Income Tax Appellate Tribunal - Ahmedabad
Asstt. Cit vs Vadilal Finance Co. (P) Ltd. Vadilal ... on 7 December, 2001
Equivalent citations: (2002)74TTJ(AHD)933
ORDER
B.M. Kothari, A.M. All these appeals involve consideration of common and interconnected points. Hence, these appeals were heard together and are being disposed of by this common order.
2. The assessee in their appeals for assessment years 1988-89 and 1989-90 have raised the following grounds :
For assessment year 1988-89 (1) The learned Commissioner (Appeals) failed to understand the facts, circumstances of the case.
(2) The learned Commissioner (Appeals) erred in confirming the non-reduction in interest income of Rs. 46,100 which is reduced from interest income receivable from Super Milk Makers (P) Ltd. for the relevant previous year as the appellant has to provide finance as promoter without charging interest/and at lower rate of interest according to the terms and conditions imposed by financial institution, namely, the State Industrial and Investment Corporation of Maharashtra Ltd. while sanctioning term loan to Super Milk Makers (P) Ltd. The entries regarding reversal of interest income have been passed in books of accounts for the year ended on 31-3-1989, and 31-3-1990, for Rs. 36,589 and Rs. 9,511, respectively.
The learned Commissioner (Appeals) has decided the above ground against the appellant in view of the detailed finding given in the appeal order for assessment year 1990-91.
(3) The appellant prays that the reduction in interest income by Rs. 46,100 may be allowed now on the basis of facts and circumstances of the case.
For assessment year 1989-90 (1) The learned Commissioner (Appeals) failed to understand the fact, circumstances of the case.
(2) The learned Commissioner (Appeals) erred in confirming the non-reduction in interest income of Rs. 72,901 which have been reduced from interest income receivable from Super Milk Makers (P) Ltd. for the relevant previous year as the appellant has to provide finance as promoter without charging interest/and at lower rate of interest according to the terms and conditions imposed by financial institution, namely, the State Industrial and Investment Corporation of Maharashtra Ltd. while sanctioning term loan to Super Milk Makers (P) Ltd. The entries regarding reversal of interest income have been passed in books of accounts for the year ended on 31-3-1989.
The learned Commissioner (Appeals) has decided the above ground against the appellant in view of the detailed finding given in the appeal order for assessment year 1990-91.
(3) The learned Commissioner (Appeals) erred in confirming the non-reduction in interest income of Rs. 1,17,000 which have been reduced from interest income receivable from Super Milk Makers (P) Ltd. for the relevant previous year as the appellant has to provide finance as promoter without charging interest/and at lower rate of interest according to the terms and conditions imposed by financial institution, namely, the State Industrial and Investment Corporation of Maharashtra Ltd. while sanctioning term loan to Super Milk Makers (P) Ltd. The entries regarding reversal of interest income have been passed in books of accounts for the year ended on 31-3-1989.
The learned Commissioner (Appeals) has decided the above ground against the appellant in view of the detailed finding given in the appeal order for assessment year 1990-91.
(4) The appellant has claimed reduction in interest income of Rs. 46,100 in assessment year 1988-89, on passing of reversal entries in books of accounts for previous years ending on 31-3-1989, and 31-3-1990, for Rs. 36,589 and Rs. 9,511, respectively. Hence, in computation of income in revised return of income, the appellant had offered Rs. 36,589 for tax. Now at present the learned assessing officer and Commissioner (Appeals) have not allowed deduction from income of Rs. 46,100 in assessment year 1988-89, the income offered for tax Rs. 36,589 is not required to be added into total income of assessment year 1989-90. Hence, if the decision of Tribunal is against appellant in assessment year 1988-89, suitable direction for non-taxation of Rs. 36,589 in assessment year 1988-89 may be given.
3. In assessment years 1990-91 and 1991-92, the revenue has raised the following grounds in its appeals :
For assessment year 1990-91 (1) The learned Commissioner (Appeals) has erred in law and on facts in deleting the reversal of interest income of Rs. 1,26,511.
(2) The learned Commissioner (Appeals) has erred in law and on facts in deleting the disallowance of interest of Rs. 3,57,750 paid on borrowed money.
For assessment year 1991-92 (1) The learned Commissioner (Appeals) has erred in law and on facts in deleting the disallowance of interest expenditure amounting to Rs. 4,17,000.
4. The brief facts relating to the aforesaid appeals are as follows :
The appellant-company is a finance company which was incorporated on 12-4-1984. The main objects of the company as per its memorandum of association are as under :
(1) To buy, underwrite, invest in, acquire, hold, trade or deal in shares, stocks, debentures, debenture-stock, bond, obligations and securities, issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debenture stocks, bonds, obligations, and securities issued or guaranteed by any government, State, Dominations, Sovereign, public body or authority, Supreme, municipal, local or otherwise, firm or person, whether in India or elsewhere either by original subscriptions, participations in equities, tender, purchase, exchange or otherwise and to subscribe for the same either conditionally or otherwise to guarantee the subscription thereof, and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof.
