(Prayer: CRP Filed U/S 55(1) Of Karnataka Agricultural Income Tax Act, 1957, Against The Order Dt 28.9.11 Passed In STA No.371/2005 On The File Of Karnataka Appellate Tribunal, Bangalore, Allowing The Appeal Filed U/S 32(5)(A) Of Karnataka Agricultural Income Tax Act, 1957.)
(Prayer: CRP Filed U/Sec 55(1) Of Kait Act, 1957, Against The Judgment And Order Dated 07.03.2011 Passed In STA.254/2007 On The File Of Karnataka Appellate Tribunal, Bangalore, Allowing The Appeal Filed U/Sec.34 Of Kait Act.)
(Prayer: CRP Filed U/S 55(1) Of Karnataka Agricultural Income-Tax Act, 1957, Against The Order Dated 2.9.2011 Passed In STA No.2424/2010 On The File Of Karnataka Appellate Tribunal, Bangalore, Partly Allowing The Appeal.)
(Prayer: CRP Filed U/S 55(1) Of The Karnataka Agricultural Income Tax Act, 1957 Against The Order Dated: 16.9.2011 In STA No.255/2010 On The File Of The Karnataka Appellate Tribunal, Bangalore, Partly Allowing The Appeal.)
(Prayer: CRP Filed U/S 55 Of The Kat Act, Filed Against The Judgment Dated: 29.09.2010 Passed In Sta. 1700 and 1701/2009 On The File Of The Karnataka Appellate Tribunal At Bangalore, Dismissing The Appeals.)
(Prayer: CRP Filed Under Sec.55 Of Kait Act, Against The Judgment Dated 26.8.2009 Passed In Sta No. 1232/2008 On The File Of The Karnataka Appellate Tribunal, Bangalore, Dismissing The Appeal Filed Under The Ait Act, 1959.)
(Prayer: CRP Filed Under Sec.55(1) Of The Karnataka Agricultural Income Tax Act, 1957, Against The Order Dated 30.9.2010 Passed In STA 591/2009 On The File Of The Karnataka Appellate Tribunal, Bangalore, Allowing The Appeal.)
(Prayer: CRP Filed Under Sec. 115 Of CPC, Against The Orders Dated 29.09.2010 Passed In STA.No. 1701/2009 On The File Of The Karnataka Appellate Tribunal At Bangalore, Dismissing The Appeal.)
1. The State Government as well as the assessees have filed these revision petitions under Section 55(1) of the Karnataka Agriculture Income-Tax Act, 1957 (for short 'the Act) challenging the order passed by the Karnataka Appellate Tribunal.
2. Though these revision petitions are coming on for admission, with the consent of the learned counsel for the parties, these revision petitions are taken up for final disposal.
3. In these revision petitions, common question of law and facts are involved with regard to claiming deduction towards interest on the loan availed by the assessees in the agricultural income and also denial of deduction of interest, for different assessment years and different orders have been passed by the Assessing Authority, First Appellate Authority and the Karnataka Appellate Tribunal. Hence, all the revision petitions are clubbed together and disposed of by this common order.
4. The assessee/respondents in CRP No. 164/2011, CRP No.64/2011, CRP No.38/2012, CRP No.202/2012 and CRP No.34/2012 are the Partnership Firms engaged in cultivation of Coffee. They filed returns of total agricultural income in Form No. 3 for the assessment years 2000-01, 2001-02, 2003-04, 2005-06, 2006-07, 2008-09 declaring the net loss for the said assessment years. The Firms claimed deduction in respect of total cultivation expenditure which includes depreciation allowance and also interest paid on the loan availed for cultivation. The Assessing Authority (Deputy Commissioner of Agricultural Income-Tax, Chikkainagalur) issued notice to the respondents calling upon them to produce the books of account and other relevant records for verification. The authorized representatives of the respondents appeared before the Assessing Authority and produced the relevant records with regard to Yield Register, Sales Statement, Ledger, Bills and Vouchers etc. The Assessing Authority after verification of the records produced by the respondents disallowed some of the claims of expenditure including the expenditure towards payment of interest for the aforesaid assessment ears and also issued demand notice calling upon them to pay the difference of agricultural tax The respondents being aggrieved by the assessment order passed by the Assessing Authority preferred appeals under Section 32(5) of the Act before the Joint Commissioner of Commercial Taxes (Appeals) Shimoga (hereinafter referred to as 'the First Appellate Authority' for short). The First Appellate Authority after considering the matter in detail had given partial relief, however disallowed the claim of deduction towards interest on the ground that the certificate issued by the Bank Authorities is not in accordance with law since the said amount was not actually paid but debited to the account of assessees. Being aggrieved by the order passed by the First Appellate Authority the respondents preferred appeals before the Karnataka Appellate Tribunal on various grounds. The Appellate Tribunal relying upon the earlier judgment of this Court made in CRP No.8.12/1992 disposed of on 18th September 1996 in M/S. SIDDESWARA ESTATE V/S STATE OF KARNATAKA held that the respondents are entitled to avail the benefit under Section 5(1) (g) to (j) of the Act and issued directions to the Assessing Authority to issue revised demand notice after giving deduction. Being aggrieved by the order passed by the Karnataka Appellate Tribunal, the State Government preferred these appeals.
