IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 4TH DAY OF JANUARY 2oV.1'o_'CCC'e._V
PRESENT
THE HONBLE EVIRJUSTICE o.v.sHYLE:i~ii§RA "
ANDCL .
THE HONBLE MR.-JUS'1C"CI C
C
BETWEEN: C
The Commissioner of Income lax
Central Circle. C.R.B1.iil'di11gCs C'
III Floor, Q'ueei11g C_'1*oad_ "
Bangalore--,5G.O do ~. j _ _ ,
Rep. by S§"Cnt.$fijaj%a=Mohiarifa:U.sl~ Appellant
[By _
Sifi Murtiiy. £2 _KiIIfIC1C3..1V"CC.' Advs .}
AND: C'
1. i\C/£fsfUnite'd,, BCrewei'ies Limited
/ Viital Mallya «road
_ F3ai1ga.l_o'i7e--56O O01 .
C -'Represented by
SCri-T';-Slfiarayana Rao, Director.
2._Th es 'ln.eo'nie~1iax Appellate
'I"ribLinal.. Bangalore Bench
III Rloor, Santhosh Complex
" «.§{.G.road, Bangalorew56O 009.
C' -- . Rfzpresented by the Vice President. Respondents
__;C{By Sri S.I5’ai’fh’asaraihi. Adv. For R-1]
This I.T.A is filed under Sec’Lion.260–A of the liicome
Tax Act. 1961 arising out of order dated 2’7. E22000 in ITA
No.2’73/Bang/99 for the assessment year 1997-98 praying
to: Whether the tribunal was right in deleting the prima facie
aCI_i:.:sin’ie;’1i’ made by ll’1€:? azssessing <).1CICic?e1' peri'air1ii'1g" to the
interest of Rs.74.75 lakhs accrued on inter corporate loans
without realising that the Assessing Oi'i'icer had t"u1l_.-.powe1's
to make an adjustment. with reference to deductionsleclainied
by the assessee which is at variance in the Profit_"aV11"d.g Loss
account and Balance sheet filed along with th:e"ret't1_1fh5and
etc. 5 = *
This appeal coming on__..fo.r_
D.V.S1-IYLENDRA KUMAR J., delhferedigthe 'i"o11t)4w'i.ng:Vg.__g A'
JUooMENr"V
This appeal is .by._'a_r1der– S'ection.260-A
of the Income Tax Act of the Income
Tax Appe11ate"3T fribanai, -:.v*BanA'ggaI0Vre…V:Bench 'B' in ITA
iva27s/B§ngjaé°tA§s;lyeaf7i9974%g in tenns of
Anneigure \ had been admitted to
examin'e'vtghe fo1Vlo\Xfi.ng's"a-hstantial questions of law:
V 'Whet'her"'t'he tribunal was right in deleting
_ prirna facte adjustment' made by the
T assessing Qfficer pertaining to the interest"
'V ' VRs.74.75 lalchs accrued on Inter
_c4orporate loans without realising that the
assessing officer had full powers to make
1' an adjustment with reference to
deductions claimed by the assessee
which is at variance in the Profit' and Loss
Account and Balance Sheet filed along
with the return?
8. Whether the assessing ojficer is entitled to
make a prima facie adjustment with
regard to an item of income taken Credit”
for in the profit and loss account’ by the
3
assessee but excluded from the
computation of income with (1 comment or
note?
2. Brief facts leading to the appeal are
assessee is a Public Limited Company
Bangalore Stock Exchange amongst = ‘V
assessment year 1997-98, in
assessee, a sum of Rs.7+l-h,_v’:/’E3..V’lal”{nsh:,
shown as interest on. a lent to
another company mana’ged–_ group on accrual
basis had been red.1ic’ed:”‘in’..the incorhne computation
exercise for ithe iieason..–_’that. the borrower was not in a
sound”-state of the assessee company has
shown that the .3.o’orr’ovirer leave alone paying interest but
‘ ‘ . wasknot even in ahposition to repay the principal amount
V”iiV1i{ely that the assessee company may lose
the en’ti1’eVt’.aIAn0unt etc. ,.