(2) To invest, purchase, develop, take on lease or exchange or otherwise acquire, foreclose, purchase on auction, hire, lease, sell, on hire purchase, or finance the sale of any property whether immovable or movable on hire purchase system or on instalment basis, exchange, mortgage, pledge, charge, hypothecate, dispose of or otherwise deal any property or rates or interests in any property or to advance or lend money on or arrange loans on any buildings, houses, bungalows, factories, trade premises, plants machinery, lands, farms including agricultural lands, jewellery, bullion, silver, diamonds, ornaments either fitted with gems or precious stones and also the jewellery or jewels and pearls, precious stones or any kind of asset or property in any manner or form whatsoever and to give for use to the persons on such terms and conditions as may be decided by the Board of Directors from time to time.
(3) To carry on and undertake any business, undertaking transaction or operation commonly carried on or undertaken by financiers, concessioners, promoters, capitalists and to undertake and carry on and execute all kinds of financial, commercial, operations including finance, hire-purchase finance, investment, housing finance business of providing finance in any manner whatsoever as can conveniently and efficiently be carried on with the business of a financial, company.
5. The learned counsel for the assessee explains that the appellant-company acting as promoter company decided to promote the company styled as Super Milk Makers (P) Ltd. (hereinafter referred to as the "SMMPL") and invested Rs. 13.04 lakhs for acquiring 13,000 shares of "SMMPL" and also gave loans and advances to the said company from time to time. The State Industrial & Investment Corporation of Maharashtra Ltd. (hereinafter referred to as the "SIICOM") had imposed certain restrictions/objections at the time of sanctioning the loan for the project of "SMMPL". Our attention was invited towards letter dated 7-1-1988, given by "SIICOM" while sanctioning term loan of Rs. 90 lakhs to meet part of the cost of setting up a project for the manufacture of ice-cream and ice-cream candy at MIDC area, Tatapur, District Thane. One of the conditions was that before commencement of- disbursement of loan by "SIICOM", the company "SMMPL" shall make satisfactory arrangement for raising interest-free unsecured loans of Rs. 9.50 lakhs. This limit of Rs. 9.50 lakhs was subsequently increased to Rs. 18.50. lakhs vide letter dated 13-12-1989, of "SIICOM" to "SMMPL". A copy of letter dated 7-1-1988, of "SIICOM" along with various annexures thereof is placed at pp. 11 to 24 of the paper book. A copy of letter dated 13-12-1989 of "SIICOM" addressed to "SMMPL" is placed at page 25 of the paper book. The learned counsel also drawn attention to the letter dated 5-2-1992, sent by "SIICOM" to "SMMPL" in which "SIICOM" has confirmed that while sanctioning term loans of Rs. 90 lakhs by their corporation to "SMMPL", the appellant-company, viz., Vadilal Finance Company (P) Ltd. (hereinafter referred to as the "VFCL") was accepted as one of the promoter of "SMMPL". As per data available with them, "SIICOM" confirmed that "VFCL" holds shares of Rs. 13 lakhs in the paid up share capital of Rs. 54 lakhs. "SIICOM", therefore, considered VFCL a corporate entity holding more than 20 per cent of equity share capital of "SMMPL". It has been further observed in the said letter that as per the terms and conditions of sanctioning. term loans of Rs. 90 lakhs, VFCL is required to bring in interest-free loan of Rs. 18.50 lakhs and 14 per cent interest bearing loan of Rs. 21 lakhs for partly financing the project cost of "SMMPL".
6. After explaining the aforesaid factual position, the learned counsel submitted that interest was initially wrongly charged by the assessee on loans and advances given to "SMMPL" contrary to the aforesaid obligations undertaken by the assessee as a promoter company to advance interest-free loans upto the limit stated above and to advance further loan on interest at the rate of 14 per cent. The excess amount of interest charged from "SMMPL" was thereafter partly reversed in the accounting year ended on 31-3-1989, and partly it was reversed in the next accounting year ended on 31-3-1990. The learned counsel drew our attention to the following chart to explain the relevant details DETAILS OF INTEREST CHARGED, INTEREST CHARGEABLE, ETC.
Accounting period ending on Gross TDS Net amount Revised Interest Diff. to be reversed Reversed on 31-3-1989 Reversed on 31-3-1990 Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
(1) (2) (3)(4) = (2-3) (5) (6) = (2-5) (7) (8) 31-12-1987 46,100 9,511 36,589 NIL 46,100 36,589 9,511 30-9-1988 3,52,709 74,069 2,78,640 2,37,149 1,15,560 41,491 74,069 31-3-1989 2,05,912 42,931 1,62,981 1,31,571 74,341 31,410 42,931 Total 6,04,721 1,26,511 4,78,210 3,68,720 2,36,001 1,09,490 1,26,511
7. Shri S.N. Soparkar, the learned counsel for the assessee contended that the interest income to the extent of Rs. 46,100 in assessment year 1988-89 and interest income of Rs. 1,15,560 for the accounting period ended on 30-9-1988 and Rs. 74,341 pertaining to the accounting period ended on 31-3-1989, aggregating to Rs. 1,89,901 relating to -assessment year 1989-90 did not accrue as interest income to the assessee in view of the aforesaid obligations undertaken by the appellant for getting term loan sanction by "SIICOM" in favour of "SMMPL". The reversal entry made in assessment years 1989-90 and 1990-91 further confirmed that such interest income did not accrue to the assessee in accordance with the terms and restrictions imposed by "SIICOM" while santioning terms loan to SMMPL". The learned Commissioner (Appeals), therefore, ought to have deleted the amount of excess interest charged by the assessee from "SMMPL". He also urged that the Commissioner (Appeals) ought to have granted deduction of Rs. 72,901 being the amount of interest reversed on 31-3-1989, and should have granted further deduction of Rs. 1,17,000 being the entry of interest reversal made on 31-3-1990, which was inadvertantly not made on 31-3-1989, as the amount of tax deduced at source was not taken into consideration while making the reversal entry on 31-3-1989.
