1. These appeals are being decided by this common order. ITA No.183/Pune/89 2. This appeal is by the assessee and it relates to asst. yr. 1983-84.
Ground No. 1 is as follows: The learned CIT(A) erred in not granting the claim for deduction of expenses of Rs. 15,36,568 in respect of earlier year expenses and particularly so when he has directed to increase the income assessed by Rs. 26,850 in respect of credits for earlier years.
There is no dispute that the expenses pertained to earlier years. The assessee was following mercantile system of accounting. Consequently, we fail to see how these expenses could be allowed in this year when they do not pertain to this year. It was brought to our notice by the learned representative of the assessee that the assessee had initiated proceedings under Section 264 of the IT Act, 1961 for obtaining relief of deduction in the years to which those expenses pertained. That was the only remedy available to the assessee on the facts and in the circumstances of the case. We reject the above mentioned ground.
The learned CIT(A) erred in not accepting the company's claim for its income being exempt under Section 10(20A).
The learned CIT(A) erred in not adopting the decision of the ITAT Jaipur Bench in respect of exemption of income of Land Development Corporation under Section 1O(20A).
Until 13th July, 1973, the Government of Maharashtra used to undertake land development and other connected agricultural engineering activities which were aimed at preserving soil erosion, maximised utilisation of irrigation potential and other allied matters. The purpose was to effect improvement of land and water resources and agriculture production. There were several schemes for these purposes and these schemes involved large scale expenses which the State Government found difficult to meet. In order to attract institutional finance for these works, the assessee-Corporation (the Maharashtra Land Development Corporation Ltd.) was established by Government resolution No. PPL/1473/69008-N, dt. 13th July, 1973, of Agriculture and Co-operation department. The assessee-Corporation is a Government undertaking and has been entrusted with the above work which till 13th July, 1973 was being performed departmentally by the Government. The objects of the assessee-Corporation are mentioned in the memorandum of Association at page 5 of the paper book and as they have been reproduced by the CIT(A) in his order, it is not necessary for us to reproduce them again in this order. Suffice it to say that the principal function of the assessee-Corporation is to implement the schemes of agriculture department of the Government falling within the purview of Bombay Land Improvement Scheme Act, 1942 and all its activites relate to improvement of land, soil conservation, improvement in water supply, improvement in farming methods, etc. The question is whether the provisions of Section 10(20A) would be attracted in respect of the income of the assesseer-Corporation.
4. Section 10(20A) of the Act which was inserted with retrospective effect from 1st April, 1962, by Finance Act, 1970, is as follows : 10. In computing the total income of the previous year of any person any income falling within any of the following clauses shall not be included : (20A) any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or both.
The scope of this Section was explained by the Board in a circular in which it is stated that since several statutory housing boards set up by the States for the framing and execution of housing and other development schemes play an important role in implementing housing programmes of the Government for common good and since those Boards were serving an important public purpose and since they did not exist for private profit, Finance Act, 1970 had made a specific provision in the new Clause (20A) of Section 10 exempting the income of such Boards from tax altogether. According to this Circular, the said provision exempts from tax any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both. The provisions of Section 10(20A) came up for consideration before the Gujarat High Court in Gujarat Industrial Development Corpn.
v. CIT [1985] 151 ITR 255/21 Taxman 250 to which our attention has been drawn on behalf of the department. It was observed that developing any city, any town or any village would require roads, buildings, sanitation, parks, sports, educational institutions and several other amenities and such activity would be an integrated activity.
