Income Tax Appellate Tribunal - Amritsar
Ganga Prashad Parshotam Lal vs Income Tax Officer on 21 February, 2005
Equivalent citations: (2006)99TTJ(ASR)201
ORDER
Bhavnesh Saini, J.M.
1. This appeal of the assessee is directed against the order of the learned CIT(A), Bhatinda, dt. 21st April, 2003, for the asst. yr. 1999-2000 on the following effective grounds :
(1a) That the reassessment by issuance of notice under Section 148 is bad in law as there was no application of mind by the assessing authority for the purpose of taking action under Section 148.
(b) That since there was no reason/application of mind by the AO assessment as framed by the AO is liable to be quashed.
(2a) Notwithstanding the abovesaid ground of appeal, addition of Rs. 8,54,764 on account of interest receivable from M/s Arihant Cotsyn Ltd. is uncalled for and CIT(A) has erred in confirming the above addition as made by the AO.
(b) That confirmation of the addition by the CIT(A) is against the facts and circumstances of the case and law as laid down by the Hon'ble Supreme Court and High Courts in many leading cases.
2. We have heard the learned Representatives of both the parties and gone through the observations of the authorities below and details submitted in the paper book by the counsel for the assessee.
3. Briefly stated, the facts as taken from the record, are that the assessee is engaged in the business of purchase and sale of cotton. Return of income for the asst. yr. 1999-2000 was filed on 2nd Nov., 1999, at the income of Rs. 25,289. The return was processed under Section 143(1) on 24th March, 2001. The AO initiated proceedings under Section 147/148 on 29th Aug., 2001, by issuing the notice to the assessee as the assessee declared interest income of Rs. 8,54,764.30 from M/s Arihant Cotsyn Ltd. pertaining to the asst. yr. 1999-2000 in the return of income for the asst. yr. 2000-01. The TDS certificate issued to the assessee clearly indicate that the amount of interest credited to M/s Ganga Parshad Parshotam Lal, Fazilka, pertained to the period 1st April, 1998 to 31st March, 1999, relevant to the asst. yr. 1999-2000 but this income was declared during the asst. yr. 2000-01. In compliance to the notice under Section 148, the assessee filed his return of income declaring same income as was shown in the original return. It was pleaded before the AO that after receipt of credit note dt. 6th July, 1999, along with confirmation of the same was received vide letter dt. 7th July, 1999, the amount of interest of Rs. 8,54,654.30 was credited to the interest account and debited to their account. Even at the date of receipt of confirmation of letter and after that also, no payment was received from them after 18th March, 1999 and even the original amount of purchase was receivable from them along with unsettled and non-determined interest and total payments were not recoverable from them instead of our utmost endeavour. It was further pleaded that (under) mercantile system of accounting, income and expenditure are accounted for only for settled and determined amount and making provision for some real income is to be kept in consideration. Doubtful income for recovery cannot be accounted under mercantile system accounting does not predict that interest in case of a doubtful debt should be treated as income under the accrual system of accounting. Accrual system of accounting does not create income. It only recognises income that has become due in the sense that is realisable. It is further submitted that the assessee was maintaining mixed system of accounting upto the asst. yr. 1996-97 and then it was changed from mixed to mercantile system from the asst. yr. 1997-98. The assessee also submitted that interest from debtors has not been credited on mercantile basis as that recovery of the original amount of purchases from them was not recoverable, what to say of unsettled, undetermined and non-recoverable interest. The balance of recovery of purchases is not recoverable instead of our utmost trial and endeavour. The assessee's counsel filed photocopies of civil suits against the parties from whom it is to recover the debts. The assessee also referred to the Guide Notes on Accrual Basis of Accounting by Research Committee of the Institute of Chartered Accountants of India. The assessee also relied on the decision in the case of Godhra Electricity Co. Ltd. v. CIT . It was further pleaded that only credit note of interest accrued was received but no amount of interest credited in his account has been received. Therefore, the assessee filed case under Section 138 of the Negotiable Instruments Act and recovery suits have already been filed in the civil Court. Copy of the same was filed before the AO. The AO, however, rejected the Guide Notes issued by the Institute of Chartered Accountants. The AO also did not rely upon the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Co. (supra). The AO was of the view that it should have been shown as income in the assessment year in question. The AO accordingly directed to make the addition of Rs. 8,54,764 being interest income from M/s Arihant Cotsyn Ltd. The assessment order was challenged before the CIT(A). The initiation of proceedings under Section 148 of the IT Act was challenged along with the addition in the assessment order in question. The same submissions were reiterated and it was submitted that since the amount was not recoverable and the accounts were not finalised, therefore, there was no question of accrual of interest in favour of the assessee. The assessee also relied upon the catena of authorities in which it was held that real income is to be taxed. It was also submitted that though the assessee received post-dated cheques but all the cheques were dishonoured and, therefore, the assessee has to resort to file criminal complaint under Section 138 of the Negotiable Instruments Act along with recovery of original amount against the debtor, M/s Arihant Cotsyn Ltd. It was also submitted that the assessee has offered such income of interest in the asst. yr. 2000-01. However, the submissions of the assessee were rejected by the CIT(A), who held that the TDS was deducted for the period under appeal, i.e., asst. yr. 1999-2000 and that the interest income shown in the next assessment year would show that the interest accrued to the assessee. The concept of real income is not applicable in this case, as such the decision of Godhra Electricity Co. (supra) is not applicable in the case of the assessee.