8. Shri Soparkar drew our attention to the judgment of the Honble Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC). In that case the assessee, viz., Godhra Electricity Co. Ltd. was restricted from recovering charges more than 1 ps per unit for lights, fans and 20 np per unit for motive power from the customers and that the right to receive increased rates had not crystallized. According to the Tribunal, the claim at the increased rates as made by the assessee-company and on the basis of which necessary entries were made in the books represented only hypothetical income and the impugned amount as brought to tax by the Income Tax Officer did not represent the income which had accrued to the assessee-company during the relevant previous year. Such a view taken by the Tribunal was upheld by the Honble Supreme Court. Shri Soparkar, invited our attention at page 758 of 225 ITR wherein the Honble Supreme Court has referred to their earlier decision in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC). Thereafter, the Honble Supreme Court at page 760 (of 225 ITR) has observed that the question whether there was a real accrual of income to the assessee 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. The learned counsel contended that in the present case also if the question relating to accrual of income is considered in a realistic manner, it would be clear beyond doubt that no interest income can be said to have accrued to the assessee on the amount of loans and advances given by the assessee to "SMMPL" to the extent indicated in the letter sanctioning the term loan to "SMMPL". The interest income wrongly accounted for in the books of account to that extent, therefore, did not really accrue to the assessee in the relevant years.
9. The learned counsel then drew our attention to the judgment of Honble Supreme Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC). At pages 323 and 324 it has been observed that in assessment year 1971-72, the assessee had shown in its books of account a sum of Rs. 7,39,232 as income from interest received from Hindustan Steel Ltd. for eight locomotives supplied by the assessee to them. The entry in this regard was reversed in the next year since Hindustan Steel Ltd. had replaced eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was charged between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result as the original agreement ceased to be operative ab initio. The entry in the books which was made about a hypothetical income which did not materialise and that entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax. The learned counsel on the strength of this judgment vehemently contended that the facts of the present case are almost similar. In the present case, the interest wrongly charged by the assessee is contravention to the terms agreed with "SIICOM" who granted term loan to "SMMPL" was reversed partly in assessment year 1989-90 and partly in assessment year 1990-91. This reversal entry supports the assessee's contention that the interest income to that extent did not really accrue to the assessee in the years under consideration when such interest was wrongly accounted for.
10. Shri Soparkar then drew our attention to the judgment of the Honble Supreme Court in the case of Uco Bank v. CIT (1999) 237 ITR 889 (SC). He submitted that at page 898 the Honble Supreme Court in the aforesaid judgment have doubted the correctness of their earlier decision in the case of State Bank of Travancore (supra).
11. Shri Soparkar then made an alternative submission that in case the excess amount of interest charged from "SMMPL" is brought to tax in assessment years 1988-89 and 1989-90, the same should be allowed as deduction in the year when reversal entries have been made, either as a trading loss or as bad debt, as no interest income has really been received nor it is likely to be realised at any further point of time. He submitted that deduction can be allowed in any of the years, viz., assessment years 1989-90 and 1990-91. Since no real income had accrued nor it was received by the assessee, the tax on hypothetical income levied on the assessee should be cancelled in the year when reversal entry was made pursuant to the aforesaid terms and condition agreed with "SIICOM".
12. The learned Senior Departmental Representative submitted that the assessee is a finance company. It has borrowed loans from Vadilal Industries Ltd. at the rate of 16.5 per cent and has given loans and advances to "SMMPL" out of such borrowed funds. There is a clear and direct nexus between funds so borrowed at higher rate of interest and the amount of loans and advances given to "SMMPL" without interest upto Rs. 18.50 lakhs and further loan of Rs. 21 lakhs: at lower rate of interest at 14 per cent. This cannot be considered to be a loan given for any business purpose. The company cannot have any business for promoting other companies. The main object as contained in the memorandum of association does not authorise the assessee-company to carry on the business of promoting companies by borrowing loans at higher rate of interest and giving it to the newly promoted company without interest or at lower rate of interest. Such activity cannot be considered to be a business activity carried on by the assessee. The interest on loans given to "SMMPL" was charged as per the terms and conditions agreed between the assessee and "SMMPL". The necessary entries in relation to interest income so accrued in favour of the assessee were made in the books of account as shown in the chart reproduced hereinbefore. The assessee-company was not a party to the agreement executed between "SMMPL" and "SIICOM". There is no legally enforceable agreement to establish any obligation on the part of the assessee to advance interest-free loan to "SMMPL" to the extent of Rs. 18.50 lakhs and further loan of Rs. 21 lakhs at lower rate of interest of 14 per cent per annum. The interest income already accrued to the assessee and duly accounted for in the books of -account cannot be converted into income not accrued to the assessee by virtue of reversal of entries relating to interest income in subsequent years. The judgments relied upon by the learned counsel are clearly distinguishable, says the learned Senior Departmental Representative. He submitted that in the case of Godhra Electricity Co. Ltd. (supra) there was a unilateral act on the part of the electricity company to account for the enhanced rate of electricity charges. The consumers had disputed the levy of enhanced rates and filed cases against such excess levy. On these facts the Honble, Supreme Court held that such entries relating to such hypothetical and notional income which was subject-matter of dispute, cannot be charged to tax in the relevant years. In the present case the assessee has accounted for interest income charged from "SMMPL". M/s. "SMMPL" have also debited interest expenditure in their books of account and have deducted the amount of tax at source therefrom. The assessee has claimed and has been allowed the credit of tax deducted at source on such interest income in the respective years. The facts of various judgments relied upon by the learned counsel are, therefore, clearly distinguishable.
