RIA HOLDINGS LTD, MUMBAI v. ITO 1(3)(1), MUMBAI

ITA 1122/MUM/2011 | 2004-2005
Pronouncement Date: 27-07-2012 | Result: Partly Allowed

Appeal Details

RSA Number 112219914 RSA 2011
Assessee PAN AAACR9841H
Bench Mumbai
Appeal Number ITA 1122/MUM/2011
Duration Of Justice 1 year(s) 5 month(s) 19 day(s)
Appellant RIA HOLDINGS LTD, MUMBAI
Respondent ITO 1(3)(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 27-07-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 27-07-2012
Date Of Final Hearing 18-07-2012
Next Hearing Date 18-07-2012
Assessment Year 2004-2005
Appeal Filed On 07-02-2011
Judgment Text
ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 1 OF 19 IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH MUMBAI BEFORE SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA JUDICIAL MEMBER ITA NOS.1119 TO 1124/MUM/2011 (ASSESSMENT YEARS: 2001-02 TO 2006-07) M/S RIYA HOLDINGS LTD 4 TH FLOOR AGRIMA N.K. MEHTA HOUSE BABUBHAI CHINAI MARG MUMBAI 400020 PAN NO.AAACR 9841 H (APPELLANT) VS. INCOME TAX OFFICER 1(3)(11) MUMBAI (RESPONDENT) ASSESSEE BY: SHRI HARESH G. BUCH DEPARTMENT BY: SHRI C.G.K. NAIR DR DATE OF HEARING: 18/07/2012 DATE OF PRONOUNCEMENT: 27/07/2012 O R D E R PER B. RAMAKOTAIAH A.M. THESE SIX APPEALS FOR VARIOUS ASSESSMENT YEARS IS O N THE ISSUE OF ADDITION ON ACCOUNT OF NOTIONAL INTEREST OF ` 16 56 000/- IN ALL THE ASSESSMENT YEARS. THE ASSESSMENT WAS ORIGINALLY COM PLETED IN ASSESSMENT YEAR 2005-06 AND ON THE BASIS OF THAT OR DER ASSESSMENTS WERE REOPENED FOR ASSESSMENT YEARS 2001 -02 TO 2004- 05 & 2006-07. 2. AS THE ONLY ISSUE IN ALL THE ASSESSMENT YEARS IS WI TH REFERENCE TO ADDITION OF ` 16 56 000/- IN EACH OF THE AYS ALL APPEALS WERE HEARD TOGETHER. IN THE COURSE OF HEARING THE LEARN ED COUNSEL WITHDREW GROUND NO.1 IN APPEALS ITA NOS.1119 TO 112 2 AND1124 PERTAINING TO REOPENING OF THE ASSESSMENT. IT WAS ALSO INFORMED THAT THE LEAD ORDER WAS PASSED IN AY 2005-06 AND ON THAT BASIS OTHER ASSESSMENTS HAVE BEEN REOPENED AND COMPLETED. THE GROUNDS RAISED BY ASSESSEE IN A.Y 2005-06 IN ITA/ 1923/ M / 2011 ARE EXTRACTED FOR THE SAKE OF RECORD. ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 2 OF 19 GROUND NO.I 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT (A) ERRED IN CONFIRMING THE ACTION OF AO IN ADDING A SUM OF ` .16 56 000/- ON ACCOUNT OF NOTIONAL INTEREST ON DEPOSIT ON THE ALLE GED GROUND THAT THE AFORESAID INTEREST ACCRUED TO THE APPELLANT. 2. THE APPELLANT THEREFORE PRAYS THAT ADDITION ON ACCOUNT OF NOTIONAL INTEREST ON DEPOSIT BE DELETED. WITHOUT PREJUDICE TO GROUND I GROUND II 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT (A) ERRED IN OBSERVING THAT APPELLANTS FACT SUGGESTED EXTRA COMMERCIAL CONSIDERATIONS AND HOLDING THAT THE CONCEPT OF REAL INCOME IS NOT APPLICABLE IN THE APPELLANTS CASE SINCE THE APPELL ANT HAD FAILED TO PROVE A CLEAR UNCERTAINTY OF RECOVERABILITY OF THE AMOUNTS GIVEN AS DEPOSITS AN D THEREBY ADDED A SUM OF ` .16 56 000/- ON ACCOUNT OF NOTIONAL INTEREST ON DEPOSIT. 2. THE APPELLANT PRAYS THAT IT BE HELD THAT THE CON CEPT OF REAL INCOME WAS APPLICABLE IN THE APPELLANTS C ASE AND ACCORDINGLY THE ADDITION BE DELETED. WITHOUT PREJUDICE TO GROUND I & II GROUND III 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE CIT (A) ERRED IN MISINTERPRETING PROVISIONS OF SUB SECTION (2) OF SECTION 145 OF THE ACT AND THE ACCOUNTING STANDARDS (AS) NOTIFIED BY THE CENTRAL GOVERNMENT IN MAKING AN ADDITION OF ` .16 56 000/- ON ACCOUNT OF NOTIONAL INTEREST. 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD T HAT THE AS NOTIFIED UNDER SECTION 145(2) OF THE ACT (SPECIFICALLY ASI) REQUIRED ASSESSEE TO ADOPT ACCOU NTING POLICIES WHICH REPRESENT TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF ITS BUSINESS UNITS AND FINANCIAL STAT EMENTS AND THAT ONE OF THE FUNDAMENTAL ACCOUNTING ASSUMPTION OF ACCRUAL ALSO HAD TO BE FOLLOWED. 3. THE APPELLANT FOLLOWING SUCH ACCRUAL ASSUMPTIO N HAD PREPARED ITS FINANCIAL STATEMENT WHICH PRESENTE D ITS TRUE PROFITS. 4. THE APPELLANT THEREFORE PRAYS THAT IT BE HELD TH AT IT HAD FOLLOWED THE AS NOTIFIED BY THE CENTRAL GOVERNMENT AND ACCORDINGLY THE SAID ADDITION BE DELETED. ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 3 OF 19 3. BRIEFLY STATED ASSESSEE IS AN INVESTMENT COMPANY. DURING THE FINANCIAL YEAR 1995-96 ASSESSEE HAD ADVANCED INTER EST BEARING DEPOSIT OF ` 92.00 LAKHS TO ONE M/S SAMETA EXPORTS (P) LTD AT 18 %. IT IS ALREADY ON RECORD THAT THE SAID COMPANY IS NO T AN ASSOCIATED COMPANY EVEN THOUGH THAT PARTYS ADDRESS IS IN THE SAME BUILDING. ASSESSEE ACCOUNTED AN AMOUNT OF ` .9 86 605/- UPTO THE PERIOD OF 30.6.1996 AS INTEREST AND ONLY AN AMOUNT OF ` .1 75 000/- WAS RECEIVED ON OR BEFORE 20.6.1998 AND THE BALANCE OF AMOUNT STILL REMAINS TO BE RECEIVED. IT SEEMS AS THE SAID COMPAN Y M/S SAMETA EXPORTS (P) LTD HAD BEEN INCURRING HEAVY LOSSES AND WAS NOT IN A POSITION TO PAY INTEREST ASSESSEE WAS NOT ACCOUNTIN G ANY INTEREST ON THE SAID DEPOSIT IN THE BOOKS OF ACCOUNT FROM 1998- 99 ONWARDS. IT IS THE CONTENTION OF AO THAT SINCE ASSESSEE IS FOLL OWING THE MERCANTILE SYSTEM OF ACCOUNTING THE INTEREST ACCRU ES TO ASSESSEE AND AFTER OBSERVING THAT NO ATTEMPTS HAVE BEEN MADE TO RECOVER THE INTEREST OR PRINCIPAL AO MADE AN ADDITION OF ` 16 56 000/- AS ACCRUED INTEREST IN THE RELEVANT A.Y. 4. BEFORE THE CIT (A) IT WAS THE CONTENTION OF ASSESSE E THAT THE AMOUNTS WERE ADVANCED BETWEEN 3 RD AUGUST 1995 TO 3 RD OCTOBER 1995 TO THE SAID COMPANY M/S SAMETA EXPORTS (P) LTD AND EVEN THOUGH INTEREST HAS ACCRUED