Income Tax Appellate Tribunal - Kolkata
Apex Enterprises (I) Ltd., Kolkata vs Department Of Income Tax on 18 March, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA BENCH "A" KOLKATA
Before Shri N.V.Vasusdevan, Judicial Member and
Shri Waseem Ahmed, Accountant Member
ITA No.1796 & 285/Kol/2008
Assessment Years :2001-02 & 2002-03
ACIT, Circle-4, 8 t h V/s. M/s Apex Enterprises (I)
Floor, P7, Chowrinhee Ltd., 4, Mango Lane,
Squre, Kolkta-700 069 Kolkata-700 001
[P AN No. AADCA 7387 A]
अपीलाथ /Appellant .. यथ /Respondent
आवेदक क ओर से/By Assessee Shri S.D.Damle, FCA
राज व क ओर से/By Revenue Sri Tanuj Neogi, JCIT, Sr-DR
सन
ु वाई क तार ख/Date of Hearing 11-02-2016
घोषणा क तार ख/Date of Pronouncement 18-03-2016
आदे श /O R D E R
PER Waseem Ahmed, Accountant Member:-
Both appeals by the Revenue are against separate orders of Commissioner of Income Tax (Appeals)-IV, Kolkata dated 06.12.2007. Separate assessments were framed by DCIT, Circle-4 Kolkata and ITO Ward- 4(3) Kolkata u/s 143(3)/147 r.w.s 144A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide their orders dated 13.01.2006 and 31.03.2004 for assessment years 2001-02 & 2002-03 respectively.
Shri D.S. Damle, Ld. Authorized Representative appearing on behalf of assessee and Shri Tanuj Neogi, Ld. Departmental Representative appearing on behalf of Department.
ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 2
2. At the time of hearing Ld. DR stated that both appeals can be heard for the sake of convenience. Hence, we heard them together and deem it appropriate to dispose of by this common order.
First we take up ITA No.1796/Kol/08 A.Y. 01-02.
3. First of all, it is observed that there is a delay of 191 days on the part of the Revenue in filing the appeal before this Tribunal. In this regard, application has been filed by the Revenue seeking condonation of the said delay as mentioned in the Application.
4. Let us to deal with limitation issue primarily before going to the merits of the case as the contours of the area of discretion of the Courts in the matter of condonation of delays in filing appeals are set out in a number of Apex Court and specially in case titled as Collector Land Acquisition, ... vs....... Mst. Katiji & Ors (1987 AIR 1353, 1987 SCR (2) 387) analyzed the situation while dealing with the delay on behalf of the Government and observed as enumerated below:
"When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non deliberate delay."
"It must be grasped that judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so."
Considering the judgment (Supra) we feel that in litigations to which Government is a party there is yet another aspect which, perhaps, cannot be ignored, if appeals brought by Government are lost for such defaults, no person is individually affected but what, in the ultimate analysis, suffers is public interest. The decisions of Government are collective and institutional decisions and do not share the characteristics of decisions of private individuals.
ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 3
5. In the instant case as the Government is Appellant as submitted that before finalization of appeal, the case has to cross many channel and we feel that there is sufficient cause for condoning the delay in the institution of the appeal hence we are inclined to condone the delay of 191 days in preferring the instant Appeal. Now let us proceed with the case on merits.
6. Grounds raised by Revenue are below:-
"1) That order of ld. CIT(A) is bad in law, hence not acceptable.
2) That under the facts and circumstances of the case, ld. CIT(A) had erred in law as well as on facts by directing the AO to assess loss in business of purchase and sale of shares as business loss.
3) That ld. CIT(A) had erred on facts by observing that the principal business of the assessee was granting of loans and advances and the same is based on misconceptions.
4) That ld. CIT(A) had erred in law and as well on facts by directing the AO to delete the interest of Rs.3,04,18,767/- receivable from M/s Bolten Properties Ltd and M/s APR Properties Ltd. during the previous year 200-01 from the total income of the assessee when the assessee itself had shown the said sum of interest as its income in its Return and it follows the mercantile system of accounting.
