Income Tax Appellate Tribunal - Mumbai
Deputy Commissioner Of Income Tax vs Reliance Petroleum Ltd. on 30 September, 2005
Equivalent citations: (2006)100TTJ(MUM)565
ORDER
K.P.T. Thangal, Vice President,
1. This appeal by the Revenue is for the asst. yr. 1994-95.
2. The only effective ground of objection by the Revenue is directed against the order of the CIT(A) in holding that interest income amounting to Rs. 46,74,87,123 on advances given to Reliance Industries Ltd., Lavanya Holdings and Trading (P) Ltd. and Reliance Industrial Infrastructure Ltd. had not accrued to the assessee, though the AO had rejected the assessee's claim of non-accrual/receipt of interest from the above three companies.
3. The case of the Revenue is that the CIT(A) ought to have appreciated that the assessee-company itself had credited the interest income in its accounts, which are duly audited and subsequently, as an after thought, that the entries were reversed on 31st Oct., 1994, which was in the subsequent accounting year and the AO had rightly pierced the corporate veil and found that the assessee's claim of non-accrual of interest did not appear to be bona fide and correct. It is also the case of the Revenue that the CIT(A) ought to have ignored the agreement between the assessee and Reliance Industries Ltd. (RIL), Reliance Industrial Infrastructure Ltd. (RIIL) and Lavanya Holdings and Trading (P.) Ltd. (Lavanya), as the only purpose of so-called agreement was to transfer funds from the assessee-company to the above three companies, all belonging to Reliance group of companies and these agreements were not at arms length.
4. The facts leading to the dispute, briefly, are as under :
Assessee filed the return on 28th Nov., 1994, declaring taxable income at MI. Assessee-company was incorporated on 3rd Sept., 1991, previously known as 'Reliance Refinery (P) Ltd. Subsequently, its name was changed to 'Reliance Petroleum Ltd.' (RPL) from 16th April, 1993 onwards.
5. In the statement of income attached with the assessee's return for the asst. yr. 1994-95, income was shown at Nil, subject to notes. The notes read as under:--
(1) a. The company has shown in the accounts income Rs.
towards interest on advances on the following parties :
(i) Reliance Industries Ltd. 35,98,61,917.81
(ii) Reliance Industrial Infrastructures Ltd. 1,55,04,657.54
(iii) Lavanya Holdings and Trading (P) Ltd. 2.58,90,410.96
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Total 40,12,56,986.31
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The amount in respect of which the interest calculated was given as advance towards project implementation, The above interest is disputed by the above parties as not in accordance with the agreements entered into with them. It is, therefore, claimed that the above amount is not to be treated as income.
b. The company has also shown in the accounts income towards interest of Rs. 50,17,808.22 on debentures of Reliance Filaments Ltd. As per the terms of issue of the debentures by Reliance Filaments Ltd., interest income is not to accrue for a period of three years from the date of issue. It is therefore claimed that the above amount is not to be treated as income.
(2) The company is incorporated Inter alia among other objects to set up petroleum refinery. In order to implement the objectives of the company, the company made a public issue of triple option convertible debentures aggregating to Rs. 2,172 crores in terms of the prospectus dt. 26th Aug., 1993.
Pending utilisation of funds in the project of petroleum refinery the funds have been used for financing and investments. The company has advanced funds to the parties for project implementation and also made various investments. The company has not prepared the profit and loss account in accordance with the guidelines issued by the Institute of Chartered Accountants of India. Accordingly, the company has adjusted the income against pre-operative expenses and issue expenses and carried the balance amount to the balance sheet by capitalising the same under the head "Miscellaneous Expenses". This treatment is in consonance with the decision of Andhra Pradesh High Court in the case of CIT v. Nagarjuna Steels Ltd. . Andhra Pradesh High Court in the above decision has considered the guidelines issued by the Institute of Chartered Accountants of India in their compilation called "Study on expenditure during construction period" and held that the difference between the pre-operative expenses and the income earned during construction period has to be capitalised.
Andhra Pradesh High Court in the case of CIT v. Andhra Farm Chemicals Corporation and Delhi High Court in the case of Snam Progetti v. Addl. CIT (1981) 132 ITR 70 (Del) have also held that the income during the construction period is to be capitalised.
6. During the course of assessment proceedings, AO noticed, assessee has credited as income received/accrued, among other, the following three items :
Interest accrued on deposit given to Rs. Reliance Industries Ltd. 42,60,92,054.79 Interest recoverable on advances made to Reliance 1,55,04,657.54 Industrial Infrastructure Ltd. Interest recoverable on advances made to Lavanya 2,58,90,410.96 Holdings & Trading (P) Ltd.
It was clarified by the assessee company vide its letter dt. 18th Nov., 1996 that in the notes attached, the interest received from RIL is shown at Rs. 35,98,61,918; whereas the correct figure was Rs. 42,60,92,055. It was further clarified that a sum of Rs. 6,62,30,137 as shown in Sechdule H of the balance sheet, has been deducted from accrued interest of Rs. 42,60,92,055 and the balance of Rs. 35,98,61,918 was shown in Note 1(a) to the return of income. As mentioned hereinabove in the reproduced notes, the assessee's representative contended before the AO that RIL, RIIL and Lavanya objected for the payment of interest on the ground that interest credited was not payable in connection with the agreement entered into with them and requested not to treat as interest credited in the assessee's account as its income for the year under consideration.
7. It was further contended that as per the agreement entered into between the assessee company and RIL, for the purpose of putting up the project at Jamnagar, no interest is payable by RIL to the assessee-company. It was further submitted that the implementation of Jamnagar project was delayed, since the funds were already placed with the above companies for very long period, the assessee-company thought it advisable to put claim on these companies for the interest. Accordingly the assessee-company passed necessary entries in the books of account of the last day of the accounting year, at the time of finalisation of accounts. Letters were written to the above companies, making the claim for interest. Assessee company received rejection to charge of interest from all the three companies. It was 'never a part of understanding with these companies that interest will have to be paid by them. Ultimately the assessee-company reversed the entries for interest in the financial year relevant to the subsequent asst, yr. 1995-96. Finally, it was the case of the assessee before the AO that no interest accrued from all the three companies at all. They have not debited any interest in their accounts to the assessee. Confirmation letters were filed from all the three companies by the assessee, requesting not to treat the interest of Rs. 46,74,87,123 credited in assessee's accounts and reversed subsequently as income for the year under consideration. Assessee also pointed out that no interest is receivable on debentures as well, as per the terms of issue.
