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IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘B', HYDERABAD

BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER

AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

ITA No. Assess-ment year

Appellant Respondent

468/Hyd/2009

2005-06

M/s. Maruti Securities Ltd., Hyderabad (PAN AABCM 3651 M)

Addl. Commissioner of Income-tax Range 16, Hyderabad

1939/Hyd/2011 2005-06 Dy. Commissioner of Income-tax Circle 16(2), Hyderabad


1111/Hyd/2011 2006-07 M/s. Maruti Securities Ltd., Hyderabad (PAN AABCM 3651 M)

Dy. Commissioner of Income-tax Circle 16(2), Hyderabad

1120/Hyd/2010

2006-07 Asst. Commissioner of Income-tax Circle 16(2), Hyderabad


Assessee by : Shri K.A.Sai Prasad

Department by : Shri Solgy Jose T.Kottaram DR

Date of Hearing 08.07.2014 Date of Pronouncement 05.09.2014

O R D E R Per Asha Vijayaraghavan, Judicial Member :

The above cross appeals are directed against separate orders

of the CIT(A)-V, Hyderabad for assessment years 2005-06 and 2006-07.

Since all the above appeals belong to one assessee and the issues involved

are similar, these appeals are clubbed and heard together and are

disposed of by this common order for the sake of convenience.

http://www.itatonline.org

ITA No.468/Hyd/2009 & 3 others

M/s. Maruti Securities Limited, Secunderabad .

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ITA No. 468/Hyd/2009 Assessment Year 2005-06.

2. This appeal is directed against the order of the Commissioner

of Income-tax (Appeals) V, Hyderabad dated 28.01.2009 for the

assessment year 2005-06.

3. Facts of the case in brief leading to the filing of the present

appeal are that the assessee, a public limited company engaged in the

business of investment in securities, filed on 19.10.2005 its return of

income for the asst year 2005-06 declaring a loss of Rs 28,93,900/- under

the normal provisions of the Income-tax Act, 1961. The assessment u/s

143(3) was completed on 06.12.2007, determining the total income at

Rs.4,21,11,366/-, after making the following additions-

S. No.

Particulars Amount (Rs.)

1. Disallowance of interest on TDS 1,00,000

2. Disallowance of interest u/s. 40(a)(ia) 1,77,87,183

3. Disallowance of expenditure for earning dividend income estimated @ 10% of dividend income

3,39,000

4. Addition of notional interest computed on advances as interest accrued and not offered

2,76,38,140

4,58,64,323

4. The CIT(A), on appeal, confirmed the addition of notional

interest computed on advances as interest accrued. With respect to

disallowance u/s. 40(a)(ia) the CIT(A) gave partial relief and with respect

to disallowance of expenditure for earning dividend income at 10% of

dividend income, the CIT(A) directed the Assessing Officer to rework the

same. Aggrieved, the assessee is in appeal before us.

5. The first issue involved in this appeal relates to the addition of

Rs.2,76,38,140 made by the assessing officer on account of notional

interest.




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6. Facts in brief relating to this issue are that during the

assessment year 2005-06, the assessee had advanced certain sums to

various parties. These advances comprised of loans which are repayable

on demand and short term advances for acquiring securities. The

assessee had entered into agreement only for the loans made with the

necessary repayment terms including interest whereas it had not entered

into any loan agreements for short term advances made for acquiring

securities and there are no covenants in the agreements entered with

regard to interest payments also. Thus, there are agreements in the case

of some loans and there were no loan agreements in others. The assessee

has not accounted any interest on accrual basis. The Assessing Officer

made addition of notional interest of Rs. 2,76,38,140 with the following

observations:

"A verification of the P&L a/c indicate that the assessee has not offered to tax any 'Interest income' on accrual basis. In this connection, it is important to mention here that the assessee follows the mercantile system of accounting and any interest income that was accrued has necessarily to be included in its total income irrespective of its receipt during the relevant year. As it is evident from the sworn statement of Shri K. Varada Rajan, Managing Director, the loans/advances are interest bearing loans. The assessee's subsequent claim that these loans are not interest bearing is not acceptable as the assessee has already received interest from some parties as is evident from answer to Q. No. 22. As the assessee company is following mercantile system of accounting, it cannot account the interest on receipt basis. Accordingly, the interest accrued on the loans given during the year relevant to A.Y. 2005-06 works out to Rs 2,76,38,140/- which the assessee has not offered to tax, is bought to tax."




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7. Aggrieved, the assessee preferred an appeal before the

CIT(A).

8. The learned Authorised Representative for the assessee

submitted before the CIT(A) that it has not been a practice for the

assessee to receive interest on the said advances. Consequently interest is

not accounted in the books on accrual basis. Schedule 9 to Annual report

forming part of audited accounts of the company for the year ended 31st

march 2005, laid down significant accounting policies followed in

preparation of the accounts. The accounting policies, inter alia, laid the

following ground rules for 'Revenue recognition':

(i) The company follows mercantile system of accounting and recognizes income and expenditure on accrual basis.

(ii) Revenue is not recognized on the grounds of prudence until realized in respect of liquidated damages, delayed payment charges, as recovery of the amounts are not certain.

9. In the present case, it was submitted before the CIT(A), the

Assessing Officer did not state that the method followed by the assessee

does not facilitate the finding out of correct income from the accounts,

consistently maintained by the assessee. The only reason for such addition

by the Assessing Officer is on account of the sworn statement made by the

Managing Director of the assessee-company before the Astt. Director of

Income-tax(Inv), Hyderabad. The test of mercantile method of accounting

needs to be weighed with the fundamental and guiding principles of

conservatism and prudence requiring caution in recognizing what is due,

while taking care to provide for all liabilities other than contingent. The

earning of income is uncertain and therefore, is not to be recognized




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following the guiding principles of accountancy namely, conservatism and

prudence. The breakup of notional interest is as under:

Sl. No.

