The DCIT, Circle-10,, Ahmedabad v. M/s. Intercontinental India, Ahmedabad

ITA 2033/AHD/2007 | 2003-2004
Pronouncement Date: 22-10-2010 | Result: Dismissed

Appeal Details

RSA Number 203320514 RSA 2007
Assessee PAN AAAFI5170K
Bench Ahmedabad
Appeal Number ITA 2033/AHD/2007
Duration Of Justice 3 year(s) 5 month(s) 11 day(s)
Appellant The DCIT, Circle-10,, Ahmedabad
Respondent M/s. Intercontinental India, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 22-10-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 22-10-2010
Date Of Final Hearing 30-09-2010
Next Hearing Date 30-09-2010
Assessment Year 2003-2004
Appeal Filed On 11-05-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI JM AND N. S. SAINI AM) ITA NO. 2033/AHD/2007 & 600 AND 601/AHD/2009 A. Y: 2003-04 2004-05 AND 2005-06 THE D. C I. T. CIRCLE-10 NARAYAN CHAMBERS ASHRAM ROAD AHMEDABAD VS M/S. INTERCONTINENTAL INDIA 8 TH FLOOR NR. MITHAKALI CIRCLE NAVRANGPURA AHMEDABAD PA NO. AAAFI 5170 K (APPELLANT) (RESPONDENT) APPELLANT BY SHRI ANIL KUMAR DR RESPONDENT BY SHRI S. N. SOPARKAR AND SMT. URVASHI SHODHAN AR O R D E R PER BHAVNESH SAINI: THIS ORDER SHALL DISPOSE OF ALL THE ABOVE DEPARTMENTAL APPEALS WHICH HAVE BEEN FILED ON SIMILAR GROUNDS OF APPEALS. THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES MAINLY ARGUED IN ITA NO. 2033/AHD/2007 FOR ASSESSME NT YEAR 2003- 04 AND SUBMITTED THAT THE DECISION IN THAT CASE MAY BE FOLLOWED IN OTHER DEPARTMENTAL APPEALS BECAUSE THE CIT (A) HAS FOLLOWED HIS ORDER FOR ASSESSMENT YEAR 2003-04 IN THE SUBSEQUENT ASSESSMENT YEARS UNDER APPEAL. THE APPEALS ARE ACCORDINGLY DIS POSED OF. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE 2 MATERIAL AVAILABLE ON RECORD. WE FIRST TAKE ITA NO .2033/AHD/2007 FOR DISPOSAL. ITA NO.2033/AHD/2007(DEPARTMENTAL APPEAL) A. Y. 2003-04 3. GROUND NO.1 IS REGARDING DELETION OF ADDITION ON ACCOUNT OF ACCRUED INCOME CHARGEABLE AT 18% AND NOT SHOWN BY T HE ASSESSEE AMOUNTING TO RS. 14 09 11 659/-. 4. THE ADDITION HAS BEEN DISCUSSED BY THE AO I N PARA 4 AND 5 OF THE ASSESSMENT ORDER. THE A.O. HAS STATED THAT THE ASSESSEE HAD ADVANCED HUGE LOANS TO M/S. BHANSALI ASSOCIATES. H E HAS STATED THAT IN THE EARLIER YEARS THE ASSESSEE HAD SHOWN IN TEREST INCOME FROM THESE ADVANCES BUT DURING THE YEAR UNDER CONSIDERAT ION THE ASSESSEE HAD NOT SHOWN ANY INTEREST INCOME THOUGH THE ADVANC ES WERE CONTINUED TO BE MADE WITH THIS GROUP. HE HAD THERE FORE ISSUED SHOWN CAUSE NOTICE TO THE ASSESSEE. THE ASSESSEES SUBMISSIONS ARE REPRODUCED IN PARA 4 OF THE ASSESSMENT ORDER AN D ARE DEALT WITH BY THE ASSESSING OFFICER IN PARA 5 OF THE ASSESSMEN T ORDER. THE A.O. HAS STATED THAT THE SUBMISSION OF THE ASSESSEE THAT THE INTEREST RATE WOULD BE DECIDED BY BOTH THE PARTIES IN THE MONTH O F MARCH EVERY YEAR DEPENDING UPON THE PROFITABILITY OF THE OTHER PARTY IS AN AFTER THOUGHT STORY TO EVADE TAX LIABILITY. FURTHER DURI NG THE F.Y. 2002-03 THE FINANCIAL POSITION OF THE SAID FIRM WAS NOT GOO D AND THE SAID FIRM WAS NOT IN A POSITION TO PAY INTEREST BECAUSE IT HA S NOT EARNED SO MUCH OF INCOME AS WAS EARNED IN THE PREVIOUS/ PAST YEARS. THEREFORE IN THE MONTH OF MARCH 2003 BOTH THE FI RMS HAVE DECIDED 3 NOT TO CHARGE/PAY INTEREST ON SAID LOAN AND THEREFO RE INTEREST HAS NOT AT ALL ACCRUED TO THE ASSESSEE FIRM AND IT HAS NOT SHOWN THE SAME AS INCOME IS NOT CONVINCING AND TENABLE. IN PARA 5 1 OF THE ASSESSMENT ORDER THE A.O. HAS ST ATED THAT INTEREST NEVER BECAME SUBJECT TO CONDITION THAT IT WILL CHARGE INTEREST ONLY IF THE RECIPIENT WILL EARN ON SUCH FUND ADVAN CED BY THE ASSESSEE. THE ASSESSEE HAS HUGE INTEREST BEARING LO ANS AND CREDIT FACILITIES OF THE BANK AND IT HAS BEEN PAYING INTER EST TO THE EXTENT OF RS.24 93 51 491/-. THEREFORE NO PRUDENT BUSINESSMA N COULD FORGO LARGE AMOUNT OF INTEREST AT THE COST OF ITS ECONOMY . THE RECIPIENT PARTY DOES NOT BECOME BANKRUPT SO SUCH TRANSACTION WOULD HAVE TO BE SETTLED IN A COMPELLING POSITION. M/S. BHANSALI ASSOCIATES CONTINUED TO ENJOY THE CREDIT FACILITY WITHOUT PAYI NG ANY INTEREST AND IT IS A FACT THAT IT HAD EARNED PROFIT. IT IS A CLEAR CASE OF FOREGOING ITS RIGHT TO RECEIVE INTEREST IN FAVOUR OF M/S. BHANSALI ASSO CIATES FOR WHICH THE REASON IS BEST KNOWN TO THE ASSESSEE. THE ASSESSING OFFICER HAS FURTHER OBSERVED THAT THE ASSESSEE HAD ADVANCED LOA N TO M/S. BHANSALI ASSOCIATES WHICH WAS SUBJECT TO CHARGING OF INTEREST AND IT WAS NEVER DECIDED EARLIER NOT TO CHARGE ANT INTERES T. EVEN THERE IS NO WRITTEN AGREEMENT/ CONTRACT IN THIS REGARD AND THER E MAY NOT BE ANY EXISTENCE OF SUCH TYPE OF ACCOMMODATIVE CONTRACTS A S PER THE LAW. AS THE ASSESSEE HAD FOLLOWED MERCANTILE SYSTEM OF A CCOUNTING INTEREST HAS TO BE CHARGED ON THE OUTSTANDING LOAN WHICH IS SUBJECT TO CHARGING OF INTEREST. THE ASSESSEE HAS NOT DEVIATED FROM ITS METHOD OF ACCOUNTING AND IT OUGHT TO HAVE CRE DITED ITS ACCOUNT 4 WITH INTEREST BY MAKING CORRESPONDING ENTRIES IN THE ACCOUNT OF RESPECTIVE PARTY. THE ASSESSING OFFICER HAS FURTHER OBSERVED IN PARA 5.2 WITH REGARDS TO VARIOUS DECISIONS RELIED UPON BY THE ASS ESSEE THAT SUCH DECISIONS DO NOT HELP THE ASSESSEE FROM NOT OFFERIN G ANY INTEREST INCOME DUE TO FOLLOWING REASONS:- (A) ADMITTEDLY ADVANCES WERE MADE FOR EARNING THE I NTEREST INCOME AND THEREFORE ALWAYS SUBJECT TO CHARGING IN TEREST. (B) THE ADVANCES DO NOT BECOME BAD OR STICKY ADV ANCES SO NONE OF THE JUDGMENT IS APPLICABLE TO THE ASSESSEE' S CASE. (C) THE CONCEPT OF REAL INCOME SHOULD NOT BE S O READ AS TO DEFEAT THE PROVISIONS OF LAW. (D) THE ASSESSEE DOES NOT ESTABLISH THAT THERE WAS IMPROBABILITY OF RECOVERY OF ADVANCES/ INTEREST. (E) THE ASSESSEE FAILS TO ESTABLISH OBJECTIVE LY TO THE SATISFACTION TO THE EFFECT OF PREVENTING THE ACCRUA L OF INTEREST AS REAL INCOME. IN THE TAXING STATUE WHERE LAW IS CLE AR CONSIDERATIONS OF EVEN INJUSTICE DO NOT AFFORD JUST IFICATION FOR EXEMPTING INCOME FROM TAXATION. (F) TAXABILITY/ ACCRUAL OF PARTICULAR INTERE ST INCOME CANNOT BE MUTUALLY DECIDED BY PAYER AND RECIPIENT AS CONVE NIENT TO THEM IN ORDER TO DEFEAT THE PROVISIONS OF LAW. 5 IN PARA 5.3 OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS OBSERVED THAT A SURVEY U/S 133A .OF THE ACT WAS CAR RIED OUT IN THE CASE OF BHANSALI ASSOCIATES ON 13/9/2005 DURING TH E COURSE OF WHICH THE STATEMENTS WERE RECORDED AND FINANCIAL TRANSACT IONS WITH M/S INTERCONTINENTAL INDIA IN WHOSE NAME CREDIT OF MOR E THAN RS.75 CRORES WAS OUTSTANDING WERE QUESTIONED. THE ASSESSI NG OFFICER HAS FURTHER OBSERVED THAT IN THE CONSEQUENT ENQUIRY IT WAS GATHERED THAT THE SAID BLIANSALI ASSOCIATES HAD REGULARLY PAID IN TEREST UP TO ASSESSMENT YEAR 2002-2003 AND IT WAS OFFERED FOR TA X BY THE ASSESSEE. FROM A.Y. 2003-2004 THE ASSESSEE HAS NOT SHOWN INTEREST INCOME ON SUCH HUGE ADVANCE. AS THE ACCOUN T IS RUNNING ACCOUNT AND NOT A CLOSED ACCOUNT THE INTEREST ACCR UED TO THE ASSESSEE IS TAXABLE. AS ADVANCE/ LOAN HAVE NOT BECO ME IRRECOVERABLE ACCRUAL OF INCOME CANNOT BE EXCLUDED . THE RELINQUISHMENT OF INCOME AFTER ACCRUAL WILL NOT MAK E THIS INCOME UNREAL. ACCRUAL OF INTEREST TAKES PLACE ON DAY TO D AY BASIS WHICH IS AUTOMATIC AND THE ASSESSEE CANNOT STOP IT AS PER IT S CONVENIENCE AND WHIMS. THE A O FURTHER OBSERVED THAT AS THE ASSESSE E HAS CONTINUED ADVANCING OF FURTHER AMOUNT TO THE SAID PARTY IN SU BSEQUENT YEAR ALSO IT IS ESTABLISHED THAT THE ASSESSEE HAD COMME RCIAL EXPEDIENCIES AND BUSINESS INTEREST WITH THAT PARTY. THEREFORE T HERE WAS NO REASON FOR NOT CHARGING OF THE INTEREST. THE A O RELIED UP ON SEVERAL DECISIONS IN SUPPORT OF HIS OBSERVATION AND ACCORDINGLY MADE ADDITION OF ACCRUED INTEREST. THE ASSESSEE IN THE STATEMENT OF FACT FILED ALONG WITH THE GROUND OF APPEAL SUBMITTED THAT IT HAD STA RTED ADVANCING LOAN TO M/S. BHANSALI ASSOCIATES IN ASSESSMENT YEAR 2000 -01. WHEN THE ASSESSEE HAD GIVEN LOAN TO THE SAID FIRM IT WAS AG REED BETWEEN THE 6 PARTIES THAT M/S. BHANSALI ASSOCIATES WILL COMPENSA TE THE ASSESSEE BY WAY OF ITS SHARE OF PROFIT EITHER IN THE FORM OF MUTUALITY AGREED LUMP SUM AMOUNT TO BE DETERMINED AT THE END OF THE WORKING OF THE FINANCIAL YEAR OR IN THE FORM OF INTEREST AT THE RA TE TO BE MUTUALLY AGREED BETWEEN THE PARTIES AT THE END OF THE WORKI NG OF THE FINANCIAL YEAR I.E. IN THE MONTH OF EVERY YEAR DEPENDING UPO N THE PROFITABILITY OF OTHER PARTY. SUCH MUTUAL UNDERSTANDING WAS PRESE NT BETWEEN THE PARTIES FROM VERY FIRST DAY WHEN THE AMOUNT WAS ADV ANCED. UP TO ASSESSMENT YEAR 2002-03 BHANSALI ASSOCIATES HAVE EA RNED INCOME AND HAD SOUND FINANCIAL POSITION THEREFORE BOTH T HE PARTIES DECIDED TO CHARGE/RECOVER INTEREST ON PRODUCT BASIS ON THE AMOUNT GIVEN BY THE ASSESSEE. FURTHER SUCH INCOME HAS BEEN OFFERED FOR INCOME TAX BY THE ASSESSEE IN EACH ASSESSMENT YEAR HOWEVER D URING THE FINANCIAL YEAR 2002-2003 RELEVANT TO A.Y. 2003-2004 THE FINANCIAL POSITION OF SAID FIRM WAS NOT GOOD AND SAID FIRM WA S NOT IN A POSITION TO PAY INTEREST BECAUSE SAID FIRM HAS NOT EARNED SO MUCH OF INCOME AS WAS EARNED IN PREVIOUS YEARS. IN A VIEW OF ME FI NANCIAL POSITION M/S. BHANSALI ASSOCIATES SHOWED ITS INABILITY TO PA Y INTEREST. IN VIEW OF SUCH CONDITIONS OF THEIR MUTUAL UNDERSTANDING AN D IN VIEW OF INABILITY OF THE M/S. BHANSALI ASSOCIATES TO PAY IN TEREST THE ASSESSEE AGREED NOT TO CHARGE OF INTEREST AND ACCORDINGLY NO INTEREST HAD IN FACT ACCRUED TO THE ASSESSEE FIRM. IT IS STATED THA T ALL SUCH MATERIAL/ FACTS WERE SUBMITTED TO ASSESSING OFFICER BUT HE HA S FAILED TO APPRECIATE THE SAME. FURTHER AS INTEREST HAS NOT A T ALL ACCRUED TO ASSESSEE FIRM IT HAS NOT SHOWN THE SAME AS INCOME. THE ASSESSEE FURTHER SUBMITTED THAT WHEN IT HAS NOT RECEIVED THE INTEREST INCOME THE HYPOTHETICAL INCOME SHOULD NOT BE TAXED. THE ASSESSEE STATED 7 THAT THERE CANNOT BE ANY PRESUMPTION THAT SINCE THE ASSESSEE HAS RECEIVED INTEREST IN EARLIER YEAR HE SHOULD RECEIV E THE SAME IN CURRENT YEAR ALSO. 4.1 WITH REFERENCE TO OBSERVATIONS MADE BY THE A.O. THE ASSESSEE EXPLAINED AS UNDER: (A) THE ASSESSEE HAS FURTHER STATED THAT THOUGH TH ERE IS NO WRITTEN AGREEMENT BETWEEN BOTH THE PARTIES CORRESP ONDENCE/ COMMUNICATION HAVE BEEN MADE BETWEEN THE ASSESSEE A ND M/S. BHANSALI ASSOCIATES REGARDING AMOUNT ADVANCED BY TH E ASSESSEE TERMS AND CONDITIONS REGARDING SUCH ADVANCE WHETHE R INTEREST TO BE CHARGED OR NOT TO BE CHARGED PERCENTAGE OF INTERES T TO BE CHARGED. IT WAS FURTHER STATED BY THE ASSESSEE THAT NO WRITTEN AGREEMENT/ CONTRACT EXISTS THIS CANNOT BE THE BASE THAT INTER EST HAS ACCRUED TO ASSESSEE. FURTHER THE UNDERSTANDING BETWEEN THE AS SESSEE AND THE OTHER PARTY CLEARLY SHOWS THAT M/S. BHANSALI ASSOCI ATES HAVE SHOWN THEIR INABILITY TO PAY INTEREST FOR AY. 2003-2004 DUE TO LOWER PROFITS EARNED BY IT IN SUCH YEAR AND ONLY ON THE BASIS OF THE SAME BOTH THE PARTIES HAVE AGREED NOT TO CHARGE/GIVE INTEREST ON SUCH ADVANCES GIVEN. THE ASSESSEE AT PARA 1.2 OF THE STATEMENT OF FACTS HAS FURTHER STATED AS UNDER:-. 