RARE ENTERPRISES,MUMBAI V. DCIT CENTRAL CIRCLE 7(1), MUMBAI

ITA 771/MUM/2024

AI Insights

The case involves appeals by both the Revenue and the assessee, Rare Enterprises, against the order of the CIT(A) concerning the assessment year 2018-19. The primary issue was whether interest income of Rs.3,60,00,000 from Dharti Dredging & Infrastructure Ltd., which was classified as an NPA and later underwent insolvency proceedings, should be taxed. The assessee argued that no interest was received or accrued due to the debtor's financial distress, while the Revenue contended that the interest income should be recognized as per the tax deducted at source (TDS) entries. The Tribunal found that the interest income had not accrued in reality, aligning with the principles of real income theory and dismissing both parties' appeals.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312766 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2018-2019
• Other Referred Cases: State Bank of Travancore vs. Commissioner of Income Tax Kerala, Shoorji Vallabhdas & Co. vs. Commissioner of Income Tax, Godhra Electricity Co. Ltd. vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R.R. MAKWANA
• Assessee Lawyers: S. C. TIWARI
• Keywords: Business income; TDS; FORM 26AS

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.1442/Mum/2024 (Assessment Year :2018-19) DCIT, Central Circle- 7(1), Mumbai Vs. Rare Enterprises 151, 15th Floor Nariman Bhavan Nariman Point Mumbai – 400 021 PAN/GIR No.AAEFR8176J (Appellant) .. (Respondent) ITA No.771/Mum/2024 (Assessment Year :2018-19) Rare Enterprises 151, 15th Floor Nariman Bhavan Nariman Point Mumbai – 400 021 Vs. DCIT, Central Circle-7(1), Mumbai PAN/GIR No.AAEFR8176J (Appellant) .. (Respondent) Assessee by Shri S.C. Tiwari Revenue by Shri R.r. Makwana, Addl. CIT Date of Hearing 08/04/2025 Date of Pronouncement 29/04/2025 ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 2 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the Revenue as well as by the assessee against order dated 11/01/2024 passed by ld. CIT(A)-49, Mumbai for the quantum of assessment passed u/s.143(3) for the A.Y.2018-19. 2. The Revenue in grounds of appeal has taken following grounds of appeal:- 1. \"On the facts and in circumstances of the case and in Law, the Ld. CIT(A) erred in concluding that the assessee did not receive the interest of Rs 3,60,00,000/-, without appreciating the fact that neither during the assessment proceedings nor during the appellate proceedings, the assessee could, by producing all its bank statements, establish that it really did not receive the interest of Rs.3,60,00,000/-, which it claimed to have not received.\" 2. \"On the facts and in circumstances of the case and in Law, the Ld.CIT(A) apparently did not consider the fact that the assessee's debtor M/s. Dharti Dredging & Infrastructure Ltd. (DDIL) was classified by State Bank of India as NPA on 30.06.2018, but almost five months after this Le. on 08.11.2018 DDIL paid TDS of Rs.36,00,000/- on interest of Rs. 3,60,00,000/-, which implies that mere classification of DDIL as NPA by its bank cannot be said to be the basis of its incapability to pay interest to the assessee, since had it been so, DDIL would have had no reason to pay only the said TDS and not paying the interest of Rs.3,60,00,000/-to the assessee, that too after being classified as NPA.\" 3. Whereas assessee has taken following grounds:- “1.On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) 49, Mumbai erred in law and in facts in not allowing credit of Rs.36,00,000/- ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 3 being tax deducted by M/s. Dharti Dredging And Infrastructure Ltd,. when Dharti Dredging had to the actually paid Rs.36,00,000/- to the account of the Revenue.” 4. The brief facts qua the issue involved are that assessee is a partnership firm carrying out business of trading and making investments. It has filed its return of income at Rs.23,07,03,020/- and current year loss of Rs.1,15,64,220/-. In financial year 2016-17, the assessee had advanced Rs.30 Crores to M/s. Dharti Dredging & Infrastructure Ltd., hereinafter referred to as ‘Dharti’ on the following dates:- Date Particulars Am tin Rs. 10.10.2016 Amount paid * 32,00,000/- XT Amount paid 4,18,00,000/- \"V... Amount paid 25,50,00,000/- 09.01.2017 Amount paid 200,00,000/- Total Rs. 32,00,00,000/- Less: 19.01.2017 Amount received 2,00,00,000/- Total Rs. 30,00,00,000/- ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 4 FFor the year ending 31/03/2017, Dharti has paid interest of Rs.1,71,28,761/- on which TDS of Rs.17,20,877/- was deducted. This interest income was offered to by the assessee as