Name of the party Notional

income (Rs.)

1. Forum Finvest Pvt. Ltd. 3,83,715

2. Ask Holding Pvt. Ltd. 7,54,849

3. DPK Stocks & Securities 4,78,282

4. Sunrich Investments 9,09,673

5. Whitemoon Trading Co. Pvt. Ltd. 60,65,569

6. Pulchand Sons & Investment Pvt. Ltd. 1,85,07,916

7. Realstone Trading Co. Pvt. Ltd. 1,73,753

8. Goldstone Trading Co. Pvt. Ltd. 3,64,383

2,76,38,140

10. Before the CIT(A), the learned Authorised Representative

further submitted that from out of the above eight parties, three parties

have not refunded the principal sum advanced (let alone interest) till date;

and another three parties returned the principal sum advanced, but did not

pay any interest. It was submitted that interest is due only when the other

party agrees to pay. In the present case, the parties who received the

advances being companies are also required to follow mercantile method

of accounting and accordingly ought to have deducted the tax at source,

so that the assessee could have accounted the interest income in its

books.

11. Before the CIT(A), the learned Authorised Representative

further submitted that Hon'ble Supreme Court in several cases held that

notwithstanding the specific mode of computation provided by the law, the

commercial principles and practice could not be ignored. Following this




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principle, the assessee has not credited the interest into its books of

account. It was pointed out that a direct case law to dispute treating

notional interest income as total income is available in CIT V/s. Banswara

Fabrics Ltd. (2004) (267 ITR 398), and a similar stand was taken by

Hon’ble Madhya Pradesh High Court in the case of CIT V/s. Premier

Industries (I) Ltd., (2002) (257 ITR 762), Hon’ble Allahabad High Court in

the case of CIT V/s Dhampur Sugar Mills Ltd (2005) (274 ITR 370).

12. The CIT(A), not finding merit in the contentions of the

assessee, confirmed the addition made by the Assessing Officer by

observing that since in the instant case the assessee was following

mercantile system of accounting, and the Managing Director of the

assessee-company, in his sworn statement given before the DDIT (Inv),

Hyderabad, has admitted accrual of interest on loans/advances given by it

to different companies, for the previous year under consideration, i. e F. Y

2004-05. He has applied the ratio of the decisions of Hon'ble Supreme

Court, and of Hon'ble Rajasthan High Court, and held that the Assessing

officer was justified in taxing a sum of Rs 2,76,38,140/- towards accrued

interest in the hands of the assessee for the assessment year 2005-06.

Accordingly, he confirmed the addition made by the Assessing Officer.

Aggrieved, the assessee is in appeal before us.

13. Before us, the learned counsel for the assessee reiterated the

submissions as made before the lower authorities and submitted that the

assessee being an investment company had made loans/advances during

the year on the basis of the sworn statements made by the MD of the

assessee before the ADIT (Inv.) and loan agreements with few parties the

Assessing Officer computed the interest income for the asst year 2005-

06 by applying interest rate at the rate of 14% on all the loans and

advances. The interest income was determined at Rs 2,76,38,140 and




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addition was made in the assessment stating it to be unaccounted interest

income. The transactions of advances given to the eight concerns involved

can be grouped in to two categories.

(a) Parties with whom no agreement is entered into and

(b) Parties with agreement but payment of interest either totally not

paid or partially paid.

14. With regard to the parties with whom no agreement, the

learned counsel submitted that the Assessing officer applied uniform rate

of 14% for all the loans made by the assessee. But there are interest free

loans given on short term basis extended without any loan agreements

and are repayable on demand. The details of parties to whom such loans

are given and interest estimated even in the absence of any agreement

are as under:

S. No.

Name Amount

advanced (Rs.)

Interest estimated by ASSESSING OFFICER

Receipt

2005-06 2006-07 Principal

(Rs.) Interest

(Rs.)

1. ASK Holding Pvt. Ltd.

12000000 7,54,849 16,80,000 Nil NA Hence

Nil

2. DPK Stocks & Securities

7650000 4,78,282 10,71,000 Nil -do-

3. Sunrich Investments

14550000 9,09,673 20,37,000 Nil -do-

4. Forum Finvest P. Ltd.

3,83,715 4,44,356 -do-

5. Platinum Commercial P. Ltd.

3,51,649

6. V7 Overseas

1,48,630

7. Blue Chip Capital Markets P. Ltd.

92,055

TOTAL

23,26,519

58,24,690




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15. The learned counsel submitted that it is highly unjustified to

estimate interest at the rate of 14% on the above loans where there are

no agreements ,When no interest has been charged on loans, and the

assessee has no formal right to receive any interest the Assessing Officer

is unjustified in estimating notional interest that too @ 14%. As can be

seen from the details above the assessee could not recover even the

principal amount in 3 out of 4 cases mentioned above. These undisputed

facts emanating from the claims made before lower authorities. It is

submitted that when the principal amount itself irrecoverable/ doubtful, it

is highly unjustified to make an addition of notional interest ignoring the

principles of prudence. Under these circumstances, there was no real

accrual of interest and interest was not taxable in the hands of the

assessee having regard to the principles of real income. In fact, there are

no agreements with these parties even to enable the charging of interest

for the amounts advanced. The assessee had further claimed even before

the Assessing Officer that even in the succeeding assessment years, no

principal was recovered owing to adverse financial circumstances and

financial crunch faced by the parties. Hence it is totally unjustifiable on the

part of the revenue to infer interest income in cases where the principal

amount became doubtful to recover particularly when there are no

agreements, and the assessee had no basis to claim any interest. The

entire addition under this group (Rs. 25,26,519 for A.Y. 2005-06 & Rs.

58,24,690 for AY. 2006- 07 referred to in table above) is baseless and is

only on assumptions. Hence it is prayed that the Tribunal be pleased to

delete the above additions made as notional interest by the Assessing

Officer.

16. Regarding Parties with agreement and partial recovery, the

learned counsel submitted that in this group the loans are repaid without

paying even single rupee interest and in certain other cases interest was




9

paid partially. The advances made to Real Stone Trading Co and Gold

Stone Trading Company are refunded without honouring the interest

commitments. The same is evident from the ledger extracts placed pages

22 & 30 of paper book -Ill of the parties where in the amount advanced is

repaid without any interest. The details of parties who have not paid any

interest and those who paid partial interest upto AY 2006-07 are as under.

Sl. No

Name Notional int. Assessment Actual received and

offered to tax

2005-06 2006-07 2005-06

2006-07

1.

White Moon Trg. Co.

60,65,569

-

Nil

78,78,760

2. Realstone Trg. Co. P. Ltd.

1,73,753 1,53,424 Nil Nil

3. Goldstone Trg. Company

3,64,363 13,82,471 Nil Nil

4. Phulchand & Sons Inv. P. Ltd.

1,85,07,916 - Nil 25,00,000

5. Glibbs Computers P. Ltd.

1,150

6. Acme Craft P. Ltd.

8,97,342

Total 2,51,11,621 24,34,387 1,03,78,760

17. The learned counsel further submitted that whenever interest

was actually received, the assessee offered the same to tax in the year of

receipt where as the Assessing Officer estimated and added the notional

interest @ 14% in Assessment years 2005-06 and 2006-07 on accrual

basis, indirectly resulting in taxing the same twice in certain cases. It is

further submitted that the addition was made completely ignoring the

realities of the business in which the assessee is operating. There are

numerous instances even in the past when the parties settled the loans




10

without interest or by paying lesser amount than the agreed interest. The

assessee is not certain of the interest collection till the time it is finally

paid by the parties. Hence, the assessee cannot venture into accounting of

interest on accrual basis and unnecessarily end up in paying taxes.

18. The learned counsel submitted that in the case of Pulchand

Sons &Investments P Ltd, the notional interest for the asst year 2005-06,

was determined at Rs 1,85,07,916/-. The fact is that the assessee had

not received any interest in the assessment year 2005-06. Though the

agreement stipulates interest at the rate of 14%, the borrower could not

make any interest payment due to loss suffered in the capital market. The

borrower had requested for complete waiver of interest also. The assessee

after several negotiations could recover interest amount of only Rs.25

lakhs as full and final settlement. The same is offered to tax on receipt

basis in the asst year 2006-07. The agreement of interest settlement

dated 21.12.2005 is placed at pages 40 & 41 of paper Book 3,

confirmation letter is placed at S. No. 37 of paper book-3. In these

circumstances, learned counsel for the assessee requested for considering

the realties with regard to recoveries while arriving at the taxable income.

It is submitted at this juncture that the tax liability could not be attracted

merely on the basis of mercantile accounting. Since it is an undisputed fact

that the assessee had not received or even certain of receiving interest

from the borrower in the asst year 2005-06, the realities of business, viz.

there being defaults in repayment and the refusal of borrower to pay

interest, application for waiver of interest and the financial crunch of the

borrower needs to be appreciated in determination of the real income of

the assessee.

19. The learned counsel for the assessee further submitted that in

the case of Whitemoon Trading Co Pvt Ltd, the Assessing officer had




11

determined notional interest of Rs 60,65,669/- for the A.Y. 2005-06. It is

submitted that it had not received any interest in the relevant asst year.

In the asst year 2006-07, it had received Rs 78,78,760/- which includes

interest pertaining to asst year 2005-06 Rs 62,84,566/-.The same is

offered to tax in the asst year 2006-07 on receipt basis. The letter from

the said party is placed at page 11 of paper book-3. Ledger account and

TDS certificates are placed at pages 12, 13 of paper book-3. It is

submitted at this juncture, that the income alleged to be suppressed was

offered to tax on actual receipt basis in the subsequent year and there is

absolutely no suppression. The borrower also have not deducted any tax

on the interest for the asst year 2005-06 and have deducted tax in

A.Y.2006-07 i.e., the year in which they were offered to tax by the

assessee also. The Form 16A issued by the respective borrowers for F.Y.

2005-06 (Page 13 of Paper Book-3) emphasis the fact that they have not

admitted the liability and claimed the same as expenditure in F.Y. 2005-

06. This is the consistent stand taken by the assessee even before the

Assessing Officer.

20. The learned Departmental Representative relied on the

impugned orders of the revenue authorities and submitted that the

assessee has been following mercantile system of accounting and hence,

interest should be recognised on accrual basis only.

21. We have considered the rival submissions and perused the

impugned orders of the Revenue authorities and other material on record.

We have also gone through the written submissions filed and the decisions

relied upon by the parties before us. We are of the opinion that to arrive at

a real income, accrual basis cannot be a justifying factor and the

commercial and business realties of the assessee, should be considered.

The interest income has been recognized in the books of accounts only to




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the extent of actual collection, which is the recommended/ recognized

method as per Accounting Standard 9 of ICAI which lays down that when

uncertainties exist regarding the determination of the amount or its

collectability, the revenue shall not be treated as accrued and hence shall

not be recognized until collection. The recognition of revenue on accrual

basis presupposes the satisfaction of two conditions-

(a) The revenue is measurable

(b) The revenue is collectable with certainty.

The interest income has been admittedly recognised only on receipt basis.

The contention of the revenue that the loan agreements have interest

clause permitting the assessee to charge interest at the rate of 14% is not

tenable. The terms of the agreements, which enabled the assessee

company to demand interest were only enabling provisions and those

enabling provisions did not guarantee the collection of overdue interest.

They only gave a cause of action to the applicant.