'APPELLANT STATES THAT WHEN IT HAS NOT SHOWN INTEREST INCOME IN HIS BOOKS OF ACCOUNTS BORROWING COMPANY HAS NOT SHOWN THE INTEREST LIABILITY ON ACC OUNT OF INTEREST PAYABLE TO THE APPELLANT AND HAS NOT CLAIM ED INTEREST EXPENDITURE INTEREST INCOME SHOULD NOT BE TAXED ON THE 8 BASIS OF ACCRUAL. EVEN DURING THE COURSE OF SURVEY PROCEEDINGS AT THE PREMISES OF BHANSALI ASSOCIATES THE PROPRIETOR OF THE FIRM HAS STATED THAT NO INTEREST HAS BEEN PAID/ ACCRUED TO PAY FOR A.Y. 2003-2004. THEREFORE CONTENTION OF ASSESSING OFFICER THAT THE APPELLANT HAS CONCEALED INCOME OF INTEREST IS ON WRONG PRESUMPTIO N.' (B) WITH REGARD TO THE OBSERVATION OF THE ASSE SSING OFFICER THAT IF NO INTEREST WAS CHARGEABLE WHY THE ASSESSEE HAD AD VANCED MONEY DURING AY. 2003-04 AND ONWARDS THE ASSESSEE HAD VIDE PARA 1.3 OF STATEMENT OF FACTS STATED AS UNDER: 'IN THIS CONNECTION APPELLANT STATES THAT RATE OF COMPENSATION TO BE PAID BY BHANSALI ASSOCIATES TO APPELLANT FIRM FOR THE AMOUNT GIVEN BY APPELLANT HA VE TO BE DECIDED IN THE MONTH OF MARCH ONLY. AS THE BHANSALI ASSOCIATES HAS NOT EARNED INCOME AS COMPARED TO PREVIOUS YEAR IN ITS BUSINESS & WAS FACING FINANCIA L CONSTRAINTS IT WAS DECIDED NOT TO CHARGE INTEREST IN A.Y.2003-2004. FURTHER APPELLANT HAS ADVANCED MONE Y IN SUBSEQUENT YEAR TO BHANSALI ASSOCIATES TO COME OUT FROM FINANCIAL CONSTRAINTS FACED BY SAID PARTY SO APPELL ANT WILL BE ABLE TO RECOVER ITS COMPENSATION FOR ADVANCE GIV EN TO SAID PARTY.' (C) WITH REGARD TO MERCANTILE SYSTEM OF ACCOUN TING AS OBSERVED BY THE ASSESSING OFFICER THE ASSESSEE AT PARA 1.4 OF ITS STATEMENT OF FACTS HAS STATED AS UNDER: 9 'APPELLANT FURTHER SUBMITS THAT IT IS UNDOUBTEDLY CORRECT THAT THE STATUTE STIPULATES THAT THE INCOME SHALL BE COMPUTED ON THE BASIS OF THE SYSTEM OF ACCOUNTING 'REGULARLY' FOLLOWED BY THE APPELLANT. IT SHOULD ME AN DURING THE PERIOD UNDER CONSIDERATION THE SAID MET HOD SHOULD BE FOLLOWED. IT MAY BE NOTED THAT THERE IS N O CHANGE IN OUR ACCOUNTING SYSTEM. IN FACT NO INTEREST HAS ACCRUED AND LEGALLY ALSO THE APPELLANT FIRM IS NOT ENTITLE D TO IT AND THEREFORE IT HAS NOT ACCOUNTED FOR. IN SPITE OF THIS IF IT IS TREATED AS CHANGE THEN ALSO APPELLANT SUBMITS THAT THE PROVISION OF INCOME TAX CANNOT BE INTERPRETED TO MEAN THAT ONCE A SYSTEM OF ACCOUN TING IS ADOPTED IT CAN NEVER BE CHANGED. 'REGULAR' IN THE PRESENT CONTEXT CANNOT MEAN PERMANENT. IT HAS NOT BEEN POIN TED OUT WITH REFERENCE TO ANY PROVISION OF THE ACT THAT A CHANGE IS IMPERMISSIBLE OR BARRED EVEN WHEN IT IS WARRANTE D BY THE EXISTING SITUATION. IT IS FURTHER STATED THAT NO HYPOTHETICAL OR THEORE TICAL INCOME CAN BE BROUGHT TO TAX. THE INCOME MUST ACCRU E IN THE REAL SENSE. MERELY BECAUSE THEORETICALLY IN ACC ORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING THE INCOM E CAN BE SAID TO ACCRUE NO TAX CAN BE LEVIED ON SUCH BAS IS. THE REALITY OF THE SITUATION AND THE FACTS CANNOT BE IG NORED. IN VIEW OF THE FACTS OF THE CASE AS INTEREST INCOME H AS NOT ACCRUED TO APPELLANT AT ALL APPELLANT HAS NOT ACCO UNTED THE 10 SAME AS INCOME EVEN IF IT IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING. FURTHER ACT OF NOT PROVIDING INTEREST INCOME DOES NOT MEAN THAT' APPELLANT HAS DEVIATED FROM HIS MERCANTILE SYSTEM OF ACCOUNTING.' THE ASSESSEE HAS RELIED ON THE DECISION OF CALCUTTA HIGH COURT IN CASE OF SHRI KEVALCHAND BAGRI VS. I.T.O. 183 ITR 207 WHEREBY THE COURT HAS HELD THAT INTEREST INCOME MAY HAVE ACCRUE D ACCORDING TO THE MERCANTILE SYSTEM OF ACCOUNTING BUT IN OUR VIEW SUCH ISSUE HAS TO VIEW IN THE CONTEXT OF COMMERCIAL AND BUSINESS REAL ITY OF THE SITUATION. (D) THE ASSESSEE ALSO SUBMITTED THAT WORDS 'ACCRUED ' 'ARISES' AND 'IS RECEIVED' ARE THREE DISTINCT TERMS AND AS PER THE D ECISION OF JAI HIND TRAVELS P. LTD. 243 ITR 451 (KERALA HIGH COURT) TH E ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE INCOME THE INCOME ACCRUES TO HIM THOUGH THE SAME MAY BE RECEIVED LATER. THE HIGH COU RT HAS FURTHER OBSERVED THAT A MERE CLAIM TO INCOME WITHOUT AN ENFORCEABLE RIGHT CANNOT BE REGARDED AS ACCRUED INCOME FOR THE PURPOS E OF THE ACT. THE ASSESSEE HAS ALSO RELIED ON THE DECISION OF HON OURABLE SUPREME COURT IN CASE OF E. I. SASSOON & CO. LTD. VS. C.I.T . 26 ITR 27 WHERE IT WAS LAID DOWN THAT INCOME MUST BE HELD TO ACCRUE AT THE POINT OF TIME WHEN A DEBT BECOMES DUE. THUS THE WORD 'ACCRUE' IS INTERCONNECTED WITH INCOME BECOMING DUE BECAUSE IT IS ONLY WHEN SO METHING BECOMES DUE TO THE ASSESSEE AND APPEARS CRYSTALLIZE D AS A DEBT IN HIS FAVOUR THAT THE RIGHT TO RECEIVE CAN BE SAID TO HAVE EMERGED. UNTIL THEN THERE IS NO ACCRUAL OF INCOME. 11 (E) THE ASSESSEE FURTHER STATED THAT THE DECISION O F THE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE V. CI T [1986J 158 ITR 10 RELIED ON BY ASSESSING OFFICER REITERATES THE P RINCIPLES OF REAL INCOME AND IT WAS EMPHASIZED THAT THE CONDUCT OF TH E ASSESSEE WHICH WAS REFLECTED IN MAKING ENTRIES IN THE BOOKS OF ACCOUNT IS EVIDENCED OF WHETHER SUCH INCOME ACCRUED OR NOT. T HE DISTINGUISHING FEATURE OF THE AFORESAID CASE I.E. STATE BANK OF TRAVANCORE (SUPRA) IS THAT THE BANK DEBITED THE AM OUNT OF INTEREST TO THE ACCOUNT OF THE DEBTORS BUT INSTEAD OF CREDITING THE PROFIT AND LOSS ACCOUNT AS INTEREST INCOME TOOK INTO BALANCE SHEET IN SUSPENSE ACCOUNT. THIS CONDUCT OF THE BANK IN THE SAID CASE CLEARLY SHOWED THAT IT HAD TREATED THE INTEREST INCOME AS HAVING A CCRUED TO IT. THE OTHER DECISION OF BANARAS STATE BANK VS. CIT 210 IT R 129 RELIED UPON BY ASSESSING OFFICER; FACTS ARE SIMILAR TO DEC ISION OF STATE BANK OF TRAVANCORE. HOWEVER IN THE CASE OF ASSESSEE IT HAS NOT DEBITE D ANY INTEREST FOR THE AMOUNT GIVEN TO BHANSALI ASSOCIATE S NOR THE SAID FIRM HAS CREDITED ACCOUNT OF THE ASSESSEE BY THE AMOUNT OF INTEREST PAYABLE. NO SUSPENSE ACCOUNT HAS BEEN CREATED AS WA S DONE IN AFORESAID TWO CASES. NO ENTRY IN THE BOOKS OF ACCOU NTS FOR CHARGING ANY SUCH INTEREST/ COMPENSATION WAS PASSED AT ALL. THE AFORESAID TWO DECISIONS RELIED UPON BY THE ASSESSING OFFICER ARE NOT SIMILAR TO THE FACTS OF THE ASSESSEE AND HENCE THE SAME CANNOT BE APPLIED IN CASE OF THE ASSESSEE IN WRONG MANNER. FURTHER IT IS THE DECISION OF THE 12 PARTNERS NOT TO CHARGE INTEREST CONSIDERING THE FAC TS AND CIRCUMSTANCES. (F) WITH REGARD TO OTHER DECISIONS RELIED UPON BY THE ASSESSING OFFICER THE ASSESSEE HAS STATED AS UNDER: - 'APPELLANT FURTHER STATES THAT DECISION OF WESTERN INDIA PAINTS AND COLOUR COMPANY VS. CIT 206 ITR 359 RELIED ON BY ASSESSING OFFICER IS NOT APPLICABLE TO PRESENT FACTS OF CASE OF APPELLANT BECAUSE IN SUCH CASE CORRESPONDENCE REGARDING WAIVER OF INTEREST WAS MADE EVEN AFTER SIX MONTHS AFTER EXPIRY OF ACCOUNTING YEAR WHEREAS IN CASE OF APPELLANT DECISION REGARDING NOT TO CHARGE/ RECOVE R INTEREST HAD BEEN MADE IN THE MONTH OF MARCH 2003. FURTHER NO ACCOUNTING ENTRY FOR SUCH INTEREST HAS BEEN PASSED IN THE BOOKS OF ACCOUNT THEREFORE NO QUESTION OF WAIVER COMES IN CASE OF APPELLANT FIRM. EVEN IN CASE OF CIT VS. HINDUSTAN MOTORS LIMITED 20 2 ITR 839 RELIED ON BY ASSESSING OFFICER IS NOT APPLICABLE AS DECISIONS REGARDING NON CHAINING OF INTEREST ON ADVANCE GIVEN TO SISTER CONCERN WAS MAD E IN THE MEETING OF BOARD OF DIRECTORS WHICH WAS SUBSEQUENT TO THE DATE OF FINANCIAL YEAR WHEREAS IN CASE OF APPELLANT SAME WAS MADE DURING THE FINANCIAL YEAR.' 13 (G) THE ASSESSEE HAS LASTLY STATED THAT IN SUCH CIR CUMSTANCES INCOME CANNOT BE ASSESSED ONLY BECAUSE IT IS FOLLOW ING MERCANTILE SYSTEM OF ACCOUNTING AND AS INCOME HAS NOT AT ALL A CCRUED TO IT AND EVEN NO ENTRY HAS BEEN MADE IN THE FINANCIAL ACCOU NT ADDITION OF SUCH ACCRUED INTEREST MADE BY THE ASSESSING OFFICER REQUIRES TO BE DELETED. 5. THE LEARNED CIT (A) CONSIDERING THE SUBMISSION O F THE ASSESSEE AND MATERIAL ON RECORD IN THE LIGHT OF THE FINDING OF THE A O DELETED THE ADDITION. HIS FINDINGS ARE REPRODUCED A S UNDER: I HAVE CAREFULLY CONSIDERED OBSERVATIONS AND FINDINGS OF THE AO IN THE ASSESSMENT ORDER AND THE ARGUMENTS OF THE LD. AUTHORIZED REPRESENTATIVE FOR THE APPELLANT. I HAVE ALSO CAREFULLY GONE THROUGH T HE VARIOUS CASE LAWS RELIED UPON BY BOTH THE SIDES. TH E APPELLANT HAS ADVANCED LOANS TO M/S BHANSALI ASSOCIATES SINCE THE ASSESSMENT YEAR 2000-2001. EARLIER THE APPELLANT HAS BEEN CHARGING INTEREST FR OM M/S BHANSALI ASSOCIATES. HOWEVER FOR THE ASSESSMENT YEAR UNDER CONSIDERATION NO INTEREST HAS BEEN CHARGED. THEE ARGUMENT OF THE APPELLANT IS TH AT INTEREST HAS NOT BEEN CHARGED BY THE APPELLANT AS MUTUALLY AGREED BETWEEN M/S BHANSALI ASSOCIATES AND THE APPELLANT IN THE MONTH OF MARCH. THE PAYMEN T OF INTEREST WAS TO BE DECIDED DEPENDING ON THE PROFITABILITY OF THE OTHER PARTY. THE FINANCIAL POS ITION 14 OF M/S BHANSALI ASSOCIATES WAS NOT GOOD AND THAT PARTY WAS NOT IN A POSITION TO PAY INTEREST. I FIND FORCE IN THE ARGUMENTS OF THE COUNSEL FOR THE APPELLANT T HAT INTEREST DID NOT ACCRUE TO APPELLANT AT ALL AND FOR THIS REASON THE INTEREST INCOME AMOUNTING TO RS. 14.09 CRORES IS NOT LIABLE TO INCOME-TAX. I AM IN AGREEME NT WITH THE COUNSEL THAT IN THE ABSENCE OF WRITTEN AGREEMENT FOR CHARGING OF INTEREST IT DOES NOT MEA N THERE WAS NO UNDERSTANDING. THE A.O. HAS NOT BEEN ABLE TO BRING ANY MATERIAL ON RECORD TO CONTRADICT THE CONTENTION OF THE APPELLANT THAT THERE WAS A MUTUAL AGREEMENT BETWEEN THE TWO PARTIES IN THE MONTH OF MARCH EVERY YEAR AND ALSO WITH REGARD TO THE FINANC IAL POSITION OF M/S BHANSALI ASSOCIATES. I