8. AO noted that it is actually surprising--first the assessee-company credited the interest in its books of account during the relevant assessment year and reversed the same in the subsequent year, claiming that no interest has accrued or receivable at all. AO further noted, as on the last day of the previous year, i.e, on 31st March, 1994 and in fact even upto September, 1994, i.e., the date of signing of the final accounts, the whole group along with the auditors, were clear in their minds and there was no doubt that interest had accrued to the assessee. AO further notes that even in the audit report dt. 24th Nov., 1994, against the column "Method of accounting employed", the auditor stated as under :
The company generally follows accrual system of accounting both as to income and expenditure except in respect of the following items which are generally accounted for on cash basis :
Income Item Interest on calls in arrears.
9. AO has taken note of the fact that all these companies belong to Reliance Group of Companies promoted by RIL. He held that the same persons decided that interest has accrued and subsequently they themselves treat that no interest has accrued, He held, "in fact, if any such agreement as claimed had existed before the end of the previous year, i.e., before 31st March, 1994, the assessee ought not have credited the interest in the books of account and the auditors would not have certified the accounts as such". For a specific query, the assessee-company vide their letter dt. 27th Jan., 1997 stated: "in this connection we submit that interest has been calculated from the date of payment till 31st March, 1994 at the rate of 18 per cent per annum". Hence, the AO came to the conclusion that even the rate of interest charged was predetermined and the assessee's subsequent stand that no interest accrued had no meaning. AO held, the same group of individuals behind the corporate veil once sitting in the chair of the assessee company and other times sitting in the chairs of above mentioned three companies take decisions for their own benefit and convenience, detrimental to the Revenue, which is not acceptable. He held, the reality of transactions and intentions can be looked by lifting the corporate veil. Hence, he held, the claim of non-accrual of interest/receipt is to be rejected. Aggrieved by the above order, assessee approached the first appellate authority.
10. Before the CIT(A), it was contended, no interest accrued either statutorily or contractually to the assessee-company from the advances made to RIL, Lavanya and RIIL. It was also contended, referring to agreement dt. 29th Sept., 1993, Clause 9(a) specifically prohibited that no interest would accrue or payable by RIL to the assessee on advances. It was further submitted that neither the purchase order nor letter of intent had any provision for paying or receiving interest. Accounts were finalised and signed by the board of directors on 23rd Sept., 1994 and the assessee company passed entries in its books of account on the last day of the accounting year, at the time of finalisation of accounts and provided for interest from RIL, Lavanya and RIIL. Though the assessee made the claim of interest vide their letter dt. 20th Oct., 1994 from RIL, it was immediately rejected by RIL vide their letter dt. 21st Oct., 1994. Similar was the case with Lavanya and RIIL. It was again repeated that none of these parties (three companies) claimed deduction for interest in their books of account. It was stated, various specifications required from the assessee-company for the purpose of finalisation of the orders for purchase of materials with various parties were also not provided by the assessee company. Thus the delay in execution of the contract was due to assessee's fault. On account of this, the matter of interest was considered by the board of directors and was decided to reverse the charge of interest made in the books for the year ended on 31st March, 1994. Entries were reversed on 31st Oct., 1994. It was also stated that the board of directors, while considering the contract, also had taken note of the fact that charging of interest was not specifically permitted. It was submitted, the action of the AO in not accepting the above facts was wrong, as such liable to be reversed.
11. The assessee relied upon the following decisions in support of assessee's case :
(i) E.D. Sasoon & Co. Ltd. v. CIT
(ii) CIT v. Nadiad Electric Supply Co. Ltd.
(iii) CIT v. Chanchani Bros. (Contractors) (P) Ltd.
(iv) CIT v. Bharat Petroleum, Corporation Ltd.
(v) Trikamlal v. CIT (1982) 134 ITR 450 (MP)
(vi) CIT v. Smt. Geetha Sanghi
(vii) Beni Prasad Sidh Gopal v. CIT
(viii) CIT v. Hindustan Housing & Land Development Trust Ltd.
(ix) CIT v. Sikaria Sons & Co. (1995) 216 ITR 440 (Gau)
(x) CIT v. Associated Commercial Corpn.
(xi) Godhra Electricity Co. Ltd. v. CIT
(xii) State Bank of India v. CIT
(xiii) Nagri Mills Co. Ltd. v. CIT
(xiv) Kedarnath Jute Mfg. Co. Ltd. v. CIT The CIT(A) obtained comments from the AO in respect of the written submissions made by the assessee.
12. It was the case of the Revenue before the CIT(A) that the agreement dt. 29th Sept., 1993 entered into with RIL was vague and of very general in nature. The clauses of the agreement were imaginary. It was entered into with a view to advance the funds to RIL without payment of interest. It was not an agreement but a facade created to transfer the funds to RIL. It was further submitted that the other two companies, i.e., Lavanya and RIIL, had no capacity to undertake orders placed on them by the assessee-company. It was further submitted, similar agreements were entered into with Reliance Poly Propylene Ltd. and Reliance Polyethylene Ltd. and the assessee demanded interest at the rate of 13.5 per cent from RIL and RIL agreed to pay at 9 per cent, and it was assessed also in the case of two companies.
13. In counter-reply, to the submission by the Department, assessee submitted that the approach of the AO was incorrect. Assessee, in support of this, relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Daulat Ram Rawatmull . It was submitted, it was not open to the AO to rewrite the agreement. It was further submitted, with regard to Lavanya and RIIL, that even if it were to be assumed that the funds were diverted for non-business purposes, the maximum that could be done is to disallow the interest paid but it was not open to the AO to compute the interest. It was further submitted, in the case of the assessee, RIL never agreed to pay interest. Therefore, there is no accrual. Merely because RIL agreed to pay to some other party, it does not mean that interest also accrued to the assessee.