AND ACCOUNTED UPTO THE PERIOD 30.6.1996 IT HAS RECEIVED ONLY AN AMOUNT OF ` 1 75 000/- AND THE BALANCE AMOUNT WAS OUTSTANDING. FURTHER IT WAS SUB MITTED THAT THE SAID COMPANY M/S SAMETA EXPORTS (P) LTD VIDE LE TTER DATED 20.6.1996 REQUESTED ASSESSEE NOT TO CHARGE INTEREST CONSIDERING ITS ADVERSE FINANCIAL POSITION. IT WAS INFORMED THAT TH E COMPANY WAS NOT RECOGNIZING THE REVENUE AND THE BOARD HAS TAKEN A CONSCIOUS DECISION VIDE ITS MEETING HELD ON 27.6.1996. AS PER ACCOUNTING POLICY AND AS PER ACCOUNTING STANDARD AS-9 ON REVEN UE RECOGNITION ASSESSEE DID NOT RECOGNIZE ANY REVENUE OF INTEREST INCOME IN THE BOOKS OF ACCOUNT AFTER JUNE 1996 AS UNCERTAINTIES WERE INVOLVED AS REGARDS TO THE COLLECTION OF THE PRINCIPAL/INTEREST . THE CIT (A) HOWEVER DID NOT AGREE WITH THE CONTENTIONS OF ASSE SSEE. HE ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 4 OF 19 ANALYZED THE ISSUE ON THE BASIS OF THE ACCOUNTING S TANDARD AS-9 REVENUE RECOGNITION AND WAS OF THE VIEW THAT THERE IS NO SIGNIFICANT UNCERTAINTY. HE WAS ALSO OF THE OPINION THAT ON PER USAL OF THE BALANCE SHEET OF THE SAID M/S SAMETA EXPORTS (P) LT D THERE ARE ASSETS IN THE BALANCE SHEET WHICH ASSESSEE SHOULD H AVE PURSUED TO RECOVER. THE CASE LAW RELIED UPON BY ASSESSEE WAS A LSO REJECTED ON THE REASON THAT THE FACTS ARE DIFFERENT. HE CONFIRM ED THE ADDITION ACCORDINGLY. 5. THE LEARNED COUNSEL DRAWING OUR ATTENTION TO THE OR DERS OF AO AS WELL AS THE ORDER OF THE CIT (A) SUBMITTED TH AT AO BROUGHT NOTIONAL INTEREST ON LOANS ADVANCED. IT WAS HIS SUB MISSION THAT ASSESSEE STOPPED CHARGING INTEREST AS EARLY AS 1996 AND NO ACTION WAS TAKEN IN ALL THE YEARS AND FOR THE FIRST TIME I N AY 2005-06 THIS ISSUE WAS TAKEN UP IN ASSESSMENT AND ON THAT BASIS OTHER YEARS ASSESSMENTS WERE REOPENED. HE ALSO SUBMITTED THAT A SSESSEE HAS ADVANCED FUNDS LONG BACK AND WAS NOT RECEIVING ANY INTEREST AS THE SAID COMPANYS FINANCIAL POSITION WAS VERY BAD. HE SUBMITTED THAT ASSESSEE HAS TAKEN STEPS FOR RECOVERY OF THE AMOUNT S WHICH ARE AS UNDER: IN 2002 AND THEREAFTER THE COMPANY SENT REMINDERS TO SEPL FOR RECOVERY OF PRINCIPAL AMOUNT. IN JULY 2004 SEPL REQUESTED THE APPELLANT TO WAIVE THE INTEREST AS IT COULD NOT EARN SUFFICIENT ENOUGH TO CLEAR ITS DUES. IN ORDER TO SMOOTHLY RECOVER THE PRINCIPAL AMOUNT T HE BOARD OF DIRECTORS OF THE APPELLANT COMPANY DECIDED TO FU RTHER WAIVE OFF THE INTEREST TILL JUNE 2007. IN JULY 2007 SEPL FURTHER REQUESTED THE APPELLANT TO WAIVE THE INTEREST AS THERE WAS NO IMPROVEMENT IN THE MAR KET CONDITIONS. ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 5 OF 19 IN JULY 2007 AFTER A PROLONGED DISCUSSION BY THE MANAGEMENT IT WAS DECIDED THAT THE INTEREST AMOUNT WOULD BE WAIVED FURTHER UPTO MARCH 31 2010. IN MARCH 2010 SEPL FURTHER REQUESTED THE APPELLAN T TO WAIVE OF THE INTEREST AMOUNT AS THERE WAS NO IMPROV EMENT IN THE MARKET CONDITIONS. IN APRIL 2010 AFTER A PROLONGED DISCUSSION BY THE MANAGEMENT IT WAS DECIDED THAT THE INTEREST WOULD BE WAIVED FURTHER UPTO MARCH 31 2013. DURING THE ENTIRE PERIOD FROM 2000 ONWARDS SEPL IN CURRED LOSSES EVEN WITHOUT PROVIDING FOR INTEREST EXPENSE ON THE APPELLANTS DEPOSITS. ITS NET WORTH ALSO CONTINUED TO REMAIN NEGATIVE. 6. FURTHER IT WAS SUBMITTED THAT THE OBSERVATIONS OF T HE CIT (A) THAT ASSESSEE HAS INDEED EARNED INCOME ON MERCANTIL E BASIS IS NOT CORRECT AND RELIED ON THE FOLLOWING CASE LAWS: I) CIT VS. PC MEDIA SYSTEMS LTD (2009) 2 DTL ONLINE 13 (DELHI). II) CIT VS. GOVIND AGENCIES (P) LTD (2007) 195 ITR 290 (ALL.) III) BRAHMAPUTRA CAPITAL & FINANCIAL SERVICES LTD VS. INCOME TAX OFFICER (2009) 119 ITD 266 (DELHI) IV) TCI FINANCE LTD VS. ACIT (2004) 91 ITD 573 (HYD.) V) CIT VS. VASISTH CHAY VYAPAR LTD (2011) 196 TAXMAN 169 (DELHI) VI) CIT VS. WOODWARD GOVERNOR INDIA (P) LTD (2007) 162 TAXMAN 60 (DELHI) VII) WESTERN MAHARASHTRA DEVELOPMENT CORPN. LTD VS. DCIT (2008) 22 SOT 13 (PUNE). VIII) DCIT (SPECIAL RANGE) VS. RELIANCE PETROLEUM LTD (20 06) 5 SOT 164 (MUM.) IX) UCO BANK VS. CIT (1999) 104 TAXMAN 547 (SC) X) ACIT VS. COROMANDAL INVESTMENT (P) LTD (2008) 174 TAXMAN 194 (GUJ.) ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 6 OF 19 HE ALSO REFERRED TO THE BALANCE SHEET OF M/S SEPL T O SUBMIT THAT THEY ARE INCURRING CONTINUOUS LOSSES AND THE SO CAL LED ASSETS STATED BY CIT(A) ARE NOTHING BUT THE LOSSES SHOWN IN THE A SSET SIDE. WHILE ADMITTING THAT COMING TO THE YEAR UNDER CONSIDERATI ON BANK HAS ADVANCED UNSECURED LOAN TO THAT COMPANY BUT IT WAS HIS SUBMISSION THAT THERE ARE LARGE AMOUNT OF LOSSES AN D THE AMOUNTS TO BE PAID BY THE SAID COMPANY. THEREFORE ASSESSEE IS NOT IN A POSITION EITHER TO RECOVER THE INTEREST OR PRINCIPA L. HE SUBMITTED THAT ASSESSEE HAS TAKEN STEPS TO RECOVER THE AMOUNT THATS THE REASON WHY THE AMOUNTS WERE NOT WRITTEN OFF IN THE BOOKS OF ACCOUNT. ASSESSEES SUBMISSION THAT JUST BECAUSE TH E AMOUNTS WERE NOT WRITTEN OFF INCOME CANNOT BE CONSIDERED A S ACCRUED AS WAS CONSIDERED BY THE CIT (A). 7. THE LEARNED DR HOWEVER RELIED ON THE PRINCIPLES LA ID DOWN BY THE CIT (A) IN THE ORDER AND THE REVENUE RECOGNITIO N METHOD AND IT WAS HIS SUBMISSION THAT NO EFFORT WAS MADE TO RECOV ER THE INTEREST FROM THE SAID COMPANY. IT WAS FURTHER SUBMITTED THA T THE TRANSACTIONS SEEMS TO BE AN ARRANGED TRANSACTION AN D THERE IS NO EXPLANATION WHY INTEREST COULD NOT BE PROVIDED WHEN ASSESSEE HAS NOT WRITTEN OFF THE AMOUNT AS BAD DEBT. HE DISTINGU ISHED THE CASE LAW RELIED UPON BY ASSESSEE. 