AGREE WITH T HE APPELLANT THAT INTEREST HAD NOT AT ALL ACCRUED TO T HE APPELLANT AND HENCE HYPOTHETICAL INCOME SHOULD NOT BE TAXED. THE AO HAS STATED THAT RELINQUISHMENT OF INCOME AFTER ACCRUAL DOES NOT MAKE IT UNREAL. THE ADVANCES HAVE NOT BECOME STICKY AND THE ASSESSEE DOES NOT SAY THERE WAS IMPROBABILITY OF RECOVERY OF ADVANCES. THIS ARGUMENT OF THE AO IS NOT CORRECT SINCE THERE IS NO ACCRUAL OF INCOME. THE RELINQUISHMENT OF INCOME OCCURS ONLY AFTER ACCRUAL. IT IS NOT THE APPELLANT'S CASE THAT THE ADVANCES HAVE BECOME STICKY. THE APPELLANT HAS ARGUED THAT INTERE ST INCOME HAS NOT ACCRUED AT ALL. 15 THERE IS FORCE IN THE ARGUMENT OF THE COUNSEL THAT DURING SURVEY U/S 133A M/S BHANSALI ASSOCIATES STAT ED THAT NO INTEREST HAS-BEEN PAID BY THEM TO THE APPEL LANT AND HAVE NOT CLAIMED ANY LIABILITY ON THAT ACCOUNT AND HENCE THERE IS NO CONCEALMENT OF INTEREST INCOME ON THE P ART OF THE APPELLANT. THERE IS FORCE IN THE ARGUMENT OF TH E COUNSEL THAT FURTHER ADVANCES HAVE BEEN GIVEN TO M/S BHANSA I ASSOCIATES IN ORDER TO RECOVER THE PRINCIPLE AMOUNT . I AGREE WITH THE APPELLANT THAT ONLY THE REAL INCOME CAN BE TAXED AND THE MERCANTILE SYSTEM OF ACCOUNTING COMES INTO PLAY ONLY WHEN THE INCOME ACCRUES TO THE APPELLANT. SINCE THE INCOME HAS NOT AL ALL ACCRUED IT CANNOT BE BROU GHT TO TAX UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THE SYSTEM OF ACCOUNTING ONLY DETERMINES WHEN THE INCOME ACCRU ES OR ARISES TO AN ASSESSEE. THE SYSTEM OF ACCOUNTING CAN NOT BRING TO TAX HYPOTHETICAL INCOME. THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF SHRI KEVAL CHAND BHAGRI VS ITO 183 ITR 207 RELIED UPON B Y THE APPELLANT IS APPLICABLE TO THE APPELLANT'S CASE. THE COUNSEL FOR THE APPELLANT HAS ALSO DISTINGUISHE D THE CASE LAWS RELIED UPON BY THE A.O. IN THE ASSESS MENT ORDER. IN THE CASE OF STALE BANK OF TRAVANCORE VS C IT 158 ITR 10 (SC) WHICH HAS BEEN RELIED UPON BY THE AO T HE BANK HAD DEBITED THE INTEREST TO THE ACCOUNT OF THE DEBTORS BUT DID NOT CREDIT THIS INTEREST TO THE P&L ACCOUNT BUT TOOK THE SAME TO THE SUSPENSE ACCOUNT IN THE BALANCE SHE ET. 16 THE SUPREME COURT HELD THAT CONDUCT OF THE BANK IN THE SAID CASE CLEARLY SHOWED THAT IT HAD TREATED THE IN TEREST INCOME AS HAVING ACCRUED TO IT. THE APPELLANT HAS N OT DEBITED THE ACCOUNT OF M/S BHANSALI ASSOCIATES AND HENCE THIS DECISION IS NOT APPLICABLE. THE APPELLANT HAS ALSO DISTINGUISHED THE OTHER CASE LAWS RELIED UPON BY TH E A.O. I THEREFORE HOLD THAT THE INCOME HAS NOT ACCRUED TO THE APPELLANT. NO SUCH ENTRY HAS BEEN MADE BY THE APPEL LANT IN ITS BOOKS OF ACCOUNT. THE ADDITION OF RS. 14.09 CRO RES MADE BY THE AO IS THEREFORE DELETED. THIS GROUND OF APP EAL IS ALLOWED. 6. LEARNED D R RELIED UPON ORDER OF THE A O. THE LE ARNED D R SUBMITTED THAT ASSESSEE RAISED LOAN FROM BANK AND P AID INTEREST. THE AMOUNT IS GIVEN TO THE SISTER CONCERN M/S. BHANSALI ASSOCIATES. INTEREST WAS CHARGED IN EARLIER YEARS AND THE A O D ISALLOWED INTEREST U/S 36(1) (III) OF THE IT ACT BUT ONE ADDITION IS M ADE ON THIS HEAD. SAME MERCANTILE SYSTEM IS FOLLOWED BY THE ASSESSEE. LEARNED D R FURTHER SUBMITTED THAT APART FROM ADVANCES GIVEN IN EARLIER YEARS FURTHER ADVANCES ARE ALSO PAID IN THE ASSESSMENT YE AR IN QUESTION. LEARNED D R SUBMITTED THAT THE FACTS WOULD SHOW IT WAS MUTUAL UNDERSTANDING TO AVOID PAYMENT OF TAXES. THERE WAS NO EVIDENCE THAT FINANCIAL POSITION OF M/S. BHANSALAI ASSOCIATES WAS NOT GOOD TO REPAY THE ADVANCE. THERE WAS NO WRITTEN AGREEMENT AT THE TIME OF GIVING ADVANCES OR AT THE TIME OF RELINQUISHMENT OF THE IN TEREST. THERE WAS NO IMPROBABILITY OF RECOVERY OF ADVANCES THEREFORE INCOME ACCRUED TO THE ASSESSEE. LEARNED D R SUBMITTED THAT THE DEC ISION OF THE 17 HON'BLE CALCUTTA HIGH COURT IN THE CASE OF KEWAL CH AND BAGRI (SUPRA) RELIED UPON BY THE LEARNED CIT (A) IS NOT A PPLICABLE TO THE FACTS IN THE CASE. THE LEARNED D R SUBMITTED THAT T HE ENTRIES IN THE BOOKS OF ACCOUNT WOULD NOT AFFECT TAXABILITY OF INC OME. IN THE ABSENCE OF EVIDENCES RULE OF CONSISTENCY MAY BE FOLLOWED. H E HAS SUBMITTED THAT THE DEPARTMENT IS NOT AWARE OF PARTIES FOR NON -CHARGING OF INTEREST. LEARNED D R SUBMITTED THAT IT WAS A COLOR ABLE DEVICE TO AVOID PAYMENT OF TAX THEREFORE A O RIGHTLY TAXED THE INTEREST INCOME ON ACCRUAL BASIS. 7. LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE HAS SUBMITTED THAT IN THE CASE OF M/S. BHANSALI ASSOCIATES THEY HAVE NOT CLAIMED A NY DEDUCTION OF THE EXPENDITURE ON ACCOUNT OF IMPUGNED INTEREST. HE HAS RELIED UPON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SHIV PRAKLASH JANAKRAJ & CO. PVT. LTD. VS CIT 112 I TR 872 IN WHICH IT WAS HELD THAT NO INTEREST HAD ACTUALLY BEEN PAID TO THE ASSESSEE COMPANY NOR HAD IT MADE ANY DEBIT ENTRY IN ITS BOOK S OF ACCOUNT. NO DATE WAS FIXED IN THE AGREEMENT OF LOAN REGARDING T HE PAYMENT OF INTEREST. IN THESE CIRCUMSTANCES EVEN IF THE ASSES SEE COMPANY HAD ADOPTED THE MERCANTILE SYSTEM OF ACCOUNTING IT CAN NOT BE SAID THAT INCOME FROM INTEREST HAD ACTUALLY ACCRUED TO IT. H E HAS ALSO SUBMITTED THAT PARTIES AGREED NOT TO CHARGE INTERES T PRIOR TO CLOSE OF THE YEAR AND IT WAS ONLY OLD AGREEMENT. HE HAS REFE RRED TO DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS SHIV PR AKASH JANAKRAJ & CO. 222 ITR 583 AND REFERRED TO THE FINDINGS THER EIN IN WHICH IT WAS HELD THAT INTEREST ON LOAN GIVEN UP AFTER EXPIRY OF RELEVANT ACCOUNTING 18 YEAR. FINDING BY THE TRIBUNAL THAT WAIVER WAS NOT B ASED ON COMMERCIAL CONSIDERATION INTEREST ACCRUED AND WAS ASSESSABLE IN THE HANDS OF THE ASSESSEE. HE HAS REFERRED OBSERVAT ION IN THIS CASE AND SUBMITTED THAT IN PRINCIPLE ONE DEPARTMENTAL AP PEAL WAS NOT PRESSED IN THE YEAR 1968-69 BECAUSE PRIOR TO THE CL OSE OF THE YEAR NO INTEREST WAS NOTED IN THE BOOKS OF ACCOUNT AND RESO LUTION WAS PASSED BEFORE EXPIRY OF THE ACCOUNTING YEAR THEREFORE NO INTEREST COULD BE CHARGED. HE HAS SUBMITTED THAT THE SAME PRINCIPLE WAS CONSIDERED BY ITAT AHMEDABAD A BENCH IN THE GROUP CASES OF M /S. JHAGADIA COPPER LTD. VS DCIT & ORS ITA NO. 3741/AHD/2007 ET C. DATED 13- 11-2009 IN WHICH IT WAS HELD THAT SINCE RESOLUTION OF WAIVER OF INTEREST WAS PASSED ON 08-11-2003 BEFORE CLOSE OF THE ACCOUN TING YEAR RELEVANT TO THE ASSESSMENT YEAR 2004-05 THEREFORE THERE IS A FORCE IN THE CONTENTION OF THE ASSESSEE THAT NO INTEREST CAN BE ASSESSED (COPY OF THE ORDER IS FILED). HE HAS ALSO RELIED U PON DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GODHRA ELECTRI CITY CO. LTD. VS CIT 225 ITR 746 ON THE PROPOSITION THAT INCOME TAX IS A LEVY ON INCOME AND NOT ON HYPOTHETICAL INCOME. HE HAS SUBMI TTED THAT SINCE THE PARTIES BEFORE THE CLOSE OF THE ACCOUNTING YEAR DECIDED NOT TO CHARGE INTEREST/PAY INTEREST THEREFORE LEARNED CI T (A) RIGHTLY DELETED THE ADDITION. HE HAS SUBMITTED THAT DUE TO THE ABOV E DECISION BOTH PARTIES HAVE NOT CHARGED INTEREST IN THEIR BOOKS OF ACCOUNT. HE HAS SUBMITTED THAT IN EARLIER YEAR INTEREST WAS CHARGED ON THE LAST DATE OF CLOSE OF THE FINANCIAL YEAR BECAUSE IT WAS DECIDED TO CHARGE/PAY INTEREST. THERE IS NO EVIDENCE ON RECORD WHETHER M/ S. BHANSALI ASSOCIATES PAID ANY INTEREST TO OTHER PARTIES. HE H AS REFERRED TO PB 78 AND 79 (A Y 2004-05) STATEMENT OF FACTS IN WHIC H IT WAS ALSO 19 EXPLAINED BEFORE LEARNED CIT (A) THAT ASSESSEE COMP ANY NOTED THAT IN EARLIER YEAR ALSO FINANCIAL POSITION OF M/S. BHA NSALI ASSOCIATE WAS NOT GOOD AND SHOWN THEIR INABILITY TO PAY THE INTER EST AND AS SUCH WITH THE MUTUAL UNDERSTANDING NO INTEREST WAS CHARGED. H E HAS SUBMITTED THAT WRITTEN CORRESPONDENCE WAS EXCHANGED BETWEEN T HE PARTIES AND COPIES OF SUCH CORRESPONDENCE WERE ALSO ENCLOSED WI TH THE STATEMENT OF FACTS FILED BEFORE LEARNED CIT (A). HE HAS SUBMITTED THAT ON THE BASIS BOTH THE PARTIES HAVE DECIDED NOT TO P AY/CHARGE INTEREST ON SUCH LOANS GIVEN BY THE ASSESSEE. HE HAS THEREF ORE SUBMITTED THAT LEARNED CIT (A) RIGHTLY DELETED THE ADDITION. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL ON RECORD. HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF JWALA PRASAD RADHAKRISHNA 198 ITR 415 HELD AS UNDER: WE ARE CLEARLY OF THE VIEW THAT IN THE ABSENCE OF ANY AGREEMENT WHETHER IN WRITING OR OTHERWISE WHETHER EXPRESS OR IMPLIED INTEREST COULD NOT BE ADDED TO THE INCOME OF THE ASSESSEE. BROADLY INTEREST CAN ACCRUE IN FAVOUR OF THE ASSESSEE EITHE R UNDER OR BY VIRTUE OF SOME STATUTE OR UNDER AGREEMENT WHICH MAY BE EITHER EXPRESS OR IMPLIED. THE POSITION IN THE PRESENT CASE IS THAT THERE IS N O MATERIAL WHATEVER TO SHOW THAT ANY SUCH AGREEMENT EXISTED. ON THE CONTRARY FROM THE CORRESPONDENCE EXCHANGED BETWEEN THE ASSESSEE AND THE DEPARTMENT AND OTHER MATERIAL ON THE RECORD IT IS APPARENT TH AT 20 THE ASSESSEE AND THE DEBTOR-COMPANIES WERE SISTER CONCERNS AND THAT THE ASSESSEE HAD STOPPED CHARGING INTEREST FROM THE DEBTOR-COMPANIES WITH EFFECT FROM JUNE 30 1969 FOR THE SIMPLE REASON TH AT THE DEBTOR-COMPANIES HAD RUN INTO FINANCIAL STRAITS AND CONSEQUENTLY THE ASSESSEE HAD STOPPED CHARGING ANY INTEREST ON THE ADVANCES. THE DEBTOR- COMPANIES HAD ALSO STOPPED CLAIMING ANY INTEREST BY WAY OF DEDUCTION. FURTHER THE FACT THAT THE ASSESSEE HAD BEEN PAID INTEREST BY THE DEBTOR-COMPANIES FOR A FEW YEA RS COULD NOT BY ITSELF AND WITHOUT MORE JUSTIFY THE INFERENCE THAT THERE WAS SOME AGREEMENT BETWEEN THE PARTIES FOR PAYMENT OF INTEREST. THAT BEING SO INTEREST COULD NOT BE SAID TO HAVE ACCRUED IN FAVOU R OF THE ASSESSEE. THE TRIBUNAL THEREFORE RIGHTLY S ET ASIDE THE ORDERS OF THE INCOME TAX OFFICER AND THE APPELLATE ASSISTANT COMMISSIONER. 8.1 HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS GOYEL M. G. GASES PVT. LTD. 303 ITR 159 CONSIDERING THE DECISIO N OF HON'BLE SUPREME COURT IN THE CASE OF GODHRA ELECTRICITY CO. LTD. 225 ITR 746 HELD AS UNDER: (II) THAT BOTH THE COMMISSIONER (APPEALS) AS WELL AS THE TRIBUNAL HAD COME TO THE CONCLUSION THA T 21 THERE WAS NO REAL ACCRUAL OF INTEREST. IT HAD BEEN NOTED THAT THE INTEREST HAD NOT EVEN BEEN RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THE ASSESSEE HAD ALSO ISSUED A NOTICE TO THE PARTIES UNDER SECTI ON 138 OF THE NEGOTIABLE INSTRUMENTS ACT 1881 FOR DISHONOUR OF CHEQUES ISSUED BY ALL (EXCEPT ONE OF T HE DEBTORS) FOLLOWED BY INITIATION OF APPROPRIATE PROCEEDINGS. THE DEBTS WERE WRITTEN OFF AS BAD DEBT S AND WERE ALSO ALLOWED BY THE ASSESSING OFFICER IN T HE SUBSEQUENT YEARS. THEREFORE REALIZATION OF EVEN TH E PRINCIPLE AMOUNT WAS IN JEOPARDY AND THEREFORE THERE COULD NOT BE SAID TO BE ANY REAL ACCRUAL OF INCOME BY WAY OF INTEREST. 