its business income in the A.Y 2017-18. It is a matter of record that during the F.Y. 2017-18, (A.Y. 2018-19) Dharti had become a NPA and assessee did not receive any interest for the year ending 31/03/2018 relevant to A.Y.2018-19. For the A.Y. 2018-19, as per Form 26AS, Dharti had not deducted any TDS for interest for the period 01/04/2017 to 31/03/2018. Since Dharti had become NPA and was facing severe financial difficulties, assessee did not account for interest receivable, as according to assessee it did not accrue because there was no chance of receiving any interest. However, on 08/11/2018 without actually paying interest to the assessee, Dharti paid TDS of Rs.36 lakhs to the Government Treasury on interest accrual of Rs.3,60,00,000/- for the year ending 31/03/2018 and this fact of payment of TDS was not known to the assessee as Dharti had not sent any TDS certificate for deduction of Rs.36 lakhs. 5. During the course of assessment proceedings ld. AO required the assessee to reconcile the income and why the amount offered to tax on interest for which TDS was reflected in 26AS has not been offered. In response assessee submitted that it had given advance to Dharti to the tune of Rs.30 Crores however, for the relevant F.Y.2017-18, it had neither received any interest nor any communication regarding payment of TDS on interest. Return of income was filed by the assessee on 31/10/2018 and has only claimed TDS credit of income which was offered for tax ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 5 and no such credit of Rs.36,00,000/- was taken. It was only during the assessment proceedings that assessee came to know that on 08/11/2018 Dharti had deposited TDS of Rs.36 lakhs on the PAN of the assessee showing interest income of Rs.3,60,00,000/-. However, the ld. AO did not accept assessee’s explanation and added Rs.3,60,00,000/- as interest income under the head ‘other sources’. Further, ld. AO also did not give credit for tax deducted at source of Rs.36 lakhs on the said interest. 6. The ld. CIT(A) noted certain important facts that Dharti had become NPA and petition was filed by its bankers u/s.7 of IBC Act 2016 and the National Company Law Tribunal has passed the order dated 05/04/2022 placing the said company under insolvency proceedings. Thus, there was no chance of recovery of the amount of Rs.3.6 Crores. Further, the assessee had not received any amount either interest or principal amount from Dharti till date and no interest was received or receivable which was offered to tax and no addition has been made by the AO in the subsequent years. 7. Another important fact which has been noted that in A.Y.2020-21, the assessee had written off the advance of Rs.30 Crores in its books and had not claimed the write off of the amount of Rs.3.6 Crores in the year under consideration. The ld. CIT (A) after appreciating all the facts and the explanation had deleted the said addition after observing as under:- ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 6 10.3 I have considered the contentions of the appellant, findings of the AO in the impugned assessment order and the facts of the case. The appellant had advanced Rs.30 Crore to DDIL as under: Date Particulars Amt. in Rs. 10.10.2016 Amount paid 32,00,000/- Amount paid 4,18,00,000/- Amount paid 25,50,00,000/- 09.01.2017 Amount paid 200,00,000/- Total Rs. 32,00,00,000 Less: 19.01.2017 Amount received 2,00,00,000/- Total Rs. 30,00,00,000/- DDIL paid interest for the year ended 31/03/2017 of Rs.1,71,28,767/- on which TDS of Rs.17,12,877/- was deducted. The same was offered to tax as business income by the appellant. Further, during F.Y. 2017-18, DDIL became an NPA and the appellant did not receive any interest from the said company for the year ended 31/03/2018.For the year under consideration (A.Y. 2018-19), return of income was filed by the appellant on 31/10/2018, and as per Form 26AS of the appellant as available on that date, DDIL had not deducted any tax at source on interest payable for the period 01/04/2017 to 31/03/2018. In view of the same and since DDIL had become an NPA and was facing financial difficulties, the appellant did not account for the interest receivable. While doing so, the appellant had considered the fact that the income did not commercially accrue, as there was no ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 7 chance of receiving the same. However, subsequently, on 08/11/2018, DDIL paid TDS of Rs.36,00,000 on/interest payable of Rs.3,60,00,000/-for the year ended 31/03/2018.The 'appellant was, however, unaware of this development, as DDIL did not send the TDS Certificate for the deduction of Rs.36,00,000/-. During the course of assessment proceedings, the AO required the appellant to reconcile the income offered to tax with the tax deducted at source as per Form 26AS and the appellant made its submissions, which have been reproduced by the AO in para 4.1 of the impugned assessment order. The AO, as stated above, rejected the contentions of the appellant and added the amount of Rs.3,60,00,000/- as interest income under the head 'income from other sources'. 