5) That ld. CIT(A) had erred in law and as well on facts in not appreciating the facts that the assessee is not entitled to maintain mercantile system of accounting for interest expenditure and cash system of accounting for interest income."
7. First issue raised in this appeal of Revenue in ground No. 2 & 3 is that Ld. CIT(A) erred in treating the speculation loss by virtue of Explanation to Sec. 73 of the Act as "business loss" on account of holding principal business of assessee as granting loan and advance.
7.1 Facts of the case in brief are that assessee in the present case is a Limited Company registered with Reserve Bank of India (RBI) as Non-Banking Finance Corporation (NBFC for short) engaged in the business of money ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 4 lending, investment in share and dealing in share. During the year assessee has shown following income:-
a) Share trading (-) Rs.7,30,88,822/-
b) Interest (net) (+) Rs.6,68,25,887/-
c) Dividend (+) Rs. 31,63,652/-
d) Other income (+) Rs. 2,41,210/-
e) Capital gains (-) Rs. 41,14,395/-
f) Share dealing (speculation) (-) Rs.3,27,55,782/-
g) Administrative expenses (-) Rs. 14,25,064/-
h) Depreciation (-) Rs. 26,185/-
The position of the availability of funds as stood on 31st March, 2001 is as under:-
Sl.No Particulars Amount (₹)
1 Share capital 4,36,89,700.00
2 Unsecured loan 100,68,04,058.00
The deployment of fund as on 31-03-2001 stand as under:-
Sl.No Particulars Amount (₹) % fund deployment
1 Investment in shares 35,37,98,204 36.5%
2 Investment in stock-in-trade 18,54,43,915 17.65%
3 Investment in loans 33,58,26,810 31.97%
During the course of assessment proceedings, as made a reference before Ld. ACIT, Range-4 Kolkata dated 18.12.2003 for the intervention in respect of pending assessment proceeding on the request of assessee u/s 144A of the Act and accordingly the Ld. CIT(A) directed the AO to treat the loss of ₹7,30,88,822/- as speculation loss by virtue of provision of Explanation to Sec. 73 of the Act. As per the said Explanation the loss from share dealing business shall be treated as speculation if the income under head from "share dealing business" is more than the income from "house property", capital gains, interest on securities and other source. In the case on hand the loss ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 5 from share dealing business is of ₹7,30,88,822/- and on the other hand the capital gains income is of ₹41,14,395/-. Therefore, the loss from share dealing the business was treated the loss from share speculation business. Ld. ACIT while giving the direction to AO u/s 144A of the Act relied in the decision of Hon'ble jurisdictional High Court in the case of CIT v. Park View Properties Pvt. Ltd.261 ITR 473 (Cal). Accordingly, AO treated the loss from share dealing business of assessee as speculation loss by virtue of the provision of Explanation to Sec. 73 of the Act.