8.2 HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS EICHER LTD. 320 ITR 410 HELD AS UNDER: THE ASSESSING OFFICER MADE AN ADDITION OF RS.68 25 000 BEING THE INTEREST ACCRUED ON INTEROPERATE DEPOSIT GIVEN BY THE ASSESSEE TO L. TH E ASSESSING OFFICER OBSERVED THAT THE ASSESSEE DID NO T DECLARE ANY INTEREST ACCRUED AND THAT THE ASSESSEE FOLLOWED THE MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE ON BEING ASKED EXPLAINED THAT THE LOAN HA D BECOME IRRECOVERABLE AND SO NO INTEREST COULD BE SAID TO HAVE REALLY ACCRUED THEREUPON. THIS WAS 22 BECAUSE ACCORDING TO THE ASSESSEE THE LOAN WHICH WAS GIVEN TO L BY AGREEMENT DATED MARCH 17 1993 WAS DULY CREDITED IN THE BOOKS OF ACCOUNT ON YEAR TO YEAR BASIS UP TO MARCH 31 1999 WHICH WAS DULY ASSESSED TO TAX THOUGH INTEREST WAS ACTUALLY RECEIVED ONLY FOR THE FIRST TWO YEARS AND NO INTERE ST WAS RECEIVED THEREAFTER TILL MARCH 31 1999 AND THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY TOOK A DECISION NOT TO ACCOUNT FOR THE INTEREST INCOME IN THE BOOKS. THE FURTHER FACTS WHICH EMERGED ON RECORD WERE THAT THE TOTAL OUTSTANDING AMOUNT OF RS.617 LAKHS INCLUDING THE PRINCIPAL AMOUNT OF RS.350 LAKH S AND INTEREST AMOUNT OF RS.267 LAKHS WAS ULTIMATELY SETTLED AT RS.480 LAKHS (PRINCIPAL RS.350 LAKHS AND INTEREST RS.130 LAKHS) BY A ONE-TIME SETTLEMENT AGREEMENT DATED DECEMBER 15 2003 OF THE ASSESSEE WITH L WHICH AMOUNT WAS TO BE PAID BY JANUARY 31 2004. BY A DEED OF ASSIGNMENT DATED DECEMBER 30 2003 THE ASSESSEE-COMPANY HAD ASSIGNED THE SETTLED DEBT OF RS.480 LAKHS TO BE RECOVERED FROM L TO E FO R A CONSIDERATION OF RS.470 LAKHS. THE TRIBUNAL DELETED THE ADDITION. ON APPEAL: HELD DISMISSING THE APPEAL THAT ON THE BASIS OF THE FACTS ON RECORD THE TRIBUNAL HAD RIGHTLY HELD T HAT ACTUAL INCOME IN FACT NEVER ACCRUED TO THE ASSESSEE AND THE ASSESSEE IN FACT HAD ALREADY PAID TAX ON 23 INTEREST INCOME ACTUALLY ACCRUED BY IT. THE TRIBUNA L THEREFORE RIGHTLY DELETED THE ADDITION OF ACCRUED INTEREST AS INCOME OF THE ASSESSEE. 8.3 HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SHIVPRAKASH JANAKRAJ & CO. PVT. LTD. VS CIT 1112 IT R 872 HELD AS UNDER: NO INTEREST INCOME ACCRUED TO THE ASSESSEE EVEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING WHO HAS WAIVED THE SAME AFTER THE END OF THE RELEVANT ACCOUNTING PERIOD AS NEITHER INTEREST WAS ACTUALLY PAID NOR THE ASSESSEE MADE ANY ENTRIES IN ITS ACCOU NT BOOKS NOR ANY DATE WAS FIXED FOR PAYMENT OF INTEREST. 8.4 ITAT AHMEDABAD A BENCH IN THE GROUP CASES OF M/S. JHAGADIA COPPER LTD. VS DCIT IN ITA NO.3741/AHD/200 7 AND OTHERS VIDE ORDER DATED 13-11-2009 IN WHICH ONE OF US (LEA RNED AM) HELD IN PARA 33 AS UNDER: 33. THE OTHER CONTENTION THAT AFTER THE WAIVER OF THE INTEREST NO INTEREST CAN BE ASSESSED ALSO H AS FORE. THE RESOLUTION WAS PASSED ON 8-11-2003 AND IT STATED THAT THE INTEREST FOR THE PERIOD FROM 1-4-20 02 TO 17-4-2004 STOOD WAIVED. THIS IS RELEVANT FOR THE APPEAL FOR THE ASSESSMENT YEAR 2004-05 FOR WHICH T HE ACCOUNTING PERIOD ENDED ON 31-3-2004. FOR THE PERIO D 24 FROM 1-4-2003 TO 31-3-2004 NO INTEREST CAN BE ASSESSED BECAUSE THE RESOLUTION WAIVING THE INTERES T WAS PASSED ON 8-11-2003 THAT IS TO SAY EVEN BEFORE THE ACCOUNTING YEAR CAME TO AN END. HOWEVER FOR TH E ASSESSMENT YEAR 2003-04 THE RESOLUTION WILL BE OF NO EFFECT BECAUSE IT WAS PASSED AFTER THE END OF THE ACCOUNTING YEAR VIZ 31-3-2003. EVEN SO IN VIEW OF OUR DECISION THAT THE DEBT DUE FROM SHALIMAR GOT WIPED OUT FROM 1-4-2003 NO INTEREST CAN BE ASSESSED ON ACCRUAL BASIS EVEN FOR THE ASSESSMENT YEAR 2003-04. 9. THE ASSESSEE EXPLAINED BEFORE LEARNED CIT (A) TH AT IT HAS STARTED ADVANCING LOAN TO M/S. BHANSALI ASSOCIATES IN ASSESSMENT YEAR 2000-01. WHEN THE ASSESSEE HAD GIVEN LOAN TO T HE SAID FIRM IT WAS AGREED BETWEEN BOTH PARTIES THAT M/S. BHANSALI ASSOCIATES WILL COMPENSATE ASSESSEE BY WAY OF ITS SHARE OF PROFIT E ITHER IN THE FORM OF MUTUALLY AGREED LUMP SUM AMOUNT TO BE DETERMINED AT THE END OF THE WORKING OF THE FINANCIAL YEAR OR IN THE FORM OF INTEREST AT THE RATE TO BE MUTUALLY AGREED BETWEEN THE PARTIES AT THE END O F THE WORKING OF FINANCIAL YEAR I.E. IN THE MONTH OF MARCH OF EVERY YEAR DEPENDING UPON THE PROFITABILITY OF THE OTHER PARTY. SUCH MUT UAL UNDERSTANDING BETWEEN THE PARTIES WAS PRESENT FROM THE VERY FIRST DAY WHEN ASSESSEE HAD ADVANCED MONEY. UP TO ASSESSMENT YEAR 2002-03 M/S. BHANSALI ASSOCIATES PAID THE AMOUNT/INTEREST T O THE ASSESSEE ON PRODUCT BASIS. HOWEVER ON THE CLOSE OF THE FINANCI AL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL IT WAS DECIDED NOT TO CHARGE/PAY INTEREST. SUCH FACTS EXPLAINED BEFORE THE LEARNED C IT (A) HAVE NOT 25 BEEN DISPUTED THROUGH ANY MATERIAL ON RECORD. IT IS ALSO ADMITTED FACT THAT THERE WAS NO WRITTEN AGREEMENT EXISTED BETWEEN THE PARTIES ON SUCH UNDERSTANDING. THEREFORE THE MUTUAL UNDERSTAN DING AGREED TO BETWEEN THE PARTIES EXPLAINED BY THE ASSESSEE HAVE BEEN RIGHTLY APPRECIATED BY THE LEARNED CIT (A) WHILE DECIDING T HE ISSUE. THE A O ALSO ADMITTED THAT THERE WAS NO WRITTEN AGREEMENT B ETWEEN THE PARTIES. IT IS ALSO ADMITTED FACT THAT NEITHER OF T HE PARTIES HAS RECORDED ANY INTEREST IN THE BOOKS OF ACCOUNT ON THE CLOSE O F THE BOOKS OF ACCOUNT RELEVANT TO THE ASSESSMENT YEAR UNDER APPEA L. IT IS ALSO NOT DISPUTED THAT ENTRIES OF INTEREST WERE ALWAYS MADE IN THE BOOKS OF ACCOUNT IN EARLIER YEARS IN THE END OF THE ACCOUNTI NG YEAR AS PER MUTUAL UNDERSTANDING OF THE PARTIES. THEREFORE M/S . BHANSALAI ASSOCIATES PAID INTEREST UP TO PRECEDING ASSESSMENT YEAR 2002-03. THE ASSESSEE REFERRED TO THE CORRESPONDENCE BETWEEN IT AND M/S. BHANSALI ASSOCIATES BEFORE LEARNED CIT (A) FOR NOT CHARGING THE INTEREST ON THE SAME UNDERSTANDING THEREFORE ON S UCH FACTS AS WERE COMING FROM THE EARLIER YEARS THE A O SHOULD NOT H AVE DOUBTED THE EXPLANATION OF THE ASSESSEE. SINCE BOTH THE PARTIES BEFORE CLOSE OF THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL DECIDED NOT TO CHARGE/PAY INTEREST AND NO ACTUAL EN TRIES ARE MADE IN THE BOOKS OF ACCOUNT WOULD SUPPORT THE EXPLANATION OF THE ASSESSEE. IN THE SURVEY U/S 133A OF THE IT ACT ALSO M/S. BHAN SALAI ASSOCIATES ADMITTED THAT NO INTEREST WAS PAID TO THE ASSESSEE AND NO LIABILITY CLAIMED OF INTEREST. M/S. BHANSALAI ASSOCIATES DID NOT CLAIM DEDUCTION OF INTEREST IN THEIR CASE IN THE ASSESSMENT YEAR UN DER APPEAL. FURTHER ADVANCES WERE GIVEN BY THE ASSESSEE TO RECOVER THE EARLIER ADVANCES AND DECISION WAS TAKEN IN COMMERCIAL EXPED IENCY. THE 26 CONDUCT OF BOTH THE PARTIES PRIOR TO THE CLOSE OF T HE ACCOUNTING YEAR NOT TO CHARGE/PAY INTEREST IS RELEVANT FACTOR TO UP HOLD THE FINDINGS OF THE LEARNED CIT (A). MOREOVER NO DATE WAS FIXED FO R CHARGING OF INTEREST THEREFORE CONTENTION OF THE ASSESSEE IS JUSTIFIED THAT EVERY YEAR CHARGING OF INTEREST WAS DEPENDENT UPON PROFIT ABILITY OF M/S. BHANSALI ASSOCIATES ON MUTUAL UNDERSTANDING. IT IS ALSO NOT IN DISPUTE THAT NO LOAN COULD BE RECOVERED DURING THE ASSESSME NT YEAR UNDER APPEAL BY THE ASSESSEE. IT MAY ALSO BE NOTED HERE T HAT WHEN ON SAME ORAL UNDERSTANDING INTEREST CHARGED IN EARLIER YEAR IS BELIEVED BY THE REVENUE DEPARTMENT AND TAXED THERE WAS NO R EASON TO DISBELIEVE THE SAME STATEMENT OF THE ASSESSEE THAT NO INTEREST ACCRUED IN THE END OF FINANCIAL YEAR UNDER APPEAL O N SAME ORAL UNDERSTANDING. IT MAY ALSO BE NOTED HERE THAT ASSE SSEE IS A FIRM SO PASSING OF THE RESOLUTION BY THE BOARD OF DIRECTORS AS IN THE CASE OF COMPANY FOR WAIVER OF INTEREST MAY NOT ARISE AND WO ULD NOT BE RELEVANT IN THE CASE OF FIRMS. THE FACTS AND CIRCUM STANCES AND CONDUCT OF THE PARTIES SHALL HAVE TO BE SEEN IN SUC H CIRCUMSTANCES IN THE CASE OF THE FIRM. SINCE BOTH THE PARTIES PRIOR TO CLOSE OF THE FINANCIAL YEAR DECIDED NOT TO PAY/CHARGE INTEREST A ND NO ENTRY HAS BEEN MADE IN THE BOOKS OF ACCOUNT WOULD SUPPORT THE CASE OF THE ASSESSEE THAT THE INTEREST STOOD WAIVED FOR THE ASS ESSMENT YEAR UNDER APPEAL. THE A O HAS NOT BROUGHT ANY EVIDENCE ON RECORD THAT THERE WAS NO MUTUAL UNDERSTANDING BETWEEN PARTIES I N THE MONTH OF MARCH OF EVERY YEAR TO CHARGE OR NOT TO CHARGE INTE REST. THE INTEREST HAD NOT ACCRUED TO THE ASSESSEE AND NO HYPOTHETICAL INCOME COULD BE TAXED IN THE HANDS OF THE ASSESSEE. MERELY INTE REST WAS CHARGED IN EARLIER YEAR IS NO GROUND TO MAKE ADDITION IN TH E ASSESSMENT YEAR 27 UNDER APPEAL. IT MAY ALSO BE NOTED HERE THAT HON'BL E SUPREME COURT IN THE CASE OF GODHRA ELECTRICITY CO. LTD. (SUPRA) QUOTED A PASSAGE FROM ITS EARLIER DECISION IN THE CASE OF CIT VS SHO ORJI VALLABHDASS & CO. 46 ITR 144 WHERE IT HAD BEEN STATED AS FOLLOWS : INCOME-TAX IS A LEVY ON INCOME. NO DOUBT THE INCOME-TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIM E AT WHICH THE LIABILITY TO TAX IS ATTRACTED VIZ. TH E ACCRUAL OF THE INCOME OR ITS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DO ES NOT RESULT AT ALL THERE CANNOT BE A TAX EVEN THOU GH IN BOOK-KEEPING AN ENTRY IS MADE ABOUT A HYPOTHETICA L INCOME WHICH DOES NOT MATERIALIZE. THE PRINCIPLE THAT THE HON'BLE SUPREME COURT APPLIE D WAS THAT EVEN IF THE ACCOUNTS ARE MAINTAINED IN THE MERCANTILE SYSTE M WHAT HAS TO BE SEEN IS WHETHER INCOME CAN BE SAID TO HAVE REALLY A CCRUED TO THE ASSESSEE. THE ABOVE DISCUSSION AND FACTS OF THE CAS E WOULD CLEARLY SHOW THAT NO INTEREST WAS CHARGED ON COMMERCIAL CON SIDERATION AS PER MUTUAL UNDERSTANDING BETWEEN THE PARTIES BEFORE THE ACCOUNTING YEAR CAME TO AN END. NO MATERIAL IS PRODUCED TO RE BUT THE FINDINGS OF THE LEARNED CIT (A). WE ACCORDINGLY DO NOT FIND AN Y JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LEARNED CIT (A) IN HOLDING THAT INCOME HAS NOT ACCRUED TO THE ASSESSEE. THERE IS NO MERIT IN THE APPEAL OF THE REVENUE. THIS GROUND IS ACCORDINGLY DISMISSED. 