4. The assessee is in appeal before us on the grounds mentioned above.
5. From the above facts and the material on record, the points under consideration are that firstly, whether the proceedings under Section 148 have been rightly initiated in the matter and secondly, whether the addition of Rs. 8,54,764 was justified in the assessment year under consideration in the asst. yr. 1999-2000 on accrual basis.
6. The learned Counsel for the assessee reiterated the same submissions made before the authorities below and also submitted that the assessee filed return on 2nd Nov., 1999, which was processed under Section 143(1) on 24th March, 2001 and the AO recorded the reasons for initiating the proceedings under Section 148 of the IT Act on 29th Aug., 2001, as the real income should be shown in the asst. yr. 1999-2000 as was noticed by the AO from the TDS certificate. The learned Counsel for the assessee submitted that since the principal amount was not coming from the debtor and no intimation was received, therefore, the assessee settled the accounts and received audit report on 31st May, 1999 and the return of income was filed accordingly. The recovery of principal amount was doubtful, therefore, there was no question of accrual of any interest in the financial year relevant to the assessment year in question. He has submitted that the assessee filed return of income as last supply was made on 23rd May, 1998 and thereafter further supply of the goods was stopped to M/s Arihant Cotsyn Ltd., as payments were not received of huge due amount. He has further submitted that balance as on 31st March, 1999, due from the aforesaid party was Rs. 12,18,241.64. He has further submitted that the debit note dt. 6th July, 1999, was received after filing of the return on 21st Nov., 1999 and only then the assessee came to know that interest has been credited in the account of the assessee and the TDS has been deducted. The learned Counsel for the assessee submitted that the post-dated cheques which were payable subsequently were got dishonoured and, therefore, the assessee filed criminal complaint under Section 138 of the Negotiable Instruments Act along with recovery suit against the debtor and that company had gone in liquidation. Therefore, the recovery of principal amount was itself in doubt. The assessee also filed written submissions in which it was explained that sequence of events absolutely made it clear that the assessee could not have credited the interest in the books of account of M/s Arihant Cotsyn Ltd. (as) the interest income never accrued to him nor there was any possibility of recovery of principal amount from the parties concerned. He has further submitted that since the TDS certificate was issued, therefore, the assessee made entry in the asst. yr. 2000-01 and shown the same income in the asst. yr. 2000-01. He has relied upon the decision of the Hon'ble Punjab and Haryana High Court in the matter of Vipan Khanna v. CIT and decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT . On the other hand, the learned Departmental Representative submitted that the last payment was received on 18th March, 1999 and that the latter dt. 7th July, 1999, was received by the assessee. Therefore, atleast revised return could have been filed. The Departmental Representative further submitted that concept of real income is applicable in this case as the concerned party issued post-dated cheques and TDS was also deposited in the Government treasury. Therefore, interest income accrued to the assessee. The learned Departmental Representative submitted that initiation of proceedings under Section 148 of the IT Act was justified.