Consequently any Corporation which was established for the purpose of developing a particular city, town or village would mean a body set up with larger purpose which could be achieved only if not only industry but several other requirements of that particular area were met by the Corporation. The Gujarat State Industrial Corporation was not such a Corporation and was not entitled to exemption under Section 10(20A) of the Act. Similar would be the case with the assessee-Corporation. The objects of the assessee-Corporation have been set out by us above. It is clear that the object is not to develop the village as such in the sense in which the Gujarat High Court has interpreted the word development of village. The object of the Legislature in inserting this provision was not to grant exemption to Corporation like the assessee-Corporation, but the object was to gram exemption to several housing boards and other development boards which are set up for planned development of city, town or village. The assessee-Corporation has not been constituted under any law enacted for the purposes mentioned in Clause (20A) of Section 10. Consequently, we hold that the provisions of Clause (20A) of Section 10 would not be attracted in the present case.
5. Before parting, we may mention that the learned representative of the assessee had drawn our attention to a decision of the Jaipur Bench of the Tribunal in the case of Rajasthan Land Development Corpn. With respect, we find that the Bench has not considered the decision of the Gujarat High Court and the purpose in enacting the special provision.
We follow the decision of the Gujarat High Court in interpreting the provisions of Section 10(20A) and reject the grounds raised by assessee.
6. The only two grounds that have been raised by the assessee in this appeal for asst. yr. 1984-85 relate to the claim for exemption under Section 10(20A) of the Act on identical facts. For the reasons already given while deciding the appeal for asst. yr. 1983-84, we reject these grounds.
7. These appeals, one by the Assessee and other by the department, relate to asst. yr. 1985-86 and are being dealt with together.
8. There are seven grounds in the assessee's appeal, but these seven grounds relate to two points. One of the points is about the change of method of accounting and the other point is exemption under Section 10(20A) of the Act. Grounds 6 and 7 which relate to exemption under Section 10(20A) of the Act are hereby rejected for the reasons already given.
9. We shall now consider ground Nos. 1 to 5 which relate to change in the method of accounting. The main source of income of the assessee-Corporation is by way of interest. Funds are provided by the State Government. The rate of interest, which would be charged, is specified. The assessee is permitted by the State Government to charge 3% more than that rate. It is this difference of 3% which constitutes the source of income. Funds are kept in deposits in banks and interest therefrom is also derived. It was submitted before us that in fact the assessee does not advance amounts to the villagers. What the assessee does is that the assessee executes the scheme of land improvement, etc.
The amounts spent on the land of a particular cultivator is treated as loan to that cultivator and interest thereon is charged. It is this interest which is the source of income. The policy of the Government is to improve the land and as such the amount is required to be spent. The assessee does not take into consideration the point whether the amounts spent would be recovered in future or not. When land is to be improved, amount is to be spent. However, in the accounts, the amount spent is treated as loan to the particular land owner and interest thereon is also included in that account. Uptil the asst. yr. 1984-85 the assessee was accounting for the interest income on accrual basis because of the mercantile system of accounting followed by the assessee. Interest accrued ran into lakhs of rupees, but the assessee was not in a position to recover any amount. Following table indicates the nature of transactions:---------------------------------------------------------S.Asst. Interest income Actual int Loan advancedNo. yr.
as per mercantile received from to cultivator system cultivators It would be seen from these figures that crores of rupees are shown as loans advanced to cultivators. In fact they are amounts spent on improvement of lands. The interest on those loans is shown as income accrued. Up to the asst. yr. 1984 85, the assessee offered this accrued income for taxation. The Government auditors noticed that if the income-tax was paid year after year in large amounts on the income which is never likely to be realised, the entire fund of the assessee-Corporation would be spent in payment of income-tax and development activities would come to an end. They, therefore, suggested that the assessee should change method of accounting from mercantile to cash as far as income by way of interest was concerned. Consequently, following resolution was passed by the Board of Directors: Resolved that the system of the accounts of the Corporation, maintained at present on mercantile basis, be changed from the accounting year ending on 30th June, 1984. The accounts will be maintained hereafter such that income will be accounted for when it is actually received.
10. In pursuance of the above resolution, the assessee changed the method of accounting as far as the interest income was concerned. The assessee changed the method so as to show the interest income in the year in which interest is actually received. In the note regarding change in the method of accounting in the accounts of the relevant year, it is mentioned as follows: The Corporation maintained its books of account under mercantile system of accounting up to the year ended on 30th June, 1983. Under this system of accounting, income is taken into account irrespective of the fact whether it is actually received or not.