28 10. ON GROUND NO.2 REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT (A) IN DELETING DISALLOWANCE OF INTEREST U/S 36 (1) (III) THOUGH SPECIFICALLY HAS NOT BEEN GRANTED AS NO SEPARATE AD DITION WAS MADE. 10.1 THE FACTS ON THIS ISSUE ARE THAT IN PARA 6 OF THE ASSESSMENT ORDER THE A O DISCUSSED THAT THE ASSESSEE HAD DEBI TED HUGE INTEREST EXPENSES AMOUNTING TO RS.24 95 84 322/-. THE ASSESS EE WAS REQUESTED TO FURNISH DETAILS OF INTEREST EXPENSES W HICH WERE FURNISHED. THE INTEREST EXPENSES WERE ON FBT PCL INTEREST ON UNSECURED LOANS AND OTHER INTEREST. IN RESPONSE TO THE QUERY OF THE AO THE ASSESSEE HAD FURNISHED DETAILED REPLY WHICH IS REPRODUCED BY THE A.O. FROM PAGES 11 TO 15 OF THE ASSESSMENT ORDE R. IN PARA 7 OF THE ASSESSMENT ORDER IT IS OBSERVED BY THE A.O. THA T THE ASSESSEE HAD ADVANCED HUGE AMOUNTS TO M/S. BHANSALI ASSOCIAT ES RIGHT FROM A.Y. 2000-01 AND DURING THE YEAR UNDER CONSIDERAT ION ALSO FURTHER AMOUNTS WERE ADVANCED. IT IS STATED BY HIM THAT THE SE AMOUNTS HAVE BEEN GIVEN OUT OF INTEREST BEARING FUNDS. IT IS STA TED THAT THE ASSESSEE HAD NO INTEREST FREE FUNDS AVAILABLE AT ANY POINT O F TIME WHICH CAN BE ADVANCED TO OTHERS. HE HAS SLATED THAT THE ASSESSEE S FINANCIAL STATEMENT SHOWS THAT IT HAD GIVEN MONIES FROM BORRO WED FUNDS. IT IS FURTHER STATED BY THE A.O. THAT THE ASSESSEES ALTE RNATE CONTENTION THAT KEEPING IN VIEW THE ITAT DECISION IN THE CASE OF TORRENT FINANCERS REPORTED AT 73 TTJ 624 AT THE MOST INTER EST TO THE EXTENT OF RS.82 03 429/- ONLY COULD BE DISALLOWED IS NOT ACC EPTED. THE A.O. HAS STALED THAT THIS IS FOR THE REASON THAT THE ASS ESSEE HAD MADE ADVANCES TO BHANSALI ASSOCIATES AS BUSINESS TRANSAC TIONS WITH THE MOTIVE TO EARN INTEREST INCOME. IT IS NOT THE CASE OF DIVERSION OF 29 INTEREST BEARING FUNDS TO NON-BUSINESS PURPOSE. IT IS STALED THAT FOR THE SAKE OF ARGUMENT IF THE ASSESSEES CONTENTIONS ARE ACCEPTED THAT IT IS A CASE WHERE THE ASSESSEE HAD INTEREST BEARIN G FUND WHICH WERE ADVANCED TO THE SAID CONCERN THE INTEREST FREE FUN D AVAILABLE TO ASSESSEE WERE NOT SO LARGE BUT IT WAS FIXED IN BUSINESS ASSETS AS INVESTMENT. THEREFORE THE FUND TRANSFERRED TO BHAN SALI ASSOCIATES WAS FROM CIRCULATING FUND WITHDRAWN FROM THE BANK. IT IS STATED THAT HAD THERE NOT BEEN ANY TRANSFER OF SUCH FUND THE AS SESSEE WOULD HAVE TO PAY LESS INTEREST TO THE BANKS AND OTHERS. THE ASSESSEE HAD DURING THE YEAR PAID INTEREST OF RS.24.93 CRORES T HIS COULD HAVE BEEN CURTAILED. THE ASSESSEE IS CARRYING ON BUSINESS TO EARN PROFIT AND IT CANNOT MAKE CHARITY BY NOT CHARGING INTEREST FROM T HE INTEREST BEARING LOANS. IT IS STALED THAT THIS INTENTION IS TO REDUC E INCOME IGNORING THE METHOD OF ACCOUNTING AND COMMERCIAL EXPEDIENCY. HEN CE THE INTEREST EXPENSES ATTRIBUTABLE TO SUCH FUND ARE NOT DEDUCTIBLE U/S.36 (1)(III).THE A O HAS RELIED UPON THE MADRAS HIGH CO URT DECISION REPORTED AT 238 ITR 939. IT IS HELD THAT THE ASSES SEE HAD FAILED TO CHARGE INTEREST FROM OTHERS AND THEREFORE INTEREST EXPENSES ATTRIBUTABLE TO SUCH AMOUNTS ARE NOT ADMISSIBLE. I T IS OBSERVED BY HIM THAT INTEREST IF TO BE DISALLOWED IT WOULD BE E QUAL TO THE AMOUNT CHARGEABLE FROM BANSALI ASSOCIATES AS THE LOAN WAS ADVANCED FROM INTEREST BEARING FUNDS. IN VIEW OF THIS IT IS HELD THAT INTEREST EXPENSES ATTRIBUTABLE TO SUCH ADVANCES TO THE EXTENT OF RS. 14 09 11 659/- AS CHARGEABLE INTEREST ARE NOT DEDUCTIBLE U/S.36(L)(I II) AND ARE ALTERNATIVELY DISALLOWED. IT IS STATED THAT AS ONLY ONE ADDITION IS TO BE MADE AND SINCE THE ADDITION IS MADE ON ACCOUNT OF A CCRUAL OF 30 INTEREST IT COVERS THE DISALLOWANCE OF INTEREST E XPENSES AND NO FURTHER ADDITION IS MADE OUT OF INTEREST EXPENSES. 10.2 THE FINDINGS OF THE A O WERE CHALLENGED BEFO RE LEARNED CIT (A) AND THE ASSESSEE IN THIS CONNECTION WITHOU T PREJUDICE TO THE GROUND NO. L SUBMITTED THAT IT WAS NOT ESTABLISHED BY THE A.O. THAT THE ADVANCES MADE BY THE ASSESSEE WERE NOT FOR THE PURP OSE OF BUSINESS. THERE IS ALSO NOTHING IN THE ASSESSMENT O RDER TO ESTABLISH THAT THE FUNDS BORROWED FOR THE BUSINESS WERE NOT F OR THE SAID PURPOSE. IT IS NOT ESTABLISHED BY THE A.O. THAT THE BORROWED FUNDS ON WHICH INTEREST HAS BEEN PAID WERE TRANSFERRED FOR A DVANCING INTEREST FREE FUND. THE ASSESSEE REFERRED TO SECTION 36(L)(I II) AND STALED AS UNDER: 'AS PER SAID SECTION 36(L )(III) FOR ALLOWANCE OF A CLAIM FOR DEDUCTION OF INTEREST PAID IN RESPECT OF CAPITA L BORROWED IS THAT FOLLOWING THREE CONDITIONS SHOULD BE FULFILLED. (I) THE CAPITAL MUST HAVE BEEN BORROWED OR TAK EN FOR THE PURPOSE OF BUSINESS OR PROFESSION. (II) THE INTEREST SHOULD HAVE BEEN PAYABLE. (III) BORROWING SHOULD BE MADE FOR THE PURPOSE OF BUSINESS. ONCE THESE THREE CONDITIONS ARE SATISFIED THE CLAIM OF INTEREST PAYMENT SIMPLY CANNOT BE REJECTED. IT WOULD NOT BE OUT OF PLACE TO GO 31 INTO THE VARIOUS JUDICIAL DECISIONS ESTABLISHING TH E RATIOS FOR THE PURPOSE OF ALLOWING DEDUCTION FOR THE INTEREST PAID BY THE ASSESSEE . THE SUPREME COURT IN THE CASE OF MADHAV PRASAD JATI A VS CIT (1979) 118 ITR 200 HAS LAID DOWN AT PAGE 208 AS UND ER: '....... WE MAY POINT OUT THAT UNDER S. 10(2)(III) THREE CONDITIONS ARE REQUIRED TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDUCTION IN RESPECT OF INT EREST ON BORROWED CAPITAL NAMELY (A) THAT MONEY (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSESSEE (B) THAT IT MUS T HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS AND (C) THAT THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AM OUNT LAND CLAIMED IT AS A DEDUCTION... THE PRINCIPLE OF LAW AFTER GOING THROUGH THE VARIOU S DECISIONS SUCH AS I) MADHYA PRADESH HIGH COURT IN THE CASE OF BIRLA G WALIOR PVT. LTD. V/S. CIT (1962) 44 ITR 847 (II) THE MADRAS HIGH COURT IN THE CASE OF CIT V/S. PUDUKOTTAL CO. (P) LTD (1972) 84 ITR 788 (III) THE MADHYA PRADESH HIGH COURT IN THE CASE D & H SECHERON ELECTRODES PVT. LTD. V/S. CIT 142 ITR 528 (IVJ) THE I.T.A.T. AHMEDABAD BENCH IN THE CAS E OF SAHIBAUG ENTERPRISE VS. I.T.O. 32 IS THAT ONCE IT IS FOUND THAT THE CAPITAL IS BORROW ED FOR THE PURPOSES OF BUSINESS THE ASSESSEE IS ENTITLED TO CLAIM THE INT EREST PAID THEREON AS DEDUCTION U/S. 36(L)(III) OF THE INCOME-TAX ACT REGARDLESS OF THE FACT THAT THE ASSESSEE HIMSELF CHARGES INTEREST AT THE L OWER RATES ON MONEYS ADVANCED OUT OF SUCH BORROWED LOANS OR EVEN PROVIDES INTEREST FREE ADVANCES TO THE SI S TER CONCERNS ETC. THE ONLY CONDITION WHICH SEC. 36(L)(III) OF THE I.T. ACT PRESCRIBES IS THAT (THE CAPITAL MUST BE BORROWED FOR THE PURPOSES OF BUSINESS AND THE ASSES SEE MUST HAVE PAID THE INTEREST ON THE SAID AMOUNT AND CLAIM ED IT AS A DEDUCTION. IN THE PRESENT CASE BORROWINGS WERE FOR THE PURPOSE OF BUSINESS.' THE ASSESSEE FURTHER SUBMITTED THAT APART FROM THE ABOVE POSITION IN LAW IT HAD INTEREST FREE FUND AVAILAB LE IN FORM OF PARTNERS CAPITAL AND INTEREST FREE BORROWINGS FOR GIVING AMO UNT TO BHANSALI ASSOCIATES FOR RS. 64 91 40 315/-. THEREFORE INTERE ST ON BORROWED FUNDS CANNOT BE DISALLOWED. IN THIS CONNECTION THE ASSESSEE STATED THAT IF IT CALCULATES INTEREST PAYABLE ON INTEREST FREE FUNDS AVAILABLE WITH IT AND INTEREST RECEIVABLE ON INTEREST FREE AM OUNT GIVEN TO BHANSALI ASSOCIATES NO DISALLOWANCE OF INTEREST CA N BE MADE U/S. 36(L)(III) OF THE ACT. THE SAME IS WORKED OUT AS UN DER: 33 INTEREST PAYABLE ON INTEREST FREE FUNDS AMOUNT RS. UNSECURED LOAN 99 82 690 CREDITORS FOR EXPENSE ' 93 415 CREDITORS 6 86 44 550 PARTNERS CAPITAL 5 03 89 880 OTHER LIABILITIES 2 94 66 534 TOTAL INTEREST PAYABLE 15 85 77 069 INTEREST RECEIVABLE LOANS AND ADVANCES 14 09 11 659 IN THIS CONNECTION THE ASSESSEE STATED THAT IT HAS INTEREST FREE FUNDS AVAILABLE WITH IT FOR GIVING INTEREST FREE AD VANCES PROPORTIONATE INTEREST ON ADVANCES CANNOT BE DISALLOWED. IN THIS CONNECTION THE ASSESSEE RELIED ON THE DECISION OF TORRENT FINANCIE RS VS. ACIT 73 TTJ 624 WHERE AHMEDABAD TRIBUNAL HAS HELD AS UNDER THE ASSESSEE HAVING ADEQUATE INTEREST-FREE FUNDS ENTIRE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSES SEE IS TO BE CONSIDERED- IF THE TOTAL INTEREST-FREE ADVANCES INCLUDING DEBIT BALANCE OF PARTNERS OF ASSESSEE-FIRM DO NOT E XCEED THE TOTAL INTEREST-FREE FUNDS AVAILABLE WITH THE AS SESSEE NO INTEREST IS DISALLOWABLE. IF IT EXCEEDS PROPORTION ATE DISALLOWANCE CAN BE MADE . 34 THE ENTIRE INTEREST-FREE FUNDS INCLUDE OWNER'S OWN CAPITAL ACCUMULATED PROFITS AND OTHER INTEREST-FREE CREDITORS AND LOANS IF TOTAL INTEREST-FREE ADVANCE S INCLUDING DEBIT BALANCES OF PARTNERS DO NOT EXCEED THE TOTAL INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESS EE NO INTEREST IS DISALLOWABLE ON ACCOUNT OF UTILISATION OF FUND FOR NON-BUSINESS PURPOSES. THE ASSESSEE FURTHER RELIED ON THE DECISION OF CIT VS. RADICO KHAITAN LIMITED 142 TAXMAN 681 WHERE HONBLE ALLAH ABAD HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESS EE AND HAS HELD AS UNDER: THE PRINCIPLE FOR ALLOWING THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED IS THAT THE FOL LOWING THREE CONDITIONS SHOULD BE FULFILLED(I) THE CAPITAL MUST HAVE BEEN BORROWED OR TAKEN FOR THE PURPOSE OF BUSI NESS OR PROFESSION (II) THE INTEREST SHOULD HAVE BEEN P AYABLE (III) IF THE BORROWING IS NOT FOR THE BUSINESS PURP OSE AND IS FOR PRIVATE PURPOSE OR NOT CONNECTED WITH THE BUSIN ESS INTEREST PAID ON SUCH BORROWING CANNOT BE ALLOWED A S DEDUCTION U/S. 36(L)(III) OF THE ACT. APPLYING THE SAID PRINCIPAL TO THE FACTS OF THE INS TANT CASE THE TRIBUNAL HAD RECORDED A FINDING THAT THER E WAS SUFFICIENT FUND AVAILABLE WITH THE ASSESSEE COMPANY IN THE FORM OF CAPITAL SHARE SHARE APPLICATION MONEY RES ERVE AND SURPLUS OTHER THAN THE BORROWED MONEY FOR DIVER TING A 35 SUM OF RS. 17.19 LAKHS THUS IT COULD NOT BE SAID THAT THE AMOUNT OF LOAN ADVANCED TO THE SISTER CONCERN WAS O UT OF THE BORROWED FUNDS' IN VIEW OF AFORESAID DECISIONS IT IS STATED THAT T HE ASSESSEE HAS INTEREST FUNDS TO COVER THE ADVANCES MADE THEREFORE NO DISALLOWANCE OF INTEREST CAN BE MADE U/S. 36(L)(III) OF THE ACT. DURING THE COURSE OF APPELLATE PROCEEDING THE ASSESSEES COUNSEL FURTHER SUBMITTED A CHART SHOWING DATE-WISE AMOUNTS PAID TO BHANSALI AS SOCIATES DURING THE YEAR AND IMMEDIATE SOURCE THEREOF AND ON THAT B ASIS STATED THAT MOST OF AMOUNTS ARE PAID FROM INTEREST FREE FUNDS A ND THE INTEREST REFERABLE TO INTEREST BEARING FUNDS USED WOULD WORK OUT TO RS.54 67 563/- AND HENCE DISALLOWANCE OF INTEREST COULD NOT EXCEED THAT AMOUNT. 