14. The CIT(A), taking note of the fact of the agreement entered into between the parties, particularly Clause 9(a) of the agreement dt. 29th Sept., 1993, wherein the question of interest was specifically ruled out and also considering the purchase orders placed with Lavanya and letter of intent issued to RIIL for supply of project material required for SBM project of Gulf of Kutch, wherein there was no provision of interest, he held that the claim of the assessee is on the right direction. He also noted that inspite of non-charging interest clause, assessee tried to charge interest and made entries in its books of account to that effect. A letter was written on 20th Oct., 1994 to all the above three companies, which was repudiated by them; letters falling beyond the date of finalisation of accounts on 23rd Sept., 1994. CIT(A), vide para 16 of his order, has drawn the issues needed to be decided before him. These are us under :
(i) Is there a right in the appellant company for interest on the advances made to RIL, Lavanya and RIIL ?
(ii) Is the company entitled to take its stand in its return of income contrary to its own books of account ?
(iii) Can corporate veil be lifted in the facts and circumstances of the case? and
(iv) What are the consequences of the lifting of corporate veil ?
15. The CIT(A) noted that as per Clause 9 there is no stipulation to charge interest the funds made available to RIL were returned when it was found that the funds could not be utilised for the purposes for which it was advanced. Assessee did not make the claim of interest till 20th Oct., 1994. He held, in fact, there was no right to receive interest vested in the assessee from RIL. Relying upon the decision of the Hon'ble Supreme Court in the case of E.D. Sasoon & Co. Ltd. (supra), the CIT(A) held that income can be said to have accrued to or earned only when a debt came into existence and the assessee acquired the vested right to receive the payment. It is not so in the instant case of the assessee, CIT(A) held. Further relying upon the decision of the Hon'ble Bombay High Court in the case of Nadiad Electric Supply Co. Ltd. (supra), he held, mere sending of bill or making a claim does not vest with any rights. A right can only be said as arising or accruing, when the other party also acknowledges it or the assessee acquires a legal right to receive it. It should be legally enforceable. The CIT(A) also relied upon the decision of the Calcutta High Court in the case of Bharat Petroleum Corporation Ltd. (supra). He further relying upon the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra), held that unless there is legally enforceable right, there is no accrual/right to receive by the party concerned. In the instant case of the assessee, there is no legally enforceable right, though it is true, the assessee claimed interest from RIL. He held, if the other party agreed to make the payment inspite of the agreement, the position would have been different.
16. Relying upon the decision of the Hon'ble Allahabad High Court in the case of Beni Prasad Sidh Gopal (supra), CIT(A) held that 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. The Hon'ble High Court held that the amount shown in the account as due from a particular person cannot be treated as merely assessee's income because he has shown it, unless the other party also admits it. Further, for the above proposition, the CIT(A) also relied upon the decision of the Hon'ble Supreme Court in the case of Hindustan Housing and Land Development Trust Ltd. (supra). He held that in the instant case of the assessee there is no dispute that the other parties repudiated the claim for interest made on them by the assessee. In the light of the above facts, the CIT(A) held that the assessee has no right to charge interest on the advances made to RIL, Lavanya and RIIL.
17. With reference to the AO's stand that the assessee is bound by the entries made in the books of account and it is not open for the assessee to take a contrary position from that of the entries made in the books of account, CIT(A) held that this is incorrect. Particularly relying upon the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), he held, "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter". He held, though the above observation of the Hon'ble Supreme Court was in a different context, i.e., of deduction claimed; the proposition very well applies in the instant case of the assessee, where the income has been accounted for in the books of account but was not offered to tax, as for example in Western India's case (supra), Godhra Electricity Co. Ltd. 's case (supra) and State Bank of India's case (supra). He again relied on the following observation of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. 's case (supra).
Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which liability to tax is attracted, viz., accrual of the income or its receipt, but the substance of the matter is 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.
Relying upon the decision of the Hon'ble Bombay High Court in the case of India Finance & Construction Co. (P) Ltd. v. B.N. Panda, Dy. CIT , the CIT(A) observed that interest cannot be charged as the one receivable if in fact the assessee has not received any interest. He held that there was no question of paying tax on income, which was said to be receivable; or the income that should have been received but not in fact received.
18. Coming to the observation of the AO that the agreement and the purchase orders have to be ignored, he held, it is not possible and not tenable stand in view of law point. Relying upon the decisions of the Hon'ble Supreme Court in the case of CIT v. Delhi Flour Mills Co. Ltd. and in the case of CIT v. Dwarkadas Khetan & Co. , he held that it is not permissible for the AO to rewrite an agreement and substitute the terms agreed upon between the parties, He held that AO's observation that the agreement must be regarded as imaginary had no substance, Coming to the observation of the AO that the assessment made in the case of RPEL and RPPL provides guidelines as to the assessment to be made in the case of the assessee also, he held, is wholly misplaced. The most important distinguishable fact in both the cases of these companies, i.e., in the case of RPEL and RPPL is that it was accepted by RIL that interest would be paid and it was actually paid.
19. Coming to the AO's observation that it is permissible to lift the corporate veil, CIT(A) held that this is also incorrect. He held that in the case of RIL more than 50 per cent of the shares are held by the public and close to 75 per cent of the shares held by financial institutions/ banks, mutual funds and the public. There are nominee directors of the financial institutions on the board of RIL and also of the assessee. Only four of the Directors are common in both the companies. In these circumstances, he held, it appears that the suggestion made by the AO is far-fetched. He held that RIL is the promoter of the assessee, but that by itself does not, lead to a conclusion that the assessee is a front company of RIL. He records, the Courts have often lifted the corporate veil for the benefit of members of the company, in criminal or quasi criminal cases, trust matters and to ascertain whether an agreement is void for being against the public policy of the country. In the instant case, none of these conditions, he held, exists. He held, RIL and the assessee are independent companies and have independent entity. Just because RIL used the funds of the assessee, AO cannot lift the corporate veil and compute interest against the decisions of various Courts on this point. With the above observation, CIT(A) held, the interest held to be accrued but, not received has not really accrued to the assessee.
Hence he deleted the addition made on this account. Being aggrieved, Revenue is in appeal before the Tribunal.