13. Shri Bhati, the learned Senior Departmental Representative relied on the judgment of Honble Supreme Court in the case of CIT v. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 222 ITR 583 (SC). In that case it was held that the interest on loan given up after expiry of relevant accounting years would be taxable in the year of accrual of interest. He submitted that the facts of this case are similar to the facts of the present case. The learned Senior Departmental Representative also relied on one more judgment in the case of CIT v. Hindustan Motors (1993) 202 ITR 839 (Cal) wherein it was held that the decision to forgo interest after the close of the accounting year cannot convert accrued interest into interest not accrued in the relevant year. The learned Senior Departmental Representative thus strongly urged that the Commissioner (Appeals) has rightly confirmed the addition of interest income in assessment years 1988-89 and 1989-90.
14. As regards the alternative request made by the learned counsel, the learned Senior Departmental Representative contended that this point is similar to the ground raised by the department in their appeal for assessment year 1990-91 where the Commissioner (Appeals) has deleted the reversal of interest income to the extent of Rs. 1,26,511. Shri Bhati pointed out that the question of granting deduction of interest in respect of reversal of interest income in a subsequent year is not permissible under any provisions of Income Tax Act, 1961. He pointed out that the first document where the assessee in their capacity as a promoter company undertook to give interest-free loan at the extent of Rs. 18.50 lakhs and further loan of Rs. 21 lakhs at lower rate of 14 per cent per annum, is letter dated 5-2-1992, of "SIICOM". This letter does not in any manner indicate that the assessee was under any legal obligation to provide such interest-free loan or loan at lower rate of interest from an anterior point of time. Therefore, the question of grant of any deduction in respect of reversal of interest income pertaining to the accounting period relevant to assessment years 1988-89 and 1989-90 does not arise at all. The amount in question cannot be allowed as bad debt or trading loss as there is no material on record to show that the amount became irrecoverable from "SMMPL" on account of their bad financial position. The learned Senior Departmental Representative strongly urged that the alternative request made by the learned counsel in assessment years 1988-89 and 1989-90 cannot be validly accepted. Likewise, the revenue's ground No. 1 in their appeal for assessment year 1990-91 deserves to be allowed as the Commissioner (Appeals) has clearly erred in deleting the addition of Rs. 1,26,511 made by the assessing officer in respect of reversal of such interest income.
15. Shri Bhati, the learned Senior Departmental Representative submitted that in assessment years 1990-91 and 1991-92 the appellant-company did not charge interest on loans and advances given to "SMMPL" to the extent of Rs. 18.50 lakhs and has also charged interest at lower rate of interest of 14 per cent per annum. on further loan of Rs. 21 lakhs, though it had borrowed loans at higher rate of 16.5 per cent. The assessing officer had rightly disallowed the interest of Rs. 3,57,750 in assessment year 1990-91 and Rs. 4,17,000 in assessment year 1991-92. The borrowings to the extent of interest-free loans given to "SMMPL" cannot be said to have been made for the business purpose of the assessee-company. Further, there is no business purpose for advancing at lower rate of interest. The assessing officer had, therefore, rightly disallowed the interest to the aforesaid extent in assessment year 1991-92. Shri Bhati submitted that the onus lies on the assessee to prove that the interest was paid on money borrowed for the purpose of business. Promoting another company is not a business purpose of the assessee-company. The primary object of the assessee-company is to carry on business of financing. Borrowing money at higher rate and lending it without interest or at lower rate of interest by no stretch of imagination, be treated as a business carried on by a finance company. Various judgments relied upon by the learned Commissioner (Appeals) in the order passed by him relating to case of managing agent are not applicable to the facts of the present case. He, therefore, strongly urged that the order passed by the Commissioner (Appeals) in assessment years 1990-91 and 1991-92 relating to deletion of disallowance of interest should be set aside and that of the assessing officer should be restored.
16. Shri Soparkar, the learned counsel for the assessee submitted that the main objects contained in the memorandum of association of the company clearly authorise it to carry on the business of promoting the companies. This is very clear from the main object clause (3) reproduced hereinbefore and is also further supported by clauses (4) and (8) of the objects incidental to the attainment of the main objects. He strongly supported the order of the Commissioner (Appeals). The learned counsel relied upon the judgment of the Honble, Madras High Court in the case of CIT v. Amalgamations (P) Ltd. (1977) 108 ITR 895 (Mad) and submitted that the view taken by the Madras High Court has been confirmed by the Honble Supreme Court in the case of CIT v. Amalgamations (P) Ltd. (1997) 226 ITR 188 (SC). He also relied upon the judgment of the Honble Delhi High Court in the case of CIT v. Premier Auto Finance (P) Ltd. (1981) 128 ITR 540 (Del) and the decision of Tribunal Madras Bench in the case of Consolidated Investments Ltd. v. Dy. CIT (1996) 57 ITD 286 (Mad-Trib) and the decision in IAC v. Standard Chartered Bank (1986) 18 ITD 397 (Cal-Trib) to support the order of Commissioner (Appeals) in relation to grounds raised by revenue in assessment years 1990-91 and 1991-92.
17. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned departmental authorities and all other documents to which our attention was drawn during the course of hearing. We have also carefully gone through all the judgments cited by the learned representatives of both sides.
18. The previous year relevant to assessment year 1988-89 ended on 31-12-1987. The interest amounting to Rs. 46, 100 was debited in the account of "SMMPL", with a corresponding credit to interest account in the books of accounting pertaining to the year ended on 31-12-1987. M/s. "SMMPL" had deducted the tax at source amounting to Rs. 9,511 out of such interest credited by them in assessee's account and duly deposited the same in government treasury. To the extent to tax deducted at source of Rs. 9,511 paid by "SMMPL" on behalf of the appellant, the interest was really received by the assessee as they have claimed and have been granted credit in respect of such tax deducted at source amount. The previous year relating to assessment year 1989-90 was a transactional previous year which comprised of 15 months. The first accounting period covered the period from 1-1-1988 to 30-9-1988, and the second accounting period covered the period from 1-10-1988 to 31-3-1989. The interest pertaining to the aforesaid period was duly accounted for in the books of account closed on 30-9-1988, and 31-3-1989, respectively, as shown in the chart reproduced in earlier part of this order. The assessee originally credited the interest income of Rs. 3,52,709 in the accounting year ended on 30-9-1988, and Rs. 2,05,912 in the accounting period ended on 31-3-1989. M/s. "SMMPL" had deducted the tax at source amounting to Rs. 74,069 and Rs. 42,931 from such interest credited by them in the assessee's account and had duly deposited the same in the government treasury. It appears that at a later point of time the assessee filed a revised return on l-6-1990, in which deduction in respect of Rs. 1,09,490 on account of reversal of interest was made. It is not known whether this entry of reversal of interest to the tune of Rs. 1,09,490 was made in the books of account for the year ended on 31-3-1989, before finalisation of the audit and before furnishing of the original return of income on 31-12-1989, or such a claim was made only by way of filing a revised return for assessment years 1988-89 and 1989-90. The return of income for assessment year 1988-89 was originally filed on 13-7-1988, declaring total income of Rs. 1,94,990. The assessee filed a revised return on 28-5-1990, declaring total income of Rs. 1,48,890. The income shown in the revised return was reduced by Rs. 46,100 being the amount of interest charged from M/s. "SMMPL" during the accounting year ended on 31-12-1987, and claimed to be not chargeable from them in view of terms and conditions agreed by M/s. "SMMPL" and "SIICOM". Likewise the assessee filed original return of income for assessment year 1989-90 on 31-12-1989, declaring total income of Rs. 1,10,260. The company then filed a revised return on 1-6-1990, declaring total loss of Rs. 1,90,670. The reason for furnishing the revised return as mentioned in the assessment order is on account of reversal of interest charged from M/s. "SMMPL" in accordance with the terms and conditions agreed between M/s. "SMMPL" and "SIICOM". This clearly shows that the entry of reversal of interest to the tune of Rs. 1,09,490 claimed to have made on 31-3-1989, was made at a later point of time or such a claim for deduction was made only by filing revised returns for assessment years 1988-89 and 1989-90. At the time when reversal of interest amounting to Rs. 1,09,490 was made, the amount of tax deducted at source was not taken into consideration. The amount equivalent to tax deducted at source pertaining to assessment years 1988-89 and 1989-90 aggregating to Rs. 1,26,511 was, therefore, claimed as deduction in assessment year 1990-91 and entry relating to reversal of interest to the extent was made in assessment year 1990-91. The fact that entry of full amount of interest was duly accounted for in the books of account for assessment years 1988-89 and 1989-90 and tax at source was deducted on entire amount of such interest credited by "SMMPL" in the account of the assessee, clearly shows that the entire amount of loans given by the assessee to "SMMPL" were originally interest-bearing loans, which had been given on interest at market rates. The accrual of income in the respective years pertaining to assessment years 1988-89 and 1989-90 is thus clearly supported by entries in the books of account made by the assessee and also by "SMMPL" in their books of account and also by the fact that "SMMPL" had deducted the tax at source on entire amount of interest credited by them, which was duly deposited in the government treasury.
19. The question which arises for our consideration is as to whether such interest income which had accrued to the assessee as per the terms agreed between the assessee and "SMMPL" and which had duly been credited in the books of account, can be treated as income not really accrued in favour of the assessee because of certain terms/conditions and restrictions placed by "SIICOM". Let us, therefore, carefully examine documents relied upon by the learned counsel for the assessee to support their contention about non-accrual of interest income on loans and advances upto the specific extent and advancing of further loans at lower rate of interest. The first letter to which our attention has been drawn is a letter dated 7-1-1988, by "SIICOM" to "SMMPL". This letter along with the annexures thereof nowhere specifically contains the fact that the assessee-company, viz., VFCL has undertaken to provide any interest-free loans to "SMMPL" or had given any undertaking to "SIICOM" in this regard. The relevant clause pointed out by the learned counsel as appearing in annexure 1 of said letter dated 7-1-1988, is reproduced below :
"Unsecured loans/deposits :
Before commencement of disbursement of the loan by the SIICOM, the company shall make satisfactory arrangements for raising interest-free unsecured loans of Rs. 9.30 lakhs of which at least Rs. 4.75 lakhs shall have been raised."