11. THE LEARNED CIT (A) CONSIDERING THE SUBMISSION OF THE ASSESSEE AND IN THE LIGHT OF THE FINDINGS OF THE A O DELETED THE ADDITION. HIS FINDINGS ARE REPRODUCED AS UNDER: I HAVE CAREFULLY CONSIDERED ARGUMENT OF THE COUNSEL AND OBSERVATION OF THE A.O. THE COUNSEL FOR THE APPELLANT HAS ARGUED THAT ONCE IT IS ESTABLISHE D THAT THE FUNDS HAVE BEEN BORROWED BY THE ASSESSEE FOR THE PURPOSES OF BUSINESS OR PROFESSION INTERES T HAS BEEN PAID ON THE SAME AND THE BORROWINGS ARE FOR THE PURPOSE OF THE BUSINESS THEN INTEREST U/S 3 6 (L)(III) HAS TO BE ALLOWED. THERE IS FORCE IN THE 36 ARGUMENT OF THE COUNSEL THAT ONCE THESE THREE CONDITIONS ARE SATISFIED THE CLAIM OF INTEREST PAYM ENT CANNOT BE REJECTED. THE AO HAS NOT BEEN ABLE TO ESTABLISH THAT THE ADVANCES MADE BY THE APPELLANT WERE NOT FOR THE PURPOSE OF THE BUSINESS. THERE IS NOTHING IN THE ASSESSMENT ORDER TO ESTABLISH THAT T HE FUNDS BORROWED FOR THE BUSINESS WERE NOT USED FOR THE SAID PURPOSE. IN FACT THE AO HAS MENTIONED ON PAGE 15 OF THE ASSESSMENT ORDER THAT THE ADVANCES MADE BY THE ASSESSEE TO M/S BHANSALI ASSOCIATES WERE MADE AS BUSINESS TRANSACTIONS AND WITH THE MOTIVE TO CLAIM INTEREST. IT IS NOT A CASE OF DIVER SION OF INTEREST BEARING FUNDS TO NON BUSINESS PURPOSES. THE COUNSEL HAS RIGHTLY PLACED RELIANCE ON THE DECISION OF THE SUPREME COURT IN THE CASE OF MADHAV PRASAD JATIA VS CIT 118 ITR 200 WHICH IS APPLICABLE TO THE APPELLANT'S CASE. THE COUNSEL FOR THE APPELLANT HAS RIGHTLY PLACED RELIANCE ON A NUMBER OF OTHER DECISIONS OF THE VARIOUS HIGH COURTS AND THE IT AT AHMEDABAD IN THE CASE OF SAHIBAUG ENTERPRISES VS ITO IN SUPPORT OF HIS CONTENTION WHICH HAS BEEN DISCUSSED SUPRA. THE COUNSEL FOR THE APPELLANT HAS TAKEN ALTERNATIVE PLEA THAT IT HAD SUFFICIENT INTEREST FR EE FUNDS AVAILABLE IN THE FORM OF PARTNERS CAPITAL AN D INTEREST FREE BORROWINGS FOR GIVING' ADVANCE TO M/S 37 BHANSALI ASSOCIATES AND HENCE INTEREST CANNOT BE DISALLOWED ON THIS GROUND. THE COUNSEL HAS PLACED RELIANCE ON THE DECISION OF 1TAT AHMEDABAD IN THE CASE OF TORRENT FINANCIAL VS ACIT 73 TTJ 624 AND AL SO ON THE DECISION OF THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS RADICO KHAITAN LTD. 142 TAXMAN 681. I DO NOT FIND ANY FORCE IN THE ALTERNATE PLEA OF THE COUNSEL IN VIEW OF THE DECISION OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES PVT LTD. 286 ITR 1. IN VIEW OF THE PUNJA B & HARYANA HIGH COURT DECISION HAD THE APPELLANT NOT ADVANCED INTEREST FREE LOAN TO M/S BHANSALI ASSOCIATES THERE WAS NO NEED FOR THE APPELLANT TO RAISE INTEREST BEARING LOANS AND TO THAT EXTENT TH E APPELLANT'S INTEREST LIABILITY WOULD HAVE BEEN LESS ER. THUS THE ALTERNATE PLEA OF THE APPELLANT IS REJECTE D. HOWEVER KEEPING IN VIEW THE FACTS THAT THE APPELLANT HAS RAISED INTEREST BEARING LOANS FOR THE PURPOSE OF BUSINESS AND INTEREST HAS BEEN PAID ON THE SAME DISALLOWANCE OF INTEREST U/S 36(L)(III) CA NNOT BE MADE. THE A.O. HAS HIMSELF MENTIONED IN THE ASSESSMENT ORDER THAT THE ADVANCES MADE BY THE ASSESSEE TO M/S BHANSALI ASSOCIATES WERE MADE AS BUSINESS TRANSACTIONS AND WITH THE MOTIVE TO EARN INTEREST. HENCE THE BORROWED FUNDS WERE FOR BUSINES S PURPOSES. THE VARIOUS CASE LAWS RELIED UPON BY THE 38 COUNSEL ARE APPLICABLE TO THE FACTS OF THE APPELLA NT'S CASE. IN VIEW OF THE DISCUSSION ABOVE THIS GROUND OF APPEAL IS ALLOWED. HOWEVER THE APPELLANT WOULD NOT GET ANY RELIEF SINCE NO SEPARATE ADDITION HAS BEEN MADE BY THE A.O. ON THIS ACCOUNT. 12. THE LEARNED D R RELIED UPON THE ORDER OF THE A O AND SUBMITTED THAT IF ON GROUND NO.1 ASSESSEE SUCCEEDS THEN DISAL LOWANCE IS TO BE MADE U/S 36 (1) (III) OF THE IT ACT. HE HAS SUBMITT ED THAT ASSESSEE BORROWED INTEREST BEARING FUNDS OF ABOUT RS.80 CROR ES AND PAID SUBSTANTIAL INTEREST OF RS.24.93 CRORES. SUBSTANTIA L AMOUNT IS PAID TO M/S. BHANSALI ASSOCIATES FROM WHOM NO INTEREST IS C HARGED. INTEREST ON FUNDS USED FOR NON-BUSINESS PURPOSES CANNOT BE A LLOWED. 13. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSE SSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND S UBMITTED THAT THERE WAS NO BORROWING IN THIS YEAR. BORROWED MONIE S TAKEN IN EARLIER YEAR SPENT FOR BUSINESS PURPOSES CANNOT BE TREATED IN THIRD YEAR AS AMOUNTS SPENT FOR NON-BUSINESS PURPOSES BECAUSE NO INTEREST IS CHARGED FORM M/S. BHANSALI ASSOCIATES IN THE YEAR U NDER APPEAL. HE HAS REFERRED TO PAGE 13 OF THE ASSESSMENT ORDER WHI CH SHOWS THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IS RS.15 85 77 069/- WHICH IS SUFFICIENT TO ADVANCE LOANS TO M/S. BHANSA LI ASSOCIATES. HE HAS SUBMITTED THAT THE DIFFERENTIAL AMOUNT IS ONLY RS.82 03 429/-. HE HAS RELIED UPON ORDER OF ITAT B BENCH AHMEDABAD I N THE CASE OF DCIT VS CORE HEALTH CARE LTD. ITA NO.85 AND 86/AHD /2007 DATED 16-10-2009 IN WHICH ON THE SAME FACTS DEPARTMENTAL APPEAL HAS 39 BEEN DISMISSED. HE HAS SUBMITTED THAT IN THIS CASE THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MUNJAL SALES C ORPORATION WAS RELIED UPON WHICH FOLLOWED DECISION IN THE CASE OF ABHISHEK INDUSTRIES. HON'BLE SUPREME COURT SUBSEQUENTLY REV ERSED THE DECISION IN THE CASE OF MUNJAL SALES CORPORATION T HEREFORE DECISION OF THE HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIE S IS NO LONGER A GOOD LAW. HE HAS SUBMITTED THAT CIT (A) IN THE PRES ENT APPEAL REJECTED THE ALTERNATE CONTENTION OF THE ASSESSEE B Y FOLLOWING DECISION OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES PVT. LTD. (SUPRA). HOWEVER THE SAID DECISION IS NOW SUPERCEDED BY THE DECISION OF HON'BLE SUPREME C OURT IN THE CASE OF MUNJAL SALES CORPORATION 298 ITR 298. THERE FORE EVEN ON ALTERNATE CONTENTION THE APPEAL OF THE ASSESSEE SH OULD HAVE BEEN ALLOWED BY THE LEARNED CIT (A). 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL AVAILABLE ON RECORD. ITAT AHMEDABAD BENCH IN THE CA SE OF CORE HEALTH CARE LTD. (SUPRA) RELIED UPON DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF S. A. BUILDERS VS CIT 288 ITR 1 ACCORDING TO WHICH IF INTEREST FREE ADVANCES ARE GIVEN FOR BUSI NESS PURPOSES THEN NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE IRRESPECTIVE OF WHETHER THEY ARE GIVEN OUT OF INTEREST FREE CAPITAL OR INTEREST BEARING FUNDS. THE TRIBUNAL CONSIDERING THE IDENTICAL FACT S DISMISSED THE DEPARTMENTAL APPEAL. THE LEARNED CIT (A) THEREFORE RIGHTLY NOTED THAT THE CONDITIONS OF SECTION 36(1) (III) OF THE I T ACT ARE SATISFIED IN THIS CASE. ON GROUND NO.1 IT IS HELD THAT THE AMOUN TS/ADVANCES HAVE BEEN GIVEN TO M/S. BHANSALI ASSOCIATES IN EARLIER Y EARS ON WHICH 40 INTEREST WAS ALSO CHARGED. THEREFORE AT THE TIME G IVING THE ADVANCES IT WAS CLEARLY GIVEN FOR THE PURPOSE OF BUSINESS. I T WAS ALSO HELD THAT IN THE ASSESSMENT YEAR UNDER APPEAL INTEREST WAS NO T CHARGED DUE TO COMMERCIAL EXPEDIENCY ON MUTUAL UNDERSTANDING. THE A O ALSO NOTED IN THE ASSESSMENT ORDER THAT SUCH ADVANCES WE RE GIVEN AS BUSINESS TRANSACTIONS AND WITH THE MOTIVE TO EARN I NTEREST. THE A O ALSO ADMITTED THAT IT IS NOT A CASE OF DIVERSION OF INTEREST BEARING FUNDS TO NON-BUSINESS PURPOSES. ON GROUND NO.1 WE HAVE CONFIRMED THE FINDINGS OF THE LEARNED CIT (A) IN DELETING THE ADDITION AND IT WAS ALSO HELD THAT ADVANCE WAS GIVEN FOR COMMERCIAL CON SIDERATION. HON'BLE SUPREME COURT IN THE CASE OF S. A. BUILDERS LTD. VS CIT 288 ITR 1 HELD THAT IN ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORROWED BY THE ASSESSEE TO GIVE AN INTEREST FREE LOAN TO SI STER CONCERN SHOULD BE ALLOWED AS A DEDUCTION U/S 36 (1) (III) OF THE I T ACT ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL E XPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS FOR THE PURPOSE OF BUSINESS. TH E EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRE D ON GROUND OF COMMERCIAL EXPEDIENCY. SINCE SUBSTANTIAL LOAN WAS G IVEN IN EARLIER YEARS THEREFORE LEARNED CIT (A) ON PROPER APPRECIA TION OF FACTS RIGHTLY DELETED THE ADDITION. THOUGH LEARNED CIT (A) NOTED IN THE IMPUGNED ORDER THAT SUFFICIENT INTEREST FREE FUNDS ARE AVAIL ABLE WITH THE ASSESSEE FOR GIVING ADVANCE TO M/S. BHANSALI ASSOCI ATES THE LEARNED CIT (A) SHOULD NOT HAVE REJECTED THE CLAIM OF THE A SSESSEE BY FOLLOWING THE DECISION IN THE CASE OF ABHISHEK INDU STRIES PVT. LTD. 41 (SUPRA) WHICH IS NO LONGER A GOOD LAW IN VIEW OF TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MUNJAL SALES C ORPORATION 298 ITR 298. CONSIDERING THE ABOVE DISCUSSIONS WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) IN DE LETING THE ADDITION. IN THE RESULT THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 15. ON GROUND NO. 3 REVENUE CHALLENGED THE ORDER O F THE LEARNED CIT (A) IN DELETING THE ADDITION OF BAD DEBTS AMOUN TING TO RS.1 49 18 720/-. 