20. The learned senior Departmental Representative submitted, the issue before the Tribunal is that having taken a conscious decision to show income from advances and having shown in the audited accounts and ratified by the board of directors , can now the assessee-company go back and say that the income has not accrued to the assessee at all? The learned senior Departmental Representative submitted, the terms of contract are contrary to each other, which indicate it is prepared in a hurry. Bringing our attention to paper book p. 22, a letter from RPL (assessee) addressed to RIL, dt. 20th Oct., 1994, wherein it is stated : "a sum of Rs. 42,60,92,054.79 is due from you towards interest up to 31st March, 1994 on the advance given to you from time to time as per the statement attached. Kindly forward to us a cheque for the above amount at the earliest", the learned senior Departmental Representative submitted, now the assessee cannot go back and say that nothing has accrued to the assessee. Assessee now cannot claim, learned senior Departmental Representative submitted, that such a letter and the claim was made casually and as soon as the other party denied their liability, assessee reversed it without murmur. Audited accounts approved by the board of directors are true and fair picture of the company and it reflects the true financial position of the company. For the above proposition the learned senior Departmental Representative submitted, once the assessee has shown something as its income, then it is for the assessee to show why it should not be treated as income. He particularly brought our attention to Section 227 of the Companies Act, which details the powers and duties of the auditors. Commenting on auditors' duty, he submitted, if there is any cause or reason to doubt in the mind of the auditor as to the accuracy of certain entries in the balance sheet or they are such that, if disclosed they would show the balance sheet in a different light, those facts must be conveyed to the shareholders and it is the duty of the auditor to make a full, careful and truthful report, in default of which he must be held to have failed to discharge his obligation. If any auditor certifies contrary to the above they are liable to be treated as unqualified and unfit to be a member of the Institute. Thus the learned senior Departmental Representative submitted, once the auditor certified and board of directors ratified the accounts, the company cannot go back from its responsibility. The learned senior Departmental Representative, getting support from the decision of the Tribunal, Mumbai Bench, in the case of ITO v. Shreyas Shipping Ltd. (2002) 76 TTJ (Mumbai) II : (2003) 86 ITD 556 (Mumbai), submitted that the method of accounting followed by the assessee in writing his books of account has to be compulsorily taken as basis of computation of income in assessment proceedings and such method is equally binding on the assessee inasmuch as he cannot follow one method or system of accounting for writing his books of account and yet another method or system of accounting for return of income, which virtually now the assessee is trying to adopt. The learned senior Departmental Representative submitted, once the assessee adopted that the income accrued, then it cannot go back and say that the income has not accrued subsequently. The assessee has to discharge the onus that the entries were incorrectly made or were not in accordance with the provision of law to go back from the stand it has taken first. Hence the learned senior Departmental Representative submitted, the decision relied by the CIT(A) in the case of Nagri Mills Co. Ltd. (supra) had no applicability. The learned senior Departmental Representative submitted, the existence or absence of entries in the books of account is not decisive and is not conclusive proof for anything. It depends upon the right of the assessee to receive the amount. In the instant case the assessee claimed it, auditors certified it as true and the board of directors of the company also approved it. Now simply the assessee cannot say that the income has not accrued to the assessee. The assessee can go back only if the assessee successfully proves that the amount has not accrued to the assessee. In the instant case the assessee has nothing to show that in fact the amount has not accrued to the assessee. The learned senior Departmental Representative submitted, in the instant case of the assessee, the principles laid down by the Hon'ble Supreme Court in the famous case of McDowell & Co. Ltd. v. CTO .
21. Again the learned senior Departmental Representative submitted, in fact the AO has not accepted assessee's contention that the interest has not accrued because the assessee had shown the interest in Schedule H of the final accounts as "Income on temporary deployment of funds" (para 8 of the assessment order) and the final accounts has been signed by the auditors and managing director of the company. The learned senior Departmental Representative further submitted, assessee company belongs to Reliance Group and is promoted by RIL, which was controlled by Shri Dhirubhai Ambani (as it was), Shri Mukesh Ambani and Shri Anil Ambani. Shri Anil Ambani is the managing director of the company. Therefore, the credibility of the explanation given by the assessee with regard to the dispute between the assessee and three companies, as also the agreement with RIL is highly suspected. Rs. 796 crores, Rs. 100 crores and Rs. 175 crores were advanced to RIL, RIIL and Lavanya during the year and RIL refunded substantial amount and only a net amount of Rs. 115 crores was standing at the close of the accounting year. He further submitted, though similar agreements entered into by two other group companies with RIL, RIL agreed to pay interest at the rate of 9 per cent on advances, which shows that the stand of the Revenue is very reasonable.
22. The learned senior Departmental Representative objected to the finding of the GIT(A) and contended that the agreement dt. 29th Sept., 1993 itself is suspicious. CIT(A) was not correct in holding that no right to receive interest vested in the assessee and therefore, it cannot be said that there was a legally enforceable right to claim interest from RIL and the other two companies. He held, CIT(A)'s reliance in the case of E.D. Sasson & Co. Ltd. (supra), Nadiad Electric Supply Co. Ltd. (supra), Bharat Petroleum Corpn. Ltd.'s case (supra), Chanchani Bros. Contractors (P) Ltd. 's case (supra) and Godhra Electricity Co. Ltd.'s case (supra), is of no relevance. He further submitted, the reasoning of the CIT(A) that, the three companies never acknowledged their liability nor made corresponding entries in the books has also no relevance.
23. Again the learned senior Departmental Representative objected to the reasoning of the CIT(A) that the AO had no right nor it is open to the AO to rewrite an agreement and substitute it on his own terms. He again submitted, the mere fact that RIIL and Lavanya have subsequently made huge supplies to the assessee on the basis of orders placed on them and not so done is also immaterial. Again the learned senior Departmental Representative objected to the finding of the CIT(A) that the agreement between the assessee and RIL cannot be treated as a facade as more than 50 per cent of the shares are held in these companies by financial institutions/banks/mutual funds/public. There are nominee directors of financial institutions and only the board of directors are common to both the companies. Therefore, both the companies are independent companies and the assessee cannot be treated as a front company of RIL, the learned senior Departmental Representative submitted, is incorrect appreciation of facts.
24. Again commenting on the agreement dt. 29th Sept., 1993, the learned senior Departmental Representative submitted, as per p. 3 of the agreement, the scope of work for RIL was to render assistance and advice to the assessee for implementing its project. RIL is to make available to the assessee experts and staff for advice. RIL is entitled to negotiate with contractors and vendors, select them and finalise the terms and conditions and all such contracts "shall be directly executed by RPL" (assessee). From the above it is clear that RIL was not required to actually set up the project for the assessee but only aid and advice the assessee for setting up of the project. Under the circumstances, payment of "advance" of nearly about Rs. 800 crores was inexplicable.