8. WE HAVE CONSIDERED THE ISSUE. AS FAR AS THE FACTS A RE CONCERNED THERE IS NO DISPUTE THAT THE SAID SEPL I S AN UNRELATED PARTY AND ALSO THERE IS NO DISPUTE THAT ASSESSEE HA S ADVANCED AN AMOUNT OF ` .90 LAKHS WAY BACK IN AUGUST-OCTOBER 1995. THERE I S ALSO NO DISPUTE FROM THE REVENUE AND IN FACT ACKNOW LEDGED BY AO IN THE ORDER THAT THE INTEREST AT 18% WAS TAKEN AS ACCRUED UPTO 30.6.1996 AND SUBSEQUENTLY NO AMOUNT WAS RECOGNIZED AS INCOME IN THE BOOKS OF ACCOUNT. IN THESE CIRCUMSTANCES WE ARE UNABLE TO UNDERSTAND HOW THE INTEREST INCOME ACCRUED TO ASSES SEE IN THE YEAR UNDER CONSIDERATION. LEVY OR NON-LEVY OF INTEREST I S A CONTRACTUAL OBLIGATION OF THE PARTIES AND THERE IS NO EVIDENCE ON RECORD THAT THE SAID SEPL PROVIDED THE INTEREST IN ITS BOOKS WHICH ASSESSEE HAS NOT ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 7 OF 19 ACCOUNTED FOR AS ACCRUED. NEITHER PARTY HAS RECOGN IZED THE INCOME OR EXPENDITURE IN RESPECTIVE ACCOUNTS. IT IS ON REC ORD THAT THE SAID SEPL REQUESTED ASSESSEE NOT TO CHARGE INTEREST AND ACCORDINGLY ASSESSEE HAS NOT PROVIDED THE INTEREST IN ITS BOOKS OF ACCOUNT. WHEN IN FACT THE PRINCIPAL ITSELF IS DOUBTFUL FOR R ECOVERY QUESTION OF ACCOUNTING INTEREST AS INCOME DOES NOT ARISE WHEN A SSESSEE HAVING RECOGNIZED AN AMOUNT OF ` .9 86 605/- AS INTEREST EARLIER COULD ONLY RECOVER AN AMOUNT OF ` .1 75 000/-. 9. THE PRINCIPLES ON THIS ISSUE OF NOTIONAL INTEREST A RE DECIDED BY THE FOLLOWING CASES: I) CIT VS. PC MEDIA SYSTEMS LTD (2009) 2 DTL ONLINE 13 (DELHI). SECTION 5 OF THE INCOME-TAX ACT 1961 INCOME A CCRUAL OF ASSESSMENT YEAR 2002-03 ASSESSING OFFICER COMPUTE D CERTAIN NOTIONAL INTEREST INCOME IN HANDS OF ASSESSEE ON APPEAL COMMISSIONER (APPEALS) OPINED THAT MERELY BECAUSE A SSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IT C OULD NOT BE HELD THAT INCOME HAD ACCRUED TO IT COMMISSIONER ( APPEALS) ALSO CONCLUDED THAT FROM FACTS IT WAS CLEAR THAT NO REAL INCOME ACCRUED TO ASSESSEE AND THAT IT WAS EVIDENT FROM LETTERS AN D CORRESPONDENCE WITH PARTIES TO WHOM LOANS WERE ADV ANCED THAT SAID PERSONS HAD EXPRESSED THEIR INABILITY TO PAY I NTEREST ACCORDINGLY COMMISSIONER (APPEALS) DELETED NOTIONA L INTEREST ADDED TO ASSESSEES INCOME TRIBUNAL UPHELD ORDER OF COMMISSIONER (APPEALS) WHETHER NO SUBSTANTIAL QU ESTION OF LAW AROSE FROM TRIBUNALS ORDER HELD YES II) CIT VS. GOVIND AGENCIES (P) LTD (2007) 195 ITR 290 (ALL.) HELD THAT IT WAS ON RECORD THAT THE FINANCIAL POSIT ION OF G HAD BECOME BAD AND IT WAS AGREED BETWEEN THE ASSESSEE A ND THE SAID COMPANY THAT NO FURTHER INTEREST WOULD BE CHAR GED AND IN ORDER TO RECOVER THE AMOUNT THE COMPANY WOULD SELL ITS LAND TO THE RESPONDENT-ASSESSEE FOR A SUM OF RS. 12 00 000 AND AFTER ADJUSTING THE DEBIT BALANCE THE REMAINING AMOUNT S HALL BE PAID. IT IS TO BE REMEMBERED THAT EARNING OF THE IN COME WHETHER ACTUAL OR NOTIONAL HAS TO BE SEEN FROM THE VIEWPOINT OF A PRUDENT ASSESSEE. IF IN GIVEN FACTS AND CIRCUMSTA NCES THE ASSESSEE DECIDES NOT TO CHARGE INTEREST IN ORDER TO SAFEGUARD THE PRINCIPAL AMOUNT AND ENSURE ITS RECOVERY IT CA NNOT BE SAID THAT HE HAS ACTED IN A MANNER IN WHICH NO REASONABL E PERSON CAN ACT. THE PRESENT CASE WAS ONE OF SUCH CASES WHE RE THE RESPONDENT-ASSESSEE ACTING AS A PRUDENT PERSON IN ORDER TO ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 8 OF 19 RECOVER THE AMOUNT HAD AGREED NOT TO CHARGE INTERE ST ON THE REMAINING AMOUNT DURING THE ASSESSMENT YEAR IN QUES TION AND TO RECOVER THE PRINCIPAL AMOUNT BY PURCHASE OF THE DEBTORS LAND. IN THESE CIRCUMSTANCES THERE DID NOT ARISE AN Y QUESTION OF BRINGING TO CHARGE NOTIONAL INCOME BY WAY INTEREST . III) BRAHMAPUTRA CAPITAL & FINANCIAL SERVICES LTD VS. INCOME TAX OFFICER (2009) 119 ITD 266 (DELHI) HELD . .. EVEN WHERE AN ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IT IS ONLY ACCRUAL OF REAL INCOME WHICH IS CHARGEABLE TO TAX; THAT ACCRUAL IS A MATTER TO BE DECIDED ON C OMMERCIAL BELIEF HAVING REGARD TO THE NATURE OF BUSINESS OF T HE ASSESSEE AND CHARACTER OF THE TRANSACTION. ACCORDINGLY FOR THE PURPOSE OF DETERMINING WHETHER THERE HAS BEEN ACCRUAL OF RE AL INCOME OR NOT RECOURSE IS TO BE HAD TO THE BUSINESS CHARA CTER OF THE TRANSACTION AND THE REALITIES AND PECULIARITIES OF THE SITUATIONS. INTEREST INCOME ON STICKY LOANS WHICH HAS THEORETI CALLY ACCRUED IN FAVOUR OF AN ASSESSEE BUT HAS NOT FACTU ALLY RESULTED OR MATERIALIZED AT ALL TO AN ASSESSEE DURING THE AC COUNTING YEAR SHOULD BE REGARDED AS HYPOTHETICAL INCOME AND NOT THE REAL INCOME. THUS THE STICKINESS OF ADVANCES OR LO ANS OBJECTIVELY ESTABLISHED IS SUFFICIENT TO PREVENT AC CRUAL OF REAL INTEREST THEREON AS REAL INCOME AND WOULD HAVE THE EFFECT OF RENDERING SUCH INCOME HYPOTHETICAL AND THE SAME CAN NOT BE BROUGHT TO TAX. UNDER THE ACT IN ORDER THAT INCOME SHOULD ACCRUE IT SHOULD NOT MERELY FALL DUE OR BECOME LEG ALLY RECOVERABLE BUT SHOULD ALSO BE FACTUAL AND PRACTIC ALLY REALIZABLE. FACTUAL OR PRACTICAL UNREALIZIBILITY TH EREOF MAY PREVENT ITS ACCRUAL DEPENDING UPON THE FACTS AND CIRCUMSTANCES ATTENDING UPON THE TRANSACTION. NO DOUBT THE ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED VIZ. THE ACCRUAL OF INCOME OR ITS RECEIPTS BUT THE SUBSTANCE OF THE MATTER IS THE IN COME. IF THE INCOME DOES NOT RESULT AT ALL THERE CANNOT BE A TA X EVEN THOUGH THE BOOK KEEPING ENTRY IS MADE ABOUT HYPOTHE TICAL INCOME WHICH DOES NOT MATERIALIZE. THE INSTANT CASE IS ON A BETTER FOOTING WHEREIN AFTER REALIZING AND ESTABLI SHING THE BAD FINANCIAL POSITION OF DEBTORS AND NO CHANCE OF REAL IZATION OF INTEREST INCOME THE ASSESSEE HAD NOT EVEN PASSED A NY ENTRY IN THE BOOKS OF ACCOUNT FOR SUCH