20. The sanction letter in question is dated 7-1-1988. The accounting year relevant to assessment year 1988-89 ended on 31-12-1987. Therefore, so far as the claim of reversal of interest income pertaining to assessment year 1988-89 is concerned, such reversal interest is not supported in any manner by the aforesaid letter dated 7-1-1988. How interest charged by the appellant-company for the year ended on 31-12-1987, can be said to have not accrued to the assessee as no interest was chargeable in view of the terms of such sanction by "SIICOM" to "SMMPL". Since the loan itself was sanctioned vide letter dated 7-1-1988, it cannot be applied in relation to interest income already accrued and accounted for on 31-12-1987.
21. The next letter which was relied upon by the learned counsel is letter dated 13-12-1989, issued by "SIICOM" to SMMPL". In this letter the interest-free unsecured loan was increased from Rs. 9.50 lakhs to Rs. 18.50 lakhs. This letter is also of a date which is subsequent to the date when the accounting year pertaining to assessment year 1989-90 was closed on 31-3-1989. This letter does not specifically show that the name of the assessee-company was mentioned therein as one of the promoter companies who have undertaken to provide interest-free unsecured loans to the tune of Rs. 18.50 lakhs. It may be relevant here to mention that this letter contained a reference of agreement entered into by M/s. "SMMPL" with Vadilal Enterprises Ltd. in respect of selling arrangements of the products manufactured by that company. "SIICOM" have mentioned in the said letter that Vadilal Enterprises Ltd. will not charge interest more than 14 per cent per annum. No specific obligation relating to the assessee for providing interest-free fund or for advancing interest at lower rate, was specifically mentioned in this letter. The learned counsel then drew our attention to letter dated 5-2-1992, which is the first document in point of time in which the obligation of the assessee as a promoter company has been mentioned. This is a letter given by "SIICOM" to "SMMPL" in response to their letter dated 21-1-1992. Copy of this letter sent by "SIICOM" to "SMMPL" has not been placed on record. Unless the context in which such reply was given is known, the scope and applicability of the terms and conditions cannot be fully and properly appreciated. However, it may be relevant here to reproduce the contents of letter dated 5-2-1992, on which heavy reliance has been placed by the learned counsel :
"Re : Term loan of Rs. 90 lakhs .......... (illegible) We hereby confirm that while sanctioning term loan of Rs. 90 lakhs by our corporation to Super Milk Makers (P) Ltd., Vadilal Finance Company Ltd., (VFCL) was accepted as one of the promoters of Super Milk Makers (P) Ltd. As per the data available with us we confirm that VFCL hold shares of Rs. 13 lakhs in the paid-up share capital of Rs. 54 lakhs. Our corporation has considered VFCL a corporate entity and holding more than 20 per cent of equity share capital of Super Milk Makers (P) Ltd.
As per the terms and conditions of our sanction, VFCL, is required to bring in interest-free loan of Rs. 18.50 lakhs and 14 per cent interest bearing loan of Rs. 21 lakhs for partly financing the project cost of Super Milk Makers (P) Ltd.
As term lenders we have charged interest at the rate of 14 per cent per annum on financial assistance extended to Super Milk Makers (P) Ltd. In view of this our corporation had stipulated that VFCL should not charge interest more than 14 per cent to Super Milk Markers (P) Ltd.
Thanking you,"
22. All the aforesaid documents do not specifically point out as to at point of time, the amount of unsecured interest-free loans upto the extent of Rs. 18.50 lakhs and further loan of Rs. 21 lakhs at the rate of 14 per cent per annum had to be arranged by "SMMPL". The appellant-company was accepted as one of the promoters. It is not known as to who were the other promoters of "SMMPL". The exclusive liability of the assessee to contribute interest-free loan of Rs. 18.50 lakhs and further interest bearing loan of Rs. 21 lakhs, has been indicated for the first time in letter dated 5-2-1992, i.e., much after the accounting year ended on 31-12-1987, 30-9-1988 and 31-3-1989. No letter from "SIICOM" has been produced before the learned departmental authorities or before us to show that they have objected to charging of interest by the assessee-company from "SMMPL" pertaining to the accounting period ended on 31-3-1989. The letter dated 7-1-1988, only required "SMMPL" to arrange Rs. 4.75 lakhs before commencement of disbursement of the loan and for the remaining amount, "SIICOM" had directed M/s. "SMMPL" to make satisfactory arrangements for raising interest-free unsecured loans. The amount of interestfree unsecured loan required to be contributed by the promoters can be given in instalments depending upon disbursement of the loan by the financial institution in various instalments. The date and period upto 'which interest-free unsecured loan was to be arranged has not been given in any of these documents produced before the learned departmental authorities. It cannot therefore, be validly contended that the interest charged by the assessee from "SMMPL" in the accounting periods relevant to assessment years 1988-89 and 1989-90 was erroneously charged in violation of the terms and conditions agreed with "SIICOM" in relation to sanction of term loan of Rs. 90 lakhs in favour of M/s. "SMMPL".
