Case Law Details
Trade link Securities Ltd. Vs. Income Tax Officer (ITAT Kolkata)
In the instant case, the addition was made by AO on account of interest due to assessee for ₹19 lacs. However, the assessee did not include the same in its income on the ground that the amount of loan given to M/s ISG Traders Ltd., was Non-performing asset (NPA). As per the Non-Banking Financial Companies Prudential Norms (Reserve Bank of India) no income of interest on NPA can be identified in the books of account. Indeed, the issue for the AY 2006-07 has been decided against the assessee by the Co-ordinate Bench of this Tribunal in assessee’s own case (supra) but we find that the fact of that case are distinguishable from the facts on hand. The addition in the AY 2006-07 was sustained by this Coordinate Bench of this Tribunal on the ground that assessee failed to demonstrate whether the interest was overdue or not. However, in the instant case, there is no ambiguity that the interest income was overdue as evident from the TDS certificate issued by M/s ISG Traders Ltd., which is placed on pages 10 of the paper book. In the similar facts and circumstances we find that various Honorable courts have held that interest income on NPA cannot be recognized.
The principle laid down by the Honorable Delhi High Court in the case of Vasisth chay Vyapar (supra) are identical to the facts of the present case. In the case before us the amount of interest was overdue but the same was not realized by the assessee since the year it was advanced to the party. Therefore we hold that the income of interest indeed has accrued to the assessee but has not been realized. Thus, applying the rule of real theory income we hold that the addition for the amount of interest income cannot be sustained in the hands of assessee. Thus, ground raised by assessee is allowed.
O R D E R
PER Waseem Ahmed, Accountant Member:-
Both appeal filed by the assessee are directed against different orders of Commissioner of Income Tax (Appeals)-2, Kolkata of even date i.e. 09.01.2015. Assessments were framed by ITO Ward-4(1), Kolkata u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2010 for assessment years 2004-05 & 2005-06 respectively. Shri P.R. Kothari, Ld. Authorized Representative appeared on behalf of assessee and Shri Surabh Kumar, Ld. Departmental Representative appeared on behalf of Revenue.
2. Both the appeals are heard together and are being disposed of by way of consolidate order for the sake of brevity.
First we take up ITA No. 426/Kol/2015 for A.Y. 2004-05.
3. Assessee has raised the following grounds:-
“1) Against recourse to reassessment proceeding u/s. 147:
a) For that on the facts and circumstances of the case and in law, ld. Commissioner of Income tax (Appeals)[CIT] erred in upholding the order of ld. Assessing Officer (A/O) passed u/s. 147 of the Income tax Act, 1961 without first examining the validity of ld. A/O’s recorded ‘reasons to believe’ about alleged escapement of appellant’s income from tax in terms of said section.
b) For that on the facts and circumstances of the case and in law, ld. CIT erred in upholding ld. A/O’s order u/s 147 passed by ld. A/O without meeting out first the preliminary objections of the appellant against ld. A/O’s recorded ‘reason to believe’ u/s. 147.
Alternatively but without prejudice to ground no. 1:
2. Against addition for interest on loan:
a) For that on the facts and circumstances of the case and in law, ld. CIT(A) erred in upholding the order of ld. A/O adding a sum of Rs. 1900000/- on account of interest on loan to ISG Traders Ltd.
b) For that on the facts and circumstances of the case and in law, ld. CIT(A) erred in upholding the order of ld. A/O ignoring the fact that interest up to 31.03.2003 was accepted to be due on 31.03.2003 by the ISG Traders Limited itself which became over due by more than six months as on 31.03.2004 because of non receipt of the same up to 31.03.2004 and therefore RBI’s NBFC Prudential Norms Directions became mandatory for the appellant in the year under this appeal.
b) For the on the facts and circumstances of the case and in law, ld. CIT(A) erred in following the Honorable ITATs judgment in appellant’s case for asst. yr. 2006-07 without appreciating the fact of subject year in proper perspective.”
4. First we take up assessee’s ground No. 2 wherein the issue was raised that Ld. CIT(A) erred in confirming the order of the Assessing Officer by sustaining the dis allowance of ₹19 lacs on account of interest income on the loan given to ISG Traders Ltd.
5. Briefly, the facts are that assessee is a Non Banking Financial Company (NBFC) carrying on the business of financing and trading in shares and securities. The assessee was registered with the Reserve Bank of India. During the course of its business, assessee has advance a loan of ₹95 lakh to M/s ISG Traders Ltd. on 16.05.2002 on interest.