5. The assessees filed CRP No. 117/2011, CRP No.I18/2011and 296/2009, being aggrieved by the order passed by the Karnataka Appellate Tribunal dismissing their appeals confirming the order passed by the Assessing Authority as well as the First Appellate Authority wherein the Tribunal has disallowed the claim of deduction of interest while assessing the agricultural income.
6. Smt.S.Sujatha, learned Additional Government Advocate appearing for the State Government contended that the order passed by the Karnataka Appellate Tribunal is contrary to law. The asses sees are following cash system of accounting and they cannot follow both cash system as well as mercantile system. Section 7 of the Act prescribes the method of accounting regularly employed by the assessee. If the cash system is being followed,, the same has to be followed and there is no provision either under the Act or under the Accounting Principle that income has to be accounted both under the cash system and the mercantile system. In the instant case, though the respondents/assessees have not actually paid the interest, the banks have issued certificates to the effect that the interest is charged against the assessees. On the basis of the said certificates, the Assessing Officer in some cases allowed deduction towards interest. Subsequently, on verification of the records from the Banks, passed orders both under Sections 36 and 37 of the Act and reassessed the agricultural income. The judgment of this Court reiied upon the Appellate Tribunal in Siddeswara r.ase is not applicable to the facts of the present case. This Court, while examining the assessment order of the year 1983-84 held that as per Section 5(l)(g) to (j) the assessee is entitled for deduction of interest. However, the proviso to Section 5(l)(g) of the Act was inserted by Act No.23/1985 w.e.f. 1-4-1985. The said proviso makes it very clear that interest allowable under Clauses (g), (h) and (i) shall be the actual interest paid on such loans or the amount calculated at the rate of interest charged by the scheduled banks. Reading of the proviso makes it very clear that unless actual interest is paid, the assessee is not entitled to claim deduction of interest. The said proviso was not examined by this Court. In the instant case, when the interest payable was not paid, the Bank debited the interest to loan account arid included the said amount to the principal amount. There is no actual payment of interest. In spite of that, the Bank issued certificates to the effect that the interest is debited. On the basis of the said certificates, the expenditure towards interest is claimed. The Assessing Authority on re-examining the matter held that in the absence of actual non-payment of interest to the loan account, the assessees are not entitled for claim of deduction towards interest. The said order was confirmed by the First Appellate Authority. The order passed by the Appellate Tribunal setting aside the order passed by the Assessing Authority as well as the First Appellate Authority, relying upon the earlier judgment is contrary to law and sought for setting aside the same.
7. On the other hand, Sri.S.P.Bhat, learned counsel appearing for the respondent/assessees in the revision petitions filed by the State Government and petitioners in CRP No. 117/2011, CRP No.118/2011 and CRP No.296/2009 contended that the order passed by the Appellate Tribunal setting aside the order passed by the Assessing Authority as well as the First Appellate Authority allowing the expenditure towards interest is in accordance with law. Whether the interest is credited or debited, this expenditure is a liability for the assessees and has to be allowed. The word "paid' used in Section 5(1)(i) has been interpreted by this Court in Qiddesivara case and held that interest, though not actually paid in cash must be deemed to have been paid if the system of accounting followed by the assessee is mercantile system. In the instant case, the respondents/assessees followed mercantile system as well as cash system. There is no prohibition under Section 7 of the Act to follow both mercantile as well as cash system of accounting. Even though a proviso is added to the main Section, the main Section remains the same. The word "actual interest paid" in the proviso will have to be understood as "actual interest paid in accordance with the method of accounting employed by the assessee" Such an interpretation would be consistent with the interpretation put to the word "paid? in the main clause by this Court. The word "actual' in the proviso having regard to the context in which, it was used should not be taken to mean cash payment. The purpose of the proviso is only to fix a rate of interest at which deduction is to be allowed under the Act. Therefore, in the context, it only signifies the rate of interest and not the mode of payment.
8. Further, Sri.S.P.Bhat, contended that on the basis of the returns filed by the revision petitioners, the assessment was concluded by the Assessing Authority under the Act and allowed the expenditure towards the interest incurred on the basis of the certificates issued by the Bank. However, after a lapse of more than 41/i years, the Assessing Officer, invoking the provisions under Sections 36 and 37 of the Act issued notice for reassessment and also in the guise of rectification of the mistake issued notice staling that the assessees have not made actual payment towards interest and they are not eligible for deduction of interest. The assessees filed objections to the said notice. Without considering the said objections, reassessment order was passed and also rectified the mistakes in the assessment made. However, it is not open to the Assessing Officer to rectify the mistakes or to make reassessment after lapse of more than four years. The order passed by the First Appellate Authority as well as the Appellate Tribunal confirming the order passed by the Assessing Authority is contrary to law. The reasoning of the Tribunal that the order made in Siddeswara Case is not applicable to the facts of the present case is erroneous in law and sought for allowing these revision petitions filed by them and also sought for dismissal of the revision petitions filed by the State Government.
9. After hearing the learned counsel appealing for the parties, the questions that arise of consideration in these revision petitions are:-
(a) Whether the. assessees are entitled for deduction of interest under Section 5(1 )(g) to (j) of the Act ?
(b) Whether the order passed by the Assessing Officer in reassessing the agricultural income and also rectifying the mistake committed earlier is in accordance with law. ?
10. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the order impugned and other relevant records.
11. The records clearly disclose that the assessees are Partnership Firms engaged in the cultivation of coffee. They had availed loan from the banks for the purpose of agriculture. They filed returns as required under Section 18 of the Act and claimed certain deductions in respect of the expenditure they had incurred for the purpose of cultivation including the interest payable to the Banks. The Assessing Officer, though initially allowed the deduction in respect of payment of interest on the basis of the certificate issued by the Banks, subsequently noticed that the assessees have not made actual payment. Accordingly, after issuance of notice in some cases he rectified the mistakes, and in some cases he reassessed the agricultural income disallowing the claim of deduction towards interest. The said order culminated in filing of the appeals before the First Appellate Authority and also before the Appellate Tribunal. The Appellate Tribunal relying upon the order passed by this Court in Siddeswara Case allowed the deduction of interest, though actual interest was not paid. In some cases, the Appellate Tribunal denied the deduction of interest.
12. Section 5 of the Act provides for computation of agricultural income. The agricultural income of a person shall be computed after making certain deductions with regard to the land revenue, local tax on agricultural land, excise duty or tax on agricultural product on such land, rent paid in respect of the said land on which agricultural income is derived, any expenses incurred on maintaining irrigation or protective work, any expenditure incurred for repair and purchase of the capital assets for the purpose of agriculture, and any expenditure with regard to depreciation of the buildings and also any interest paid in the previous year.
13. Section 5(1)(g) to 5(1)(j) of the Act provides for deduction of interest paid in the previous year on any amount borrowed and actually spent on any capital expenditure incurred for the purpose of deriving agricultural income. Section 5(1)(g) to 5(1) (j) reads as under:
"5(1)(g) any interest paid in the previous year on any amount borrowed and actually spent on any capital expenditure incurred for the benefit of the land from whic'n the agricultural income is derived;
Provided that the interest allowable under clauses (g), (h) and (i) shall be the actual interest paid on such loans or the amount calculated at the rate of interest charged by the scheduled banks on such loans whichever is less:
(h) where the land from which the agricultural income is derived is subject to a mortgage or other capital charge, any interest paid in the previous year in respect of such mortgage or charge;
Provided that the interest allowable under clauses (g), (h) and (i) shall be the actual interest paid on such loans or the amount calculated at the rate of interest charged by the scheduled banks on such loans whichever is less;
(i) any interest paid in the previous year on any debt, whether secured or not, incurred for the purpose of acquiring the land from which the agricultural income is derived:
Provided that the interest allowable under clauses (g), (h) and (i) shall be the actual interest paid on such loans or the amount calculated at the rate of interest charged by the scheduled banks on such loans whichever is less;
(j) any interest paid in the previous year on any amount borrowed and actually spent on the land on which the agricultural income is derived:
Provided that the need for borrowing was bona fide having regard to the assets of the assessee at the time:
Provided, further that the interest allowable under this clause shall be the actual interest paid on such loan or the amount calculated at the rate of interest charged by the scheduled banks on such loan whichever is less"
A plain reading of the above Section and provisos thereto makes it clear that interest allowable under the above Section shall be the actual interest on such loans as borrowed and spent on the capital expenditure or land from which, the agricultural income is derived. The Section is very clear on this point that interest should have been paid so as to claim the benefit of deduction under the above Section.
14. Section 7 of the Act provides for method of accounting. The agricultural income shall be computed for the purpose of Sections 5 and 6 in accordance with the method of accounting regularly employed by the assessee. If no method of accounting has been regularly employed by the assessee or if the method employed is such that, in the opinion of the Assessing Authority then the agricultural income cannot properly be deducted therefrom, then computation shall be made upon such basis and in such manner as he may determine.
15. In the instant case, the assessees have contended that they are following the mercantile system of accounting, and therefore, the interest so charged by the Bank which was not paid by the assessees should also be considered for allowing the expenditures. The words "actual interest paid' in the proviso will have to be understood as "actual interest paid in accordance with the method of accounting employed by the assessed". However, the records clearly disclose that assessees are not only following the mercantile system of accounting, but also following the cash system. The assessees had borrowed loans from the banks for agricultural purposes and hhe interest is charged by the Banks. The interest charged by the Banks was not paid by the assessees, and hence the said amount was credited to the principal amount of the assessees. Even though the assessees have not paid interest, the Banks issued certificate stating that the interest is debited to the account of the assessees. On the basis of the said certificate, the Assessing Officer had allowed deduction on expenditure in the agricultural income. It is relevant to note that, by Act No.23/1985, the provisos were added to these sub-Sections w.e.f. 01-04-1985. The proviso contemplates that the interest allowable under the Section shall be the actual interest paid on such loans or the amount calculated at the rate of interest charged by the scheduled banks is only eligible for deduction in the expenditures. In the instant cases, the communication received by the respective banks clearly discloses that the assessees have not paid the actual interest on the said loan amount However, the interest payable was credited to the principal amount. In view of the said communication, the Assessing Authority had taken steps to repossess the agricultural income of the assessees and to rectify the mistake in the assessment order.
16. The Karnataka Appellate Tribunal relying upon the judgment of this Court in Siddeswara case has allowed the deduction of interest payable on the loan amount. The said judgment is not applicable to the facts of the present case. The said case was relating to the assessment year 1983-84. The court had not considered the subsequent amendment incorporating provisos to Section 5(l)(g), (h) (i) and (j) as per the Act No.23/1985 which came into force w.e.f. 01-04-1985. The proviso provides that unless the interest is actually paid on the said loan amount, the assessees are not entitled for deduction of interest while assessing the agricultural income. In view of that, the said Siddeswara case is not applicable to the present case. The reliance placed by the Tribunal is erroneous in law.
17. Smt.S.Sujatha, Additional Government Advocate relying upon the judgments reported in (1995) 214 ITR 477 (A. Sulaiman Rawther by legal heir Mohammed Ismail V/S State of Kerala); (1973) 89 ITR 61 (Shew Kissen Shatter V/S Commissioner of Income-Tax, West Bengal}-, and (1991) 192 ITR 577 (Jaswantrai P. Mehta V/S Commissioner of Income-Tax) contended that only the interest actually paid or interest calculated at the rate charged by the Banks whichever is less is allowable. The interest paid on the amount borrowed alone is deductable and the interest payable if not paid becomes part of the principal amount and thereafter interest has been paid not only on original principal but also on the part of interest which has become part of the principal amount which cannot be treated as amount borrowed. Hence, the interest paid on such unpaid interest amount is also not deductable under the Act. In support of her contention she strongly relied upon the judgment 01 Hon'ble Supreme Court in SHEW KISSEN BHATTER case referred to above, which reads as under:
"The question is whether the assessee is entitled to deduct the compound interest payable by him in accordance with the terms of the contract referred to earlier or whether he is only entitled to deduct simple interest at the rate of 6 3A % per annum. It must be borne in mind that what the law permits is the deduction of the "amount of any interest on such mortgage or charge". The interest payable by the assessee on the capital charge was at the rate of 63A % per annum. But if he fails to pay that in accordance with the terms of the contract, he was liable to pay compound interest. In other words, if he fails to pay interest in accordance with the contract, he was liable to pay interest on interest. Or, to put it differently when the interest payable is not paid, the same became a part of the principal and, thereafter, interest has to be paid not only on the original principal but also on that part of the interest which had become a part of principal. It cannot be said that the interest which became a part of the principal can be considered as the capital charge. What the assessee is entitled to deduct is the interest payable by him on the capital charge and not the additional interest which, because of his failure to pay the interest on the due date had been considered as a part of the loan.
Similar view has been taken by the Kerala High Court as well as the Gujarat High Court. Hence, the assessees are not entitled for deduction of interest, if the interest is not actually paid.
18. On the other hand, Sri.S.P.Bhat, learned counsel appearing for the assessees relied upon the judgments in (1994) 208 ITR 930 (Commissioner of Income-Tax, Bombay City III, Bombay V/S Citibank N.A.); (2002) 257 ITR 443 (Commissioner of Income-Tax V/S United Credit Ltd.) to contend that the assessees are following mercantile system of accounting for some transactions and also following the cash system of accounting for certain transactions. There is no prohibition under the Act to follow these systems of accounting. In the mercantile system, the amount payable towards interest is also deductable under the Act. The word paid used under the Section should be consistent with the method of accounting followed by the assessees. Further, reopening of the assessment by reassessment order by the Assessing Officer after lapse of four years is contrary to law unless the Assessing Authority has reason to believe that the income or profit or gain chargeable to the agricultural income tax had escaped assessment or the Assessing Authority has reason to believe that there is a mistake in the assessment, he can reopen the assessment. In the instant case, no reason has been recorded by the Assessing Officer to reopen the assessment and hence, the order passed by the Assessing Officer is contrary to law. The contention of the assessees cannot be sustainable in law. The plain leading of Section 5(1)(g) to 5(1)(j) and provisions thereto makes it clear thai the interest allowable under the above Section shall be the actual interest paid on such loan. Hence, there is no scope for further interpretation of the word 'paid' used in Section 5(l)(j) of the Act as deemed to have been paid in the system of accounting followed by the assessee.
19. Section 36 of the Act contemplates "income escaping assessment". If for any reason any agricultural income chargeable to tax under this Act has escaped assessment in any financial year, the Assessing Office:', may, within a period of five years reassess the agricultural income after following the procedure prescribed under the Act. Section 37 also contemplates that if there is any mistake in the assessment, the Assessing Officer can rectify the mistake within a period of five years after following the procedure prescribed under the Act. On verification of the records, we found that the Assessing Authority had rectified the mistakes and also reassessed the income within a period prescribed under the Act. While doing so, he has followed the procedure prescribed under the law. There is no infirmity or irregularity in the said procedure. In view of that, we are of the opinion that the assessees are not entitled for deduction of expenditure in the form of interest unless the actual interest is paid on such loans. The communication received from the banks clearly discloses that no actual interest was paid by the assessees. Hence, the assessees are not entitled for any deduction Accordingly, the assessees are not entitled for any relief. The judgment relied upon by the S.P.Bhat is not applicable to the facts of this case. The order passed by the Appellate Tribunal in allowing deduction of interest on the amount borrowed is erroneous in law. The questions raised in these revision petitions are held against the assessees. Accordingly, we pass the following:
ORDER
The CRP No. 164/2012, CRP No.406/2011, CRP No.202/2012, CRP No.38/2012 and CRP No.34/2012 filed by the State Government are allowed and CRP No.117/2011, CRP No.296/2009 and CRP No.118/2011 filed by the assessees are dismissed.