8. Aggrieved, assessee preferred appeal before Ld. CIT(A) and submitted that there are two exceptions provided in the Explanation to Sec. 73 of the Act that the provisions of Explanation to Sec. 73 of the Act will not be applicable. Firstly in terms of gross total income and secondly is the principal business of assessee was granting of loan. In the instant case, AO has not considered the second exception i.e. granting of loan and advance while applying the provision of Explanation to Sec. 73 of the Act. Ld. AR further submitted that the principal business of assessee is of granting loan and advance which can be easily worked out from the following details:-
Financial Year Assessment Tock-in-trade in Loans & shares (Rs. in advances (Rs. in Year lacs) lacs) 1999-00 2000-01 3369.96 8239.19 200-01 2001-02 1854.44 3358.27 2001-02 2002-03 838.04 2817.49 2002-03 2003-24 304.03 3225.21 Accordingly, Ld. CIT(A) deleted the addition made by AO by observing as under:-
" 9. In the impugned order the AO and the Addl. Commissioner considered the applicability of Explanation to Sec. 73 only in the context of test laid down relating to composition of gross total income. The ratio laid down by the Calcutta high Court in the case of CIT Vs. park View Properties Pvt Ltd. (supra) was applied because they applied test of ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 6 composition of Gross Total Income. In the decided case the assessee claimed exemption from the Explanation, on the ground that whole of its income consisted, income from other sources. No case was made out by that assessee that the Explanation was not applicable because its principal business was granting of loans. In this case however the assessee has claimed exemption with reference to the test of principal business. The assessee carried on business of non-banking financial company and was registered with RBI as NBFC. As an NBFC the assessee arrived on business of financing and derived substantial interest. It also carried on share trading business. However, when the assessee carried on more than one business; it was necessary to ascertain the principal business with reference to regularity of the activities and predominant deployment of funds in different business segments. From the comparative chart of deployment of funds during the relevant year in preceding and subsequent years I find that funds deployed in business of granting loans as on 31st March 2000, 2001, 2002 & 2003 were Rs.8239.19 Lacs, Rs.3358.27 Lacs, Rs.2817.49 Lacs & Rs.3225.21 Lacs respectively. Corresponding investment of funds in stock-in-trade of shares on these dates was Rs.3369.96 Lacs, Rs.1854.44 Lacs, Rs.838.04 Lacs & Rs.304.03 Lacs respectively. It thus appeared that on the above balance sheet dates funds deployed in granting of loans were substantially more than in stock-in-trade of shares. I further note that there had been consistent and substantial decrease in deployment of funds in share trading business over the 4 years. The funds invested in stock-in-trade of shares as on 31st March 2000 were Rs.3369.96 Lacs which came down substantially to Rs.304.03 Lacs by 31st March 2003. Deployment of business funds in share trading business got progressively reduced between F.Y 1999-00 to 2002-03 and deployment of funds in business of granting of loans was always more. Applying deployment of fund criteria therefore it appeared that the assessee's "principal business" was granting of loans.
10. The expression "principal business" has not been defined in the Income tax Act. In the context of application of Explanation to Sec. 73; this expression was interpreted by the Special Bench of the ITAT Kolkata in the case of DCIT Vs. Venkateshwara Investment & Finance Pvt. Ltd. (93 ITD 177) wherein the Tribunal made the following observations:
'We hold that to decide whether the case of an assessee falls in exceptions provided in Explanation to section 73 of the Act or not and to decide whether the principal business of the assessee is that of granting of loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual income from such activities during a particular year. Merely because the ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 7 numerical value of the profit/loss in purchase and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. What constitutes the "principal business" has not been defined anywhere in the Act. What constitutes the principal business depend on the facts and circumstances of each case. the Memorandum and the Articles of Association of the company, past history of the assessee, current and past year's deployment of the capital of the assessee, break- up of the income earned during the relevant and past years and the nature of the activities of the assessee will all help in determining the principal business of the assessee. If in any particular year, the assessee has nominal business since and has substantial interest income, it does not imply that the assessee's principal business is of fiancé or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loans and advances, may earn a comparatively high income from other activities in any particular year and still the principal business of the assessee may remain granting of loans and advances. The Explanation to section 73 is in the nature of a deeming provision and as such has to be strictly construed. The decisive factor is the true nature of activities of the relevant period as well as in the past or succeeding periods.'
11. Applying ratio laid down in this decision I find that the assessee regularly carried on business of granting of loans & earned substantial interest. Deployment of funds in the business of granting of loans was predominantly more than share trading business and therefore applying fund deployment criteria assessee's "principal business" could be said to be "granting of loans" and therefore the Explanation to Sec. 73 was not applicable. The AO is accordingly directed to assess loans in business of purchase & sale of shares as "business loss" and allow it's set off as per law."