7. On consideration of the above facts and circumstances, we are of the view that the AO was justified in initiating proceedings under Section 148 of the Act. The assessee filed TDS certificate in the asst. yr. 2000-01 in which the relevant period was mentioned as 1st April, 1998 to 31st March, 1999. This material on the record of the AO clearly suggests that the AO was having prima facie view that interest income accrued to the assessee. The AO accordingly formed his opinion as according to him the interest income escaped the assessment. Once belief is well-founded, the recourse to Section 147 cannot be said to be illegal. At the time of initiation of proceedings under Section 147/148, the two conditions must coexist that the AO has reason to believe that income chargeable to tax has escaped the assessment for any assessment year. He must have reason to believe that such income escaped assessment by reason of the omission or failure on the part of the assessee to make a return under Section 139 for the assessment year or to disclose fully and truly material facts necessary for his assessment for that year. The existence of belief could be challenged but at the stage of reopening the Court should not consider the sufficiency or the correctness of the material. In the present case, the AO has TDS certificate available on record which indicated that interest accrued to the assessee in the financial year relevant to the assessment year under appeal. The AO, therefore, formed his opinion on that basis that income escaped the assessment in the year under appeal. Whether interest income is to be added in the year under consideration is a matter subsequent to the initiation of proceedings under Section 147 of the IT Act. We, therefore, do not find any justification to interfere in the orders of the authorities below as regards initiation of proceedings under Section 147 of the IT Act; the same is justified in the matter. We, therefore, dismiss this ground of appeal of the assessee as regards challenging the initiation of proceedings under Section 147 of the Act. The connected point is of real income. The case law relied upon by the learned Counsel for the assessee before the authorities below as well as before us is in the matter of Godhra Electricity Co. (supra). It is held in this case that income-tax is levied on all the income. It is further 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. There is no dispute about the legal proposition decided in this case as relied upon by the counsel for the assessee. We find in this case though a subsequent entry is made by M/s Arihant Cotsyn Ltd., but in this case there is no mere entry as post-dated cheque was also issued to the assessee upon which the TDS was also deducted. Therefore, in this case there is no mere entry by the parties. It is coupled with more evidence, i.e., TDS certificate and post-dated cheques, therefore, the case law relied upon by the counsel for the assessee are not applicable. The case of UCO Bank (supra) relied by the counsel for the assessee is also not applicable as amount is received through post-dated cheque by the assessee and as such there is no dispute whether interest income is assessable or not as it was offered for taxation in next year. This issue is decided against the assessee.
8. The last point raised in this appeal is about the taxability of interest income of Rs. 8,54,764 in the assessment year in question, i.e., 1999-2000.
9. The CIT(A) rejected the claim of the assessee as according to him the interest income related to the financial year 1998-99 was within the ample knowledge of the assessee well before filing of the return even while confirmation from the debtor side was not available. According to the C1T(A), the position becomes further more clear on 7th July, 1999, when B/C was received by the assessee. The CIT(A) observed that the return was filed on 2nd Nov., 1999. The CIT(A) further observed that even if TDS was received after 18th Nov., 1999, after filing of the return but the income part disclosure is not always dependent upon the discharge of TDS liability of debtor. According to the CIT(A), TDS document does not help the assessee to ignore the credit amount altogether. Therefore, the CIT(A) confirmed the findings of the AO as regards assessability of interest on accrual basis in the assessment year under appeal, i.e., 1999-2000. The assessee in the paper book filed copy of letter dt. 7th July, 1999, of M/s Arihant Cotsyn Ltd. in which the debtor has confirmed the credit balance of: the assessee as on 6th July, 1999, in a sum of Rs. 19,94,890.94. As per certificate-opening balance as on 6th July, 1999 (copy of the same is filed at p. 30 of the paper book), which reads as under :
Rs.
Opening balance 1-4-1999 2,18,241.64
Interest 6-7-1999 8,54,764.30
B/charges 6-7-1999 15,909.00
_____________
Total : 20,88,914.94
TDS + Surcharge 94,024.00
_____________
C/B as on 6-7-1999 19,94,890.94
