 11. M/S. ATREYEE AGRO FARMS PVT. LTD., H-17, FLAT NO. 2 01, TULSI APTS., MADHURA NAGAR, SR NAGAR, HYDERABAD-38. 12. M/S. BALAGHAT GREENFILEDS PVT. LTD., B-79, MADHURA NAGAR, HYDERABAD-38. 13. M/S. KOEL AGRO FARMS PVT. LTD., H. NO. EWS 1040, II I PHASE, KPHB COLONY, KUKATPALLY, HYDERABAD-72. 14. THE CIT(A)-VII, HYDERABAD. 15. THE CIT (CENTRAL), HYDERABAD 16. THE DR, B BENCH, ITAT, HYDERABAD.