23. The learned counsel placed heavy reliance on the judgments of the Supreme Court. Let us examine the applicability of the principles of law laid down by the Apex Court on the facts of the present case. The Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra) was considering assessability of enhanced amount of electricity charges accounted for by the assessee in their books of account. The unilateral increase in the rates for supply of electricity by the electricity company was challenged by the consumers in the court of law. Even after litigation relating the enhancement of electricity charges was finally settled by the Supreme Court vide judgment dated 26-2-1969, the State Government advised the assessee-company to maintain status qua for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers. In the meantime, subsequently the assessee-company was taken over by the government. On these facts the Hon'ble Supreme Court held that even though the assessee-company was following mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee-company in respect of those enhanced charges. The amount in question brought to tax by the Income Tax Officer did not represent income which had really accrued to the assessee during the relevant previous years. If the present matter is examined in the light of the aforementioned principles laid down by the Supreme Court, there is no material on record to show that the assessee was required to contribute interest-free loans and advances to M/s. "SMMPL" upto the extent of Rs. 18.50 lakhs on or before 31-3-1989. In fact a letter dated 13-12-1989, issued by "SIICOM" much after the accounting year ended on 31-3-1989 makes it obligatory for any promoter company to advance the amount of Rs. 18.50 lakhs without specifying any particular date. It is also not known in what manner and mode of instalments such interest-free unsecured loan was required to be contributed by the promoters of M/s. "SMMPL". The reversal of interest charged for the accounting year ended on 31-12-1987, is patently wrong as the first sanction letter issued by "SIICOM" is dated 7-1-1988. The letters dated 13-12-1989, and 5-2-1992, of "SIICOM" nowhere contain any objection by "SIICOM" in respect of interest charged by the appellant-company from M/s. "SMMPL" in the accounting years ended upto 31-3-1989. M/s. "SMMPL" had actually paid part amount of interest by way of payment of tax deducted at source on behalf of the assessee out of interest credited for the accounting periods relevant to assessment years 1988-99 and 1989-90 and the assessee claimed credit in respect of such amount of tax deducted at source. It cannot be said that nothing was realised out of such interest income charged from M/s. "SMMPL". The amount of interest was credited by M/s. "SMMPL" in the current account of the assessee in their books of account. By crediting such amount, M/s. "SMMPL" has acknowledged the payment of a debt payable to the assessee-company in respect of such interest. The subsequent reversal of interest pertaining to the period upto 31-3-1989, is simply the amount of income voluntarily forgone by the assessee after it had already accrued in favour of the assessee. Such forgoing of income already accrued cannot result in non-accrual of interest income, which had already accrued in favour of the assessee and had duly been accounted for by both the parties in their respective books of account.
24. The next judgment which was heavily relied upon by the learned counsel is the judgment of Supreme Court in the case of CIT v. Bokaro Steel Ltd. (supra). The Honble Supreme Court in this case observed as under at pages 323 and 324 of Report :
"In the assessment year 1971-72, the assessee had shown in its books of account a sum of Rs. 7,39,232 as income from interest received from Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-company to them. The entry in this regard was reversed in the next year since Hindustan Steel Ltd., had replaced the right locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax."
The aforesaid judgment also does not in any manner support the case of the assessee. In that case the original agreement ceased to be operative ab initio. The reversal entry in the next year was necessary because the entire nature of transaction executed between the parties had undergone a change. There was a resolution of the assessee-company in this regard. The assessee-company in the present case is not even confirming party to the agreement between M/s. "SMMPL" and "SIICOM". It is true that the assessee-company was one of the promoter companies and the obligation on their part to contribute interest-free unsecured loan is indicated in the first document being letter dated 5-2-1992, but that letter also does not show that the assessee was liable to contribute such interest-free loan upto the extent of Rs. 18.50 lakhs on or before 31-3-1989,. The letter cannot be applied with retrospective effect in relation to interest charged on the entire amount at full rates during the accounting periods relevant to assessment years 1988-89 and 1989-90.
25. The learned counsel for the assessee submitted that the correctness of the judgment of the Supreme Court in the case of State Bank of Travancore (supra) has been doubted by the Honble Supreme Court in the case of Uco Bank v. CIT (supra). He drew our attention to the observations made by the Honble Supreme Court at page 898 of the said Report. These observations only relate to the legal effect of the beneficial circular in view of the decision by a Bench of Five Judges of Supreme Court in the case of NavnitIal C. Jhaveri v. Appellate Assistant Commissioner (1965) 56 ITR 198 (SC). It has not in any manner doubted the correctness of the principles of law laid down by the Supreme Court in the case of State Bank of Travancore (supra) so far as it relates to concept of accrual of income vis-a-vis theory of real income explained in the said judgment. The Honble Supreme Court in the case of Godhra Electricity Co. (supra) relied upon by the learned counsel has quoted with approval the following observations made in the case of State Bank of Travancore (supra). The relevant extract as appearing at page 758 of is reproduced below :
In State Bank of Travancore v. CIT (supra), after considering the various decisions of this court, Sabyasachi Mukharji, J (as the learned Chief Justice then was), has said :
"An acceptable formula of co-relating to notion of real income in conjunction with the method of accounting for the purpose of the computation of income 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 accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of the 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 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 but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made 'no income'."