15. THIS ISSUE HAS BEEN DISCUSSED BY THE AO IN PARA 10 OF THE ASSESSMENT ORDER. IT IS OBSERVED BY THE A.O. THAT T OTAL AMOUNT OF RS. 1 54 84 949/- WAS DEBITED TO THE PROFIT AND LOS S ACCOUNT AS MISCELLANEOUS EXPENSES BEING EXCESS PROVISION WRITT EN BACK. THIS INCLUDED THE FOLLOWING AMOUNTS: RS. 583379 INTEREST INCOME. RS. 14918720 DEPB AND ADVANCE LICENSES RS. 16150 LESS: RENT EXPENSES RS. 15485949 TOTAL THE ASSESSING OFFICER HAS OUT OF THE ABOVE AMOU NT DISALLOWED RS. 1 49 18 720/-. THE ASSESSEE HAD CONTENDED BEFOR E THE A.O. THAT IT HAD OFFERED DEPB LICENSE AND ADVANCE LICENSE REC EIVED DURING THE EARLIER EARS AS INCOME AND CORRESPONDING DEBIT WAS GIVEN TO EXPORT INCENTIVES RECEIVABLE. HOWEVER CERTAIN LICENSES WE RE NOT UTILIZED EVEN AFTER LAPSE OF 4 TO 5 YEARS AND HENCE THE SAME WERE SURRENDERED TO DGFT. APART FROM THAT VALIDITY OF C ERTAIN LICENSES HAD EXPIRED AND THE ASSESSEE WAS UNABLE TO UTILIZE THE SAME. HENCE THE 42 AMOUNT OF RS. 1.49 CRORES WAS WRITTEN OFF IN THE PR OFIT & LOSS ACCOUNT. THIS EXPLANATION HAS NOT BEEN ACCEPTED BY THE A.O. IT IS STATED BY HIM THAT THE ASSESSEE HAD MERELY FURNISHE D JV ENTRIES FROM THE BOOKS FOR WRITING OFF SUCH RECEIVABLES. NO FURT HER DETAILS IN THIS REGARD WERE BROUGHT ON RECORD WITH SUPPORTING EVIDE NCE. HE HAS FURTHER OBSERVED THAT IN THE EARLIER YEARS THE INCO ME WAS SUBJECTED TO DEDUCTION U/S. 80 HHC. THUS THE INCOME BEING EXEMPT NO TAX WAS PAID THEREON AND THE AMOUNT WRITTEN BACK CANNOT BE ALLOWED AS EXPENSES/ LOSS OR BAD DEBT. HE HAS FURTHER STATED T HAT THE TERM BAD DEBT IS NOT DEFINED IN THE ACT BUT IS A CONDITION T HAT IT HAS TO BE SHOWN THAT IT BECOMES BAD TO GET THE DEDUCTION. IN THE AS SESSEES CASE THE AMOUNT WAS FOR LICENSES OBTAINED WHICH FROM DGFT WH ICH COULD NOT BE UTILIZED. SURRENDERING OF LICENSES DUE TO NON US E CANNOT BE TREATED AS BAD DEBT. IN THIS CONNECTION THE ASSESSEE REFERR ED TO EXPLANATION GIVEN TO THE A.O. IN ASSESSMENT PROCEEDINGS ON THIS ISSUE AS UNDER: ' IN THIS CONNECTION ASSESSEE SUBMITS THAT IT HAS OFFERED DEPB LICENSE AND ADVANCE LICENSE RECEIVED DURING EARLIER YEARS AS INCOME AND CORRESPONDING DEBIT WAS GIVEN TO EXPORT INCENTIVE RECEIVABLE. HOWEVER CERTAIN LICENSES WERE NOT UTILIZED BY ASSESSEE EVEN AFTER LAPSE OF 4 TO 5 YEA RS HENCE ASSESSEE HAS TO SURRENDER ADVANCE LICENSE TO DGFT. FURTHER VALIDITY OF SOME OTHER LICENSES WAS EXPIRED AND ASSESSEE WAS UNABLE TO UTILIZE THE SAID LICENSES . THEREFORE ASSESSEE HAS WRITTEN OFF LICENSES OF RS.1.49 CRORES IN PROFIT AND LOSS ACCOUNT AND CLAIMED AS 43 REVENUE EXPENDITURE. ASSESSEE ENCLOSES FOLLOWING DOCUMENTS TO SUPPORT ITS CLAIM OF LICENSES WRITTEN OFF DURING THE YEAR. (1) JOURNAL VOUCHERS SHOWING ACCOUNTING ENTRIES PAS SED IN BOOKS OF ACCOUNT FOR A.Y 2003-2004 REGARDING EXCE SS PROVISION WRITTEN BACK. (2) DETAILED WORKING SHOWING INCOME WAS OFFERED IN EARLIER YEARS & LICENSES WERE NOT UTILIZED BY ASSES SEE SINCE THEN. (3) LETTERS RECEIVED FROM DGFT REGARDING SURRE NDER OF LICENSE. AS THE ASSESSEE HAD OFFERED INCOME ARISING FROM LIC ENSES IN THE RETURN OF INCOME FILED FOR SAID YEARS EXPEN DITURE ARISING ON NON UTILIZATION OF SUCH LICENSES IS CLAI MED AS BUSINESS EXPENDITURE IN A.Y. 2003-2004. IT IS SUBMI TTED THAT THE APPELLANT HAD PRODUCED NECESSARY DETAILS TO JUSTIFY THE CLAIM AND THE OBSERVATION OF THE A.O. T HAT THE APPELLANT HAD NOT FURNISHED ANY DETAILS WAS NOT COR RECT. THE APPELLANT FURTHER REFERRED TO SECTION 36(1) (VI I) AND SLATED THAT THE BAD DEBT WRITTEN OFF AS IRRECOVERAB LE IN THE ACCOUNT IS ALLOWABLE SUBJECT TO THE FOLLOWING CONDI TIONS: 44 (A) THE DEBT HAS BEEN TAKEN INTO ACCOUNT IN CO MPUTING THE INCOME OF THE ASSESSEE OF PREVIOUS YEAR OR (B) IT REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF MONEY LENDING WHICH IS CARRIED ON BY THE ASSESSEE. AS IN THE CASE OF APPELLANT INCOME ARISING FROM DE PB/ ADVANCE LICENSES ARE ALREADY CONSIDERED AS PART OF INCOME IN EARLIER YEARS WRITING OFF OF SUCH INCOME AS BAD DEBT BECAUSE SUCH LICENSES HAVE BEEN EXPIRED/ NON USABLE OR SURRENDERED TO DGFT IS ALLOWABLE BUSINESS EXPENDITURE U/S. 36(L)(VII) OF THE ACT. THE FOLLOWI NG DECISIONS SUPPORT THE ARGUMENTS OF APPELLANT: (I) CIT VS. GIRISH BHAGWATPRASAD REPORTED AT 256ITR PAGE 772 (GUJARAT HIGH COURT) (II) ITO VS. ANIL H. RASTOGI REPORTED AT 86 ITD 193 (MUMBAI IT AT) (IN) (III) NEW DEAL FIN. INVEST. LTD 74 ITD 469 (CHENNAI ITAT) AS REGARDS THE OBSERVATIONS OF THE AO THAT DEDUCTIO N U/S. 8O HHC WAS AVAILED AND HENCE THE AMOUNT WRITTE N OFF IS NOT ALLOWABLE DEDUCTION IT IS STATED THAT IN TH E PREVIOUS ASSESSMENT FIRST OF ALL ABOVE REFERRED INCOME HAS BEEN CONSIDERED AS INCOME BY THE APPELLANT IN RETURN OF INCOME 45 AND FROM SUCH INCOME PERMISSIBLE DEDUCTION U/S. 80 HHC HAS BEEN CLAIMED. IT IS NOT THE FACT THAT ENTIRE IN COME IS EXEMPT INCOME FROM INCEPTION AS STATED BY ASSESSING OFFICER. FURTHER TO CLAIM ANY BAD DEBT IT IS NECE SSARY THAT RECEIPTS WHICH ARE WRITTEN OFF SHOULD HAVE BEEN CON SIDERED AS INCOME IN EARLIER YEARS WHICH IN CASE OF APPELLANT HAS BEEN DONE SO BY INCLUDING SUCH INCOME AS PART OF GROSS T OTAL INCOME. IT IS IMMATERIAL WHETHER ANY DEDUCTION HAS BEEN CLAIMED ON SUCH INCOME OR NOT FOR CLAIMING DEDUCTIO N OF BAD DEBT U/S. 36(1) (VII) OF THE ACT. AS THE APPELLANT HAS SATISFIED ALL THE CONDITIONS L AID DOWN U/S. 36(1) (VII) R. W. S. 36(2) OF THE ACT FOR CLAI MING BAD DEBT OUT OF INCOME FROM BUSINESS OR PROFESSION DISALLOWANCE MADE BY ASSESSING OFFICER IS REQUIRED LO BE DELETED. THE APPELLANT FURTHER SUBMITTED THAT IF THE ABOVE A MOUNT IS HELD TO BE NOT ALLOWABLE U/S.36 (2) THE SAME IS REPRESE NTING LOSS ARISING DIRECTLY IN THE COURSE OF BUSINESS AND IS A DMISSIBLE U/S.28 AS BUSINESS LOSS. IN THIS CONNECTION THE FOL LOWING CASES ARE RELIED UPON: A. MADRAS HIGH COURT DECISION IN DEVI FILMS PRIVATE LTD. V. CIT (75 ITR 301) 'THE STATUTORY PROVISION RELATING TO THE ALLOWANCE OF A BAD DEBT IS NOT EXHAUSTIVE. A DEBT BECOMES BAD FOR PURPOSES OF DEDUCTION IN THE 46 COMPUTATION OF TOTAL INCOME IF FACTS OBJECTIVELY CO NSIDERED REASONABLY POINT TO AN INFERENCE THAT HAVING REGAR D TO THE CIRCUMSTANCES OF THE DEBTOR IT HAS BECOME DIFFICUL T OR IMPOSSIBLE OF RECOVERY. WHETHER A DEBT IS OF SUCH A NATURE IS ALWAYS A QUESTION OF FACT WHICH HAS TO BE DETERMINE D IN THE LIGHT OF THE EVIDENCE AND CIRCUMSTANCED OF EACH CAS E. THERE IS NO PRESUMPTION IN THE MATTER AND IT IS FOR THE ASSE SSEE TO ESTABLISH IT. A TRADING LOSS HAS A WIDER CONNOTATIO N THAN A BAD DEBT. THERE MAY BE A BAD DEBT WHICH MAY NOT FALL WITHIN THE PURVIEW OF SECTION 10 (2)(XO BUT MAY WELL BE REGARDED AS ONE ELIGIBLE TO DEDUCTION IN THE COMPUTATION OF THE NET PROFITS CHARGEABLE TO TAX BECAUSE SUCH BAD DEBTS WILL HAVE TO BE TAKEN INTO ACCOUNT ON THE SIDE OF DEBIT WHICH WILL REDUCE THE NET PROFITS. BUT WHETHER ALLOWANCE CAN BE GIVEN IN THAT WAY MAY SOMETIMES DEPEND ON WHETHER THE OUTGOING OR WHAT I S REGARDED AS BAD DEBT RESULTING IN A LOSS IS ON THE CAPITAL OR REVENUE ACCOUNT. MOST TRADING LOSSES INCURRED IN TH E COURSE OF CARRYING ON OF BUSINESS IN A PARTICULAR YEAR WILL A LSO COME UNDER THAT CATEGORY AND WILL NATURALLY ENTER INTO COMPUTI NG THE NET TOTAL INCOME AS THE REAL PROFITS CHARGEABLE TO TAX CANNOT BE ARRIVED AT WITHOUT SETTING OFF OF LEGITIMATE TRADIN G LOSS...................................' B. SUPREME COURT DECISION IN RAMCHANDAR SHIV NARAYAN V. CIT (111 ITR 263) (SC) 47 UNDER SECTION 10(1) OF THE INDIAN INCOME-TAX ACT 1 922 HEREINAFTER CALLED THE 1922 ACT THE ASSESSEE WAS R EQUIRED TO PAY TAX IN RESPECT OF THE PROFITS OR GAINS OF ANY B USINESS CARRIED ON BY HIM. THE CORRESPONDING PROVISION IN THE 1961 ACT IS TO BE FOUND IN SECTION 28. SUB-SECTION (2) OF SECTION 10 OF THE 1922 ACT PRESCRIBED THE METHOD FOR COMPUTATION OF PROFIT S OR GAINS AFTER MAKING THE ALLOWANCES ENUMERATED IN THE VARIO US CLAUSES OF THAT SUB-SECTION. THE CORRESPONDING SECTION 29 O F THE 1961 ACT SAYS: 'THE INCOME REFERRED LO IN SECTION 28 SHALL BE COMPETED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTIONS 30 TO 43A.' IN TERMS NO SPECIFIC PROVISION IS TO BE FOUND IN EI THER OF THE TWO ACTS FOR ALLOWING DEDUCTION OF A TRADING LOSS OF THE KIND WE ARE CONCERNED WITH IN THIS CASE. BUT IT HAS BEEN UNIFORMLY LAID DOWN THAT A TRADING LOSS NOT BEING A CAPITAL LOSS HAS GOT TO BE TAKEN INTO ACCOUNT WHILE ARRIVING AT THE TRUE FIGURES OF THE ASSESSEE'S INCO ME IN THE COMMERCIAL SENSE. THE LIST OF PERMISSIBLE DEDUCTION S IN EITHER OF THE ACTS IS NOT EXHAUSTIVE. WE MAY JUS T REFER LO SECTION 10(2) (XV) OF THE 1922 ACT CORRESPONDING TO SECTION 37 OF THE 1961 ACT. THE RELEVANT WORDS OF THE SAID PROVISION NAMELY 'ANY EXPENDITURE ... NOT BEING I N THE NATURE OF CAPITA! EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVEL Y FOR 48 THE PURPOSE OF SUCH BUSINESS...' OCCURRING IN EITHE R OF THE TWO PROVISIONS HAS NOT BEEN ABLE TO TAKE WITHIN ITS AMBIT LOSS OF PROPERTY OR MONEY BY THEFT OR DACOILY AS IT IS NOT AN EXPENDITURE WHICH HAS AN ELEMENT OF VOLITION BUT A FORCED LOSS. THE CASES HAVE LAID DOWN (HAT SUE!; A LOSS IS A TRADING LOSS IN THE COMMERCIAL SENSE AND HAS GOT TO BE TAKEN INTO ACCOUNT FOR ASCERTAINMENT OF TRUE TAXABL E PROFITS.' FROM PAGE 269 OF THE REPORT: 'THE PRINCIPLE APPLICABLE IN INDIA IS MORE OR LESS THE SAME. IF THERE IS A DIRECT AND ' PROXIMATE NEXUS BE TWEEN THE BUSINESS OPERATION AND THE LOSS OR IT IS INCIDENTAL TO IT THEN THE LOSS IS DEDUCTIBLE AS WITHOUT THE BUSINESS OP ERATION AN<-L DOING ALL THAT IS INCIDENTAL TO IT NO PROFIT CAN BE EARNED. IT IS IN THAT SENSE THAT FROM A COMMERCIAL STANDARD SUCH A LOSS IS CONSIDERED TO BE A TRADING ONE AND B ECOMES DEDUCTIBLE FROM THE TOTAL INCOME ALTHOUGH IN TERM S NEITHER IN THE 1922 ACT NOR IN THE 1961 ACT THERE IS A PRO VISION LIKE SECTION 51(1) OF THE AUSTRALIAN ACT.' C. SUPREME COURT DECISION IN BADRIDAS DAGA V. CIT (34 ITR 10) D. SUPREME COURT DECISION IN CIT V. S. C. KOT HARI (82 ITR 794) 49 THE ASSESSING OFFICER MAY BE DIRECTED TO ALLOW THE TRADING LOSS INCIDENTAL TO BUSINESS U/S 36 (1) (VII) OF THE ACT. 16. THE LEARNED CIT (A) CONSIDERING THE SUBMISSION OF THE ASSESSEE AND FINDINGS OF THE A O DELETED THE ADDITI ON. HIS FINDINGS ARE REPRODUCED AS UNDER: I HAVE CAREFULLY CONSIDERED OBSERVATIONS AND FINDINGS OR THE AO IN THE ASSESSMENT ORDER AND THE ARGUMENTS OF THE ID. AUTHORIZED REPRESENTATIVE FOR THE APPELLANT. I HAVE ALSO CAREFULLY GONE THROUGH THE V ARIOUS CASE LAWS RELIED UPON BY BOTH THE SIDES. THE A.O. H AS MADE DISALLOWANCE OF RS 1 49 18 7207/- WHICH HAS BE EN CLAIMED BY THE APPELLANT AS A BAD DEBT- ON ACCOUNT OF DEPB LICENSE AND ADVANCE LICENSE. THE DISALLOWANCE HAS BEEN MADE BY THE A. O. ON THE GROUND THAT THE APPEL LANT HAS ENJOYED DEDUCTION U/S 80HHC ON THE DEPB LICENSE AND ADVANCE LICENSE INCOME. SINCE THE INCOME WAS EXEMPT THE BAD DEBT ON ACCOUNT OF THESE LICENSES CANNOT BE ALLOWED. ON THE OTHER HAND THE COUNSEL HAS MAINLY A RGUED THAT THE DEBT HAS BEEN TAKEN INTO ACCOUNT IN COMPUT ING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR. THEREF ORE WRITING OFF SUCH INCOME AS BAD DEBT; BECAUSE THESE LICENSES HAVE EXPIRED OR HAVE BEEN SURRENDERED TO DGFT IS ALLOWABLE AS BUSINESS EXPENDITURE U/S 36(1) (VII). THE COUNSEL HAS ALSO PLACED RELIANCE ON SOME CASE L AWS IN THIS REGARD WHICH HAVE BEEN DISCUSSED SUPRA I FIND FORCE 50 IN ' THE ARGUMENTS OF THE COUNSEL THAT THE INCOME F ROM THESE LICENSES HAS BEEN CONSIDERED AS INCOME BY THE APPELLANT AND FROM SUCH INCOME DEDUCTION U/S 80HHC HAS BEEN CLAIMED AND THAT THE ENTIRE INCOME IS NOT EXEM PT FROM INCEPTION. THE COUNSEL SLATED THAT THE APPELLANT IS SATISFYING THE CONDITION THAT TO CLAIM ANY BAD DEBT THE RECEIPTS WHICH ARE WRITTEN OFF SHOULD HAVE BEEN CON SIDERED AS INCOME IN THE EARLIER YEARS WHICH IN THE CASE OF THE APPELLANT HAS BEEN DONE BY INCLUDING SUCH INCOME AS PART OF GROSS TOTAL INCOME. THE CASES LAWS RELIED UPON B Y THE COUNSEL ARE ALSO APPLICABLE TO THE FACTS OF THE APP ELLANT'S CASE. TIE A.O. HAS NOT ALLOWED THE BAD DEBTS ON THE UNDERSTANDING THAT THE ENTIRE INCOME IS EXEMPT SINC E INCEPTION WHICH IS NOT THE CORRECT VIEW. THUS IN VI EW OF THE ARGUMENT OF THE COUNSEL FOR THE APPELLANT THE ADDIT ION MADE BY THE A.O. ON ACCOUNT OF DISALLOWANCE OF BAD DEBT IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 17. THE LEARNED D R RELIED UPON THE ORDER OF THE A O AND SUBMITTED THAT ASSESSEE CLAIMED BAD DEBT ON DEPB AND ADVANCE LICENSES. ASSESSEE SHOULD PROVE THAT IT SHOULD BE DEBT AS WEL L AS BAD. IT WAS WRITING OFF OF ONLY BECAUSE ASSESSEE ENJOYED DEDUCT ION U/S 80 HHC IN THE EARLIER YEARS. 