In our case, till 30th June, 1983, we have taken credit of interest receivable from cultivation and shown it in our books of accounts which resulted in substantial amount of profit on which income-tax had to be paid as per IT Act, 1961.
It is the experience of this Corporation that recovery of loan as well as interest there on from cultivators is very low, hence it was felt that in order to show true and fair view of the affairs of the Corporation, it would be necessary to change the method of accounting as far as income is concerned and no credit should betaken in respect of income which is not received. It was, therefore, decided to maintain the books of accounts of the Corporation under Mixed Accounting System which means income would be brought into account when actually realised and expenses would be booked when the liability would arise.
Thus the assessee has changed from mercantile system of accounting to mixed accounting system which means that income would be brought to account when actually realised and expenses would be booked when the liability would arise.
11. The assessee pleaded before the IAC that the change of method of accounting was bonafide and that the said changed method was being followed consistently in the subsequent years. The IAC (Asst.) observed that the method has been changed to reduce the tax liability. According to him the assessee could have claimed as bad debt the amounts which became irrecoverable in future and continued to follow mercantile system of accounting. He made an addition of Rs. l,40,16,432 in respect of the accrued interest after rejecting the change in the method of accounting.
12. The assessee filed appeal before the CIT(A). The CIT(A) held that the change was bonafide and that the assessee was entitled to change the method of accounting. He, however, was of the opinion that the assessee should have changed the entire system of accounting from mercantile to cash and that even as regards the expenses, cash system of accounting should have been followed. He directed the ITO to recompute the income by following cash system of accounting not only for the income accrued but also in respect of the liability incurred.
The assessee is now in appeal before us and the submission is that the direction given by the CIT(A) would create confusion in the accounts and that the assessee was entitled to maintain mixed system of accounting under which income would be shown on cash basis and liability would be claimed on the basis of incurring. The department is also in appeal on this point before us and grounds 1 to 3 have been raised by the department on this point. The grievance of the department is that the assessee should not have been allowed to change the method of accounting from mercantile to cash basis. The grounds raised by the assessee and those raised by the department on this point would be considered together by us.
13. It is now well-established that an assessee is entitled to change the method of accounting regularly employed by him. What he must alter, however, is his regular method, that is to say, he must abandon what up to that time has been his regular method and start a new regular method and not merely a new method for a casual period. [See Sarupchand v. CIT [1936] 4 ITR 420 (Bom.)]. When an assessee bona fide changes his method of accounting and satisfies the department that he intends to adopt changed method of accounting thereafter or that he has in fact adopted it thereafter, that satisfies the requirement of Section 145, neither principle nor authority bars an assessee from substituting the method of accounting for another at his choice. In view of these principles, what is to be seen is whether the change made by the assessee was bona fide and whether that change has been consistently followed in subsequent years. As far as second aspects is concerned, there is no dispute that in subsequent years, this particular method has been consistently followed after change was effected in this assessment year. So the only question is whether change was bona fide. We have already made reference to the nature of activities of the assessee-Corporation. As already stated the main purpose of the assessee-Corporation is not to earn profits. The main purpose is to implement the schemes of the Governmentregarding land improvement, soil conservation, etc. The assessee is bound to spend the amounts in implementation of that scheme. In the process, some income by way of interest accrues to the assessee. That is merely incidental. The main purpose is not to earn that income. The affairs are not run on professional or commercial basis. They are run as per the policy of the Government to improve the quality of land and to provide other facilities to lower strata of the rural society. It is in this background that we have to consider the above question. We have to take into account all the surrounding circumstances. The figures given above indicate that although the so called accrued income runs into lakhs of rupees, actual receipts are nil. Consequently the said accrued income is not the real income of the assessee. In these peculiar circumstances, if the assessee decides to change the method of accounting so that interest income would be accounted for as and when received it cannot be said that the change was not bona fide. Interest when actually received would constitute the income. Beside, the number of debtors runs into thousands. It is not possible for the assessee to take legal action against them and recover the amounts on regular basis. It would be extremely inconvenient to claim the deduction as bad debt when the amount becomes irrecoverable. This is because it would be doubtful as to in which year the amount would become irrecoverable. In the meantime the assessee would be required to pay huge amount by way of tax on income which the assessee has not really received or likely to receive. In the peculiar circumstances of the present case and considering the restrain under which the assessee-Corporation was working, the change in method of accounting must be regarded as bona fide.