Copy of the TDS certificate under Section 203 is also filed at p. 31 of the paper book in which in the first column, it is mentioned, date of payment/credit--6th July, 1999, The date of payment is 18th Nov., 1999, for the period from 1st April, 1998 to 31st March, 1999. The claim of the assessee had been that the audit was completed for the assessment year under appeal, i.e., 1999-2000 as on 31st May, 1999. Copy of the audit report is also filed at p. 7 of the paper book. The assessee has also shown the debit amount of M/s Arihant Cotsyn Ltd. in a sum of Rs. 12,18,241.64 as on 31st March, 1999. The debtor, M/s Arihant Cotsyn Ltd., also shows the opening balance as on 1st April, 1999, in a sum of Rs. 12,18,241.64 as per certificate filed at p. 30 of the paper book. These facts clearly establish that both the parties did not make any entry of the interest amount upto the period 31st March, 1999. M/s Arihant Cotsyn Ltd. for the first time, credited the amount of interest as on 6th July, 1999, which is also supported by the entry recorded in the TDS certificate. As per TDS certificate, the date of payment is 18th Nov., 1999. M/s Arihant Cotsyn Ltd. in their certificate (copy of which is filed at p. 30 of the paper book) has mentioned the amount of TDS. Though it is dt. 6th July, 1999, but the fact remains that the TDS payment was made on 18th Nov., 1999. This narration shows that TDS payment could have been mentioned in the letter dt. 6th July, 1999, only when TDS was deposited on 18th Nov., 1999 and as such it is difficult to believe that such entry of the interest was furnished to the assessee in July, 1999, otherwise, the debtor would not have mentioned the amount of TDS in such certificate. The TDS is paid only on 18th Nov., 1999 and as such, such facts could have been mentioned in certificate thereafter only. The CIT(A) was, therefore, not justified in holding that the confirmation of the interest was within the knowledge of the assessee well before the filing of the return on 2nd Nov., 1999. This was the sole reason upon which the CIT(A) rejected the claim of the assessee. However, the facts are otherwise and as such the findings of the CIT(A) are not based upon the proper appreciation of the facts available on record. The counsel for the assessee was justified in contending that the credit entry of interest came to the knowledge of the assessee only after filing of the return. The claim of the assessee had been that though TDS has been credited to the party account but no payment of the principal amount or any interest had been received. Therefore, the assessee had to file criminal case and civil suit because of dishonour of cheques issued for October/November, 1999. The case of the assessee is that M/s Arihant Cotsyn Ltd. ultimately went in liquidation and as such recovery of the principal amount remained in doubt. The claim of the assessee had also been that the assessee could not have credited the interest income in the books of account for the asst. yr. 1999-2000, since the interest income never accrued to him nor there was any possibility of recovery of the amount from the party concerned. The last deal for supply of goods which was made by the assessee of the cotton bales was on 23rd May, 1998 and thereafter supply was stopped to this party because of the fact that the payments were not forthcoming. Copy of the account of this party is filed at p. 32 of the paper book, which shows that a sum of Rs. 75,61,944.33 was due as on 23rd May, 1998 and thereafter in small instalments the assessee got the principal amount. Yet, the balance carried forward on 31st March, 1999, was Rs. 12,18,241.64. The statement of the assessee as regards impossibility of recovery of the principal amount is supported by the subsequent litigation in which the assessee filed civil and criminal cases in the Court of law against M/s Arihant Cotsyn Ltd. as the post-dated cheques of the payment were dishonoured. M/s Arihant Cotsyn Ltd. went in liquidation, therefore, the plea of the assessee that as on 31st March, 1999, there was impossibility of the recovery of the principal amount was justified. The assessee did not account for the interest as the assessee was almost certain that principal amount due from M/s Arihant Cotsyn Ltd. is not likely to be recovered. The decision of the assessee not to debit the interest in those accounts was, therefore, directly relatable to the business expediency.
10. The Hon'ble Rajasthan High Court in the matter of CIT v. Banswara Fabrics Ltd. , while considering the appeal of the Revenue on the question of addition on account of notional interest on debit balances of two of the debtors, considered the following facts. In this case interest on these accounts had not been charged in the account of the assessee for the accounting period relevant to the assessment year in question. The AO was of the opinion that when the assessee is maintaining his books of account on mercantile system, not debiting the two parties named above with the interest accrued on the debit balances cannot absolve it from inclusion of the interest which has accrued on the debit balances during the previous year relevant to the asst. yr. 1987-88 in its total taxable income. It was the opinion of the AO that both the companies are managed by the same group of persons and non-charging of interest was not due to their poor financial position but it was in fact waiver of interest income in favour of the sister-concerns. The CIT(A) deleted the addition and was of the opinion that when recovery of the principal itself was in doubt, waiver of interest can be considered to be in the interest of business and not conferring any favour by transferring profits to the debtor. This finding has been affirmed by the Tribunal. The Hon'ble High Court considering the question of law dismissed the appeal of the Revenue and held as follows :
Secondly, it is equally a finding of fact that in the circumstances which existed during the relevant assessment year, the assessee did not account for the interest when the assessee was almost certain that the dues from M/s Jai Mangal Investment & Trading Co. and M/s Banswara Textile Mills Ltd. are not likely to be recovered. Thus, the decision not to debit the interest in those accounts was directly relatable to the business expediency and, therefore, it cannot be said to be a plain and simple waiver in favour of the sister-concern without any business consideration.