25. Again the learned senior Departmental Representative submitted, Clause 7 at p. 5 of the agreement envisages RIL providing funds to the assessee "on terms and conditions to be agreed in writing". Clause 8 at p. 6 of the agreement similarly envisages RIL providing funds to assessee in foreign exchange. Clause 9, however, envisages assessee providing funds to RIL significantly without any written agreement and Sub-clause (c) states that RIL shall pay to contractors and suppliers. If the orders for contract are to be executed by the assessee directly with the contractors and vendors in terms of Clause 3 of the agreement the provision of assessee making funds available to RIL for making payment in respect of such contract is inexplicable. Further, in this clause, it is stated that monies paid to contractor/vendor by RIL will be deducted from advances made by the assessee to RIL. Thus, the agreement itself envisages payment of moneys to RIL by the assessee in excess of and without reference to the amounts due to contractors/vendors, which is to be paid to RIL on behalf of the assessee. Finally, Sub-clause (d) of Clause 9 requires that advances made by the assessee to RIL be secured through deposit of marketable securities. Throughout the assessment and appellate proceedings, the assessee has not given the details of the securities deposited by RIL with the assessee. The learned senior Departmental Representative further submitted, there is no independent evidence on record to prove that the agreement was indeed entered in September, 1993 and no dates have been given in the signatures made on behalf of the assessee and RIL at p. 8 of the agreement.
26. The learned senior Departmental Representative thus submitted, the order of the CIT(A) is liable to be reversed for the following reasons :--
(a) The CIT(A) has not dealt with the question as to when an assessee has shown an income as accrued in its final accounts, which has been audited by the statutory auditors and has been adopted by the board of directors , whether it is possible for the assessee to repudiate the fact of accrual.
(b) When the amount accrued has been shown in the final accounts as income earned on temporary deployment of funds, is it open for the assessee to claim in its return of income that the amount on which interest has been shown to have accrued represents advances made for project implementation or for supplies to be made for setting up of the project.
(c) As regards AO having questioned the genuineness of the agreement between the assessee and RIL, the CIT(A) has merely brushed it aside on the ground that substantial shareholding in the assessee-company and RIL were held by public and financial institutions. He has ignored the fact that the effective management and affairs of the company is in the hands of the Reliance Group. He has also not examined the genuineness of the agreement with reference to the terms of the agreement as also categorical statement made in the annual accounts of the assessee that the interest has accrued on the temporary deployment of funds.
(d) Reliance placed by the CIT(A) on the decision of the Hon'ble Supreme Court in the cases of Kedamath Jute Mfg. Co. and SBI as also on the decision of the Hon'ble Gujarat High Court in the case of Nagari Mills Co. is misplaced inasmuch as while it is true that entries in the books of account are neither decisive or conclusive, the treatment accorded to a particular item in the final accounts represents the true and fair view of the affairs of the company and should be accepted as such unless the provisions of law and the facts of the case mandate otherwise. The assessee has not been able to discharge this onus as the agreement with RIL, on which the assessee has placed great reliance, is of colourable nature and lacks any credibility. The terms of the agreement, as demonstrated above, provides for advances by RIL to the assessee and at the same time, advances by the assessee to RIL. Further, it is to be noted that the amount advanced to RIL does not have any relationship or proportion to the scope of work envisaged under the agreement. It is also to be noted that claims of interest on RIL (as also on RIIL and Lavanya) was made on 20th Oct., 1994 and replies of the three parties denying any liability to pay interest was received within a few days thereafter. The assessee did not take any further action with regard to its claim. The letters addressed by the assessee to the three companies are curt as are the replies received thereto, clearly indicating that the claims and the denials were merely subterfuge to demonstrate to authorities a situation that did not exist in reality. Therefore, no reliance can be placed on this agreement to contend that the assessee had no enforceable right to interest particularly when the annual accounts unequivocally treated it as an income in its final accounts on temporary deployment of funds. For similar reasons, reliance placed by the assessee on other case laws is misplaced.
(e) It has been held by a number of judgments of Hon'ble Supreme Court and High Court that colourable transactions and arrangements should be probed to find the reality or substance of the matter. Reference is invited to the decisions in the case of Jiyajeerao Cotton Mills Ltd. v. CIT ; Kikabhai Premchand v. CIT ; G. Venkatswami Naidu & Co. v. CIT ; Juggilal Kamlapat v. CIT ; CIT v. Durgaprasad More and finally McDowell & Co. Ltd. v. CTO
27. The assessee has submitted written submissions, briefly stating as under:
The assessee company made a public issue of Triple Option Convertible Debentures (TOCD) of Rs. 60 each aggregating to Rs. 2,172 crores to part finance the cost of the project of grassroot fuel refinery at Jamnagar. It was offered to public on 23rd Sept., 1993, which is relevant to the asst. yr. 1994-95. Assessee received an amount of Rs. 850 crores towards share capital and non-convertible portion of TOCD. RIL is the promoter of the assessee company in respect of the above project. RIL has set up and is running several petrochemical complexes at Patalganga and Hazira and has expertise in setting up, commissioning and operating petrochemical complex, It built over the years a team of highly competent and experienced engineers and other professionals. RIL also has database information relating to technologies, plants, equipments, engineering services connected with petrochemical projects. The assessee company was desirous of putting up the above project within the span of 36-40 months. Assessee decided to approach RIL since they had all the expertise to take over the responsibility of putting up the project within the stipulated, time.
28. The assessee, therefore, entered into an agreement with RIL on 29th Sept., 1993. RIL was to render all the assistance, advice and services for timely completion and commissioning of the project. The services contemplated include configurations, selection of technologies, negotiations with process licensers, engineering contractors, fabricators, vendors and. selection of agencies. RIL was also to make available experts and experienced staff in their employment. As per the agreement, RIL was not entitled to recover or charge any fee from the assessee for the above services, but out of pocket expenses. It was also provided, in the case of temporary deficiency or inadequacy of funds, then RIL was to assist in arranging temporary accommodation to meet such deficiency. RIL was to arrange funds in foreign exchange to meet assessee's requirements. In consideration of the above services as well which RIL is to discharge their obligations in respect of the assessee's project, assessee agreed to make certain funds available to RIL. But there was a stipulation that no interest will accrue or will be payable by RIL to the assessee on such funds. It is further the case of the assessee that RIL was not supposed to charge the fees in respect of making available various services, the assessee was also not to charge interest on the money made available, by virtue of Clause 9 of the agreement with RIL. This was beneficial agreement to both the sides and in the best interest of both the parties.