14. In several decisions of High Courts, change of this nature has been considered to be bona fide. We shall proceed to consider those decisions. In CIT v. Rajasthan Investment Co. (P.) Ltd. [1978] 113ITR 294 (Cal.), the assessee was an investment company whose source of income was interest on loans and advances and who was maintaining its accounts on mercantile basis. Subsequently the assessee changed the method of accounting from mercantile basis to cash basis and the changed method was regularly followed in subsequent years. The assessee had not received any interest from the debtors for the last few years and on account of following mercantile basis the assessee was compelled to pay tax on interest amount which it had not received and which was not likely to be received. It had changed the method of accounting so that true and correct state of affairs will be reflected in the accounts. The Tribunal's finding that the change over to the cash basis was more realistic and did not involve any mala fides on the part of the assessee was upheld by the High Court The present case stands on a stronger footing.
15. In Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 (Cal.).the assessee changed its method of accounting in respect of interest income from mercantile to cash system and the changed system was regularly followed for subsequent years. It was held that when there was no specific finding that the assessee in maintaining the change in the method of accounting was not acting bona fide and when changed method was a recognised method and when the same has been followed regularly in subsequent years, same must be accepted by the department. In the present case also the method adopted by the assessee, namely, mixed system of accounting, was a recognised method and the changed method has been regularly employed in subsequent years.
The circumstances indicate that the change was bona fide.
16. In CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612/29 Taxman 413 (Guj.), when the assessee experienced difficulty because of non-receipt of income from interest from two parties with which it had placed its funds by way of deposits, it decided to switch over to the cash system of accounting so that it may not be required to pay income-tax on notional income. The ITO held that the assessee could not change the method of accounting, but the Tribunal accepted the change. The High Court held that there was no finding that the change was not bona fide.
Besides, it was not shown by the Revenue that this change lacked durability or regularity and was merely a stop gap arrangement to avoid payment of tax. It was held that the assessee was entitled to switch over to the cash system of accounting in view of the peculiar circumstances in which the assessee was placed. The facts in our case, as already stated, stand on stronger footing.
17. The learned CIT(A) has directed that the entire accounts should be on cash basis. We are unable to confirm the said directions. The difficulty which the assessee was experiencing was in respect of the so-called interest income which was more or less a notional income. It was for this reason alone that the assessee was required to change the method of accounting as far as income by way of interest was concerned.
Consequently, the assessee would be entitled to change the method in such a way that the interest income would be accounted for as and when received. However, the expenses could be accounted for as and when they were incurred. This is because in the case of company, mercantile system is the normal system of accounting. It is only because of peculiar facts that the change is required to be made in respect of interest income. Mixed system of accounting is also one of the recognised methods of accounting. The real income of the assessee would arise only in the year in which the interest is received. As already stated the assessee is unable to take drastic steps to recover the amounts because the assessee has to act in accordance with the policy of the Government. In these circumstances, the method adopted by the assessee in the accounts was the proper method and that since the method has been regularly employed in subsequent years and since real income could be ascertained by this method, the same should be accepted by the department. We are unable to accept the submission on behalf of the department to the effect that with the changed method, real income would not be ascertainable. Far from it, the real income would be ascertainable on account of the method it is now being adopted by the assessee looking to the peculiar facts of the present case.