5.1 M/s ISG Traders Ltd has claimed interest expense of ₹19 lacs payable to assessee after deducting TDS. Thus, assessee has earned an income of ₹19 lacs by way of interest on the loan provided to M/s ISG Traders Ltd. but assessee did not recognized its income in its books of account. On question by the AO, the assessee submitted that the interest income has accrued to it but it has never been received from the M/s ISG Traders Ltd. Therefore, the income was not recognized in its books of account. However, AO disregarded the contention of assessee on the ground that assessee failed to satisfy whether any effort was made by it to recover the amount of interest. Thus, the AO made the addition of ₹ 19 lacs as undisclosed interest income of assessee and added to the total income of assessee.
6. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT submitted that it has received any amount from M/s ISG Traders Ltd., Therefore, no addition can be sustained on account of interest income. However, Ld. CIT(A) disregarded the contention of assessee by observing as under:-
“4.1. I have examined the assessment order as well as the submissions of the A.R. of the appellant. I am not in agreement with the views of the A.R. of the appellant. In appellant’s own case for A.Y. 2006-07 on the same issue the Honorable ITAT, B Bench Kolkata has adjudicated on 27th May, 2014 at ITA No. 1385/Kol/2011 in favor of the Revenue. The relevant portion of the judgment is elaborated as below:-
“10. It is an admitted position that the loans were advanced based on Promissory Note. Interest can be considered as overdue only when there is an agreement between the parties wherein a stipulation is there with regard to the date of payment of interest. In the absence of any such stipulation we can never say that interest has fallen due on a particular date or was overdue. Similarly a loan can be considered as overdue only when it remains unpaid despite lapse of six months from the date of demand of the loan. Assessee here has been unable to produce any document to show that it had made any demand for return of the loan by the concerned creditors. There is no claim by the assessee that the loans given were term loan. This being the situation the loans given by the assessee to he said two companies will not, in our considered opinion, fall within any of the limb of the definition of nonperforming asset. Even otherwise, Honorable Apex Court had clearly held in the case of Southern Technologies Ltd. (supra) that prudential norms issued by the Reserve Bank of India cannot override the provisions of the Act. As per Section 5 of the Act, total income shall include all income from whatsoever derived from such person, which accrues or arise to him in a given previous year. Assessee undisputedly was following mercantile system of accounting. By virtue of the application of the accrual principle, interest income had definitely accrued to the assessee. The concerned companies were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. No doubt Honorable Delhi High Court in the case of Vasisth Chay Vypar Limited (supra) had held that, once Inter Corporate Deposits had become non-performing asset and possibility of realizing interest was almost nil, no interest could be treated as accrued to the assessee. However, the loans given here by the assessee, were not Inter Corporate deposits. There is nothing on record to show that possibility of realizing the interest was nil. Ld. Counsel of the assessee had admitted that the said companies were having substantial assets with them. Hence we cannot say that interest income was illusory or not real. In such circumstances, we are of the considered opinion that the assessee cannot take of refuge under the Prudential Norms issued by the Reserve Bank of India and say that principles of accrual of income, then mercantile basis of accountancy is followed wound not apply to it. No doubt, section 4 5Q of the R.B.I act is overriding in nature and has to be given primacy. However unless and until an assessee shows that a loan or advance had become a non-performing asset, there can be no question of applying the norms set out for such non-performing asset We are, therefore, of the opinion that Ld. CIT(Appeals) fell in error in deleting the addition made by the assessing Officer. We, therefore, set aside the order of Ld. CIT(Appeal) and the addition made by the Assessing Officer is restored.
11. In the result, appeal of the revenue sands allowed.:
4.2 Humbly following the order of the jurisdictional Tribunal, I am of the opinion that the action of the AO of adding a sum of Rs. 19,00,000/- on account of interest receivable should be confirmed. Grounds No. 2(a)& (b) are dismissed.”
Aggrieved by this, the assessee has come up in appeal before us.