29. Assessee also placed a purchase order for supply of various materials on 2nd March, 1994 with Lavanya. Supply contemplated included structural steel, steel plates, enforcement steel and pipes etc. The value of the total purchase order was about Rs. 590.16 crores. In the purchase order issued to Lavanya, there was no clause by which the assessee could also charge interest. Assessee provided advances against the agreement purchase order/letter of intent to RIL, Lavanya and RIIL. It passed entries in the books of account crediting interest as income on such advances on the last day of the accounting year. The statutory auditors and the board of directors approved the final accounts on 23rd Sept., 1994. Overlooking the specific prohibition in Clause 9(a) of the agreement dt. 29th Sept., 1993, assessee made a claim for a sum of Rs. 42,60,92,054.79 towards interest upto the period ended 31st March, 1994. The claim made by the assessee was rejected by RIL vide their letter dt. 21st Oct., 1994, i.e., immediately on the very next day of the claim made by the assessee, i.e., vide letter dt. 20th Oct., 1994. Similar claim was also made with Lavanya on the very same date, i.e., after the accounts were finalised, for a sum of Rs. 2,58,90,410.96 being interest due on account of amount advanced for the period ended 31st March, 1994. Lavanya too rejected the claim vide letter dt. 22nd Oct., 1994; since the delay was on the part of the assessee to implement the said project and hence there is no question of payment of interest. Claim was made against RIIL vide letter dt. 20th Oct., 1994, demanding Rs. 1,55,04,657.54 towards interest accrued upto 31st March, 1994. This claim was also rejected by RIIL. It was submitted, since the delay was on the part of the assessee to provide necessary specifications, the question of payment of interest by RIIL did not arise at all.
30. Consequently, the assessee reversed the entries in respect of interest in its books of account in the financial year 1994-95, i.e., asst. yr. 1995-96, as the above parties did not agree to charge of interest. According to the assessee, these facts are available from the ledger of the succeeding year. Though the assessee had accounted for interest for the period ended 31st March, 1994, other parties, i.e., RIL, Lavanya and RIIL had not provided for the said interest as liability in their books of account for the year ended 31st March, 1994. Interest as well other income by way of interest, profit on sale of investment were deducted from issue expenses, pre-operative expenses, deferred revenue expenditure under the head "Miscellaneous expenditure", which put together amounted to Rs. 46,74,87,123 (Schedule H). Out of the amount so received as share capital as well from the calls received in advance, the assessee has given project advances to RIL, Lavanya and RIIL; also made investments in convertible debentures of Reliance Filaments Ltd.; units of UTI and bonds of various public sector undertakings.
31. In the return filed, the assessee submitted that the above interest income of Rs. 46,74,87,123 is not liable to be taxed and filed the return declaring Nil income. Assessee submitted, interest has not accrued as the same is not in accordance with the agreement/purchase order/letter of intent and is disputed by other parties; hence, it was mentioned as not offered for tax.
32. As mentioned above, the facts were not accepted by the AO for the reason that the accounts were signed by the managing director and approved by the auditors as well. He held, assessee belongs to Reliance Group and the same set of persons decided that interest accrued first and subsequently held not accrued; which is not acceptable. The rate of interest was pre-determined. The interest foregone v/as an afterthought.
33. When the matter was carried before the CIT(A), the CIT(A) accepted assessee's contention. He agreed with the assessee's contention that assessee had no right to receive interest as there was no legally enforceable right to claim interest from RIL, Lavanya and RIIL. Other parties never acknowledged the liability/debt nor had they made corresponding entries in their books of account to that effect. Merely the assessee made entries in the books is not the determining factor. Only the provisions of law relating thereto determines the taxability. AO cannot rewrite an agreement and substitute terms of agreement.
Coming to the lifting of corporate veil, CIT(A) held, more than 50 per cent of the shares of the assessee-company were held by financial institutions/banks and nominee directors of such institutions were placed on Board of the assessee; hence, assessee and RIL were two different entities.
34. The learned Counsel for the assessee relied on the order of the CIT(A) and reiterated the submissions made before the CIT(A). He submitted, interest has not accrued to the assessee on advances made to RIL, Lavanya and RIIL. The agreement with RIL was for rendering prompt assistance and advise to the assessee for timely completion and commissioning of refinery plant and undertaking negotiations with various engineering contractors/vendors etc. Learned Counsel particularly brought our attention to Clause 9(a) of the agreement which specifically denies the liability of RIL to pay interest to the assessee on the advances made. Learned Counsel further submitted, since the implementation of Jamnagar project was delayed and the funds advanced were blocked for a long time, as a prudent businessman the assessee thought it advisable to make the claim for interest against the other three companies. Assessee made entries in the books of account on the last day of the accounting year while finalising the accounts. Accounts were finalised and signed by the board of directors on 23rd Sept., 1994.
35. Learned Counsel submitted, at the request of the assessee-company the other three companies confirmed to the AO that no amount was debited towards interest in their books of account, as assessee claimed. As noted above, learned Counsel submitted, there was no enforceable right against the other three parties, particularly he placed reliance upon the specific prohibition for claim of interest. Other three companies did not acknowledge the claim of the assessee. It is noteworthy, learned Counsel submitted, that the claims for interest were preferred by the assessee after the balance sheet was signed on 23rd Sept., 1994, though the entries in the assessee's books of account were passed at the time of finalisation of accounts. When the claim was rejected, the entries were reversed in the subsequent financial year.
36. Relying upon the decision of the Hon'ble Supreme Court in the case of E.D. Sasoon & Co. Ltd. (supra), learned Counsel submitted, unless and until assessee's contribution or parenthood is effective in bringing into existence a debt or right to receive the payment or in other words a debitum in presenti, solvendum in future, it cannot be said that any income has accrued to him.
37. Relying upon the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra), learned Counsel submitted, the question whether there is real accrual income or not need to be considered by taking the probability or improbability or realisation in a realistic manner. Again relying upon the decision of the Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra), learned Counsel submitted, there is a clear distinction between the cases, such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and, cases, where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. Learned Counsel also relied upon the following decisions :
(a) CIT v. Bokaro Steel Ltd.