18. The learned departmental representative has relied on decisions in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC), CIT v. Hira Lal Mittal & Sons [1972] 86 ITR 463 (All.) and State Bank of Travancore v.CIT [1986] 158 ITR 102/24 Taxman 337 (SC). These decisions lay down as to when interest income is said to accrue when mercantile system of accounting is followed. These decisions do not lay down that the assessee was not entitled to change the method of accounting if there are genuine reasons for such change and when the changed method is followed regularly in subsequent years. Consequently, these decisions are of no assistance for deciding the point in controversy with which we are dealing.
19. We may in this connection refer to the decision of the Bombay Bench 'D' in the case of Maharashtra State Textile Corpn. Ltd. [IT Appeal No.6448 (Bom.) of 1983 dated 26-8-1988]. In that case, the assessee was a Government company and had taken over sick mills. Huge amounts had been advanced to the sick units and the assessee was not receiving either the principal or the interest. The assessee was bound to lend because of the policy of the Government. The assessee changed the method of accounting from mercantile to cash only in respect of interest receivable from the sick units. The Tribunal held that in the circumstances of the case the change of method in respect of interest receivable from mercantile to cash was bona fide and that such change should be accepted for making the assessment. The facts of our case are identical. There is no legal infirmity in allowing the changed method of accounting only in respect of interest receivable by the assessee in the peculiar circumstances of the case. It is not necessary that in respect of other matters also there should be change in the method of accounting.
20. Considering all the circumstances and after paying due regard to the submissions made by the parties before us, we direct the ITO to accept the system of accounting followed by the assessee for this assessment year which has been also followed in subsequent assessment years and determine the profit and loss on the basis of the said system of accounting. We set aside the direction of the CIT(A) in which he has directed that about other items also cash system should be followed.
21. In the departmental appeal, we have now to consider ground Nos. 4,5 and 6. These grounds are as follows: (4) On the facts and in the circumstances of the case, theCIT(A) has erred in deleting the addition in respect of earlier years expenses amounting to Rs. 1,45,740.
(5) On the facts and in the circumstances of the case, the CIT(A) has erred in his directions reducing addition of Rs. 2,03,229 to Rs. 66,363 when in the extent of Rs. 1,00,506 is confirmed. Addition may be confirmed fully or to the extent found justified by Hon. ITAT. (6) Without prejudice to the appeal for asst. yr, 1984-85, the CIT(A) erred in his observations regarding disallowance of Rs. 1,84,999 regarding penal interest payable to Command Area Development Authority.
22. As regards ground No. 4, reference may be made to pages 60 and 61 of annual account. The figure is Rs. 1,95,739.94. The IAC (Asst.) took this figure at Rs. 1,45,739.94. Subsequently by an order under Section 154 of the Act, he corrected the figure to Rs. 1,95,739.94.
Consequently the ground No. 4 does not survive and is rejected.
23. As regards ground No. 5, the IAC has made addition of Rs. 2,03,229.
The CIT(A) reduced it to Rs. 66,363 (see departmental paper book). Item No. 1 is Rs. 1,84,999.96. The CIT(A) has directed that it should be allowed in asst. yr. 1984-85. The CIT(A) has not allowed this item for asst. yr. 1985-86 with which we are concerned. Consequently the department could not have any grievance on that score. It was agreed by the learned departmental representative that only two small items - Rs. 2850 and Rs. 2977 - remained to be considered. Since these are very small items, it is not necessary to interfere in the order of the CIT(A). Consequently, ground No. 5 is liable to be rejected.
24. As regards ground No. 6, it does not arise out of the order for asst. yr. 1985-86 and as such it is liable to be rejected.
25. The assessec's appeals for asst. yrs. 1983-84 and 1984-85 are dismissed, while appeal for 1985-86 is partly allowed. Departmental appeal for asst. year 1985-86 is dismissed.