Commissioner of Income Tax vs Nima Ltd.

D.A. Mehta, J.—The Income Tax Appellate Tribunal, Ahmedabad Bench "C", has referred the following question u/s 256(1) of the Income Tax Act, 1961, at the instance of the Commissioner of Income Tax :

"Whether the Appellate Tribunal was right in law in holding that the assessee was entitled to deduction of interest for 12 months for the calendar year 1983 when the debit note was received after the close of the accounting year of the assessee ?"

The assessment year is 1984-85 and the relevant accounting period is the calendar year 1983. The assessee, a public limited company is a wholly owned subsidiary of Jyoti Limited. The assessee-company debited an amount of Rs. 11,49,206 on December 31, 1983, as interest payable to Jyoti Limited. The Assessing Officer disallowed the claim holding that no interest had been charged prior to the calendar year ; that Jyoti Limited had agreed not to charge any interest for the next year ; the assessee being a subsidiary of Jyoti Limited was more or less under the effective control of management of Jyoti Limited ; in the absence of any written agreement there was no contractual obligation on the assessee-company to pay such interest; Jyoti Limited, had not shown the outstanding balance due from the assessee-company in its books as loan up to June 30, 1983, and hence the interest payment had been made by the assessee for consideration other than in the normal course of carrying on business.

The assessee carried the matter in appeal. The Commissioner of Income Tax (Appeals) vide his order dated February 8, 1989, confirmed the disallowance of Rs. 11,49,206.

The assessee preferred second appeal before the Tribunal. The Tribunal has vide its order dated March 1, 1993, upheld the claim made by the assessee-company. The Tribunal has found that substantial amount was payable by the assessee-company to Jyoti Limited, that it was not possible to presume that this would be non-interest bearing loan. It would be open to the creditor, according to the Tribunal not to charge or waive the interest, but if any interest is charged by the creditor the debtor is bound to honour the same. The Tribunal has further found that the assessee-company is continuously incurring losses and by claiming deduction for interest payment the assessee-company does not derive any advantage, considering the fact that up to the assessment year 1990-91 there was no positive income in the hands of the assessee-company and there were substantial amounts of carried forward losses and unabsorbed depreciation ; while on the other hand, the interest paid by the assessee has been brought to tax in the hands of Jyoti Limited which is a profit making company. Thus, the Tribunal has ruled out any tax planning in the light of the facts available on record. Accordingly, the Tribunal has held that the assessee was entitled to the deduction of interest payment.

"1. The Tribunal has further held that the claim for interest payment is for the period commencing from July 1,1982 to June 30, 1983 and then from July 1, 1983 to December 31, 1983. The Tribunal has therefore held that even though Jyoti Limited had passed a resolution calling upon the assessee to pay interest for the aforesaid period interest attributable to the period between July 1, 1982 and December 31, 1982, does not pertain to the previous year relevant to the assessment year of the assessee-company and hence interest for the said period is not allowable. In other words, the Tribunal has held that interest payment for a period of 18 months cannot be allowed when the previous year is constituted of 12 months, namely, calendar year 1983."

Mr. B. B. Naik, learned standing counsel appearing for the applicant-Revenue submitted that Jyoti Limited had passed a resolution only on November 18, 1983, and in the absence of any agreement to pay interest Jyoti Limited could not charge interest for past period and if it could not charge interest for the past period the assessee-company cannot claim the same and the same was rightly disallowed by the Assessing Officer. In this connection emphasis was laid on the fact that Jyoti Limited had for the first time treated the outstanding balance due from the assessee as loan only on June 30, 1983. The second contention was to the effect that Jyoti Limited could not on its own, by passing a resolution, impose interest on the asses-see-company in the absence of bi-partite agreement. That the acceptance made by the assessee-company was admittedly after December 31, 1983, and hence there was no concluded contract.

Though served there is no appearance on behalf of the respondent.

It is fallacious on the part of the Revenue to presume that Jyoti Limited has by passing a resolution on November 18, 1983, sought to charge interest for the past period. The relevant previous year, i.e., the accounting period of the assessee is the calendar year 1983. Admittedly, the resolution passed by Jyoti Limited on November 18, 1983, is during the accounting period relevant to the assessment year under consideration. Therefore, to say that Jyoti Limited, can call upon the assessee to pay interest only with effect from November 18, 1983, and not between January 1, 1983 and November 17, 1983, is an incorrect proposition which cannot be accepted.

The fact that Jyoti Limited did not treat the outstanding amount from the assessee-company as a loan in its books up to June 30, 1983 is wholly irrelevant to the issue. Admittedly, on June 30, 1983, when the accounting period of Jyoti Limited ended, Jyoti Limited had shown outstanding amount in its books of account as outstanding loan from the assessee-company. This date, namely June 30, 1983, falls within the accounting period relevant to the assessment year in question in the case of the assessee.

The contention that interest was unilaterally charged by Jyoti Limited deserves to be stated only to be rejected. Though admittedly necessary entry was made in its books by the assessee-company only after receipt of debit note some time in January/February 1984, the same was made as on December 31, 1983. Therefore, to contend that acceptance of the proposal to charge interest was after the accounting year is not correct. Once the creditor has called upon the debtor to pay interest, the debtor has passed necessary entry during the accounting period and rightly made the payment, on which the creditor has paid tax it cannot be successfully urged by the Revenue that there was no concluded contract. It is not even the case of the Revenue that Jyoti Limited was wrongly taxed on the interest amount received by Jyoti Limited from the assessee.

Learned Counsel for the Revenue has not been able to dispute the fact that by making payment of interest the assessee-company does not stand to derive any advantage considering the assessment record of the assessee-company, which has been taken note of by the Tribunal. Similarly, that there is actual payment and Jyoti Limited, has paid tax on the interest received by Jyoti Limited is also not disputed.

In these circumstances, for the reasons stated hereinbefore, it is not possible to accept any of the contentions raised on behalf of the Revenue there being no infirmity in the order of the Tribunal.

The question referred to the court for its opinion is therefore answered in the affirmative, i.e., in favour of the assessee and against the Revenue. The reference stands disposed of accordingly. There shall be no order as to costs.