By TIOL News Service

AHMEDABAD, OCT 04, 2017: THE issue before the Bench is - Whether when the assessee had not attached interest clause to the loans given but finally got interest after arbitration, the Revenue could still expect it to offer interest income to tax in its return. NO is the verdict.

Facts of the case

The assessment for the AY 2003-04 was re-opened by the AO, on grounds that some income of the assessee had escaped taxation, on account of the assessee's claims of depreciation on plant & machinery and additional expenditures claimed on them. Such reopening of assessment was upheld by the Tribunal. Subsequently, the Tribunal examined the three grounds on which the reopening was based, and on examination of which the re-opening of assessment was set aside.

On hearing the appeal, the High Court held that,

++ in the first two out of these three grounds, it was admitted before the Tribunal that the issues were examined by the AO during the original scrutiny assessment who had made no additions. Therefore, the Tribunal opined that any reopening on the basis of such grounds would amount to change of opinion and therefore, was not permissible. The Revenue's contention that the Assessing Officer had not made specific mention of these issues in the assessment order also did not find favour of the Tribunal observing that the assessee would have no control over the manner in which the Assessing Officer would treat such issues in the order of assessment after full scrutiny;

++ w.r.t. the third ground, it was undisputed that such issue did not come up for consideration before the AO in the original assessment. However, on this ground the Tribunal entered into the merits and held that the same could not have formed the basis for making any additions;

++ without elaborating, the Tribunal examined the question whether on the third ground, the AO could have formed a belief that income chargeable to tax had escaped the assessment. The Tribunal ultimately held it against the Revenue. If we peruse the order in this respect more minutely, the issue pertains to offering certain interest income to tax. The assessee had given a loan to one GSIL but had not received interest on such loan for a long time, perhaps on the ground that there was no interest stipulation in the loan document. In the past, the assessee would offer notional interest on accrual basis. However during the period relevant to the AY in question, the issue came to be referred for arbitration. The Board of Directors of the assessee company therefore, passed a resolution not to offer the interest income to tax in view of such uncertainty in its receipt itself. The Tribunal noted that much later the arbitral award was available holding the assessee entitled to interest at the rate of 11.5%. The Tribunal therefore, found that the assessee was justified in not accounting for such interest in the return when there was no stipulation for interest in the agreement between the parties.

(See 2017-TIOL-2077-HC-AHM-IT)