10.4 The real question here is whether the income had really accrued or not. It is not a hypothetical accrual of income that is to be taken into consideration, but the real accrual of the income. Whether an accrual has taken place or not is to be judged on the principles of real income theory. In determining the question whether it is hypothetical income or real income, the facts of the case in totality has to be examined. 10.5. Before me, the appellant has submitted following details- a) Copy of Petition dated 19th August 2020, under section 7 of IBC, 2016 by State Bank of India against M/s. Dharti Dredging and Infrastructure Limited is enclosed as 'Annexure- A' b) Copy of Order passed by NCLT Hyderabad Bench-1 dated 05.04.2022 10.5.1. On perusal of application of financial creditor before the NCLT Bench, in the Para No. 6, following details are mentioned- \"The Corporate Debtor after availing all the facilities failed and neglected to repay the amounts as per the sanction terms. The loan accounts, as a result, became irregular. Despite several requests, demands etc. by the Bank the Corporate Debtor, and its Management didn't take any steps to regularize the loan accounts. Due to the failure and the gross negligence of the Corporate Debtor and its management in repaying the ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 8 outstanding dues, the Bank had to classify the accounts as NPA on 30.06.2018 by complying with the guidelines issued by the RBI from time to time in this regard.\" 10.5.2. In the order of Hon’ble NCLT dated 05.04.2022, in the Para No. 3, it is stated as under. \"It is averred that, at the request of the Corporate Debtor, the Consortium Banks renewed/modified/enhanced the said credit facilities from time to time during 2011 to 2017 which were confirmed by the Corporate Debtor from time to time. The Corporate Debtor has hypothecated all the Dredgers in favour of the Financial Creditor and further executed revival letters on 09.04.2013, 21.04.2015 and 24.04.2018 and balance confirmation letters in all the accounts as on 31.03.2016, 31 03.2017 & 31.03.2018. Despite issuing several reminders by the Petitioner when the Corporate Debtor failed to repay the loans and no effort was forthcoming from the side of Corporate Debtor to regularize the loan accounts, the Petitioner Bank classified the accounts as Non-Performing Asset on 30.06.2018.\" From the above, it is seen that the SBI has already classified the loan taken by M/s Dhatri Dredging and Infrastructure Ltd, as NPA on 30/06/2018. The Hon'ble NCLT has also allowed the application of Financial Creditor and appointed Interim Resolution Professional vide order dated 05/04/2022. 10.6 The facts in the appellant's case can be summarized as under:- The appellant had given an advance of Rs.30 Cr. to M/s. Dharti Dredging & Infrastructure Ltd. (DDIL) In F.Y. 2016-17. Interest received of Rs 1,71,28,767/- on this advance has been offered to tax for the A.Y 2017-18 as business income. The State Bank Of India has classified the Loans given to M/s. Dharti Dredging & Infrastructure Ltd. as NPA on 30/06/2018 ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 9 The Sate Bank of India has filed corporate insolvency petition against debtor to M/s. Dharti Dredging & Infrastructure Ltd. before the NCLT. Hyderabad Bench. The Hon’ble NCLT, Hyderabad Bench, vide order dated 05.04.2022, allowed the petition filed by the SBI and appointed the Interim Resolution Professional. vi. The appellant has written off the Debt in the F.Y. 2019-20. 10.7 From the above facts it can be seen that the SBL has classified the loans given to M/s. Dharti Dredging & Infrastructure Ltd in the FY 2018-19 on the facts that, the debtor had failed to repay the loan. This shows that the financial condition of M/s. Dharti Dredging & Infrastructure Ltd was not sound and it was not in a position to pay the interest. It was facing financial difficulties. Even the recovery of principal amount was doubtful. In the facts of the case, there was no certainty regarding the receipt of interest. In the backdrop of these facts, it cannot be said that the interest income has been accrued to appellant as it was following mercantile system of accounting. 