7. Ld. AR for the assessee before us filed paper book which is running from pages 1 to 54 and cited various case law. He further submitted that the addition was confirmed by the Honorable Tribunal in assessee’s own case in ITA No. 1385/Kol/2011 for the AY 2006-07 dated 27.05.2014. However, the addition was made by the Honorable Co-ordinate Bench of this Tribunal as assessee failed to produce the evidence to demonstrate that the interest became overdue. Therefore, the addition was sustained. However, in the instant case, the interest became due during the year as evident from the TDS certificate issued by M/s ISG Traders Ltd. to the assessee. Therefore no cognizance of the order of this Co-ordinate Bench of this Tribunal can be taken in the instant case of assessee.
On the other hand, Ld. DR vehemently relied on the order of Authorities Below.
8. We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. In the instant case, the addition was made by AO on account of interest due to assessee for ₹19 lacs. However, the assessee did not include the same in its income on the ground that the amount of loan given to M/s ISG Traders Ltd., was Non-performing asset (NPA). As per the Non-Banking Financial Companies Prudential Norms (Reserve Bank of India) no income of interest on NPA can be identified in the books of account. Indeed, the issue for the AY 2006-07 has been decided against the assessee by the Co-ordinate Bench of this Tribunal in assessee’s own case (supra) but we find that the fact of that case are distinguishable from the facts on hand. The addition in the AY 2006-07 was sustained by this Coordinate Bench of this Tribunal on the ground that assessee failed to demonstrate whether the interest was overdue or not. However, in the instant case, there is no ambiguity that the interest income was overdue as evident from the TDS certificate issued by M/s ISG Traders Ltd., which is placed on pages 10 of the paper book. In the similar facts and circumstances we find that various Honorable courts have held that interest income on NPA cannot be recognized. In this connection we rely on the judgment of Honorable Delhi High Court in the case of CIT vs. Vasisth chay Vyapar reported in 330 ITR 440 (Del), wherein it was held as under:-
“It was not in dispute that on the application of the provisions of the RBI Act and the 1998 Directions, the ICDs advanced to ‘S’ by the assessee had become NPA. It was also not in dispute that the assessee- company being NBFC was bound by the aforesaid provisions. Therefore, under the aforesaid provisions, it was mandatory on the part of the assessee not to recognize the interest on the ICDs as income having regard to the recognized accounting principles. The accounting principles, which the assessee was indubitably bound to follow, were AS-9. [Para 16]
Therefore, it could not be said that income in the form of interest, though not received, had still accrued to the assessee under the provisions of the Income-tax Act and was, therefore, exigible to tax. It was so for the reasons:
(1)The assessee had not received any interest on the said ICDs placed with ‘S’ since the assessment year 1996-97 as it had become NPA in accordance with the Prudential Norms, which was entered in the books of account as well. The assessee had further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment year 2006-07. Reason was adverse financial circumstances and the financial crunch faced by ‘S’. So much so, it was facing winding up petitions which were filed by many creditors. Those circumstances led to an uncertainty insofar as, recovery of interest was concerned, as a result of the aforesaid precarious financial position of ‘S’. What to talk of interest, even the principal amount itself had become doubtful to recover. In that scenario, it was legitimate move to infer that interest income thereupon had not ‘accrued’..
(2) The assessee being an NBFC was governed by the provisions of the RBI Act. In such a case, interest income could not be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these Norms, the ICDs had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, interest could not be treated to have been accrued in favor of the assessee. [Para 17]
Therefore, decision of the Tribunal was correct in law.”
The principle laid down by the Honorable Delhi High Court in the case of Vasisth chay Vyapar (supra) are identical to the facts of the present case. In the case before us the amount of interest was overdue but the same was not realized by the assessee since the year it was advanced to the party. Therefore we hold that the income of interest indeed has accrued to the assessee but has not been realized. Thus, applying the rule of real theory income we hold that the addition for the amount of interest income cannot be sustained in the hands of assessee. Thus, ground raised by assessee is allowed.
9. Since we have deleted the addition made by the AO on merit therefore we are not inclined to adjudicate the legal grounds of appeal raised by the assessee.
10. In the result, assessee’s appeal is allowed.
Coming to ITA No. 427/Kol/2015 for A.Y. 05-06.
11. As stated earlier, the issues in this year is same as that of the last year (A.Y 04-05). The only difference is the amount involved. Since the facts are exactly identical, both parties are agreed whatever view taken in the above appeal of the assessee may be taken in this appeal of assessee also, we hold accordingly.
12. In the result, assessee’s appeal is allowed.
13. In combine result, both appeal of assessee stand allowed.
Order pronounced in open court on 26/12/2017