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
9. We have heard rival contentions of both the parties and perused the materials available on record. Before us Ld. DR submitted written submission which is running pages 1 to 4 and submitted that AO relied on the facts that share trading loss which was Rs.10,58,44,604 (7,30,88,822/-plus Rs.3,27,55,782/-) was much more than the other income, therefore, Explanation to Sec. 73 was applicable. The AO also relied upon jurisdictional ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 8 High Court's decision in the case of CIT vs. Park View Properties. However, before Ld. CIT(A) assessee argued that Explanation to Sec. 73 provides exceptions clauses. The AO has relied upon the one exception only which says if the company gross total income consists mainly of income for house property, Capital gain and other sources then the explanation to Sec. 73 of Act does not apply, but AO has not considered the other condition which says if Company principal business is of granting of loan and advances then the explanation to Sec. 73 will also not apply. The assessee, accordingly drawn our attention on page 6 of CIT(A)'s order where the fund deployed position was recorded and stated that funds deployed in stock-in-trade of shares are more than the capital employed in loans and advances. Accordingly the Ld. CIT(A) ordered that loss may be treated as business loss. Ld. DR stated that assessee showed a wrong picture, first of all, let us see the balance sheet as on 31.03.2001 the assessee has 4.37 crores of share capital and 7.15 crores reserves and 100.68 crores of unsecured loans (credit) i.e. Total ₹112.20 crores. This fund is applied towards loan and advances of 3.73 crores, 18.5 crores in stock-in-trade of shares and 38.37 crores in investment. In the given chart produced before the Ld. CIT(A) the assessee very conveniently forgot to show the funds applied towards investment which is at ₹38.37 crores. Investment has been made upon share script of Adani Exports & Vikas WSP Ltd. Thus the total funds applied towards share stock and share investment are ₹ 58.87 crores as against loan and advance of ₹ 36.73 crores. Even the sundry debtors which are out of share trading business constitute further fund of ₹ 4.01 crorer. Thus assessee's statement that major fund is locked up in loans and advance is wrong and mischievously placed. Ld. DR submitted that the assessee's turnover of ₹121 crores in share trading. Thus, assessee's main engagement was trading in shares and investment in shares and assessee is no more an NBFC company as RBI has cancelled its certificate. Therefore, exceptions to explanation to Sec. 73 of the Act do not apply and requested to treat the loss in share trading as speculative and relied on the order of AO.
ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 9
From the aforesaid discussion, we understand that the AO has invoked the provisions of explanation to Sec. 73 of the Act for treating the loss from shares trading business as speculation loss on the ground that loss from share trading business was greater than the income from other sources and capital gain. However the ld. CIT(A) reversed the order of the AO by holding that AO has in his order has overlooked the criteria for the exception to the explanation to Sec. 73 of the Act i.e. this explanation to Sec. 73 of the Act does not apply to a company the principal business of which is the granting of loans and advances. Accordingly the ld. CIT(A) granted the relief to the assessee from the provisions of explanation to Sec. 73 of the Act. The ld. AR has filed a paper book which is running in pages from 1 to 52. We find from the paper book filed by the assessee that the company is a NBFC registered with RBI vide registration no. 05.01076 on dated 20.3.1998. The copy of certificate from RBI is placed on page 29 of the paper book. We find that this certificate would be issued by RBI only when the assessee is engaged in the lending activities. We further find that the Learned AO had not considered at all the position of fund deployment which makes it clear that the principal business of the assessee is granting of loans and advances. Therefore the provisions of Explanation to Sec. 73 of the Act cannot be applied to the facts of the case. For the better understanding of the case, the details of funds deployed by the assessee in each of the years are given below:-
Financial Year Assessment Tock-in-trade in Loans & shares (Rs. in advances (Rs. in Year lacs) lacs) 1999-00 2000-01 3369.96 8239.19 200-01 2001-02 1854.44 3358.27 2001-02 2002-03 838.04 2817.49 2002-03 2003-24 304.03 3225.21 We observe that the Learned AO has decided the impugned issue on the basis of income composition of the assessee. Accordingly the AO held that the income from share trading is more than the income from capital gain and other sources.
ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 10
So the AO applied the provisions of Explanation to Section 73 of the Act. Now let us understand the Explanation to section 73 of the Act at this juncture :-
Section 73 - Losses in Speculation Business Explanation - Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on Securities" , "Income from house property", "Capital gains" and "Income from Other Sources"], or a company [the principal business of which is the business of banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
From the above, it is very clear that the provisions of Explanation to Sec. 73 of the Act will not be applied where the principal business of the assessee is that of granting loans and advances and such company is also in the business of purchase and sale of shares, then the activity of purchase and sale of shares would not attract the provisions of Explanation to Sec. 73 of the Act. We have already held that the fund deployed in lending activity exceeds the fund deployed in share trading activity on a consistent basis over a period of time. Hence the principal business of assessee is that of granting loans and advances and thereby outside the ambit of Explanation to Sec. 73 of the Act. Hence, the share trading loss of claimed by the assessee cannot be construed as speculation loss and accordingly we have no hesitation in upholding the order of the Learned CIT(A). Accordingly, the ground raised by the Revenue is dismissed.
10. Coming to next ground of Revenue's appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer on account of interest income of ₹3,04,18,767/-. During the year, assessee has created its profit and loss account by interest income from the following parties:-
a) M/s Boltono Properties Ltd. ₹2,49,63,287/-
b) M/s APR Properties Ltd. ₹ 55,54,480/- ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 11
During the course of assessment proceeding assessee submitted that above interest income shown is hypothetical income which was never earned. The assessee is a NBFC and registered with RBI. In terms of prudential guidelines issued by RBI regarding recognition of income by way of interest where the interest on loan granted is not paid for a period not exceeding six months then the income by way of interest should not be recognized. During the year under consideration, loans were provided to the above parties without any agreement between the company and the debtor. There was no mentioned for charging of any interest at a specific rate for any specific period in the agreement. The loan debtor neither acknowledged its liability to pay interest nor provided any confirmation for the payment of interest. The assessee has recognized interest income unilaterally without any confirmation from the party concerned. Besides the loan debtor never deducted any TDS on the interest expenditure. The assessee was also not sure whether the loan debtor has ever recognized the liability to pay interest in its books of account. The assessee has provided the addresses of the above company before AO for seeking confirmation from the party concerned. Finally, assessee prayed that this income is nothing but hypothetical income and therefore should be deleted from the total income. However, AO disregarded the claim of assessee by observing that it is amazing to note that assessee has advanced money to the above parties without any writing agreement for charging interest. Besides the loan debtor has repaid the principal amount of loan. The assessee has not shown any efforts for recovery of interest amount from the parties. Finally, AO disregarded the plea of the assessee by confirming the addition of ₹3,04,18,767/- towards the interest on the above loan in the total income of assessee.
11. Aggrieved, assessee preferred appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:-
"15. The present assessee regularly followed mercantile system of accounting. In mercantile system of accounting assessment of income is made on accrual basis. Accrued income is required to be assessed ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 12 irrespective of the difficulties; in realization of the accrued income. The concept of real income cannot therefore be brought into play in every case of non realization of income to postpone assessment of accrued income. This proposition is laid down by the Supreme Court in CIT Vs. Shiv Prakash Janak Raj & Co Pvt. Ltd. (222 ITR 583). In that case assessee followed mercantile system of accounting. It had advanced loans to a firm whose partners were shareholders/directors. After the expiry of the relevant year interest on loan was given up. The Tribunal found that such waiver was not based on commercial consideration & therefore the Supreme Court upheld the assessment of accrued interest rejecting assessee's plea that on the principle of real income; taxation of interest accrued cannot be postponed. In it's decision in the case of Godhra Electricity Co. Ltd Vs. CIT (225 ITR 746) however the Supreme Court held that income tax is levy on income. No doubt, income tax act takes into account 2 points of time at which liability to tax is attracted viz accrual of income or it's receipt; but the substance of the matter is the income. If income does not result at all; there cannot be a tax; even though in book keeping; an entry is made about a hypothetical income, which does not materialize. In the decided case the assessee company had accounted for revised electricity tariff after the revision was upheld by the Supreme Court. Neither the consumers nor the State Government however accepted revision in Power Tariff and the Electricity Undertaking was taken over by the government and the revised tariffs were never realized. The AO assessed revised power tariff as assessee's income because the assessee had accounted for such income in its books. The Supreme Court, however, held that when the revised power tariffs were never realized, income accounted by the assessee in its books was only a hypothetical income and not real income and therefore could not be assessed to tax. The ratio laid down in these two judgments need to be considered in the present appeal as the assessee has denied its liability to tax on the plea that it had accounted in its books only hypothetical income & not real income.