22. The method of accounting, as followed by the assessee, does

not create any income; but the method of accounting only recognizes

income. There is some merit in the submission of the assessee that when

the principal itself is overdue and not collected, there is no basis for

making out a case that interest income would be collectable with certainty.

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 commercial belief having regard to the nature of

business of the assessee and character of the transaction. Accordingly, for

the purpose of determining whether there has been accrual of real income

or not, recourse is to be made to ascertain the nature of business and

character of the transaction and the realities and peculiarities of the




13

situations. The decision very heavily relied upon by the first appellate

authority in the case of State Bank of Travancore Vs CIT (1986) 158 ITR

102 was subsequently overruled in its land mark decision in the case of

UCO Bank Vs CIT 237 ITR 889. In this regard, we place reliance on the

ratio laid down by various judicial authorities on the proposition that the

income cannot be taxed on hypothetical basis, and it is only the real

income that is to be brought to tax. In this behalf, we also rely, giving

below summary of the ratio laid down, on the following decisions-

a) CIT vs. Godhra Electricity Co. 225 ITR 746 (SC),

The view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted.

b) Andhra bank(225 ITR 447)(SC): It was held, that there cannot be a tax if no income resulted, despite the entry in the book keeping. The case deals with s. 148. Assessee changed method of accounting from AY 1960 onwards. But during AY 1963-64, the AO objected the change and reopened assessments for AY 1960 onwards. Apex court held that this amounts to change of opinion and re-assessment is not valid.

23. Further, the learned counsel for the assessee relied on the

decision of the Hon’ble Supreme Court CIT vs. Excel Industries Ltd. & Ors.

(358 ITR 295) and submitted that going by the accounting standard

though the revenue is collectible by certainty, the assessee in the present

case, in fact, had not received any interest and hence, interest in question

remained only notional interest. As canvassed by the learned counsel for

the assessee, some of the parties did not repay even the principal amount

and some of the parties settled the accounts by paying some interest and

hence, we agree that computation of notional interest at 14% on all the




14

advances and making additions on that basis to the income of the

assessee, is not justified.

24. We may, at this juncture, refer to the Ahmedabad Bench

decision of the Tribunal in the case of ITO vs. CJ Rathod (11 ITR (Trib.)

252), relied upon by the learned counsel for the assessee. In this case

the assessee had given interest free loans to some persons. The

Assessing Officer added certain sums as deemed interest on such loans. It

was held that there was no agreement between the assessee and the

persons to whom the money had been advanced regarding charges of

interest and the assessee had actually not charged any interest and these

loans were interest free loans. As there was no charge of interest it was

held that the assessee was not entitled to any income and the deemed

addition made by the Assessing Officer is to be deleted.

25. We may further refer to the decision of this Tribunal in CCI

Finance V/s. ACIT (91 ITD 573), also relied upon by the learned counsel

for the assessee, wherein it was held that accrual of interest income on

non-performing assets account has to be judged from realistic point of

view. Non recognition of interest income on the ground that the interest

had not really accrued as the realisability of principal outstanding itself

was doubtful was held to be legally correct under the mercantile system of

accounting.

26. We may further refer to the decision of this Tribunal in the

case of NSL Power Infrastructure Ltd. V/s. CIT in ITA No. 1219/Hyd/2011

dated 24.1.2013, relied upon by the learned counsel for the assessee

before us, duly pointing that the High Court in ITTA No. 607 of 2013, has

dismissed the appeal by the Department, by holding that non-offering of

interest income is distinguished when there is no certainty and the

company has not derived any interest. As for the decision of State Bank of




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Travancore V/s. CIT (158 ITR 102), relied upon by the learned CIT(A) in

the impugned order, as pointed out by the learned counsel for the

assessee the Hon’ble Supreme Court has reversed the view taken in that

case, vide its decision in UCO Bank (237 ITR 889) wherein it has been held

as follows:

“……The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. The circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the case of Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, the legal effect of such circular is, inter alia, considered by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act 15 of 1955, which came into force on April 1, 1955. The Government, however, realised that the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. Accordingly, a circular was issued by the Central Board of Revenue on May 10, 1955,




16

pointing out to all Income-tax Officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC), this court observed that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, a Bench of three judges of this court has also taken the view that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. This court, however, clarified that the Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act. Also a circular cannot impose on the taxpayer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C.B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 issued by the Central Board of Direct Taxes relating




17

to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K.P. Varghese v. ITO [1981] 131 ITR 597. There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility". The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, or the subsequent decision in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court.




18

Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a "sticky" loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of




19

section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the Department was a judgment of a Bench of two judges of this court in Kerala Financial Corporation v. CIT [1994] 210 ITR 129, where this court, following the majority view in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), held that interest which had accrued on a "sticky" advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act.

27. In the light of the foregoing discussion and the case-law on the

point, we delete the addition of Rs.2,76,38,140 made by the assessing




20

officer and sustained by the CIT(A), allowing the grounds of the assessee

on this issue.

28. The next issue involved in this relates to rebate under S.88E in

respect of Securities Transaction Tax paid of Rs. 27,07,315.

29. Facts in brief relating to this issue are that by mistake, the

assessee debited the said amount to Profit and Loss Account under the

expenditure head "turnover charges paid", and claimed it as regular

expenditure. Thereafter before the CIT(A) the assessee claimed for rebate

u/s. 88E by filing additional ground. The learned AR submitted before the

CIT(A) that since the income returned was loss, the assessee had not

claimed the rebate under S.88E before the Assessing Officer. However,

since the assessment resulted in positive income, it was claimed, rebate

based on evidences is allowable. In the remand report submitted by the

assessing officer to the CIT(A), the assessing officer’s only objection was

that the loss was converted into positive income due to the technical

addition and hence, rebate under S. 88E is not allowable. The CIT(A)

after detailed consideration of the matter, rejected the claim of the

assessee for rebate under S.88E of the Act, for the reasons discussed in

paras 14.1 to14.4 of the impugned order, relevant portion of which reads

as follows:

"14.2. In the Profit and Loss Account filed with the return, the appellant has shown income from capital market at Rs. 4,15,57,891 and dividend income at Rs. 33,09,372. In the statement of computation of total income, while claiming the income from dividend as exempt u/s. 10(33), the appellant has computed loss at Rs. 28,93,904. However, after making addition of Rs. 1,77,87,183, disallowance out of expenses amounting to Rs. 3,39,000 and addition of a sum of Rs. 2,76,38,140 towards accrued interest on loans, the Assessing Officer has arrived at gross income of Rs. 4,29,70,423, and




21

after allowing set off of unabsorbed depreciation for an amount of Rs. 8,59,057, he has arrived at the taxable income of Rs. 4,21,11,366. After excluding the amount of Rs. 2,76,38,140 towards interest, which is assessed under the head 'Income from Other Sources', which has no nexus with the taxable securities transactions carried by the appellant, it would be seen that the appellant was having income for an amount of Rs. 1,82,26,183 from business, as per the assessment made by the Assessing Officer, and since the appellant has shown the major income from the capital market, it has to be construed that the same. was from the taxable securities transactions carried out by it during the previous year. Since as per section 29 of the Act, income under the head Profits and gains of business or profession is computed in terms of the provisions of sections 30 to 43D of the Act, the disallowance made u/s. 40(a)(ia) of the Act, has to be construed as part of business income arising from the taxable securities transactions carried on by the appellant during the previous year. Thus, in principle, I agree with the submission of the appellant that it is entitled to rebate u/s. 88E of the Act. However, u/s. 88E of the Act, it is clearly stated that no deduction shall be allowed unless the assessee furnishes along with the return of income evidence of payment Securities Transaction Tax in the prescribed form. The provisions of first proviso below sub-section (1) of section 88E reads as under:

"Provided that no deduction under this sub-section shall be allowed unless the assessee furnishes along with the return of income, evidence of payment of securities transaction tax in the prescribed form."

14.3. Further, the relevant provisions of Rule 20AAB of the Income

Tax Rules, 1962, which deals with the prescribed form for the above

purpose, are as under:

20AB. Evidence of payment of security transaction tax for

claiming deduction under Section 88E.-The evidence of

payment of securities transaction tax which is required to be

furnished alognwith the return of income by the assessee

under the first proviso to section 88E-




22

(i) On the value of transaction entered into by him in a

recognised stock exchange, shall be in Form No.10DB

and shall be verified in the manner indicated therein;

(ii) On the value of transactions of sale, by him, of a unit of

an equity oriented fund to the Mutual Fund, shall be in

Form No.10DC and shall be verified in the manner

indicated therein.

14.4 Thus, unless an assessee furnishes alongwith return of income,

evidence of payment of Securities Transaction Tax, in the prescribed

form, no rebate can be allowed u/s. 88E of the Act for any tax

claimed to have been paid towards Securities Transaction Tax.

However, in the instant case, as verified by me, the appellant has

not furnished any evidence of payment in the said prescribed form

regarding payment of any Securities Transaction Tax during the

previous year, alongwith the return of income filed by it on

19.10.2005. It may be mentioned here that alongwith the return,

the appellant has filed a statement of computation of income,

calculation of MAT working, report u/s. 115JB in form No.29B, Audit

Reports in form No.,3CA and 3CD, and the 11th Annual Report for

the year 2004-05, copy of audited Balance Sheet, Profit and Loss

Account and the scheduled thereto. Since the appellant has not filed

the require evidence in the prescribed form with the return of

income, having regard to above proviso to section 88E of the Act, in

my considered view, the appellant cannot be allowed any rebate u/s.

88E of the Act, notwithstanding the fact of payment for an amount of

Rs.27,07,315 made towards such tax during the previous year.

Hence, the claim of the appellant for allowance of rebate u/s. 88E of

the Act is rejected. Thus, the above additional ground is rejected.”

30. The assessee is in appeal before us on this issue.

31. Learned counsel for the assessee submitted that the assessee

had paid securities transaction tax of Rs. 27,07,315 during the previous

year relevant to assessment year 2005-06 and evidence for payment of

the same had also been submitted to the Assessing Officer. He also




23

submitted that the CIT(A) did not dispute the fact that the assessee is

eligible for rebate under S.88E of the Act. The first appellate authority

confirmed the action of the assessing officer in making the impugned

disallowance, merely on the ground that the assessee did not file required

evidence in the prescribed form with the return of income. In the

circumstances, he pleaded that the Tribunal should direct the Assessing

Officer to allow the claim of the assessee for allowance of rebate under

S.88E of the Act.

32. On the other hand, Learned Departmental Representative

strongly supported the impugned orders of the Revenue authorities, and

submitted that furnishing of the requisite evidence in prescribed form is

mandatory as per the provisions of S.88E of the Act, and as such, failure

on the part of the assessee in this behalf is fatal to the claim for rebate

under S.88E.

33. We have heard both the parties and perused the material

available on the record. We are of the considered opinion that though

furnishing of evidence as to payment of Securities Transaction Tax

alongwith the return filed is prescribed by the statutory provisions, those

provisions are only procedural, and non-furnishing of the same is not fatal

to the claim for relief under S.88IE of the Act. In the facts of the present

case, the claim of the assessee for rebate under S.88E is an off-shoot of

conversion loss returned into positive income on account of additions

made. In this view of the matter, we do not find any justification for

rejection of the assessee’s claim for rebate under S.88E of the Act. We

accordingly set aside the impugned order of the CIT(A) on this aspect and

direct the assessing Officer to verify whether the assessee had filed the

required evidence in the prescribed with regard to provisions of S.88E of

the Act. Ld.CIT(A) allowed similar claim in later year on which Revenue




24

has come up in appeal. Since the assessee had made the payment of an

amount of Rs.27,07,315 towards Securities Transactions Tax during the

previous year, the claim of the assessee for allowance of rebate under

S.88E of the Act has to be considered in the light of the evidence furnished

in that behalf. The assessing officer is directed to allow the claim of the

assessee after due verification of the evidence furnished by the assessee.

Assessee’s grounds on this issue are treated as allowed.

34. The next ground is with respect of disallowance of expenditure

attributable to earning of dividend income of Rs. 33,09,372.

35. Facts of the case in brief in relation to this issue are that

during the year under consideration, assessee had earned dividend income

of Rs 33,09,372. The assessee has not attributed any expenditure for

earning this income on the ground that these dividends are directly

credited into the bank account without any effort from the assessee. The

assessing officer attributed an indirect expenditure of Rs.3,39,000, by

estimating the same adopting a rate of 10% of the dividend income

earned during the year. He accordingly treating the said amount as

expenditure incurred for earning such dividend income, made an addition

of Rs 3,39,000/- under S.14A of the Act to the income returned by the

assessee.

36. The assessee filed a ground before the first appellate authority

to the effect that ‘the Assessing Officer erred in attributing Rs. 3,39,000/-

as the expenditure incurred for earning exempted dividend of Rs

33,09,372/-‘. Before the first appellate authority, assessee submitted a

computation with regard to expenditure attributable to earning of dividend

income, according to which it worked out to Rs. 1,30,309/-. The first

appellate authority directed the Assessing officer to work out the




25

disallowance under S.14A in accordance with the provisions of Rule 8D

with the following remarks:

“Thus, as per the admission of the assessee, certain expenditure has been incurred for earning dividend income of Rs 33,09,372 for this assessment year, which stands included in the expenses claimed under different heads, as shown in the Profit and Loss account. Such amount of expenditure pertaining to earning of the dividend income, has to be disallowed u/s 14A of the act. Thus having regard to the ratio of the above decision in the case of ACIT vs Citicorp Finance (India) Ltd..[300 ITR (AT) 398), the Assessing Officer has to work out the disallowance amount u/s 14A in accordance with the provisions of Rule 8D of the Income Tax Rules, 1962. He is directed accordingly".

37. Aggrieved by the order of the CIT(A), assessee is in second

appeal on this issue.

38. We have considered the rival submissions and perused the

orders of the Revenue authorities. Besides reiterating the contentions

urged before the Revenue authorities, assessee filed before us an

additional ground contending that the CIT(A) failed to appreciate the legal

position that Rule 8D was inserted w.e.f. 24.03.2008 and hence is not

applicable to the facts of the case since it is held to be prospective in

nature. We find merit in this contention of the assessee. The issue relating

to retrospective nature of the provisions of Rule 8D is covered by the

decision of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) (Bom) and

Bellwether Microfinance Fund Pvt. Ltd. (ITA No. 908/Hyd/2013 dated

8.1.2014), wherein it was held that provisions of Rule 8D are not

retrospective in nature. We accordingly hold that the provisions of Rule

8D are not applicable to the facts of the assessee's case for the

Assessment year 2005-06. However, considering the volume of dividend

income earned and the nature of the business of the assessee, we find




26

that the disallowance made by the assessing officer estimating the

expenditure relatable to dividend income at 10% of such income is quite

reasonable. We accordingly sustain the disallowance made by the

assessing officer and reject the grounds of the assessee on this issue.

39. The last issue involved in this appeal is with regard to

disallowance of interest expenditure under S. 40(a)(ia) of the Act.

40. Facts in brief in relation to this issue are that during the

previous year relevant to assessment year 2005-06, the assessee had

incurred interest expenditure of Rs 1,77,67,183/-. The assessee had

deducted TDS and remitted the same before the due date for filing return

of income u/s 139(1). The entire expenditure of Rs 1,77,67,183 (wrongly

typed as 1,77,87,183/- in the order u/s 143(3)) was disallowed by the

Assessing officer for the reason that the TDS was not remitted within the

time stipulated in S.200 of IT Act. Before the First Appellate Authority,

the assessee had submitted that it had remitted Rs 91,033/- pertaining to

interest payment of Rs 4,35,358/- relating to March 2005 on 7th May 2005

along with the other TDS amounts payable and the same should not be

disallowed u/s 40(a)(ia) in view of amendment made to provisions of

40(a)(ia) in Finance Act, 2008. Accordingly, the First Appellate authority

directed the Assessing officer to allow the deduction for the said amount of

Rs 4,35,358/-, but upheld the balance disallowance of Rs. 1,73,51,825/-

made by the assessing officer, though the assessee had remitted the TDS

deducted in respect of all the interest payments made during the asst

year 2005-06, before the due date for the filing of the return under

S.139(1).

41. Still aggrieved by the order of the CIT(A), assessee preferred

second appeal before the Tribunal.




27

42. The learned counsel for the assessee submitted that since the

assessee had remitted the TDS on interest expenditure before the due

date for filing return of income u/s 139(1), there is no justification to

disallow any part of the interest payment claimed as expenditure under

S.40(a)(ia). The assessee also filed an additional ground before us in this

behalf which reads as under:

"Since the tax deducted at source was paid before the due date u/s 139(1), the disallowance of interest u/s 40(a)(ia) is not justified since the amendment by Finance Act 2010 is held retrospective in nature".

The learned counsel submitted that the details of remittances made were

already filed before first Appellate authority, as placed at page 6 of paper

book-2 before us as well, as proof of evidence for remittance before the

due date under S.139(1). The learned counsel placed reliance on the

following decisions and contended that the amendment brought in by

Finance Act 2010 is curative in nature and has retrospective effective

application.

I. In the case of CIT vs. M/s. PEC Electricals Pvt. Ltd. (ITTA No.

263 of 2013 dated 12.07.2013) the Hon'ble Andhra Pradesh High Court held that the amendment to section 40(a)(ia) made by the Finance Act of 2010 is retrospective in nature.

II. The Calcutta High Court in the case of CIT vs Virgin Creations (ITAT No.302 of 2011 dated 23rd November, 2011) held that the amendment in Sec. 40(a)(ia) is having retrospective application.

III. The ITAT, Hyderabad in the cases-

(i) Sri Lakshmi Gayatri Hotels Pvt. Ltd V/s. ACIT (ITA No

625/Hyd/2013 dated 19.08.2013)

(ii) ITO V/s. Meil Ratna JV (ITA No. 20/Hyd/2013 dated




28

21.08.2013)

(iii) DCIT V/s. IVRCL Infra structure & Projects Ltd (ITA No. 1220/Hyd/2013 dated 20.12.2013)

-held that amendment to Sec 40(a)(ia) is retrospective in nature.

IV, In the case of ACIT vs Piyush C. Mehta (52 SOT 27 (Mum), it

was held that amendment to provisions of section 40(a)(ia) by Finance Act, 2010 is retrospective and where assessee deducted tax at source from payment for works contracts during relevant assessment year and deposited same before due date of filing return under section 139(1), no disallowance could be made.

43. Learned Departmental Representative on the other hand,

strongly supported the orders of the Revenue authorities.

44. We have heard both the parties and perused the material

available on record. It is an undisputed fact that the assessee has remitted

all the amounts of TDS effected from the interest payments in question

before the due date for the filing of the return under S.139(1) of the Act.

Following the consistent view taken by the coordinate benches of the

Tribunal under identical circumstances where remittance of the TDS

amounts were made into government account before the due date for the

filing of the return under S.139(1) as well as on the nature of amendment

under Finance Act, 2010, we find no justification for the disallowance of

Rs.1,73,51,825 in terms of S.40(a)(ia) of the Act. We accordingly set

aside the impugned order of the CIT(A) and direct the assessing officer to

delete this disallowance of Rs.,1,73,51,825 after due verification of the

claim of the assessee with regard to remittance of the amounts of tax

deducted before the due date of filing of the return under S.139(1) of the

Act. Assessee’s grounds of appeal on this issue are treated as allowed.




29

45. In the result, assessee’s appeal, ITA No.468/Hyd/2009 for the

assessment year 2005-06 is allowed.

Department’s Appeal: ITA No.1939/Hyd/2011 : Assessment year 2005-06

46. In this appeal of the Revenue directed against the order of the

Commissioner of Income-tax(Appeals)-V, Hyderabad dated 12.9.2011,

the only effective grievance of the Revenue is with regard to legality and

validity of the reopening of the assessment by the assessing officer under

S.147 of the Act.

47. Facts of the case in brief are that subsequent to completion of

original assessment made under S.143(3) of the Act on 6.12.2007

determining the income of the assessee at Rs.4,21,11,366 as against loss

returned by the assessee of Rs.28,93,900( subject matter of appeal

above), the assessing officer on verification of the material on record,

found that the assessee has shown expenses of Rs.46,39,452 incurred

towards earning of dividend income. Since lesser amount of expenses

incurred by the assessee for earning dividend income was disallowed in

terms of S.14A of the Act while completing the original assessment, the

assessing officer was of the view noticing that income chargeable to tax

has escaped assessment. He accordingly issued a notice under S.148 of

the Act, and ultimately disallowing an amount of Rs.46,39,452, as against

earlier disallowance of exp sustained by the CIT(A) of Rs.37,90,491, the

assessing officer ultimately determined the taxable income of the assessee

at Rs.4,89,39,527, vide order of assessment dated 31.12.2010 passed

under S.143(3) read with S.147 of the Act.

48. On appeal before the CIT(A), the assessee contested the




30

legality and validity of reopening of the assessment. Finding merit in the

contentions of the assessee on that aspect, drawing support from the

decision of the Full Bench of the Delhi High Court in the cases of Kelvinator

India Ltd. (256 ITR 1) among others, the CIT(A) held the reopening of

assessment as not valid, and consequently held the re-assessment to be

null and void.

49. Aggrieved by the above order of the CIT(A), Revenue is in

appeal before us.

50. We heard both sides and perused material available on record

including the impugned orders of the Revenue authorities. We find that the

CIT(A) noted in the first place in the impugned order that the disallowance

made under S.14A of the Act in the original assessment order dated

6.12.2007 was subject matter of adjudication by the CIT(A) vide his order

dated 28.1.2009, and on that very issue further appeal against the

disallowance sustained by the CIT(A) was also pending before the

Tribunal. Thus, the reopening of the assessment in this case is based on

the very same material which was already available on record at the time

of completion of the original assessment. The CIT(A), after referring to the

decision of the Full Bench decision of Delhi High Court in the case of

Kelvinator India (256 ITR 1) and the subsequent decisions of the Madras

High Court in the case of Apollo Hospital Enterprises Ltd. V/s. ACIT (287

ITR 25) and CIT V/s. Abdul Rahaman Sait (306 ITR 142), held that the

assessing officer could not have re-assessed any income by making

recourse once again to the provisions of S.14A. Apart from this, going

into the factual matrix of the case as well, the CIT(A) held that the

reopening of the assessment was made on account of mere change of

opinion and as such, reopening of the assessment is not valid. Since the

assessing officer after detailed analysis of the material already available on




31

record at the time of completion of original assessment, made certain

disallowance in terms of S.14A of the Act, and such disallowance made by

the assessing officer, having been contested by the assessee on appeal, it

was also examined and adjudicated upon by the first appellate authority,

we agree with the CIT(A) that reopening of assessment in this case is

based on mere change of opinion. Since the action of the CIT(A) in

holding the re-opening of assessment as not valid, in the circumstances of

the case, is in conformity with the settled position of law as laid down by

the decision of the Delhi high Court in the case of Kelvinator India Ltd.

(supra) and subsequent decisions of the Madras High Court noted above,

in the absence of any decision to the contrary brought to our notice by the

Revenue, we find no infirmity in the impugned order of the CIT(A), which

is accordingly confirmed, rejecting the grounds of the Revenue in this

appeal.

51. In the result, Revenue’s appeal for the assessment year 2005-

06, being ITA No.1939/Hyd/2011, is dismissed .

Assessee’s Appeal: ITA No.1111/Hyd/2010 : Assessment year 2006-07 52. This appeal by the assessee is directed against the order of the

Commissioner of income-tax(Appeals) V, Hyderabad dated 10.06.2010 for

the assessment year 2006-07.

53. The first effective grievance of the assessee in this appeal is

against the addition of Rs.82,59,078 towards notional interest made by

the assessing officer on estimate basis, which has been sustained by the

CIT(A). This issue is identical with the one considered by us hereinabove,

in the context of the assessee’s appeal for assessment year 2005-06.




32

Facts and circumstances of the case for the assessment year 2006-07,

being similar to the ones involved in the assessment year 2005-06, for the

detailed reasons discussed by us in paras 21 to 27 hereinabove, we delete

the addition of Rs.82,59,078 made by the assessing officer and sustained

by the CIT(A), allowing the grounds of the assessee on this issue.

54. The next effective grievance of the assessee in this appeal

relates to interest amount of Rs.60,65,569 offered to tax by the assessee

in the year under appeal. This amount of Rs.60,65,569, being part of the

amount of interest added by the assessing officer in the preceding year,

viz. assessment year 2005-06 on accrual basis, assessee pleaded for

deleting this amount of Rs.60,65,569. This claim of the assessee was not

accepted either by the assessing officer or the CIT(A). In view of our

decision, deleting the addition made by the assessing officer towards

notional interest in the preceding year, viz. assessment year 2005-06, vide

paras 21-27 hereinabove, we uphold this amount of Rs.60,65,569 being

assessed on receipt basis in the year under appeal. We accordingly reject

the ground of the assessee on this issue.

55. The next issue involved in this appeal relates to disallowance of

claim of loss of Rs.1,85,07,916 as non-receipt of interest added one

estimate basis in earlier assessment year. Admittedly, this issue also is

inter-linked to the addition made on account of notional interest in the

preceding year, viz. assessment year 2005-06 and if interest is held to be

assessable on actual receipt basis, this ground becomes infructuous and

no interference with the impugned orders of the Revenue authorities is

called for. In view of our decision, deleting the addition made by the

assessing officer towards notional interest in the preceding year, viz.

assessment year 2005-06, vide paras 21-27 hereinabove, we find no merit




33

in this ground of the assessee, which has become infructuous, and as such

liable to be rejected. We accordingly reject the same.

56. In the result, assessee’s appeal for the assessment year 2006-

07, being ITA No.1111/Hyd/2010, is partly allowed.

Department’s Appeal: ITA No.1120/Hyd/2010 : Assessment year 2006-07

57. This being a cross appeal of the Revenue for the assessment year

2006-07 is also directed against the order of the Commissioner of

Income-tax Appeals)-V, Hyderabad, for the assessment year 2006-07.

58. The only effective grievance of the Revenue in this appeal relates

to allowability of rebate under S.88E of the Act. Facts and circumstances

relating to disallowance of rebate under S.88E for this year are similar to

those considered by us while dealing with the corresponding ground for

the assessment year 2005-06 herein above, whereby for the detailed

reasons discussed in para 33 hereinabove, we set aside the impugned

order of the CIT(A) on this aspect for that year and directed the

assessing Officer to verify whether the assessee had filed the

required evidence in the prescribed with regard to provisions of

S.88E of the Act, and to allow the claim of the assessee for rebate

under S.88E after due verification of such evidence. The CIT(A), in

the impugned order for the year under appeal has directed the

assessing officer to verify whether there is evidence of payment in

the prescribed format, and if the assessee has complied with the

statutory condition, to allow the rebate as claimed by the assessee.

Since the directions of the CIT(A) in the impugned order for the year

appeal are in consonance with the ones given by us hereinabove for

the assessment year 2005-06, we do not find any infirmity in the




34

order of the CIT(A), which is accordingly upheld. Consequently, the

grounds of the Revenue, being devoid of merit, are rejected.

59. In the result, Revenue’s appeal for the assessment year

2006-07, being ITA NO.1120/Hyd/2010, is dismissed.

60. To sum up-

(a) While the assessee’s appeal for assessment year

2005-06, being ITA No.468/Hyd/2009, is allowed,

the same for assessment year 2006-07, being ITA

No.1111/Hyd./2010, is partly allowed;

(b) Revenue’s appeals for both the years, being ITA

No.1939/Hyd/2011 for assessment year 2005-06

and ITA No.1120/Hyd/2010 for assessment year

2006-07, are dismissed.

Pronounced in the court on 5th September, 2014

Sd/- Sd/- Sd/- (B. RAMAKOTAIAH)

ACCOUNTANT MEMBER (ASHA VIJAYARAGHAVAN)

JUDICIAL MEMBER Hyderabad, dated the 5th September, 2014 Tprao/BVS Copy to: 1. M/s. Maruti Securities Ltd., Flat No. 66, Ground Floor, Park View

Enclave, Manovikas Nagar, Secunderabad.




35

2. 3.

Additional Commissioner of Income-tax. Range-16, Hyderabad. Deputy CIT, Circle-16(2), Hyderabad.

4. The Asst. CIT, Circle-16(2), Hyderabad.

5. The Addl. CIT, Range-16, Hyderabad.

6. The CIT(A)-V, Hyderabad.

7. Departmental Representative, ITAT, Hyderabad


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