(b) Nadiad Electric Supply Co. Ltd. 's case (supra)
(c) Chanchani Brothers (Contractors) (P) Ltd. 's case (supra)
(d) Bharat Petroleum Corporation Ltd. 's case (supra)
(e) Trikamlal's case (supra)
(f) Geeta Sanghi's case (supra)
(g) Beni Prasad Sidh Gopal's case (supra)
(h) Sikaris Sons & Co's case (supra)
(i) Associated Commercial Corporation's case (supra).
38. Learned Counsel further submitted, entries made by the assessee in its books of account is not determinative of the question whether assessee has earned any profit or suffered any loss. For the above proposition he relied upon the decision of the Hon'ble Supreme Court in the case of State Bank of India (supra).
39. The learned Counsel also relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT v. Western India Engineering Co. and the decision of the Tribunal in the case of Sarabhai Chemicals (P) Ltd. v. ITO (1985) 13ITD 653 (And).
40. Thus, the learned Counsel summed up; it is well settled that a mere claim by a person cannot result in accrual of income in his hands. Only the real income can be brought into tax net. In order to have accrued income in the hands of the assessee, a debt must come into existence in assessee's favour and it must be legally enforceable. The manner in which the assessee made entries towards the claim against the other parties is not determining factor. Therefore, the interest could never be held to have accrued to the assessee.
41. Opposing the contention of the learned senior Departmental Representative, learned Counsel for the assessee submitted, the main plank of the argument of the Departmental Representative is on the accounting of interest income in the books of account of the assessee; auditing it by its auditors and approving it by the board of directors . Once the assessee had made entries, ratified by the auditors, audited by the statutory auditors and approved by the board of directors , according to the Revenue, the assessee cannot go back and say that it was a mere entry in the books without accrual. Learned Counsel submitted, another stand of the Revenue is that clauses of agreement are contradictory and due to common management much reliance cannot be placed on the clauses of agreement with RIL. He further objected learned senior Departmental Representative's pointing of various anomalies in the agreement. Learned Counsel submitted, neither the AO nor the learned senior Departmental Representative could give any evidence in support of their argument that interest income on advances given to these three companies accrued to the assessee inasmuch as it has created a debt or right to receive in assessee's favour.
42. Learned Counsel submitted, it is well settled principle that the entries made in the books of account is not final and determinative factor and it alone cannot be the basis for taxing an amount. He submitted, Companies Act lays down provisions for maintaining books of account based on norms and standards and cast a responsibility on the board of directors and the auditors to disclose the trading results truly and fairly; but the provisions of Companies Act or the conduct of the board of directors , shareholders and auditors do not make an income taxable. Taxability or non-taxability depends on the right to receive the amount but not whether the board of directors auditors and shareholders approved it. Hence, the learned Counsel submitted the order of the learned first appellate authority is to be upheld.
43. Hearing the rival submissions and going through the orders of the Revenue authorities and the decisions cited by the contending parties, we are of the view that no interference is warranted in the order of the learned first appellate authority. The main thrust of the argument of the Revenue is that the assessee had shown certain interest as accrued on deposits given to RIL and also interest recoverable on advances made to RIIL and Lavanya. Subsequently the assessee reversed the above claim of interest inspite of the fact that assessee's accounts were finalised, audited by the statutory auditors and also approval was accorded by the board of directors . According to the Revenue, this is an after thought so as to defraud the Revenue of the tax due. According to the Revenue, the auditors certified against the column 'method of accounting employed' in their audit report dt. 24th Nov., 1994 as 'accrual system of accounting'. Once the income accrued, the assessee had no right to reverse it and to say that no income accrued: If it really becomes bad, the assessee had other remedies to get it corrected subsequently. Against this, the case of the assessee is that there is an agreement entered into between the parties dt. 29th Sept., 1993 and there is a specific clause in that agreement, i.e., Clause 9(a), which bar any interest. This clause specifically states that no interest shall accrue or be payable by RIL to RPL on such advances. However, the assessee vide its letter dt. 20th Oct., 1994 claimed interest and on the very next day RIL rejected the claim of the assessee. According to the Revenue, the agreement itself has no sanctity because it is vague and afterthought entered into between the same parties because RIL and RPL both are managed by the same family/group, virtually one and the same.
44. Coming to the stand of the Revenue that the agreement is vague and not of much relevance and, therefore, the CIT(A) should not have taken note of the so called agreement and in any case Tribunal should not consider it as a valid piece of evidence with regard to interest; we are unable to accept this proposition. RIL finalised their accounts on 18th July, 1994, prior to the finalisation of accounts by the assessee. In their audit report they had made no provision for interest as payable to the assessee. In the light of these facts, assessee's claim that interest not accrued on the advances is to be accepted, as any unilateral steps will not give assessee a legally enforceable right to receive interest.
45. Now the question is once after claiming it as accrued, can the assessee go back from the stand? First we have to note that the other parties have specifically denied their responsibility. In RIL's accounts, which was finalised prior to the claim of the assessee as mentioned above, no interest is provided as payable to the assessee. This crucial fact has to be kept in mind while considering whether unilateral claim of the assessee of interest will amount actually accrual of interest to the assessee only because the auditors certified it and the board of directors approved it. As rightly contended by the assessee, in the case reported in Godhra Electricity Co. Ltd. (supra) the Hon'ble Supreme Court held : "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". This was a case wherein the assessee unilaterally increased the rate of electricity supplied for lights and fans to 70 paise per unit with a minimum of Rs. 5 for every installation w.e.f. 1st July, 1963. It was contended that under the Electricity (Supply) Act, 1948, as amended in 1956, assessee-company was entitled to enhance the charges unilaterally subject to the conditions prescribed in the Sixth Schedule to the said Act, i.e., Electricity (Supply) Act, 1948. The Hon'ble Supreme Court held, approving the view of their Lordships' earlier decision in the case of CIT v. Shoorji Vallabhdas & Co. that whether the accounting method followed by the assessee is cash or mercantile, "what has to be seen is whether income can be said to have, really accrued to the assessee-cornpany". Again their Lordships approved the view taken by his Lordship Sabyasachi Mukharji, Judge (as he was then), in the case of State Bank of Travancow v. CIT "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 facts 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'." This observation of their Lordships is in favour of the Revenue, Revenue contended. In the instant case the assessee has shown interest as its income, auditors certified it and the board of directors approved it. Therefore, in the light of this decision, assessee cannot go back, according to the Revenue. But we are afraid this decision speaks otherwise. Income should really accrue to the assessee. The unilateral claim of the assessee does not amount to accrual in reality. The other party should also acknowledge it. All the three parties, from whom the assessee claimed interest, denied their liability. The accounts of RIL was finalised even before the assessee. They have not made any provisions for interest.