18. ON THE OTHER LEARNED COUNSEL FOR THE ASSESSEE R EITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND RELIE D UPON DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF LOR DS DAIRY FIRM 51 LTD. VS CIT 27 ITR 700 IN WHICH IT WAS HELD (I) THAT AS IT WAS NECESSARY FOR THE ASSESSEE TO EMPLOY THE CASHIER AN D TO DEPUTE TO HIM THE DUTY OF WITHDRAWING MONEYS FROM THE BANK THE LOSS DIRECTLY AROSE FROM THE NECESSITY OF DEPUTING THAT DUTY TO THE CASHIER AND THEREFORE LOSS CAUSED BY THE EMBEZZLEME NT WAS A TRADING LOSS AND THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION; (II) THAT AS THERE WAS NO EVIDENCE ON THE RECORD E XCEPT THE FACT THAT THE ASSESSEE WROTE OFF THIS AMOUNT IN THE YEAR OF ACCOUNT THE COURT WAS ENTITLED TO PRESUME THAT THE AMOUNT B ECAME IRRECOVERABLE WHEN THE ASSESSEE WROTE IT OFF IN ITS BOOKS OF ACCOUNT AND THAT THEREFORE THE ASSESSEE WAS ENTITLE D TO CLAIM THE SUM OF RS.32 000 AS A TRADING LOSS IN THE ASSES SMENT YEAR 1947-48. HE HAS ALSO RELIED UPON THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS ABDUL RAZAK & CO. 136 I TR 825 IN WHICH IT WAS HELD ON THE FACTS THAT THE TRIBUNAL HAD OVERLOOK ED THE STATEMENTS OF THE ASSESSEE AND THE DEBTOR FIRM WH ERE IT HAD BEEN CLEARLY STATED THAT THESE ADVANCES WERE ASKED FOR AND MADE IN FACT HAVING REGARD TO THE COMMERCIAL RELAT IONS BETWEEN THE PARTIES AND THE COMMERCIAL RELATIONS WERE ADMIT TEDLY OF PRINCIPAL AND COMMISSION AGENTS. THE TRIBUNAL WAS N OT JUSTIFIED IN HOLDING THAT THE ADVANCE TO M/S. M.P. WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE-FIRM. THE DEBT O WED BY M/S. M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINES S OF THE ASSESSEE AND WAS ALLOWABLE AS A BAD DEBT AND CONSEQ UENTLY THEREFORE AS A TRADING LOSS UNDER S. 28(1). 52 HE HAS ALSO RELIED UPON RECENT DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF T. R. F. LTD. VS CIT 323 ITR 3 97 IN WHICH IT WAS HELD AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE T O ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRIT TEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSE E. HOWEVER IN THE PRESENT CASE THE ASSESSING OFFICER HAS NOT EXAMINED WHETHER THE DEBT HAS IN FACT BEE N WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS THE BAD DEBT ACCOUNT IS DEBITED AND TH E CUSTOMERS ACCOUNT IS CREDITED THUS CLOSING THE ACCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES THE PROVISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATED ABOVE THE ASSESSING OFFICER HAS NOT EXAMINE D WHETHER IN FACT THE BAD DEBT OR PART THEREOF IS W RITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE ASSESSING OFFICER. HENCE THE MATTER IS REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSIDERATION OF THE ABOVE-MENTIONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTENT OF THE WRITE O FF. HE HAS ALSO RELIED UPON ORDER OF ITAT AHMEDABAD C B ENCH IN THE CASE OF CHIRAG PLASTS VS ITO IN ITA NO.2196/AHD/200 9 DATED 18-09- 2009 AND FURTHER SUBMITTED THAT THE CONDITIONS OF S ECTION 36 (1) (VIII) 53 ARE SATISFIED IN THIS CASE THEREFORE DEDUCTION ON ACCOUNT OF BAD DEBTS IS RIGHTLY ALLOWED BY THE LEARNED CIT (A) AND SUBMITTED THAT EVEN THE SAME IS ALLOWABLE AS BUSINESS LOSS. 19. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) IN DE LETING THE ADDITION. THE FACTS NOTED BY THE LEARNED CIT (A) HAVE NOT BEE N DISPUTED. IT IS ADMITTED FACT THAT INCOME FROM THESE LICENSES HAVE BEEN CONSIDERED AS INCOME BY THE ASSESSEE AND FROM SUCH INCOME DEDU CTION U/S 80 HHC HAVE BEEN CLAIMED AS PER LAW. IT WOULD THEREFO RE SHOW THAT THE ENTIRE INCOME OF THE ASSESSEE WAS NOT EXEMPT FROM B EGINNING. THE ASSESSEE HAS SATISFIED THE CONDITIONS OF THE CLAIM OF BAD DEBTS. EVEN OTHERWISE WHEN THE ASSESSEE OFFERED INCOME ON ABOV E ACCOUNT IN EARLIER YEAR AND CORRESPONDING DEBIT WAS GIVEN TO E XPORT INCENTIVES RECEIVABLES THEREFORE BECAUSE OF NON-UTILIZATION O F THE LICENSES VALUE WAS SURRENDERED BECAUSE OF THE VALIDITY EXPIRED AND ASSESSEE WAS UNABLE TO USE THE SAME. THEREFORE IT COULD BE CONS IDERED AS BUSINESS LOSS TO THE ASSESSEE ALSO. IT WOULD FALL I N CATEGORY OF BUSINESS LOSS ALSO BECAUSE OF THE LICENSES CONNECTE D WITH THE BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE EXAMI NING THE CASE OF THE ASSESSEE FROM EVERY POSSIBLE ANGLE WE DO NOT F IND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LE ARNED CIT (A). WE CONFIRM HIS FINDING AND DISMISS THIS GROUND OF APPE AL OF THE REVENUE. 20. ON GROUND NO.4 REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT (A) IN DELETING THE DISALLOWANCE OF RS.1 00 000 /- MADE BY THE A O AS PREVIOUS YEARS EXPENSES. 54 21. THE A O NOTED IN PARA 12 OF THE ASSESSMENT ORDE R THAT THE SAME EXPENDITURE DID NOT RELATE TO THE CURRENT YEAR AND WAS DISALLOWED. ASSESSEE EXPLAINED THAT DURING THE CURR ENT ASSESSMENT YEAR IT HAS RECEIVED PROFESSIONAL BILL OF RS.1 00 000/- PERTAINING TO PRECEDING ASSESSMENT YEAR 2002-03. AS THE FINANCIAL STATEMENT FOR ASSESSMENT YEAR 2002 WERE FINALIZED PRIOR TO DATE O F RECEIPT OF THE BILL THEREFORE CLAIM OF EXPENDITURE WAS MADE IN T HE ASSESSMENT YEAR UNDER APPEAL BECAUSE SUCH EXPENDITURE HAS BEEN CRYS TALLIZED DURING THE YEAR WHICH IS ALLOWABLE U/S 37 OF THE IT ACT. T HE ASSESSEE RELIED UPON DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAURASTRA CEMENT & CHEMICAL INDUSTRIES LTD. VS CIT 213 ITR 52 3 IN WHICH IT WAS HELD THAT THE ASSESSEE FOLLOWED MERCANTILE SYST EM OF ACCOUNTING EXPENDITURE RELATING TO EARLIER YEAR LIABILITY ARISING IN RELEVANT PREVIOUS YEAR EXPENDITURE IS DEDUCTIBLE. THE ASSES SEE FURTHER EXPLAINED THAT IN CASE EXPENDITURE IS NOT ALLOWED D EDUCTION IN THE ASSESSMENT YEAR UNDER APPEAL THE SAME SHOULD BE AL LOWED IN THE EARLIER YEAR. 22. THE LEARNED CIT (A) CONSIDERING EXPLANATION OF THE ASSESSEE AND MATERIAL ON RECORD NOTED THAT THE EXPENDITURE H AS BEEN INCURRED BY THE ASSESSEE AND THE DECISIONS CITED BY THE ASSE SSEE SUPPORT THE CONTENTION OF THE ASSESSEE AND ACCORDINGLY DELETED THE ADDITION. 23. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE. THE ASSESSEE ADMITTEDL Y RECEIVED BILL DURING THE CURRENT ASSESSMENT YEAR THEREFORE LIAB ILITY OF THE ASSESSEE TO PAY THE AMOUNT IS CRYSTALLIZED DURING T HE ASSESSMENT 55 YEAR UNDER APPEAL. THE LEARNED CIT (A) RIGHTLY DELE TED THE ADDITION BY FOLLOWING THE DECISION OF THE HON'BLE GUJARAT HIGH COURT ABOVE BECAUSE THE LIABILITY ARISES DURING THE ASSESSMENT YEAR UNDER APPEAL. THERE IS NO MERIT IN THIS GROUND OF APPEAL OF THE R EVENUE. SAME IS ACCORDINGLY DISMISSED. 24. GROUND NO.5 AND 6 ARE GENERAL AND NEED NO ADJUD ICATION. NO OTHER POINT IS ARGUED OR PRESSED. 25. IN THE RESULT THE APPEAL OF THE REVENUE IN ITA NO.2033/AHD/2007 FOR ASSESSMENT YEAR 2003-04 IS DIS MISSED. ITA NO.600/AHD/2009 (A Y: 2004-05)(DEPARTMENTAL APP EAL) ITA 601/AHD/2009 (A Y: 2005-06)(DEPARTMENTAL APPEAL ) 26. BOTH THE ABOVE DEPARTMENTAL APPEALS ARE DIRECTE D AGAINST THE COMMON ORDER OF LEARNED CIT (A)-XVI AHMEDABAD DATE D 17-12-2008 FOR ASSESSMENT YEARS 2004-05 AND 2005-06. 27. THE REVENUE IN ASSESSMENT YEAR 2004-05 ON GROUN DS NO.1 AND 2 CHALLENGED THE DELETION OF ADDITION OF RS.13.71 C RORES BEING ACCRUED INTEREST ON BORROWED FUNDS ADVANCED TO M/S. BHANSALI ASSOCIATES. ON GROUNDS NO.3 AND 4 DELETION OF DISA LLOWANCE OF RS.13.71 CRORES ON ACCOUNT OF INTEREST U/S 36(1) (I II) ON ALTERNATE GROUND IS CHALLENGED. GROUNDS NO.5 AND 6 ARE GENERA L. 28. THE REVENUE IN ASSESSMENT YEAR 2005-06 ON GROUN DS NO.1 AND 2 CHALLENGED THE DELETION OF ADDITION OF RS.19.14 C RORES BEING ACCRUED INTEREST ON BORROWED FUNDS ADVANCED TO M/S. BHANSALI 56 ASSOCIATES. ON GROUNDS NO.3 AND 4 DELETION OF DISA LLOWANCE OF RS.19.14 CRORES ON ACCOUNT OF INTEREST U/S 36(1) (I II) ON ALTERNATE GROUND IS CHALLENGED. GROUNDS NO.5 AND 6 ARE GENERA L. 29. THE LEARNED CIT (A) DECIDED ALL THE GROUNDS IN FAVOUR OF THE ASSESSEE BY FOLLOWING HIS ORDER FOR ASSESSMENT YEAR 2003-04. THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES SUBMITT ED THAT LEARNED CIT (A) FOLLOWED THE ORDER FOR ASSESSMENT YEAR 2003-04 FOR THE PURPOSE OF DELETING THE ABOVE ADDITIONS AND THE ORDER IN TH AT CASE MAY BE FOLLOWED IN THIS YEAR ALSO. 30. ON CONSIDERATION OF THE ABOVE FACTS WE FIND TH AT IN BOTH THE APPEALS OF THE REVENUE THE GROUNDS OF APPEALS ARE S AME WHICH HAVE BEEN CONSIDERED AND DECIDED IN ASSESSMENT YEAR 2003 -04 IN ITA NO.2033/AHD/2007 AND DEPARTMENTAL APPEAL HAS BEEN D ISMISSED ON ALL THESE GROUNDS. BY FOLLOWING THE SAME REASONS FO R DECISION WE DO NOT FIND ANY MERIT IN ALL THE GROUNDS OF APPEAL OF THE REVENUE. ALL GROUNDS ARE ACCORDINGLY DISMISSED. 31. GROUND NO.5 AND 6 ARE GENERAL AND NEED NO ADJUD ICATION. NO OTHER POINT IS ARGUED OR PRESSED. 32. IN THE RESULT THE APPEALS OF THE REVENUE IN IT A NO.600/AHD/2009 AND ITA NO. 601/AHD/2009 FOR ASSESS MENT YEARS 2004-05 AND 2005-06 ARE DISMISSED. 57 33. IN THE RESULT ALL THE DEPARTMENTAL APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22-10-2010. SD/- SD/- (N. S. SAINI) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 22-10-2010 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD