In Shiva Laxmi Exports Ltd v. CIT, the division bench of the Calcutta High Court held that interest income could not said to have had accrued when the same was waived by the Company by passing a resolution. While deleting the addition made in respect of the said income, the bench clarified that such income is excludable from the levy of income tax.
The assessee-Company derives income from interest and commission. During the financial year 1985-86, assessee advanced to loans to two borrowers, upon the request of these borrowers for not charging any interest at the material point of time, assessee waived the interest income and the same had been confirmed through a resolution. The AO, however, treated these interest waived as interest income of the assessee. On second appeal, the ITAT confirmed the addition of interest, merely on ground that the assessee follows the mercantile method of accounting.
Before the High Court, the assessee contended that resolution passed by the Board of Directors for the waiver and all the necessary evidences were produced before the lower authorities. It was also contended that waiver of interest was accepted by the respective Assessing Officers in the earlier assessment years subsequent to the passing of the resolution by the Board.
On behalf of the Department, it was contended that since the borrowers’ dues were not declared bad debts and the assessee had applied the mercantile system of accounting, the assessing officer had rightly added the interest income as having accrued for the relevant assessment year.
The bench noted that, in the instant case, the assessee had taken resolution prior to the assessment year under consideration and there is no dispute that it was a decision of the assessee based on commercial consideration. Further, there is no records showing any linkage or nexus between the assessee and its two borrowers.
Allowing the appeal, the division bench comprising of Justice Anirudha Bose and Justice Arindam Sinha held that “In this perspective, we find the points of law involved in this appeal are covered by Shoorji Vallabhdas (supra) and Poona Electric (supra). The interest income could not said to have had accrued for the appellant for the assessment year in the background of the resolutions taken for waiver of interest.”
Read the full text of the Judgment below.
