Suhas Chandra Sen, J. -
(1.) The relevant facts of this case are as follows : The assessment years involved are 1960-61 and 1961-62. The asses-see is a foreign company incorporated in the United Kingdom. The Indian Company, ICI India Ltd., is a wholly owned subsidiary company of the assessee. The assessee entered into an agreement by correspondence for the advance of loans to its Indian subsidiary to enable the latter company to purchase shares of another Indian company, ACCI, with the ultimate object of getting the shares transferred subsequently to itself at the issue price. The assessee advanced loans of Rs. 1,75,30,720 to its Indian subsidiary by three instalments on 31st May, 1957, 31st July, 1957, and 30th November, 1957. The loan was to carry interest on certain terms. The Indian subsidiary debited to its accounts and credited the account of the assessee the following interests :
(2.) The assessee took credit of these interests in its accounts. The previous years relevant to the assessment years under reference respectively ended on 31st December, 1959, and 31st December, 1960. Item "A" of the above interest fell within the assessment year 1960-61, and remaining two items within the assessment year 1961-62. These two latter items aggregated to Rs. 9,62,515. The assessee exercised its option in February, 1961, for the transfer of the shares by its Indian subsidiary. The shares were ultimately transferred to the assessee in March, 1961. The company, ACCI, declared dividend for the period for which the interest had been credited by the assessee in its accounts after the assessee had become a registered shareholder of those shares and consequently the assessee received the entire dividend from these shares. Considering that, according to the terms on which the loan had been advanced, no interest became due from its Indian subsidiary, the assessee reversed the entries with respect to the above interest and refunded the sum of Rs. 12,05,122 being the aggregate of the amounts of Rs. 2,42,607 and Rs. 9,62,513. The assessee submitted the returns showing incomes including the interest amounts of Rs. 2,42,606 and Rs. 9,62,515 respectively in the assessment years 1960-61 and 1961-62. Subsequently, it submitted the revised returns excluding the above interest amounts on the ground that these interest amounts did not accrue and did not constitute the income of the assessee. It was submitted that the interest was computed provisionally and according to the terms for the advance of the loan no interest became due from its Indian subsidiary as the subsidiary did not receive any dividend for the period for which the interest was credited and that the entries had been reversed in the assessment year 1962-63. The ITO found that the interest was credited to the assessee's account and the tax also was deducted and paid and the payment of interest had been made by credit notes passed by the assessee-company on 1st April, 1961. He was of the opinion that the interest could not be excluded from the income of the assessee. He rejected the assessee's contention that no interest accrued as the Indian subsidiary had not received any dividend for the period for which the interest had been credited by the assessee. The ITO, therefore, included the amount of interest of Rs. 2,42,607 and Rs. 9,62,515 in the years under reference.
(3.) The assessee came up in appeals before the AAC who heard both the appeals together and disposed them of by a common order. The AAC referred to certain parts from the letter of the Indian subsidiary of 7th March, 1957, and to resolution of the board of the Indian subsidiary of 27th March, 1957, as forming terms of the advance of the loans and took the view that the arrangement between the assessee and the Indian subsidiary was that the assessee was to advance the amount in shares of the ACCI and the assessee retained the right to acquire the shares at the purchase price from the Indian subsidiary and that the arrangement envisaged a payment of interest by the Indian subsidiary to the assessee at the rate of 1 1/2% above the bank rate, subject to the condition that the interest rate at no time should exceed the rate of dividend paid by the company on its ordinary shares. The AAC was of the view that the entries in the accounts of the assessee were made at the time when the assessee had not decided to get the shares transferred to it and placing reliance on the decision in the case of CIT v. Shoorji Vallabhdas & Co. he was of the view that making of the entries in the accounts did not create a right to receive interest from the Indian subsidiary. He deleted the addition made by the ITO in both the years under reference.;