8. Thereafter, he has referred to various judgments of the Hon’ble Supreme Court and in the case of Godhra Electricity Co. Ltd. reported in 91 Taxman 351 and held that what can be taxed is the real income and not hypothetical income. Here in this case it is a fact that financial condition of the debtor was not sound and debtor had already defaulted with the payment of loan to SBI and under this situation there was no possibility to recover the interest in future. Even the recovery of the principal amount was doubtful. Thus, he held that interest cannot be assessed in the hands of the assessee. 9. Here in this case earlier the appeal was decided by the Tribunal vide order dated 27/09/2024, however, the same was ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 10 reaclled later on the ground that there was no representation on behalf of the assessee and incharge from the office of the S.V. Tiwari who was appeared to seek adjournment and by mistake bench had marked the presence and since it was an exparte order, the same was recalled vide order dated 10/02/2025. 10. We have heard both the parties and also perused the relevant facts and material on record. It is an undisputed fact that assessee had advanced amount of Rs.30 Crores in the F.Y. 2016-17 and in that year he had received interest of Rs.1,71,68,767/-. The said interest on the loan given to Dharti was offered to tax as business income. In F.Y. 2017-18, assessee did not receive any interest and it was stated that since Dharti had become NPA and various proceedings were initiated against this company by the bankers, there was no chance of receiving any interest. In fact the petition was filed by the bankers’ u/s.7 of the IBC of the Act, 2016 and NCLT has passed an order dated 05/04/2022 placing the said company under Insolvency proceedings. Since at that time only assessee had no hope for recovery of interest, it had not shown interest on accrual basis. It was post filing of the return of income assessee came to know that the said company, Dharti had deducted TDS of Rs.36 lakhs, however, the interest income of Rs.3,60,00,000/- accrued to the assessee was not paid to the assessee. Ld. CIT(A) had already incorporated the background of the debtor company that it was in the huge financial distress and had become NPA and there was no chance of any recovery of interest. Even the Principal amount has been written off in the F.Y. 2020-21. Once, assessee ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 11 was aware that the debtor company will not pay the interest, there was no point in showing interest on accrual basis and then in the subsequent year claimed it as bad debt. Even the loan given by the State Bank of India was classified as NPA on 30/06/2018. It was for this reason SBI had filed corporate insolvency petition against the debtor, i.e., Dharti before the NCLT. Once all these facts were there before the assessee, there was no point to show any kind of interest income on accrual basis. It is a trite law that accrual must be real income taking into account the actuality of the situation whether accrual has taken place or not. This principle was laid down by the Hon’ble Supreme Court in the case of State Bank of Travancore vs. Commissioner of Income Tax Kerala (1986) 158 ITR 101 wherein it was held and observed as under:- \"An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of taxation is difficult to evolve. Besides any strait-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case, when and how does an income accrue and what are the consequences that follow from actual of income as well settled. The accrual must be real taking in to account the actuality of the situation, whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory. After accrual, non charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted in determining the question whether it is hypothetical income or whether real Income has materialised or not. Various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment. Only what has really accrued to the assessee has to be found out and what has accrued must be ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 12 considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together\" 11. This concept of ‘real income’ was laid down in a very classical judgment of the Hon’ble Supreme Court in the case of Shoorji Vallabhdas & Co., reported in 46 ITR 144 wherein the Hon’ble Court held as under:- “Income-tax is a levy on income. No doubt, the Income-tax 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, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a \"hypothetical 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 account\" 12. This principle again was reiterated in the later judgment in the case of Godhra Electricity Co. Ltd., (supra), the Hon’ble Supreme Court after taking note of various judgments had finally observed as under:- “The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and the Tribunal had ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 13 rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal.” 13. Thus, what is important here is one has to see the probability or improbability of realization of a debt in a realistic manner. Here in this case there was no probability of realizing any interest from the debtor company as the same was declared NPA and therefore, there was no reason that assessee should have declared any income on accrual basis when in real there was no income received nor under these circumstances income could have been accrued to the assessee. Ld. CIT (A) has rightly held the tax can be levied on real income and not hypothetically income. 14. Another important fact is that even though TDS was deducted by the debtor company even when no interest was ever paid to the assessee till date. In the subsequent assessment year assessee had not shown any interest and the same has been accepted by the ld. AO in the assessment orders and in fact in A.Y.2021-22 assessee has written off the principal amount as bad debt. Thus showing interest income on accrual basis and then writing it off subsequently was only a futile exercise when assessee was aware that it will not receive any amount from the debtor company. Accordingly, we uphold the order of the ld. CIT(A) that there was no interest actually accrued to the assessee ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 14 which can be brought to tax. The order of the ld. CIT(A) deleting the interest amount of Rs.3,60,00,000/- is upheld. 15. In so far as assessee’s appeal is concerned that where the amount of Rs.36,00,000/-, assessee should be given credit, we are unable to accept the proposition of the assessee for the reason that once assessee has not declared any corresponding income assessee cannot deduct take credit of the TDS. This has been held by the Hon’ble Jurisdictional High Court in the case of Imageads & Communications (P) Ltd. vs. ITO reported in (2025) 172 taxmann.com 87 (Bom):- 20. We have heard learned Counsel for the parties and with their assistance we have perused the record. At the outset, we may observe that the Assessing Officer, the Commissioner (Appeals) as also the Tribunal has held against the Appellant in denying the benefits of the TDS amounting to Rs. 30,10,549/- as claimed by the Appellant on the amounts as alleged to have been received by it on behalf of ISPL.. It is not in dispute that the income corresponding to the TDS was not offered to tax by the appellant. It is stated to have been offered to tax by ISPL alongwith the TDS. The Appellant has not placed on record as to what was the exact position in respect of the returns of the ISPL qua the said amount and whether the ISPL, in offering the relevant income, has claimed TDS or otherwise. 21. Admittedly, in the present case, the assessee has filed a NIL return. It would not require any claboration that the TDS is on the income/receipt of the assessee and forms part of the income of the assessee. Thus, when there is no income being offered qua the corresponding TDS and as TDS is part of the assessee's income, the position being taken by the appellant is a position contrary to its returns. There cannot be a situation that the principal income corresponding to the TDS as claimed, is not offered for assessment as a NIL return is filed, however, merely the benefit of TDS income is claimed. This would be contrary to the provisions of Section 198 ITA No.1442/Mum/2024 & 771/Mum/2024 Rare Enterprises 15 of the Income Tax Act which provides that the tax deducted at source would be the income received. Admittedly in the present case, for the Assessment Year in question, independent tax returns have been filed by the assessee as also by the ISPL. Thus, such incongruence and a position contrary to the return of the appellant goes contrary to the provisions of Section 198 read with Section 199 of the Income Tax Act. 16. In view of the aforesaid principle the assessee cannot take the credit of TDS, once the corresponding income has not been shown. Accordingly, the grounds raised by the assessee are dismissed. 17. In the result appeal of the Revenue as well as appeal filed by the assessee is dismissed. Order pronounced on 29th April, 2025. Sd/- (GIRISH AGRAWAL) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 29/04/2025 KARUNA, sr.ps Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// "