INTEREST. THE GUIDANC E NOTE ON ACCRUAL OF INCOME ON ACCOUNTING ISSUED BY THE ICAI LAYS DOWN THAT WHERE THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING THE REVENUE RECOGNITION IS TO BE POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN TERMS OF THE GUIDANCE N OTE IT IS APPROPRIATE TO RECOGNIZE REVENUE IN SUCH CASES ONLY WHEN IT BECOMES REASONABLY CERTAIN THAT ULTIMATE COLLECTION WILL BE MADE. IT WAS AN UNDISPUTED FACT THAT IN THE INSTANT CASE TILL ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 9 OF 19 DATE BOTH PRINCIPAL AND INTEREST REMAINED UNPAID A CCORDINGLY AS PER THE ACCEPTED ACCOUNTING PRINCIPLE THE REVEN UE SHOULD BE RECOGNIZED ONLY IN THE PERIOD WHEN IT IS REASONABLY ASCERTAINED THAT ULTIMATE COLLECTION WOULD BE MADE. IN THE INST ANT CASE IT WAS A MATTER OF RECORD THAT TILL DATE NO INTEREST H AD BEEN RECEIVED BY ASSESSEE NOR ANY AMOUNT WAS RECEIVED TO WARDS REFUND OF PRINCIPAL. THOUGH THE ACT TAKES INTO ACCO UNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATT RACTED VIZ. THE ACCRUAL OF INCOME OR ITS RECEIPTS YET THE SUBSTANC E OF THE MATTER IS INCOME. IF THE INCOME DOES NOT RESULT AT ALL THERE CANNOT BE A TAX EVEN THOUGHT IN BOOK KEEPING AN E NTRY IS MADE ABOUT A HYPOTHETICAL INCOME WHICH DID NOT MA TERIALIZE. AFTER CONSIDERING THE MATERIAL PLACED ON RECORD IT COULD BE SAID THAT NEITHER ANY INTEREST NOR ANY PRINCIPAL COULD B E RECOVERED BY THE ASSESSEE TILL RELEVANT TIME. THE OBSERVATION S MADE BY THE COMMISSIONER (APPEALS) TO THE EFFECT THAT THE A SSESSEE- COMPANY AND THE BORROWING-COMPANIES WERE KNOWN TO E ACH OTHER AND THEREFORE THE INTEREST INCOME WAS BOUND TO ACCRUE AND THE ASSESSEE SHOULD HAVE ACCOUNTED FOR THE SAME AS INCOME WERE OF NO SUBSTANCE INSOFAR AS MERE KNOWI NG EACH OTHER WOULD NOT BE SUFFICIENT TO RENDER THE FINANCI AL POSITION OF THE BORROWING-COMPANIES BETTER SO AS TO INCREASE TH E LIKELIHOOD OF INTEREST PAYMENT TO THE ASSESSEE-COMPANY. THE OB SERVATION OF THE COMMISSIONER (APPEALS) TO THE EFFECT THAT TH E ASSESSEE WAS NOT FOLLOWING THE DIRECTIONS OF THE RBI FOR CON VERTING THE LOANS TO NON-PERFORMING ASSETS WAS ALSO INCORRECT INSOFAR AS THE BALANCE SHEET AND OTHER RELEVANT DOCUMENTS PLAC ED ON RECORD CLEARLY INDICATED THAT FULL EFFECT HAD BEEN GIVEN BY THE ASSESSEE WITH REGARD TO CLASSIFICATION OF ASSETS AS NPAS IN TERMS OF THE PRUDENTIAL NORMS OF THE RBI. MERELY ON CONJECTURES AND SURMISES THE COMMISSIONER (APPEALS) HAD STATED THAT LENDER AND BORROWING-COMPANIES HAD THEIR OWN SCHEME S TO PLAY. IV) TCI FINANCE LTD VS. ACIT (2004) 91 ITD 573 (HYD.) THE MERCANTILE SYSTEM OF ACCOUNTING CANNOT BE CON SIDERED A MERE MATHEMATICAL MODEL WHERE SUBJECTIVE CONCL USIONS ON REALISABILITY OR OTHERWISE OF AN INCOME HAVE NO PLA CE. RECOGNITION OF INTEREST INCOME IN THE INSTANT CASE WAS NOT MADE ON THE MERE IPSE DIXIT OF THE ASSESSEE. A REGULAR METHOD OF ACCOUNTING AS CONSIDERED PRUDENT BY THE RBI HAD BE EN FOLLOWED CONSISTENTLY FOR MORE THAN 4 YEARS AND THA T METHOD HAD BEEN ACCEPTED BY THE REVENUE IN THE EARLIER YEA RS. SUCH REGULARLY EMPLOYED METHOD OF ACCOUNTING COULD NOT BE DISTURBED UNLESS PROFITS AND GAINS COULD NOT BE PRO PERLY DEDUCED THERE FROM AND UNLESS THE ASSESSEE HAD MAD E SUCH ENTRIES ON A MERE IPSE DIXIT. AS-I NOTIFIED BY THE CENTRAL GOVERNMENT IN PURSUANCE OF SECTION 145(2) MANDATES THAT ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 10 OF 19 CONSISTENCY IS A FUNDAMENTAL ACCOUNTING ASSUMPTIO N. PRUDENCE AND SUBSTANCE OVER FORM ARE THE CORNER STONES TO THE ACCOUNTING POLICIES TO BE ADOPTED BY AN ASSESSE E. ACCRUAL OF INCOME HAS TO BE JUDGED FROM THE REALISTIC POINT OF VIEW. NON- RECOGNITION OF INCOME ON THE GROUND THAT THE INCOME HAD NOT REALLY ACCRUED AS THE REALISABILITY OF THE PRINCIPA L OUTSTANDING ITSELF WAS DOUBTFUL IS LEGALLY CORRECT UNDER THE M ERCANTILE SYSTEM OF ACCOUNTING WHEN THE SAME IS IN ACCORDANC E WITH AS- I NOTIFIED BY THE GOVERNMENT. THE PRINCIPLE QUESTIO N THAT WAS TO BE CONSIDERED WHETHER THE ASSESSEES METHOD OF ACCO UNTING VIOLATED ACCOUNTING STANDARDS NOTIFIED BY THE CENTR AL GOVERNMENT. THE CASE OF THE REVENUE WAS NOT THAT AS -I HAD BEEN VIOLATED BY THE ASSESSEE. IN FACT THE SUPREME COURTS JUDGMENT IN THE CASE OF STATE BANK OF TRAVANCORE V. CIT [1986] 158 ITR 102 / 24 TAXMAN 337 WAS ON THE POSITION OF LAW PRIOR TO THE ACT ADOPTING AS-I AND II FROM 25-1-1996 VIDE NOTIFICATION NO. SO 69(E). THE NOTIFICATION CAME INTO EFFECT FRO M 1-4-1996 AND ACCORDINGLY APPLIED TO THE ASSESSMENT YEAR 19 97-98 AND SUBSEQUENT ASSESSMENT YEARS. THE ISSUE THAT WAS NOT IN DISPUTE WAS THAT THE ACCOUNTING POLICIES ADOPTED BY THE ASSESSEE WERE THOSE THAT WERE MANDATED BY THE RBI. THE ACCOUNTING POLICIES MANDATED BY RBI ARE NOT CONTRAR Y TO AS-I NOTIFIED BY THE CENTRAL GOVERNMENT. IN FACT THEY D EFINE WHAT IS PRUDENCE AND ALSO REQUIRE ASSESSEES TO GO BY THE SUBSTANCE OF THE ISSUE RATHER THAN THE FORM. [ SEE PARA (4) OF AS-I AND PRUDENTIAL NORMS ISSUED BY RBI.] THE REVENUE COULD NOT REQUIRE THE ASSESSEE TO CHANGE ITS METHOD OF ACCOUNTING UNL ESS PARA 9 OF AS-II WAS SATISFIED. THUS WHEN THE REVENUE COUL D NOT DEMONSTRATE THAT THE CONSISTENT METHOD OF ACCOUNTIN G FOLLOWED BY THE ASSESSEE WAS IN VIOLATION OF AS-I THE DISAL LOWANCE MADE ON THAT GROUND COULD NOT BE SUSTAINED. IT WAS SIGNIFICANT TO NOTE THAT THE ASSESSING OFFIC ER HAD ACCEPTED THE STAND OF THE ASSESSEE-COMPANY IN RESPE CT OF THE REVERSED FINANCE INCOME RECOGNIZED IN EARLIER YEAR S. THIS REVERSAL WAS DONE BASED ON THE NBFC PRUDENTIAL NORM S RBI DIRECTIONS 1998 ISSUED BY THE