46. Now we have to see whether unilateral claim by the assessee gives rise to any legally enforceable right. It is not so. In the case of Nadiad Electric Supply Co. Ltd., (supra), the Hon'ble jurisdictional High Court held that sending the bills amounts to making a claim. It did not create a legally enforceable right nor a corresponding legally enforceable obligation on the other party. The same principle applies in the instant case of the assessee. Even, if we accept, the Revenue's contention that the agreement is sham and cannot be taken cognizance of because the parties in fact are the same being a family controlling the companies; we are afraid it does not further the case of the Revenue. In the absence of agreement there is no legally enforceable right on the part of the assessee to charge interest either. The Revenue, in such a case, at the most can treat this amount as advance made for non-business purposes. There is no such case for the Revenue. The case of the Revenue is that since all the companies are controlled by (late) Shri Dhirubhai Ambani, Shri Mukesh Ambani and Shri Anil Ambani; the credibility of the explanation advanced by the assessee with regard to dispute between the assessee and the three companies is also to be highly suspected. This assertion of the Revenue is not entirely correct. As rightly contended by the assessee, in addition to these individuals; financial institutions/banks/nominee directors of such institutions are on Board of the assessee. More than 50 per cent of the shares of the assessee company are held by financial institutions/banks. The companies are different entities. Therefore, the companies are to be treated as independent entities.
47. Another contention of the Revenue is that, as per Section 211 of the Companies Act and specifically Sub-section (1) thereof, every balance sheet of a company "shall give true and fair view of the state of affairs of a company as at the end of the financial year"; therefore, as certified by the auditors and approved by the board of directors , now the assessee cannot go back because as on that date this was the true and fair view of the state of financial position of the company. The contention of the Revenue has to fail for the reasons stated hereinabove because unilateral decision taken by the assessee, which is not enforceable in law, does not amount to accrual of income to the assessee. As stated hereinabove in para 45, reliance placed by the Revenue in the case of State Bank of Travancore (supra) does not further Revenue's case. The Hon'ble Supreme Court held that notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee. In the case reported in State Bank of Travancore (supra), the Hon'ble Supreme Court was dealing with a case where the assessee had treated interest on sticky advances as accrued according to its mercantile system of accounting and the assessee had debited the respective parties with that interest. After the close of the year, the assessee without giving up its interest, which it could have as a bad debt, did not offer it for taxation but carried it to the Interest Suspense Account. The Hon'ble Supreme Court held that the interest on sticky advances has to be treated as income which has accrued to the assessee, In the instant case of the assessee, in the agreement it is agreed upon that no interest will be payable. Assessee claimed interest, which was quickly rejected. Even before assessee's accounts were finalised, audited and approved; the other parties' accounts were audited and no provision was made on account of interest. Hence, the unilateral claim of the assessee, unless it is enforceable in law, does not amount to accrual of income.
48. We also find that the Hon'ble Supreme Court dealt with similar issue in the case of Bakaro Steel Ltd. (supra). In this case the assessee had shown in its books of account a sum 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 eight 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, was about a hypothetical income, which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the Hon'ble 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 Hon'ble Supreme Court held "in the present case also the entry which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax."
49. The decision of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. v. CIT strictly does not apply to the facts of the instant case. This was a case where the agreed managing agency commission was relinquished by a subsequent resolution, In this case the Hon'ble Supreme Court held as under:
Income accrues when it becomes due. The postponement of the date of payment does not affect the accrual of income. The fact that the amount of income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground for claiming deductions.
The mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received.
The above quoted portion makes it clear that it should become legally due, though they are not actually received. But in the instant case of the assessee it is difficult to hold that it becomes legally due because the other parties have not provided for it.
50. The case reported in CIT v. Shiv Prakash Janak Raj & Co. (P) Ltd. is also on facts distinguishable. In this case, it is true, the Hon'ble Supreme Court held: "the concept of real income should not be so read as to defeat the provisions of the Act". Their Lordships further held: "the conduct of parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not". Their Lordships further held: "mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee". This was a case where the assessee in the past years received and charged interest from the firm, where the shareholders and directors of the assessee-company were also partners. In the subsequent year the assessee-company passed a resolution on 9th Oct., 1967, i.e., before the end of the accounting year, deciding not to charge interest from the firm in view of the difficult financial position of the firm. CIT(A) and Tribunal upheld the order of the AO whereas the Hon'ble High Court reversed it. In further appeal, the Hon'ble Supreme Court reversing the decision of the High Court on facts held as under :
For the previous two assessment years, viz. 1966-67 and 1967-68, the assessee-company did charge interest on the loan advanced by it. to the firm which showed that the loan was an interest bearing loan, The second circumstances to be noticed was that the resolution waiving interest was passed after the expiry of the relevant accounting year in the case of the three subsequent assessment years, viz. asst. yrs. 1969-70, 1970-71 and 1971-72. Only in the case of the asst. yr. 1968-69, was the resolution passed before the expiry of the accounting year. Thirdly, the assessee-company was maintaining its accounts on the mercantile basis. Yet another circumstance to be noticed was that the Tribunal had found as a fact that the waiver was not based upon any commercial considerations. Therefore, the Tribunal was right in taking the view it did in respect of the asst. yrs. 1969-70, 1970-71 and 1971-72. In the case of the asst, yr. 1968-69, however, the resolution was passed before the expiry of the accounting year and though the finding of the Tribunal was that the said waiver was not actuated by any commercial considerations, the Revenue did not press the case so far as this assessment year was concerned.
51. Considering the above facts and the decisions cited supra, we are of the view that no interference is called for in the order of the CIT(A). Hence, the appeal by the Revenue fails and is dismissed.
52. In the result, appeal of the Revenue stands dismissed.