3. ” With the assessee following the mercantile system
of accounting and the assessing authority noticing that
V. ,_..the assessee company under an agreement, had lent a
sum of Rs.3.25 crores to another company with a
condition that the amount should be repaid with simple
4
interest at 21% pa. and as the profit and loss account
of the assessee had already been prepared wherein the
assessee in fact had shown this amount as an_”‘in:’_’c-:o’me
accrued to the company during the
relevant for the assessment year; the a_:sse4ssi:rigV’officer
acting under Section 143{l][alfl_oil.’_lthe
intimation to the assessee assessee’ that V’
the claim for reduci1’1g this”‘”int.erest._ incorn’e””from the
total income of the assessee isln’ot_..pen.nis_sib1e.
4. It is on*.sn–chl_intiri:iatiori;.j”—the? controversy has
developed to one appeal by the assessee
which calrriellto d:sn;i.§sed and a second appeal to the
w_hich”‘has…1net with success and the tribunal
accepting the real income theory put
assessee in the following terms:
V “We have examined the facts of the
; case and considered the arguments. We have
also perused the order of the CIT (Appeals).
‘ The preliminary issue herein is regarding the
applicability of Section 143[1)(a) with regard
to inclusion of income in the hands of the
assessee. We have already held in other
appeals that the Assessing O_[]’icer cannot
traverse beyond the powers accorded under
Seciion.143(1)(a). Sri Parthasarathi cited the
judgment of the Karnataka High Court and
5
the jurisdictional High Court in that judgment
in the case of God Granites and others has
held that matter is in favour of the assessee._
Apart from this several judgment cited by the-.p
Id. Advocate strengthen the case of
assessee. Applying the same prinei-p.l_es_’_s’
herein also the addition made
Assessing Officer and corfirmed bathe’
(Appeals) has to be deleted frorri the’ft’otall._:’p. _
income and the addl. Tax leviedtajlsot r”1eeds=t’o._ 5
be deleted.” A’ ”
5. The tribunal has reveprsed firstrli’
appellate authority theV_xziew._ta_l;Zen –the_assessing
authority, therefore before us
on the questions of Vas’~ir1diea-t,edV’above.
6. We i”,}’r..Krishna, learned Special
Governrnent Advocate ‘appearing for the revenue and Sri
learned Counsel appearing for the
– ”
Driiifishna, learned Counsel would point out that
the of the appellate tribunal suffers from the basic
defect of not even indicating the reasons to record a
lflnding “applying the same principles herein also the
addition made by the assessing officer and confirmed by
the CIT (Appeals) has to be deleted from the total
irrconle and the addltional tax levied also needs to be
deleted.”
3,. The statutory provisions of Section
reievant point of time reads as under:
“143(1){aJ Where a return has jbeen under ‘
Section 139 or in response to a”,no7t.._ic”e unci_er–.siib>s’ection
(1}ofSection 142,- ”
(1′) if any tax or interest is jbunddue art the basis
of such return, after _adju’strnent of any tax
deducted ‘at source, any advance tax paid
and any..,_amoi-int,pairigotherwise by way of
tax or interest, ‘then, without. prejudice to the
provisions. sub;se?ctioni2}’,’ an intimation
shall. be figsentjto ._th.e — ..as’sessee specyrying the
i.surn~’so paylablle, eand’ such intimation shall be
” -Audi-ieeriéed ‘”10′-be “a’~n”otice of demand issued
lu:’:£?i~er’V,sec_tio,n I56 and all the provisions of
_ ._ ‘t’his=A<:t"ishall4apply accordingly: and
{it}, «if anyfrefund is due on the basis of such
~. return, it shall be granted to the assessee:
_ that in computing the tax or interest
. 'payable .by'-,._or refundable to, the assessee, the following
adjus'tnients "shall be made in the income or loss declared
~_ i'n_the' ' 'namelyr
ti} ' any arithmetical errors in the return, accounts
or documents accompanying it shall be
rectified;
” lit) any loss carried forward, deduction,
allowance or relief, which, on the basis of the
information available in such return, accounts
or documents, is prima facie admissible but
which is not claimed in the return, shall be
allowed;
{iii} any loss carried forward. deduction.
allowance or relief claimed. in the return,
which, on the basis of the information
w/A
wherein the assessee itself had t’rea.ted this as an
income accrued to the company. The,1’efore, t;}i1ei=e’is no
question of assessee coming up with the tli:eo1″y_’V’~of__”‘ r.eal_
income/not real income.
:2. On the other hand,
Counsel appearing on it of
vehemently urged that
the borrower being ‘Company which
was rieitheij” amount nor
interest practical Vi€W of the
I3’18.'[I31:J3l’1V_’ Z of no real income and
thus directing the assessing
aut}§1’on?t.y to “‘ac_cVept the version of the assessee that a
:AF.<s..:74L.'75 iakhs cannot be treated as part of the
"iodtaie "ini:_o__rn*eV" for the assessment year. Therefore,
question adding this amount to the total income of
., i',i1ie-._assessee and levying tax on that does not arise.
'.52.. The incidental question is the at:t.ract.ion of the
provisions of Section l4~3[1)[A} of the Act, which reads
as under:
“l43[i][A): [a] Where a result of the
adjustments made under the first proviso to CT1Fii,IS€ [a]
ofsub–section[l),-
[i] the income declared by any
return is increased: or V’ V.
[ii] the loss declared
return is reduced
income, 9 I A. it l V
the Assessing Officer
[A] in a case where”tlief7’ir’1creasc.in income under
sub Ciatdsé [iiof increased the
total further increase
the payable under sub~
s’e’ct;ionA[.l]V’ a_11.-wadditional income tax
A calcu.la’te:d.V_at_.l.ti–:.e’irate of twenty percent on the
VVd«ifference’het\isreen the tax on the total income
‘ it so increased and the tax that would have been
< chargeable' had such total income been
by the amount of adjustments and
l the additional if].(.'0fI1€"*EE§LX in the
intimation to be sent under sub~clause [i] of
V " ll clause [a) of sub section [1};
[B) in a case where the loss so declared is reduced
under sub~clause (ii) of this clause or the
aforesaid adjtisiirrients have the effect of
converting that loss into income, calculate a
sum [hereinafter referred to as additional
§/i
’10
Incon1e–tax] equal to twenty per cent of the tax
that would have been chargeable on the
amount of the adjustments if it haci been
the total income of such person and spelcéiijgthe
additional incomewtax so calculated;,’_inIf the
intimation to be sent under sub.–__clajuse ‘{ie}.’_jof”
clause [a) of subssection~{.]_];A _ V ‘ H
{C} where any refund dtiée :’-g1n..der*,su’b4se€i:tiof1i{e1′],
reduce the amount oVf._sU_ch
amount equiVa1en”tl.:to the “income!
tax calculated undc.r_:’–si1b–claiisel. [Al or sub»
clause [13], asidthetcase.
section (3) AVoii”tvh_iVs’vsecti’o.n or} section 154 or section 250
or section V25«’l;_seCtion”260 or section 262 or section
263 or s’eict.ionV’V-26′-‘ii,the amount on which additional
in’éo1n__em£.a,>s: is’«.p__ayvable under clause (a) has been
. ‘i«nc1’easied_:o~rv reduced, as the case may be, the additional
. in_coI11e’sta:=;.T’shall be increased or reduced accordingly,
and,-_.-~ it
~ ii} in a case where the additional incoIne–taX is
increased, the Assessing Officer shall serve
on the assessee a notice of demand under
section 156;
(ii) in a case Where the additional incorne–taX is
reduced, the excess amount. paid, if any.
shall be refunded.”
é/..
11
Section 143[1)(a) of the Act speaks ou’ii:””»cthe
consequences of an intimation and the conseqi,1en_’cé::_i’sc
that the assessee is called upon to pay_.t?_.0€54/jet…
tax on the actual tax fOL1I1d:i_: du.-eel
intimation.
13. We have perused’ thetl’orcl.e;rs:l”o.f thelvtxfbunal and
the first appellate authoritylanld: thelasslessing authority.
We have hea;»d’gf:d co__nsidere’dl:th.e.sfuljmissions made at
14. VC)n” Counsel for the revenue
and the as.sessee,,_ it.iscl”eaJ: to us that the controversy is
to only for the reason that the
under Section 143(l)(a) can lead to an
at the rate of 20% of the actual tax found
due iziterms of Section 143[1)[a) of the Act as per the
statutory provisions stood at the relevant point of time.
___Ti5. While learned Counsel for the revenue and the
learned Counsel for the assessee are in agreement that
even in respect of the interest amount i.e., 74.75 lakhs,
/’
yr/t
l 2
appeal is still pending before this Court. In so far as this
appeal is concerned, the real consequence is only
relating to 20% additional tax liability in terms of
Section l43(l)[a) of the Act.
16. The assessee is following the “=
accounting and it is also a
terms of an agreement had of
to another company with a Vstippulation that:,th¢.lborrower
should repay the interest at 21%
p.a. When theslelavlailable even in
termsV, of ‘l by the assessee, as the
assesseellf the mercantile system of
“automatically follows that the assessee
of Rs.74.75 lakhs which accrues the
moment”ltl_ic5 year is over from the date of lending,
whether or not the amount is realised in reality.
.17 We find that the observation of the first appellate
“authority to the effect that the assessee could have
claimed the amount as a bad debt in respect of the
principle amount which in turn, could have avoided
V,
13
further accrual of interest etc., is appropriate in this
regard. If the assessee had not chosen to write off the
amount lent to the other company and as long”‘–.it is
shown as outstanding amount and with
to receive interest at 21% p.a. as K
amount, accrual of interest on
system of accounting is inev_itabVle–.rAccru.ed.V’..of
should definitely be broughtin 5 V
of the Act. b _ VA _ it g by
18. When such is Xthere was no
choice—i”oi’ “authority but to add back this
amount as_Vp.art._of._tl1e~’i’ income, though the assessee
have ciaimedcthis as not a real income or on any
L’ other
19?}— In’tl1:’e” context of the admitted fact situation and
V. legal position, We find the findings recorded by the
tribunal are rather perplexing. The order of the tribunal
wsuffers from the basic defect of not spelling out the
reasons for reversing the well considered reasons of the
assessing authority and the first appellate authority
14
more particularly when the legal position is that the
interest should be brought to tax as income on accrual
basis. The assessing authority was bound to
claim of the assessee that a sum of
not constitute income for the reason
income etc.
20. We are unable to accep__t:”th_e-subrnissionsimade by
Sri Parthasarathi. the assessee as
accrual of income in ‘cannot be made
dependant~on__ abi1ity..,.’or..” of a borrower to
either\re’payV or the interest. Assuming
that it vvVa«s_Vddso, there” other possibilities as provided
recogniz.ed_..under the Income Tax Act and as
I noti.ce’d:”by.l:”the first appellate authority, by way of
lent amount as an irrecoverable debt and
not byulany other method. It is not open to the income
taxfauthorities, who are statutory functionaries under
_the act to accept any theory propounded by the
assessee which is not supported by statutory provision.
The statutory provision is very clear and mandates the
income tax authorities to act in particular Way. , ”
M
15
21. We find the tribunal has committed a grave error
in law in simply allowing the appeal of the assesste_”e_tarid
reversing the findings of the assessing auth–orit},z:ty:2:uidi
first appellate authority on the “aspect interetstd
amount being taken as income oii_accrua1’basis.«. ” K
22. Accordingly, we allovv thisvyapfhjea.1..’ T
questions framed are” answe’redVi_:inufavourAofthe revenue
and against the assesseetantdthe of the tribunal is
set aside. The’gorder:__pa,ssed’~hyt’–the___assessing authority
and jtiieddfirsttt”appellate authority is
restored.” to »sbea_1f”their respective costs.
sd/–
…..
Sci/~
IUDGE