16. In this case, assessee accounted for interest on the amounts advanced to Bolten Properties Ltd. & APR Properties Ltd but such interest was never actually received & as ultimately written off. As per Sec. 194A the payer of interest was liable to deduct tax; from such interest. If the debtors had acknowledged their liability to pay interest then there would have been tax deduction u/s. 194A. It does not appear that the revenue took any steps against the debtors for the default committed in non deduction of tax. On these facts therefore, I find force in submissions of the A/R that the debtors did not ever accept their liability to pay interest and what was accounted in assessee's books was a hypothetical income being unilateral claim for interest. I also note that in Return for A.Y 2007-08 the assessee did not claim deductions for bad debts as assessee is agitating the assessment of such income in ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 13 appeal for AY 2001-02. Considering the totality of the facts I am therefore inclined to accept submissions of the A/R that Rs.3,04,18,767/- did not represent assessee's real income and therefore not chargeable to tax in AY 2001-02. The AO is accordingly directed to exclude interest of Rs.3,04,18,767/- from assessee's total income. Ground Nos. 3 to 6 are allowed."
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
12. We have heard rival contentions and perused the materials available on record. Before us Ld. DR submitted that assessee is not a charitable organization to provide the interest free loans to the parties. There is no substance in the argument of the assessee that there is no clause in writing in the agreement between the two parties regarding charging of interest. The business of the assessee is of a money lender and each loan was given to earn interest. Hence it was the correct procedure which the assessee has done by showing interest income in its books of account as maintained on mercantile basis. Even if the assessee thought that interest was unrecoverable then it should write it off in the books of account. If the theory of real income is applied so liberally then assessee would claim for every unrealized income in the first instance that it is not a real income. Ld. DR relied on the order of AO.
13. On the other hand Ld AR relied on the order of Ld. CIT(A) and submitted that the assessee has recognized interest income in its books of accounts. According to Ld. DR, assessee is a money lender and loans were given to earn interest. However to tax interest as income it was necessary for revenue to prove that in the first instance interest was "real income" and it was not hypothetical income. In the paper book the assessee has furnished copies of ledger accounts of both debtors appearing in the assessee's books. It is evident from the said account that except repayment of the principal sums the debtor companies did not pay any further sums towards interest throughout the FY 1999-00 relevant to AY 2000-01. The assessee was an NBFC and as such it was bound to follow "income recognition' norms ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 14 contained in Prudential Account Guidelines issued by the RBI. As per the said Prudential Guidelines where the interest remained in arrears for consecutive period of six months then the assessee was not permitted to recognize any income. Ld. AR relied the case law of Hon'ble Delhi High Court in the case of CIT v. Vashist Chai Vayapar Ltd and Others 330 ITR 440 (Del) has held that where an NBFC does not realize interest and account has become NPA then interest cannot be taxed merely because an assessee follows mercantile system of accounting. The Hon'ble High Court accordingly held that accrued interest on the loans considered to be NPA was not chargeable to tax. It is further material to submit that till date i.e. 2012 the assessee has not realized a single penny from the two debtors companies towards alleged accrued interest unilaterally accounted by the assessee in its books. In fact in the accounts for the year ended 31.03.2007, assessee actually written off the interest earlier accounted. However, in the AY for 2007-08 no deduction was allowed for the bad debts written off even though in AY 2001-02 the income was assessed by the AO. It will thus be appreciated that the year in which the interest was written off as bad debt deduction has not been allowed by the Revenue. In the circumstances, assessee submitted that the relief allowed by Ld. CIT(A) following the judgment of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. 225 ITR 746 (SC) From the above discussion, we understand that assessee has shown interest income in its books of account but while framing of assessment before AO requested to exclude the income from assessment on the ground that it was never realized by assessee. From the submission of Ld. AR we find that assessee was able to recover the principal amount during financial year in which loan was given to above parties concerned. But AO did not agree with the plea taken by assessee and AO added it to the total income of assessee. In our considered view there has to be real income before charging the tax. In the present case the ld. DR has not brought anything on record to controvert the findings of the ld. CIT(A). The AO has not taken the confirmation by ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 15 exercising his power under section 133(6) of the Act from the loan parties. We are also putting our reliance in the similar case where the Hon''ble Supreme Court has held in the case of CIT v. Shoorji Vallabhadas and Co. (1962) 46 ITR 144 (SC) as under:-
"Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tad is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
14. We find that as per the guidelines of RBI if assessee does not pay interest for a period of exceeding six months then interest income should not be recognized in its books of account. The guideline of RBI is very much applicable to assessee as it is NBFC and governed by regulations of RBI. We also find that various courts has decided that real income should be brought to tax merely assessee has booked the income in its books of account. It does not mean that it has become the income of assessee. Following the proposition of case (supra), we have no hesitation in upholding the order of Ld. CIT(A). This ground of Revenue's appeal is dismissed.
15. In the result, Revenue's appeal is dismissed.
Coming to the ITA 285/Kol/2008 A.Y 02-03.
16. Revenue has raised following grounds:-
"1. That the Ld. CIT(A) has erred in law as well as on facts by directing the assessing office to assess loss in business of purchases & sale of shares as business loss.
ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 16
2. That the Ld. CIT(A) has erred on facts by observing that the principal business of the assessee was granting of loans and advances and the same is based on misconceptions.
3. That the Ld. CIT(A) has erred in law as well as on facts by deleting the addition of Rs.8,40,000/- on account of interest receivable from M/s Shaw Wallace & Co. Ltd.
4. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts by deleting the addition of Rs.8,40,000/- on account of interest receivable when the assessee has claimed the credit of tax deducted at source on such interest income."
17. Issue No. 1 and 2 are inter-connected and same facts we have already discussed in ITA No. 1796/Kol/2008 for AY 2001-02 in para-7 to 14 of this order and taking a consistent view in this matter, hence, we dismiss issue No 1 and 2 of this appeal of Revenue accordingly.
18. Next issues raised in ground No. 3 and 4 in this appeal by Revenue is that Ld. CIT(A) erred in deleting the addition made by AO for Rs.8.40 lacs on account of interest receivable from Shaw Wallace & Co. Ltd.
18.1 The assessee has claimed TDS on receipt of interest from Shaw Wallace & Co. during the AY 2003-04. On question by the AO, assessee submitted that this interest income relates to the AYs 1999-00 to 2002-03 and the suit for recovery of loan was pending in the court of law that is why assessee did not account for any interest income in its books of account in earlier years. So, the AO opined that the income of Rs. 8.40 lacs for the AY 2001-02 has escaped assessment and accordingly framed assessment under section 147 of the Act.
19. Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition by observing as under:-
"5. In Ground No.s 4 to 10 the assessee has objected to the assessment of Rs.8,40,000 being accrued interest on ICDs granted to Shaw Wallace & co. Ltd. the reasons given by the AO for the said ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 17 addition are same as discussed in the assessment for A.Y 1999-2000. In my appellate order of the even date in appeal No. 144/CIT(A)-IV/05- 06 for the AY 1999-2000 I have deleted the said addition on the ground that during the pendency of civil suit no interest accrued to the assessee. Following my appellate order for the AY 1999-2000 I direct the AO to delete the addition of Rs.8,40,000."
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
20. We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR relied on the order of Ld. CIT(A). From the aforesaid discussion we understand that assessee has given loan to M/s Shaw Wallace & Co. on interest but assessee did not account for the interest income due to the dispute which then was pending in the court of law. M/s Shaw Wallace & Co. paid the interest amount after deducting TDS in AY 2003-04 and accordingly assessee has booked the income in that year. However, AO disagreed the view of assessee on the ground that the income was accrued in the AY 2001- 02 so it was to be offered for tax in that year. Before us Ld. AR submitted that this issue is already covered in favour of assessee by this Tribunal in assessee's own case in ITA No. 282-283/Kol/2008 for AY 1999-00 and 2000- 01, dated 26.09.2008, where the Tribunal has held:-
"13. In view of the above, we hold that the ld. CIT(A) was justified to delete the interest of Rs.17,50,000/- in the assessment year 1999-2000 and of Rs.17,48,81/- in the assessment year 2000-01 as in these assessment years neither the assessee claimed TDS benefit nor the interest was credited to the assessee's a/c and on the other hand, the suit was pending before the Hon'ble Kolkata High Court. However, we hold that the said interest is liable to be assessed in the assessment year 2003-04, the assessment year 2003-04, the assessment year in which the interest was credited to the assessee's a/c and the TDS certificate was issued to the assessee and the assessee also claimed the TDS in the return filed for that assessment year irrespective of the fact that the suit was pending before the Hon'ble Kolkata High Court.
14. In view of the above, the grounds of appeals taken by the Department for both the assessment years under consideration are rejected with the above observation that the amount of interest of ITA No.1796 & 285/Kol/2008 A.Ys 01-02 & 02-03 ACIT Cir-4 Kol. v. M/s Apex Enterprises (I) Ltd. Page 18 Rs.17,50,000/- and of Rs.17,48,801/- are both liable to be taxed in the assessment year 2003-04 and not in the assessment years under consideration.
15. Before we part with these appeals, we may sate that our above directions for charging of interest of Rs.17,50,000/- and of Rs.17,48,801/- are to be charged in the assessment year 2003-04 are necessary as it was stated at the time of hearing of these appeals that the above interests have been charged on substantive basis by the AO in these assessment years under consideration and on protective basis in the assessment year 2003-04. Accordingly, the AO while giving effect to our order will take necessary action as per law and considering our above observations."
Taking a consistent view in assessee's own case (supra), this ground of Revenue's appeal is dismissed.
20. In the result, Revenue's appeal is dismissed.
21. In the combined result, both appeals of Revenue are dismissed.
Order pronounced in the open court 18/03/2016
Sd/- Sd/-
(N.V.Vasudevan) (Waseem Ahmed)
(Judicial Member) (Accountant Member)
Kolkata,
*Dkp
"दनांकः- 18/03/2016 कोलकाता ।
आदे श क
त ल प अ े षत / Copy of Order Forwarded to:-
1. आवेदक/Assessee-M/s Apex Enterprises (I) Ltd., 4, Mango Lane, Kolkata-700 001 2 राज व/Revenue-ACIT, Circle-4, P7, Chowringhee Square, 8th Floor, Kolkata-69
3. संब-ं धत आयकर आय/ ु त / Concerned CIT Kolkata
4. आयकर आय/ ु त- अपील / CIT (A) Kolkata
5. 2वभागीय 5त5न-ध, आयकर अपील य अ-धकरण, कोलकाता / DR, ITAT, Kolkata
6. गाड9 फाइल / Guard file.
By order/आदे श से, /True Copy/ उप/सहायक पंजीकार आयकर अपील य अ-धकरण, कोलकाता ।