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2009 DIGILAW 940 (MP)

CIT v. Reliable Carriers (P. ) Ltd.

2009-08-06

DIPAK MISRA, R.K.GUPTA

body2009
ORDER : Dipak Misra, J. 1. This is a reference by the Tribunal under Section 256(1) of the Income Tax Act, 1961 at the instance of the revenue in respect of the following question: Whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting Rs. 7,61,360 added by the assessing officer on account of accrued interest from sister concern ? 2. The assessee was mainly engaged in carrying on business of transportation of cigarettes manufactured by Indian Tobacco Co. Ltd. (for short the ITC). The directors of the assessee company got encouragement from the ITC for entering into the field of manufacturing cigarettes. A partnership firm in the name and style of Reliable Cigarette Industries was constituted by the family members of the directors. For the aforesaid venture the ITC gave an interest-free loan of Rs. 19.50 lacs to the assessee company which the assessee gave to the firm. An agreement dated 16-8-1982 was entered into between the assessee company and the firm. As per the agreement the firm had undertaken assured and given assurance to the assessee to appoint the assessee as its transporting agent and contractor for a period of ten years commencing from 1-4-984 for transportation of its raw materials and manufactured products at rates which might be higher by 10 per cent of the prevailing market rates. It was also agreed that the assessee would not charge any interest, claim, charges or profits on its finances till 31-3-1984. There was stipulation in the agreement that the firm should pay to the assessee an annual sum equivalent to 50 per cent of its annual net profit from manufacturing business or interest @ 24 per cent on total finances. The net profits were to be computed after deduction of business expenditure and depreciation chargeable under the Act. The assessee transferred the entire interest-free loan of Rs. 19.50 lacs received from the ITC to the firm. The business of the said firm was taken over by another company, namely, Reliable Cigarette and Tobacco Co. (P) Ltd. in the year 1984. The said company undertook the liability to pay the advances given by the assessee. However, the agreement entered into by the assessee with the firm was not accepted by the said company and no new agreement was executed by the cigarette company in favour of the assessee. 3. (P) Ltd. in the year 1984. The said company undertook the liability to pay the advances given by the assessee. However, the agreement entered into by the assessee with the firm was not accepted by the said company and no new agreement was executed by the cigarette company in favour of the assessee. 3. As the statement of facts drawn by the Tribunal would show in view of the advance of Rs. 30,75,283 by the assessee to the company till 31-12-1986 which included the amount of Rs. 19.50 lacs received by the assessee from the ITC and also included the advance made to the firm on the basis of the agreement entered into between the assessee and the firm, the assessing officer held that the interest @ 24 per cent accrued to the assessee. Because of the said situation, he computed the interest income at Rs. 7,39,140 and made addition thereof. 4. Being dissatisfied with the order of addition, the assessee preferred an appeal before the Commissioner (Appeals) who confirmed the order of the assessing officer. 5. Being aggrieved by the action of the Commissioner (Appeals) the assessee preferred an appeal before the Tribunal and the Tribunal, on the basis of the material available before it deleted the addition. The Tribunal, while dealing with the factum of deletion, gave the following reasons: 13. We have minutely considered the respective submissions of the parties. It is apparent from the entire correspondence entered into between, the assessee-company and the cigarette company that whatever agreement was entered into between the assessee and the firm for payment of interest @ 24 per cent had undergone variation to the extent that the entire advances were treated as interest-free. It could be so. since the assessee was interested only in the contract of transport. The assessing officer was, therefore, in error in acting upon the original agreement entered into between the assessee and the firm. 14. Even otherwise the alleged accrual of interest income cannot be treated as income of the assessee, when the agreement to pay interest has undergone substantial variation to the extent that the entire advance has been treated as interest-free. The assessing officer was, therefore, in error in acting upon the original agreement entered into between the assessee and the firm. 14. Even otherwise the alleged accrual of interest income cannot be treated as income of the assessee, when the agreement to pay interest has undergone substantial variation to the extent that the entire advance has been treated as interest-free. Neither the assessee nor the cigarette company made any entry in their books of account as to that interest, that is to say, the assessee did not debit the amount of interest to any account in its books of account and the cigarette company also did not claim any part of such interest as business expenditure. The principle of real income has been summarised by the Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) as under: As a result of the aforesaid discussion, the following propositions emerge: (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged, in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) 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. After debiting the debtors account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. After debiting the debtors account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but in every case it must be applied with care and within well-recognized limits. 15. Keeping these principles in view, it is held that no interest income really accrued to the assessee. The addition of Rs. 7,39,140 is deleted. 6. In this backdrop, the present question has been referred for answer by this Court. 7. We have heard Mr. Rohit Arya, learned senior counsel, along with Mr. Sanjay Lal, for the revenue and Mr. Sumit Nema, learned Counsel for the respondent assessee. 8. It is submitted by Mr. Arya that the Tribunal is not justified in deleting the amount added by the assessing officer as the same was accrued as interest on the sister concern. Mr. Sumit Nema, learned Counsel appearing for the assessee, submitted that the order passed by the Tribunal is absolutely invulnerable as no real income accrued in favour of the assessee and, therefore, it could not be treated as such as a consequence of which the same would not come within the concept of accrued income. 9. To appreciate the submissions raised at the Bar, we have carefully perused the order passed by the Tribunal. After perusing the reasons ascribed by the Tribunal, we are of the considered opinion that the concept of accrued income would not apply in as much as there is no definite income and, in fact, the term accrual in respect of income has different connotation. As is clear from the order of the Tribunal the income was neither real and the assessing officer has not rejected the books of accounts nor recorded a finding that the income was actually received and as the same was not actually paid, there could not be refusal of the same. The Tribunal has correctly relied on the decision rendered in State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and come to the conclusion that the tests which have been laid down therein do not make the present addition as an accrued income. The Tribunal has correctly relied on the decision rendered in State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) and come to the conclusion that the tests which have been laid down therein do not make the present addition as an accrued income. If the principles laid down by the Apex Court are applied to the case at hand, the analysis of the factual matrix by the Tribunal is absolutely justified and it cannot he said that the Tribunal is not correct in deleting the addition of Rs. 7,39,140 added by the assessing officer on account of accrual by the sister concern. 10. Accordingly, the reference is answered in the affirmative in favour of the assessee and against the revenue.