The Honble Supreme Court has clearly held that once accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made "no income".
26. The learned counsel for the assessee made an alternative contention that if the interest income in question is charged to tax on accrual basis in assessment years 1988-89 and 1989-90, as has been done by the assessing officer, deduction in respect of reversal of interest should be allowed in the year of entry of reversal of such interest which has been made in assessment years 1989-90 and 1990-91 as bad debt or trading loss. The onus lies on the assessee to prove that a particular deduction is allowable as a bad debt or as a trading loss. The voluntary forgoing of income which had already accrued in favour of the assessee by passing entry of reversal of such interest income in subsequent year, cannot support the assessee's claim for grant of deduction as a bad debt or as a trading loss. It is only a case of application of income after it had already accrued in favour of the assessee, which cannot be allowed as a deduction either as bad debt or trading loss.
27. In view of the aforesaid facts and discussions, we do not find any merit in any of the grounds of appeal raised by the assessee in their appeals for assessment years 1988-89 and 1989-90 except in relation to ground No. (4) in assessee's appeal for assessment year 1989-90. In case the assessee has offered Rs. 36,589 for tax in assessment year 1989-90 at the time of filing of revised return, the said amount should be excluded as it is a part of interest income of Rs. 46, 100 upheld in assessment year 1988-89.
28. We will now consider the appeals filed by the revenue. In assessment year 1990-91, the first ground relates to deletion of Rs. 1,26,511 being the reversal of interest income charged from M/s. "SMMPL" in assessment years 1988-89 and 1989-90. In view of the forgoing discussions, we are of the view that no deduction can be made in respect of reversal of interest income pertaining to those years had really accrued in favour of the assessee and subsequent forgoing of such income and reversal of entry relating to such interest income, cannot justify deletion of the said amount of disallowance/addition made by the assessing officer. The relief granted by the Commissioner (Appeals) to the extent of Rs. 1,26,511 in assessment year 1990-91 is, therefore, set aside and the order of the assessing officer in relation to this point is restored.
29. The second common ground raised by the revenue in their appeals for assessment years 1990-91 and 1991-92 relates to deletion of disallowance of interest expenditure amounting to Rs. 3,57,750 in assessment year 1990-91 and Rs. 4,17,000 in assessment year 1991-92. The learned Senior Departmental Representative had mainly relied on the reasons mentioned in the assessment order and submitted that the assessee was finance company and promoting of another company was not a part of business activity. No company would borrow loan at higher rate and give it to other sister concern at lower rate of interest or without interest. The assessing officer has, therefore, rightly disallowed the interest expenditure to that extent. The learned Departmental Representative had also placed reliance on the judgment of Honble Madras High Court in the case of CIT v. Coimbatore Salem Transport (P) Ltd. (1966) 61 ITR 480 (Mad). It has been held by the High Court that onus of proving that expenditure had been actually incurred for and in the course of business for earning income, is undoubtedly on the assessee. But the High Court has further held that the moneys in this case were borrowed by the company on interest and advanced it to its directors without interest and revenue authorities disallowed the portion of the interest paid by the assessee on the moneys borrowed by it in proportion to what it could have charged from its directors on moneys advanced to them. The Tribunal granted full deduction on the ground that it was a matter of business prudence and in the absence of positive materials that the moneys borrowed had been utilised for non-business purposes, the department was not justified in disallowing any portion of the interest paid. The Honble High Court approved the view taken by the Tribunal. Therefore, this judgment instead of supporting the revenue's case, supports the assessee's contention. The main object contained in the memorandum of association inter alia, authorises the assessee-company to promote other companies. The assessee has substantial interest in the newly formed company 'SMMPL. The investment in the newly formed company "SMMPL" is, therefore, a business propose of the assessee-company. It cannot, therefore, be validly contended that the funds borrowed on interest by the assessee have been diverted for non-business purpose. The Commissioner (Appeals) has given elaborate reasons while deleting the aforesaid additions in the appellate order passed by him in assessment year 1991-92. He has relied on several judgments while deleting the aforesaid disallowances such as decisions in the case of CIT v. Khairagarh Timber Mart (1982) 137 ITR 346 (MP), CIT v. Bhikhamchand Jankilal (1981) 131 ITR 554 (MP) and CIT v. Bharat Insurance Company Ltd. (1983) 142 ITR 342 (Del). After giving a deep and thoughtful consideration to the elaborate and convincing reasons given by the Commissioner (Appeals) in the order passed by him, we are of the considered opinion that the Commissioner (Appeals) has rightly deleted the disallowance out of interest expenditure made by the assessing officer in assessment years 1990-91 and 1991-92, We do not find any justification to interfere with the view taken by the Commissioner (Appeals) in relation to this common ground raised by the revenue in assessment years 1990-91 and 1991-92.
30. In the result :
(i) Assessee's appeal for assessment year 1988-89 (ITA No. 2641/Ahd1995) is dismissed.
(ii) Assessee's appeal for assessment year 1989-90 (ITA No. 2542/Ahd/1995) is partly allowed.
(iii) Revenue's appeal for assessment year 1990-91 (ITA No. 2898/Ahd/1995) is partly allowed.
(iv) Revenue's appeal for assessment year 1991-92 (ITA No. 2899/Ahd/1995) is dismissed.