RBI ON 31-1-1998. T HUS WHILE ACCEPTING REVERSAL NON-RECOGNITION BASED ON THE SA ME GUIDELINES WAS DISPUTED BY THE REVENUE. THEREFORE THE ACCOUNTING POLICIES AND THE CONSISTE NT METHOD OF RECOGNIZING INCOME ADOPTED BY THE ASSESSEE WERE NOT MERELY ON ITS IPSE DIXIT BUT WERE IN CONSONANCE WITH THE STATUTORY REGULATIONS AND IT COULD NOT BE SAID THAT SUCH ACC OUNTING POLICIES DID NOT RESULT IN REPRESENTING A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS. V) CIT VS. VASISTH CHAY VYAPAR LTD (2011) 196 TAXMAN 169 (DELHI). IT WAS NOT IN DISPUTE THAT ON THE APPLICATION OF TH E PROVISIONS OF THE RBI ACT AND THE 1998 DIRECTIONS THE ICDS ADVAN CED TO S ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 11 OF 19 BY THE ASSESSEE HAD BECOME NPA. IT WAS ALSO NOT IN DISPUTE THAT THE ASSESSEE-COMPANY BEING NBFC WAS BOUND BY T HE AFORESAID PROVISIONS. THEREFORE UNDER THE AFORESAI D 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 PR INCIPLES WHICH THE ASSESSEE WAS INDUBITABLY BOUND TO FOLLOW WERE AS- 9. 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 TH E SAID ICDS PLACED WITH S SINCE THE ASSESSMENT YEAR 1996-97 A S IT HAD BECOME NPA IN ACCORDANCE WITH THE PRUDENTIAL NORMS WHICH WAS ENTERED IN THE BOOKS OF ACCOUNT AS WELL. THE AS SESSEE 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 FINANCI AL CRUNCH FACED BY S. SO MUCH SO IT WAS FACING WINDING UP PETITIONS WHICH WERE FILED BY MANY CREDITORS. THOSE CIRCUMSTA NCES LED TO AN UNCERTAINTY INSOFAR AS RECOVERY OF INTEREST WAS CONCERNED AS A RESULT OF THE AFORESAID PRECARIOUS FINANCIAL P OSITION OF S. WHAT TO TALK OF INTEREST EVEN THE PRINCIPAL AMOUNT ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THAT SCENARIO IT WA S LEGITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAD NO T 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 PR UDENTIAL NORMS ISSUED BY THE RBI IN EXERCISE OF ITS STATUTOR Y POWERS. AS PER THESE NORMS THE ICDS HAD BECOME NPA AND ON SUC H NPA WHERE THE INTEREST WAS NOT RECEIVED AND POSSIBILITY OF RECOVERY WAS ALMOST NIL INTEREST COULD NOT BE TREATED TO HAVE BEEN ACCRUED IN FAVOUR OF ASSESSEE VI) CIT VS. WOODWARD GOVERNOR INDIA (P) LTD (2007) 162 TAXMAN 60 (DELHI): SECTION 5 READ WITH SECTION 145 OF THE INCOME-TAX ACT 1961 - INCOME - ACCRUAL OF - WHETHER IN DETERMINING WHETHE R THERE HAS IN FACT BEEN ACCRUAL OF LIABILITY OR INCOME ACCOUNTANCY STANDARDS PRESCRIBED BY ICAI WOULD HAVE TO BE FOLLO WED AND APPLIED - HELD YES. SECTION 145 PRESCRIBES THE METHOD OF ACCOUNTING TO BE FOLLOWED BY THE ASSESSEE FOR COMPUTING INCOME CHARGEABLE UND ER THE ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 12 OF 19 HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. SECTION 145(1) STATES THAT THE COMPUTATION WOULD BE IN ACC ORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. SECTION 145(2) FURTHER S TATES THAT THE CENTRAL GOVERNMENT MAY NOTIFY FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS O F ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. THE MERCANTI LE SYSTEM AS DISTINGUISHED FROM THE CASH SYSTEM BRINGS IN THE CO NCEPT OF ACCRUAL OF LIABILITY OR INCOME IN THE RELEVANT PREV IOUS YEAR WHICH IS THE SUBJECT-MATTER OF THE ASSESSMENT. THE LIABILITY IS REFLECTED EVEN WHERE THERE IS NO ACTUAL EXPENDITURE ; LIKEWISE THE INCOME IS REFLECTED EVEN WHERE THERE IS NO ACTU AL RECEIPT OF MONEY. MOREOVER SECTION 209(3) OF THE COMPANIES AC T MAKES IT MANDATORY FOR COMPANIES TO KEEP ACCOUNTS ON ACCRUAL BASIS ONLY. THE STATEMENT OF THE CONCEPT OF ACCRUAL AS EXPLAI NED BY THE SUPREME COURT IN E.D. SASOON & CO. LTD. V. CIT [19 54] 26 ITR 27 HAS HELD GOOD TILL DATE. THEREFORE IT FOLLOWS THAT WHILE COMPUTING BUSINESS INCOME CHARGEABLE TO TAX UNDER S ECTION 28 THE MERCANTILE SYSTEM OF ACCOUNTING HAS TO BE FOLLO WED AND PROVISION FOR ANTICIPATED LOSSES AND FORESEEABLE LI ABILITIES WILL HAVE TO BE TAKEN INTO ACCOUNT. SECTION 145 ALSO ACK NOWLEDGES THE NEED TO FOLLOW ACCOUNTING STANDARDS. THESE MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT. THE ACCOUNTIN G STANDARDS PRESCRIBED BY THE ICAI ARE ALSO REQUIRED TO BE FOLLOWED BY THE ASSESSEES. THIS HAS RECEIVED RECOGN ITION IN SEVERAL DECISIONS OF THE HIGH COURTS AND THE SUPREM E COURT. ACCOUNTING STANDARDS OF THE ICAI. THE ACCOUNTING STANDARDS ISSUED BY THE ICAI REQUIRE THAT ACCOUNTING POLICIES MUST BE GOVERNED BY THE PRINCIP LE OF PRUDENCE. IN OTHER WORDS PROVISIONS SHOULD BE M ADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY THE B ASIC ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. PA RA 6 OF ACCOUNTING STANDARD 1 DEFINES ACCRUAL AS THE ASSUM PTION THAT REVENUES AND COSTS ARE ACCRUED THAT IS RECOGNIZED AS THEY ARE EARNED OR INCURRED (AND NOT AS MONEY IS RECEIVED OR PAID) AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE. WHAT IS REQUIRED THEREFORE IS THAT ALL ANTICIPATED LIABILITIES AND FORESEEABLE LOSSES HAVE TO BE PROVI DED FOR WHILE CAUTION IS TO BE EXERCISED AGAINST ACCOUNTING FOR U NEARNED GAINS. ULTIMATELY THE EMPHASIS IS ON PRESENTING A T RUE AND CORRECT STATE OF AFFAIRS OF THE COMPANY AS A GOING CONCERN. THIS EXPLAINS WHY FOR INSTANCE THE VALUATION OF CLOSIN G STOCK AS ON ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 13 OF 19 THE DATE OF THE BALANCE SHEET IS DONE AT COST OR M ARKET VALUE WHICHEVER IS LOWER. WHERE THE MARKET VALUE IS LOWER THAN THE COST VALUATION AT MARKET VALUE REFLECTS THE ANTICI PATED LOSS. ON THE OTHER HAND WHERE THE MARKET VALUE IS HIGHER TH AN THE COST THE UNREALIZED GAINS ARE NOT ACCOUNTED FOR. ACCOUNTING