11. The Hon'ble Allahabad High Court in the matter of Jwala Prasad Radha Krishna v. CIT considered the following facts. The relevant assessment year is 1974-75. The assessee is the sole selling agent of Raza Textiles Ltd., Rampur. As per its balance sheet, the following amounts were found to have been advanced to three companies. The debtor companies credited the assessee with the interest upto the period ending 30th June, 1969, whereafter no interest was charged nor credited nor was the same claimed by the debtor company as deduction in the computation of its own income. The assessee did not show any interest from any of the debtor companies in its return for the relevant assessment year. The ITO held that as the assessee-company was following the mercantile system of accounting and as the assessee was charging interest in the previous years, the interest should be added to the income of the assessee on the same basis for the year in question also. This finding was affirmed in appeal by the AAC. On a further appeal, the Tribunal set aside the orders of the authorities below and held that there was no material on the record to show that any agreement, whether written or otherwise, existed between the assessee and the debtor companies for payment of interest. The Tribunal further held that the interest had neither legally nor actually accrued in favour of the assessee and, consequently, the assessee rightly did not show the same in its return. The Hon'ble Allahabad High Court affirmed the findings of the Tribunal and dismissed the reference application of the Revenue and has held as follows :
We are clearly of the view that in the absence of any agreement, whether in writing or otherwise, whether express or implied, interest could not be added to the income of the assessee. Broadly, interest can accrue in favour of the assessee either under or by virtue of some statute or under agreement which may be either express or implied. The position in the present case is that there is no material whatever to show that any such agreement existed. On the contrary, from the correspondence exchanged between the assessee and the Department and other material on record, it is apparent that the assessee and the debtor companies were sister-concerns and that assessee had stopped charging interest from debtor companies w.e.f. 30th June, 1969, for the simple reason that the debtor companies had run into financial straits and, consequently, the assessee had stopped charging any interest on the advances. The debtor companies had also stopped claiming any interest by way of deduction. Further, the fact that the assessee had been paid interest by the debtor companies for a few years could not by itself and without more justify the inference that there was some agreement between the parties for payment of interest. That being so, interest could not be said to have accrued in favour of the assessee. The Tribunal, therefore, rightly set aside the orders of the ITO and the AAC.
12. In the present appeal before us, the assessment order is silent as regards any agreement, whether written or otherwise, existed between the assessee and the debtor company for payment of interest. The AO has not brought any material on record that the interest has legally or actually accrued in favour of the assessee on debit amount. Merely because the assessee charged interest in earlier year is no ground to show interest in the year under consideration. The AO has not given any finding as regards existence of any agreement (written) or otherwise (in support) of the fact that the interest has legally accrued in favour of the assessee. The claim of the assessee had been that huge amount was due upon M/s Arihant Cotsyn Ltd. and as such the assessee has not shown any interest as the principal amount itself was in doubt. The assessee had taken this decision not to debit the interest in the accounting period, relevant to the assessment year in question, because of the business expediency and this fact is ultimately supported by the fact that the assessee had to resort to the civil and criminal litigation against M/s Arihant Cotsyn Ltd. for recovery of the balance amount. It is also a fact that M/s Arihant Cotsyn Ltd. went in liquidation, therefore, the recovery of the principal amount became doubtful. The assessee as well as M/s Arihant Cotsyn Ltd. have not shown any interest in the assessment year under appeal, i.e., 1999-2000 as the assessee had rightly shown the amount of interest because of entry made on 6th July, 1999, in the asst. yr. 2000-01 as the accounting period for 6th July, 1999, would end on 31st March, 2000. This fact shows that ultimately interest is assessed in subsequent year and as such there is no escapement of income, i.e., amounts of interest in question. Therefore, both the decisions of the Hon'ble Allahabad High Court and the Rajasthan High Court are clearly applicable in the case of the assessee.
13. The Hon'ble Rajasthan High Court in the matter of CIT v. Rajasthan Financial Corporation held that where the litigation is going on, interest in cases under litigation could not be treated as income of the assessee. In this case the assessee was following hybrid system of accounting. The learned Counsel for the assessee submitted that the assessee got the benefit of TDS certificate in the asst. yr. 2000-01 as the whole amount of interest of Rs. 8,54,764 was shown in the asst. yr. 2000-01. The contention of the learned Departmental Representative regarding filing of the revised return is liable to be rejected because of the finding given above.
14. Considering the above discussion and the case law referred to above, we set aside the orders of the authorities below and hold that the interest income did not accrue in favour of the assessee on the debit balance of M/s Arihant Cotsyn Ltd. for the assessment year under appeal, i.e., 1999-2000. The addition of Rs. 8,54,764 is, therefore, unwarranted. We delete the same. The appeal of the assessee is accordingly allowed on this issue.
15. The learned Counsel for the assessee submitted that other grounds are consequential in nature and as such call for no interference.
16. As a result, the appeal of the assessee is allowed partly as indicated above.