STANDARD 11 (AS 11) ISSUED BY THE ICAI S PECIFICALLY DEALS WITH THE ISSUE OF ACCOUNTING FOR FLUCTUATION IN FOREIGN EXCHANGE RATES AS IMPACTING THE CURRENT ASSETS AND LIABILITIES. THE SUPREME COURT HAS IN CHALLAPALLI SUGARS LTD. V . CIT [1975] 98 ITR 167 PUT ITS SEAL OF APPROVAL ON ADOPTING TH E ACCOUNTING STANDARDS WHILE INTERPRETING SECTION 10(2)(VI) (VI A) (VIB ) AND SECTION 10(5) OF THE INDIAN INCOME-TAX ACT 1922 WH ILE INTERPRETING THE EXPRESSION ACTUAL COST. THEREFORE THE JUDICIALLY ACCEPTED POSITION APPEARE D TO BE THAT IN DETERMINING WHETHER THERE HAS IN FACT BEEN ACC RUAL OF LIABILITY OR INCOME THE ACCOUNTANCY STANDARDS PRES CRIBED BY THE ICAI WOULD HAVE TO BE FOLLOWED AND APPLIED . VII) WESTERN MAHARASHTRA DEVELOPMENT CORPN. LTD VS. DCIT (2008) 22 SOT 13 (PUNE). SECTION 145(1) UNAMBIGUOUSLY PROVIDES THAT THE PROF ITS OF BUSINESS ARE TO BE COMPUTED IN ACCORDANCE WITH EIT HER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. HOWEVER RIDER IS THAT THE PROVISIONS OF SECTION 145(1) ARE SUBJECT TO THE PROVISIONS OF SECTION 145 (2) WHICH IN TURN PROVIDE THAT THE ACCOUNTING STANDARDS AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT FROM TIME TO TIME ARE TO BE FOLLOWED BY ANY CLASS OF ASSESSEE OR IN RESPECT OF ANY CLASS OF INCOME. THEREFORE THE NOTIFIED ACCOUNTING STANDARDS ARE TO BE FOLLOWED BY AN ASSESSEE EVEN IF THESE ACCOUNTING STANDARDS P ROVIDE FOR AN ACCOUNTING TREATMENT CONTRARY TO THE MERCANTILE SYSTEM OF ACCOUNTING OR CASH SYSTEM OF ACCOUNTING AS MAY BE R EGULARLY FOLLOWED BY THE ASSESSEE. TO THAT EXTENT THE NOTIF IED ACCOUNTING STANDARDS ARE TO HAVE PRECEDENCE. ONE OF THESE NOTIFIED ACCOUNTING STANDARDS IS AS-1. A PLAIN READING OF THE NOTIFIED AS-1 WOULD SHOW THAT IRRESP ECTIVE OF WHATEVER BE THE METHOD OF ACCOUNTING EMPLOYED BY TH E ASSESSEE IT IS SINE QUA NON THAT THE FINANCIAL STATEMENTS PREPARED ON THE BASIS OF SUCH METHOD OF ACCOUNTING MUST REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFA IRS OF THE BUSINESS. TO THAT EXTENT THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE HAS TO GIVE WAY TO THE ACCOUNTING POLI CIES AIMED AT TRUE AND FAIR VIEW OF THE AFFAIRS OF THE BUSINES S. ONE OF THE MAJOR CONSIDERATIONS FOR HAVING SUCH ACCOUNTING POL ICIES IS PRUDENCE. WHAT FOLLOWS IS THAT THE CONSIDERATIONS OF PRUDENCE HAVE TO BE BLENDED WITH THE STRICT PRINCIPLES OF ME RCANTILE OR ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 14 OF 19 CASH METHOD OF ACCOUNTING EVEN WHEN AN ASSESSEE IS FOLLOWING MERCANTILE OR CASH METHOD OF ACCOUNTING AND AN IMPROVISED METHOD OF MERCANTILE OR CASH METHOD OF A CCOUNTING WHICH MAY RESULT FROM SUCH A BLENDING OF CONSIDERAT IONS OF PRUDENCE WITH THE STRICT PRINCIPLES OF MERCANTILE O R CASH METHOD OF ACCOUNTING MEETS THE REQUIREMENTS OF SECTION 14 5. THE CONCEPT OF PRUDENCE AS ONE OF THE BASIC CONSI DERATIONS IN DECIDING ACCOUNTING POLICIES IS NOT OF A RECENT ORI GIN. IT IS ONE OF THE FUNDAMENTAL PRINCIPLES OF ACCOUNTING THAT AS A MEASURE OF PRUDENCE AND FOLLOWING THE PRINCIPLE OF CONSERVATIS M THE INCOMES ARE NOT TAKEN INTO ACCOUNT TILL THE POINT O F TIME THAT THERE IS A REASONABLE DEGREE OF CERTAINTY OF ITS RE ALIZATION WHILE ALL ANTICIPATED LOSSES ARE TAKEN INTO ACCOUNT AS SO ON AS THERE IS A POSSIBILITY HOWSOEVER UNCERTAIN OF SUCH LOSSES BEING INCURRED. NO DOUBT AS A GENERAL PRINCIPLE OF THE MERCANTILE METHOD OF ACCOUNTING REVENUES ARE REFLECTED IN THE BOOKS OF ACCOUNT OF THE PERIOD IN WHICH REVENUES ACCRUE AND REVENUE IS RECOGNIZED AS IT IS EARNED. HOWEVER THERE ARE EXCEPTIONS TO T HIS PRINCIPLE AND SUCH EXCEPTIONS ARE WARRANTED BY THE CONSIDERAT IONS OF PRUDENCE WHICH IN ANY EVENT OVERRIDE THE STRICT PRINCIPLES OF MERCANTILE METHOD OF ACCOUNTING. GUIDANCE NOTE ON ACCRUAL BASIS OF ACCOUNTING ISSUED BY THE ICAI UNAMBIGUOU SLY DEMONSTRATES THE RATIONALE OF SUCH EXCEPTIONS. WHILE THESE GUIDANCE NOTE ON ACCRUAL BASIS OF ACCO UNTING ISSUED BY THE ICAI ARE NOT BINDING UNDER THE ACT; B UT THESE AUTHORITATIVE PRONOUNCEMENTS BY THE PREMIER ACCOUNT ING BODY IN INDIA DO THROW LIGHT ON THE NATURE AND PRINCIPLE S OF MERCANTILE METHOD OF ACCOUNTING WHICH IS NOT DEFI NED UNDER THE ACT. IT IS WELL-SETTLED IN LAW THAT IN LEGISL ATION RELATING TO A PARTICULAR TRADE BUSINESS OR PROFESSION WORDS HAV ING SPECIAL MEANING IN THAT CONTEXT ARE UNDERSTOOD IN THAT SENS E. THE PROVISIONS OF SECTION 145 PERTAIN TO THE ACCOUNTING ASPECTS AND THEREFORE ANY EXPRESSIONS FINDING PLACE THERE IN ARE TO BE CONSTRUED IN THE MANNER IN WHICH THESE ARE CONSTRUE D IN THE ACCOUNTING PROFESSION. THE AUTHORITATIVE PRONOUNCEM ENTS MADE BY THE ICAI THEREFORE MUST BE GIVEN DUE CONSIDERA TION WHEN EXAMINING CONNOTATIONS OF AN ACCOUNTING EXPRESSION I.E. MERCANTILE METHOD OF ACCOUNTING AND PARTICULARLY W HEN THERE IS NOTHING TO THE CONTRARY IN THE TAX LEGISLATION. THEREFORE EVEN WHEN AN ASSESSEE IS FOLLOWING MERCA NTILE METHOD OF ACCOUNTING IT IS INDEED POSSIBLE AND AT TIMES EVEN NECESSARY THAT DEPENDING UPON THE PROBABILITY OR I MPROBABILITY OF BEING ABLE TO RECOVER THE AMOUNTS REVENUES WHIC H LEGALLY ACCRUE TO AN ASSESSEE MAY NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF INCOME RECOGNITION. TO THAT EXTENT IT I S STILL POSSIBLE FOR AN ASSESSEE TO RECOGNIZE CERTAIN REVENUES DUE TO THEIR ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 15 OF 19 PECULIAR NATURE ON RECEIPTS BASIS. THE ONLY CHANGE THAT HAS BEEN BROUGHT ABOUT BY AMENDMENT IN SECTION 145 IS T HAT WHILE PRIOR TO THE AMENDMENT THERE WAS NO NEED TO JUSTIF Y SUCH AN ACCOUNTING TREATMENT ON MERITS AND IT WAS POSSIBLE FOR THE ASSESSEE TO ARGUE THAT AS LONG AS A METHOD HAS BEEN CONSISTENTLY FOLLOWED NO OBJECTION CAN BE TAKEN TO THE SAME THE SITUATION POST-AMENDMENT IS THAT ANY NON-RECOGN ITION OF REVENUE HAS TO BE JUSTIFIED BY THE ASSESSEE ON MERI TS. POST- AMENDMENT IT IS ALSO NECESSARY FOR THE ASSESSEE TO DEMONSTRATE THAT EVEN UNDER THE MERCANTILE METHOD O F ACCOUNTING THERE ARE GOOD REASONS FOR NOT RECOGNIZ ING THE REVENUES IN QUESTION ON ACCRUAL BASIS AND THAT FACT S AND CIRCUMSTANCES OF THE CASE WARRANT THAT SUCH REVENUE S ARE RECOGNIZED ONLY WHEN THE SAME ARE RECEIVED. THAT WI LL ESSENTIALLY DEPEND ON FACTS OF EACH CASE. THE FACTS OF THE INSTANT CASE DID INDEED JUSTIFY TH AT EVEN UNDER MERCANTILE METHOD OF ACCOUNTING REVENUE IN QUESTION I.E. ACCRUED INTEREST ON SEED MONEY LOANS WOULD BE RECOG NIZED ONLY WHEN THE SAME WOULD ACTUALLY BE RECEIVED BY T HE ASSESSEE. THERE WAS NO DISPUTE TO THE FACT THAT THE ASSESSEE- CORPORATION WAS WHOLLY OWNED BY THE GOVERNMENT OF MAHARASHTRA AND WAS ENGAGED IN VARIOUS ACTIVITIES AIMED AT DEVELOPM ENT OF INDUSTRIES AND PROMOTION OF INDUSTRIALIZATION IN WE STERN REGION OF THE MAHARASHTRA STATE. THESE ACTIVITIES WERE SUR ELY NOT ON COMMERCIAL LINES AND THE PREDOMINANT PURPOSE OF THE SE ACTIVITIES WAS TO PROMOTE GROWTH AND DEVELOPMENT IN THE TARGET AREA. WHEN SEED MONEY WAS GIVEN TO AN ENTREPRENEUR THE PURPOSE OF THIS ADVANCE WAS TO ENABLE HIM TO START HIS BUSINESS AND EVEN THE REPAYMENT PROCESS WOULD START ONLY AFTER THE ENTREPRENEUR WAS ABLE TO REPAY THE COMMER CIAL LOAN. IT WAS MORE OF A VENTURE CAPITAL THAN A COMMERCIAL FUNDING AND THIS VENTURE CAPITAL WAS EXTENDED TO THE SECTIONS O F SOCIETY WHICH WERE NOT ONLY UNDERPRIVILEGED BUT WERE LEAST SAFE FROM THE COMMERCIAL POINT OF VIEW. THEREFORE THE APPROA CH OF THE ASSESSEE IN RECOGNIZING THE REVENUE BY WAY OF INTE REST ON SEED LOANS ONLY WHEN RECEIVED COULD NOT BE SAID TO BE U NJUSTIFIED. FURTHER EVEN AFTER THE AMENDMENT IN THE COMPANIES ACT WHICH POST-AMENDMENT PERMITS ACCOUNTING ONLY ON M ERCANTILE BASIS THE GOVERNMENT OF INDIA ISSUED A NOTIFICATIO N FOR RELAXING THE NORMS AND PERMITTING THE ASSESSEE-CORPORATION T O BOOK THE REVENUES IN QUESTION ONLY WHEN ACTUALLY RECEIVED. T HIS FACT APTLY DEMONSTRATED THE BONA FIDES OF THE APPROACH OF THE ASSESSEE AND JUSTIFIED DELAYED RECOGNITION OF REVE NUE ON ACCOUNT OF INTEREST ON SEED LOANS. FURTHER THE REC OVERIES OF INTEREST ON SEED MONEY WERE EXTREMELY LOW AND THE POSSIBILITIES OF RECOVERING THESE AMOUNTS SOMEWHAT REMOTE. NO ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 16 OF 19 DOUBT THERE IS A LEGAL RIGHT TO RECEIVE THE INTERE ST BUT THERE WERE ALSO GROUND REALITIES WHICH DID NOT PERMIT STR ICT ENFORCEMENT OF THIS RIGHT. ANY OTHER VIEW OF THE MA TTER WOULD RESULT IN DISTORTION IN THE FINANCIAL RESULTS DISCL OSED BY THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. THE PR OVISIONS OF SECTION 145(1) ARE SUBJECT TO INTER ALIA MANDATE OF AS-1 WHICH ALSO PRESCRIBES THAT ACCOUNTING POLICIES ADOPTED B Y AN ASSESSEE SHOULD BE SUCH SO AS TO REPRESENT A TRUE A ND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS PROFE SSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND P RESENTED ON THE BASIS OF SUCH ACCOUNTING POLICIES. IN THE NAME OF COMPLIANCE WITH SECTION 145(1) IT CANNOT BE OPEN T O ANYONE TO FORCE ADOPTION OF ACCOUNTING POLICIES WHICH RESULT IN A DISTORTED VIEW OF THE AFFAIRS OF THE BUSINESS. THEREFORE EVE N UNDER THE MERCANTILE METHOD OF ACCOUNTING AND ON PECULIAR F ACTS OF INSTANT CASE THE ASSESSEE WAS JUSTIFIED IN FOLLOWI NG THE POLICY OF NOT RECOGNIZING THESE INTEREST REVENUES TILL THE POINT OF TIME WHEN THE UNCERTAINTY TO REALIZE THE REVENUES VANISH ED. FURTHER ASSUMING FOR A MINUTE THAT THE METHOD OF A CCOUNTING FOLLOWED BY THE ASSESSEE WAS INDEED CONTRARY TO THE PROVISIONS OF SECTION 145(1) BUT THEN THE ASSESSING OFFICER W AS NOT ENTITLED TO MAKE ADJUSTMENTS IN THOSE BOOKS OF ACCO UNT TO BRING THE SAME IN CONFORMITY WITH THE PROVISIONS OF SECTI ON 145(1). ALL THAT HE COULD DO IN SUCH A SITUATION WAS TO LEAN ON SECTION 145(3) WHICH PERMITS HIM TO MAKE A BEST JUDGMENT ASSESSMENT UNDER SECTION 144. IN THE BEST JUDGMENT ASSESSMENT HE HAD TO TAKE INTO ACCOUNT ALL SUCH MA TERIALS AS HE HAD GATHERED IN THE COURSE OF ASSESSMENT PROCEED INGS. THIS MATERIAL OBVIOUSLY INCLUDED THE GOVERNMENT OF INDIA NOTIFICATION WHICH DESPITE THE FACT THAT ALL COMPA NIES ARE REQUIRED TO FOLLOW ACCRUAL BASIS OF ACCOUNTING SPE CIFICALLY DIRECTED THE ASSESSEE-CORPORATION TO BOOK INTEREST INCOME ON SEED MONEY LOANS ONLY WHEN THE SAME WOULD BE ACTUAL LY RECEIVED. A NOTIFICATION ISSUED BY THE GOVERNMENT O F INDIA CANNOT BE TAKEN LIGHTLY NOR CAN THE ASSESSING OFFIC ER BE SIMPLY DISMISSIVE ABOUT IT. THEREFORE NOTIFICATION NO. GS R 770(E) DATED 10-9-1990 WAS SOUND BASIS TO COME TO THE CONC LUSION THAT THE REVENUES IN QUESTION COULD BE TREATED AS I NCOME ONLY WHEN THE REVENUES WERE REALIZED. A BEST JUDGMENT AS SESSMENT IS ALSO REQUIRED TO BE A SOUND AND RATIONALE JUDGME NT ABOUT THE INCOME OF THE ASSESSEE. THEREFORE THE ASSESSEE COU LD NOT BE FORCED TO PAY TAX ON THE INTEREST ACCRUED ON SEED M ONEY LOANS. THEREFORE THE ASSESSING OFFICER WAS DIRECTED TO DE LETE THE IMPUGNED ADDITION MADE TO THE INCOME OF ASSESSEE. ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 17 OF 19 VIII) ITAT MUMBAI BENCH F IN THE CASE OF DCIT SP ECIAL RANGE 18 MUMBAI VS. RELIANCE PETROLEUM LTD (2006) 5 SOT 165 (MUM). SECTION 5 OF THE INCOME-TAX ACT 1961 - INCOME - A CCRUAL OF - ASSESSMENT YEAR 1994-95 - ASSESSEE-COMPANY HAD SHOW N CERTAIN AMOUNT AS INTEREST ACCRUED ON DEPOSITS GIVE N TO RIL RIIL AND L COMPANY - ASSESSEE LATER REVERSED SAID CLAIM IN SPITE OF FACT THAT ITS ACCOUNTS WERE FINALIZED AUD ITED BY STATUTORY AUDITORS AND APPROVED BY ITS BOARD OF DIR ECTORS - ACCORDING TO REVENUE THIS WAS AN AFTER-THOUGHT SO AS TO DEFRAUD REVENUE OF TAX DUE; ONCE INCOME ACCRUED AS SESSEE HAD NO RIGHT TO REVERSE IT AND TO SAY THAT NO INCOM E ACCRUED - ACCORDING TO ASSESSEE HOWEVER BY VIRTUE OF AN AGR EEMENT BETWEEN PARTIES NO INTEREST WAS TO ACCRUE OR PAYAB LE BY RIL TO ASSESSEE ON SUCH ADVANCES - WHETHER IN VIEW OF FACT THAT RIL FINALIZED ITS ACCOUNTS PRIOR TO FINALIZATION OF ACC OUNTS BY ASSESSEE AND THAT IN ITS AUDIT REPORT IT HAD MADE NO PROVISION FOR INTEREST AS PAYABLE TO ASSESSEE ASSESSEES CLA IM THAT INTEREST HAD NOT ACCRUED ON ADVANCES WAS TO BE ACC EPTED AS ANY UNILATERAL STEPS WOULD NOT GIVE ASSESSEE A LEGA LLY ENFORCEABLE RIGHT TO RECEIVE INTEREST - HELD YES - WHETHER UNILATERAL CLAIM OF ASSESSEE WITHOUT OTHER PARTY ACKNOWLEDGING IT AMOUNTED TO ACCRUAL IN REALITY - HELD NO - WHETHER THEREFORE THERE WAS NO ACCRUAL OF INTERES T INCOME ON ADVANCES GIVEN TO RIL L COMPANY AND RIIL AND ASS ESSEE HAD NO RIGHT TO CHARGE INTEREST ON SUCH ADVANCES. IX) HON'BLE SUPREME COURT IN THE CASE OF UCO BANK VS. CIT (1999) 04 TAXMAN 547 (SC). SECTION 5 READ WITH SECTIONS 119 AND 145 OF THE I NCOME-TAX ACT 1961 - INCOME - ACCRUAL OF - ASSESSMENT YEAR 1 981-82 - WHETHER IN VIEW OF CBDT CIRCULAR DATED 9-10-1984 INTEREST ON A LOAN WHOSE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVERED BY ASSESSEE-BANK FOR LAST THREE YEARS BUT HAS BEEN KEPT IN A SUSPENSE ACCOUNT AND HAS NOT BEEN BROUGHT TO PROFIT AND LOSS ACCOUNT OF ASSESSEE CANNOT BE INCLUDED IN INCOME OF ASSESSEE - HELD YES - WHETHER CBDT CIRCULAR DATED 9-10-1984 IS IN CONFLICT WITH PROVISIONS OF SECTION 145 - HEL D NO. 10. THE PRINCIPLES LAID DOWN ABOVE CAN BE SUMMARI ZED AS : A) THAT MERELY BECAUSE ASSESSEE WAS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING IT COULD NOT BE HELD THAT INC OME HAD ACCRUED TO IT. B) EARNING OF THE INCOME WHETHER ACTUAL OR NOTI ONAL HAS TO BE SEEN FROM THE VIEWPOINT OF A PRUDENT ASSESSEE. I F IN GIVEN FACTS AND CIRCUMSTANCES THE ASSESSEE DECIDES NOT TO CHARGE INTEREST IN ORDER TO SAFEGUARD THE PRINCIPAL AMOUNT AND ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 18 OF 19 ENSURE ITS RECOVERY IT CANNOT BE SAID THAT HE HAS ACTED IN A MANNER IN WHICH NO REASONABLE PERSON CAN ACT. C) THE GUIDANCE NOTE ON ACCRUAL OF INCOME ON ACCO UNTING ISSUED BY THE ICAI LAYS DOWN THAT WHERE THE ULTIMAT E COLLECTION WITH REASONABLE CERTAINTY IS LACKING TH E REVENUE RECOGNITION IS TO BE POSTPONED TO THE EXTENT OF UNC ERTAINTY INVOLVED. IN TERMS OF THE GUIDANCE NOTE IT IS APPR OPRIATE TO RECOGNIZE REVENUE IN SUCH CASES ONLY WHEN IT BECOME S REASONABLY CERTAIN THAT ULTIMATE COLLECTION WILL BE MADE. D) NON-RECOGNITION OF INCOME ON THE GROUND THAT T HE INCOME HAD NOT REALLY ACCRUED AS THE REALISABILITY OF THE PRINCIPAL OUTSTANDING ITSELF WAS DOUBTFUL IS LEGALLY CORRECT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING WHEN THE SAME IS I N ACCORDANCE WITH AS-I NOTIFIED BY THE GOVERNMENT E) IT IS ONE OF THE FUNDAMENTAL PRINCIPLES OF ACC OUNTING THAT AS A MEASURE OF PRUDENCE AND FOLLOWING THE PR INCIPLE OF CONSERVATISM THE INCOMES ARE NOT TAKEN INTO ACCOUN T TILL THE POINT OF TIME THAT THERE IS A REASONABLE DEGREE OF CERTAINTY OF ITS REALIZATION WHILE ALL ANTICIPATED LOSSES ARE T AKEN INTO ACCOUNT AS SOON AS THERE IS A POSSIBILITY HOWSOEVE R UNCERTAIN OF SUCH LOSSES BEING INCURRED. F) THE PROVISIONS OF SECTION 145(1) ARE SUBJECT TO INTER ALIA MANDATE OF AS-1 WHICH ALSO PRESCRIBES THAT ACCOUNT ING POLICIES ADOPTED BY AN ASSESSEE SHOULD BE SUCH SO A S TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFA IRS OF THE BUSINESS PROFESSION OR VOCATION IN THE FINANCIAL S TATEMENTS PREPARED AND PRESENTED ON THE BASIS OF SUCH ACCOUNT ING POLICIES. IN THE NAME OF COMPLIANCE WITH SECTION 1 45(1) IT CANNOT BE OPEN TO ANYONE TO FORCE ADOPTION OF ACCOU NTING POLICIES WHICH RESULT IN A DISTORTED VIEW OF THE AF FAIRS OF THE BUSINESS. THEREFORE EVEN UNDER THE MERCANTILE METH OD OF ACCOUNTING AND ON PECULIAR FACTS OF INSTANT CASE THE ASSESSEE WAS JUSTIFIED IN FOLLOWING THE POLICY OF N OT RECOGNIZING THESE INTEREST REVENUES TILL THE POINT OF TIME WHEN THE UNCERTAINTY TO REALIZE THE REVENUES VANISHED. 11. IN THE PRESENT ASSESSEE CASE THERE IS UNCERTAI NTY IN REALIZING THE PRINCIPLE ITSELF. THE PRINCIPLES LAID DOWN IN R ECOGNIZING THE INCOME EQUALLY APPLIES TO THE FACTS OF THE CASE. FO R THESE REASONS WE ARE OF THE OPINION THAT NO NOTIONAL INTEREST CAN BE BROUGHT TO TAX. ACCORDINGLY GROUNDS RAISED ON THIS ISSUE ARE ALLOWED. ITA NOS.1119 TO 1124 RIA HOLDINGS LIMITED MUMBAI PAGE 19 OF 19 12. SINCE SIMILAR ISSUE WAS ALSO CONTESTED IN OTHER YEARS AND AO MADE SIMILAR ADDITIONS IN EACH OF THE ASSESSMENT YE ARS FOR THE REASONS STATED ABOVE WE ALLOW ALL THE GROUNDS ON T HIS ISSUE. AO IS DIRECTED TO DELETE THE AMOUNT OF INTEREST BROUGHT T O TAX IN RESPECTIVE YEARS. 13. IN THE RESULT APPEAL IN ITA NO. 1123/MUM/2011 IS ALLOWED AND OTHER APPEALS ITA/ 1119 TO 1122 AND 1124 TO ARE CON SIDERED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY 2012. SD/- SD/- (AMIT SHUKLA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED 27 TH JULY 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR D BENCH ITAT MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI