| SooperKanoon Citation | sooperkanoon.com/75806 |
| Court | Income Tax Appellate Tribunal ITAT Ahmedabad |
| Decided On | Aug-17-2007 |
| Judge | R Garg, Vice, I Verma |
| Reported in | (2008)114TTJ(Ahd.)145 |
| Appellant | National Dairy Development Board |
| Respondent | Additional Commissioner of |
Originally an Indian Dairy Corporation, was formed as a company and registered under the Companies Act, 1956, for the common objectives of development of rural masses. It was dissolved and its undertaking got vested in the National Dairy Development Board (hereinafter referred to as "NDDB"), a corporation constituted under the NDDB Act, 1987, which came into effect on 12th day of October, 1987. Section 44 of this Act provided that the NDDB would not be liable to pay income-tax or any other tax on its income, profits or gains derived. The said Section 44 read as under: 44. Notwithstanding anything contained in the IT Act, 1961 or any other enactment for the time being in force relating to tax on income, profits or gains, the National Dairy Development Board shall not be liable to pay income-tax or any other tax in respect of its income, profits or gains derived.
2. With effect from 1st April, 2003 the said Section 44 was omitted by the Finance Act, 2002 and the present assessment year chargeable to tax is asst. yr. 2003-04, the appeal of which is before us.
3. The first dispute is with regard to the addition of Rs. 1,05,27,02,724 on account of interest which was actually received during the year under consideration. The background of the addition is that though the board was not chargeable to tax, it was following hybrid system i.e., cash system for accounting the interest income and mercantile system for accounting expenditure upto financial year 2000-01. During the financial year 2001-02, the board had changed the system and henceforth accounting the income on accrual basis as against cash basis being followed in the earlier year. During the year under consideration i.e., financial year 2002-03 relevant to asst. yr.
2003-04, the same accrual system was continued. The change is stated to be in consonance with the requirement of Accounting Standard, issued by the Institute of Chartered Accountants of India. The AO observed that though the need to change the accounting system was based on guidance notes issued by Accounting Standard Board (ICAI), the reason for adopting accrual system of accounting was not for to seek as it was to reduce the incidence of tax on the interest income received in cash during the year which was though receivable in the earlier years. He referred to the board resolution dt. 13th May, 2002, the contents of the note relating to the said resolution, another resolution dt. 27th May, 2002 ratifying the proposal. After quoting this resolution, he held that the policy of accounting the interest income was reviewed since NDDB was required to subject itself under the provisions of IT Act, and that the resolutions were passed subsequent to passing of Finance Act, 2002. He ultimately concluded in para 4.11 as under: 4.11 In view of the aforesaid, it is found necessary that the resolutions passed by the NDDB changing in the system of accounting interest income retrospectively, does not result in escapement of income assessable for the year under consideration. Therefore, what is required to be taken into account is income as declared by the assessee on accrual basis and also such interest income relating to the period prior to financial year 2002-03 but actually received during the previous year. For this purpose, I find it necessary to invoke the provisions of 145(3) of the Act. As discussed earlier, it cannot be said that the assessee has regularly employed either cash or mercantile system of accounting. The intention behind changing the system of accounting with retrospective effect is suspect and does not satisfy the provision of Section 145(1) of the Act regarding computing income chargeable to tax in accordance with either cash or mercantile system of accounting regularly employed.
The method of accounting interest income for the relevant previous year, was not followed in the year prior to the assessee became a taxable entity. Hence, provisions of Section 145(3) r/w Section 145(1) of the Act are required to be invoked to bring to tax, interest income pertaining to the period prior to financial year 2002-03 but actually received during the year. Accordingly, for the reasons mentioned in details as above, an amount of Rs. 1,05,27,20,724 is added to the total income. Since the assessee has furnished inaccurate particulars of income, proceedings under Section 271(1)(c) of the Act are initiated.
The above given instructions issued by the Central Government required the appellant to disclose specifically prior period items in the P&L a/c of the current financial year 2002-03, so that their impact on the profit and loss in the current previous year could be appropriately perceived. The appellant failed to mention such major part of its interest income (Rs. 1,05,27,20,724) which it had diverted to the prior year on accrual basis in the P&L a/c of the current year for ascertaining its impact on the income of the appellant in the current year. Thus, the appellant has faulted on various counts in presenting its accounts correctly.
The appellant's contention that the appellant had every right to change its system of accounting from cash to mercantile cannot be disputed but doing it in the manner and in the circumstances as stated above, is hard to digest and makes it difficult to believe that the action of the appellant to change its method of accounting was a bona fide one.
The appellant had been following consistently cash system of accounting upto financial year 2000-01 for interest transactions. It would have followed the same system for the financial year 2001-02 also had the Finance Act, 2002 had not omitted Section 44 of the NDDB Act. It was only in the post-financial year 2001-02 that the appellant decided through its board's resolutions to change its consistently followed method of accounting ex post facto when it had already followed practically in every respect, its old regular method of accounting in its day-to-day transactions upto 31st March, 2002.
Since, interest income was the only major source of income declared in the P&L a/c, therefore, it would have been appropriate for the appellant to have continued with the cash system of accounting for the financial year 2001-02 and only from 2002-03 it should have switched over to the mercantile system of accounting to avoid giving distorted results to its earnings.
The appellant has admitted in the submissions and the rejoinder that the incomes were accrued in the financial year 2001-02 or earlier years.... In view of the said admission on part of the appellant that the income had accrued in the financial year 2001-02 or earlier years, then even if, the appellant changes its system of accounting from hybrid to mercantile then also the incomes which had accrued prior to the financial year 2001-02 but were received during the current year could not be posted in the financial year 2001-02.
Thus, the appellant is not following any proper system of accounting.
The provisions of Section 145 pertaining to the method of accounting were amended by the Finance Act, 1995 w.e.f. 1st April, 1997 as a result of which, every assessee was required to maintain its books of account either on cash system or on mercantile system of accounting, whichever is regularly employed by the assessee. Thus, the hybrid system of accounting which enabled an assessee to keep different systems of accounts for different heads/parts of its business was completely done away with. The assessee had to maintain its accounts either on cash or on mercantile system, whichever provided true determination of its income/profit.
If the assessee genuinely wanted to change the system of accounting then appropriate course for it would have been to change the system from hybrid to mercantile system of accounting w.e.f. 1st April, 1997, from which date the law laid down under Section 145 stood amended. But the appellant chose the option only in the post-enactment of Finance Act, 2002 that too retrospectively by passing the resolutions on 13th May, 2002 and 27th May, 2002. The change in the system of accounting from cash to mercantile authorized by the board resolutions dt. 13th May, 2002 and 27th May, 2002 for the period preceding 31st March, 2002 definitely gave a retrospective angle to the whole affair. The exercise resulted in the drastic jump in the interest income declared for the financial year 2001-02 vis-a-vis interest income declared for the financial year 2000-01. As against the interest income of Rs. 246 crores only declared in the financial year 2000-01, the interest income for the financial year 2001-02 jumped to Rs. 774 crores. In the given background, the whole exercise to adopt a different system of accounting was not transparent one, as it shifted the incidence of tax on interest amount of Rs. 1,05,27,20,724 to the tax-free time zone i.e., prior to 31st March, 2002 and accordingly, nullified the tax effect. Thus, in the circumstances, the AO was justified in bringing to tax the interest amount of Rs. 1,05.27,20,724 by invoking the provisions of Section 145(3). Accordingly, the addition made by the AO on this account is sustained.
At the time of the appellate proceedings, it was argued by the appellant that on one hand the AO has taxed Rs. 1,05,27,20,724 on receipt basis but on the other hand it has also taxed Rs. 17,50,37,979 (interest provision for the financial year 2002-03) on accrual basis, this action of the AO amounts to following the hybrid system of accountancy which is against the provisions of Section 145(1) and (2). I have considered these submissions of the appellant, which were also confronted to the AO and observed that since the appellant has ultimately decided to adopt mercantile method of accounting for the current as well as for all its subsequent years, therefore, such amount of Rs. 17,50,37,979 has to be taxed on due basis in the current year as has been shown by the appellant itself in the current year. Whereas, the amount of Rs. 1,05,27,20,724 has to be taxed on receipt basis in the current year itself because with the change in the system of accounting carried out by the appellant, the said amount otherwise would have escaped the tax net for all times to come. Hence, in the given situation, there was no other alternative in bringing to tax the said amount in any other manner than the one followed.
5. The learned Counsel of the assessee submitted that this is the first year of the taxability of the assessee and it has to be assessed on the basis of system of accounting being followed by it in the year under consideration particularly when the same is followed in the subsequent years consistently. It is true that there was a change in the accounting policy, but that was in earlier year, when the assessee shifted from cash to accrual system of accounting. Qualification by the auditors was also in the earlier years. The change was as per the requirement of Accounting Standard, whereby hybrid system of accounting is not permitted, which was being followed by the assessee prior to financial year 2001-02. It is also submitted that change was bona jide and saving of tax is no criteria. The assessee is following the system year to year, the Department has no right to reject the same and for this, he relied upon the decisions : (i) The Gujarat High Court in the case of CIT v. Ganga Charity Trust Fund (1986) 53 CTR (Guj) 365 : (1986) 162 1TR 612 (Guj); (ii) The Calcutta High Court in the case of Reform Flour Mills (P) Ltd. v. CIT (iii) The Supreme Court in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC); (iv) The Punjab and Haryana High Court in the case of CIT v. Punjab State Industrial Development Corporation Ltd. ; (v) The Calcutta High Court in the case of Snow White Food Products Co. Ltd. v.CIT ; (vi) The Madras High Court in the case of G.Padmanabha Chettiar and Sons v. CIT Gujarat High Court in the case of CIT v. Atul Products Ltd. ; and (viii) The Supreme Court in the case of United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC).
6. The learned Departmental Representative, on the other hand, supporting the orders of the Revenue authorities, submitted that Section 44 of the NDDB Act, 1987 exempts the assessee for non-payment of tax, which does mean that assessee was not an assessee under the IT Act, because of this specific provisions of Section 44 in the NDDB Act, 1987, it was not to pay tax. The change according to him was not bona fide as it was only with a view to evade tax on the income which was chargeable on the basis of system being followed by the assessee in the earlier years. The intention of the assessee was evident from the fact that everything regarding the change was the enactment of the Finance Act, 2002 making the assessee liable to tax.
7. We have heard the parties and considered the rival submissions. Let us first discuss the impact of Section 44 of the NDDB Act, 1987. It might be that Section 44 provided that the NDDB shall not be liable to pay income-tax or any other tax in respect of its income, profits or gains derived, may mean that it is the tax which is not payable by the assessee, but nonetheless it was an assessee under the IT Act. However, if we look from the practical point of view, the meaning has to be ascribed to the words used in Section 44, as if the NDDB were exempt from liability to income-tax itself. The use of the words "shall not be liable to pay income-tax...." clearly shows that NDDB is not subject to charge of income-tax. Even otherwise, when a person is not liable to pay income-tax the fact whether it was an asscssee under the Act or the computation of income thereunder, would be of no use, and it would be an academic exercise. Section 44 is to be understood in that sense and until it survived, the NDDB was not an asscssee liable to income-tax.
8. Until financial year 2000-01 the assessee was following cash system of accounting. It switched over to mercantile system w.e.f. 1st April, 2001. The board resolution for the change in the system of accounting dt. 13th May, 2002, reads as under: Resolved that the interest income be recognized as revenue on accrual basis with effect from the financial year beginning 1st April, 2001 in respect of all the term loans, the repayment of which (including payment of interest) is not in default for more than two quarters, as set out in the agenda note.
To consider recognition of income on term loans on accrual basis with effect from the financial year beginning 1st April, 2001.
The present accounting policy by the NDDB in respect of interest on long-term loans recognized interest as income only when it is actually received. With the income of the NDDB now subject to tax, the above accounting policy was received. The income-tax guidelines stipulates that interest be recognized as income when due. We have also studied the guidelines issued by the Reserve Bank of India on income recognition, which also considered interest as income on accrual basis. It may be mentioned that the NDDB's statutory auditors have since long been commenting on the policy with regard to recognition of income on interest. Considering all the above, it is proposed to account for interest an accrual basis w.e.f. 1st April, 2001 in respect of all term loans, the repayment of which (including payment of interest due) is not in default for more than two quarters.
10. Another resolution ratifying the proposal dt. 27th May, 2002, reads as under: To ratify the proposal approved by the Chairman, NDDB considering recognition of income on all loans on accrual basis with effect from the financial year 2001-02.
The board vide resolution No. 06/65/09/2002-2003 approved recognition of interest income on project loans as revenue on accrual basis with effect from the financial year beginning 1st April, 2001, in cases where the repayment is not in default for more than two quarters. However, our tax consultants have now advised that interest should be recognized as income in all cases (loans to milk as well as oil unions) irrespective of default. They have further advised that a corresponding provision for such doubtful receipt may also be made in the accounts.
Since the accounts for the financial year 2001-02 had to be closed for audit, approval of the Chairman, NDDB was obtained (copy enclosed at p. 8) and interest on all loans was recognized on accrual basis. A corresponding provision for doubtful receipts has been made in respect of loans, which are in default for more than two quarters.
The board may kindly ratify the above proposal and adopt the following resolution: Resolved that the proposal approved by the Chairman, NDDB to recognize interest on all loans disbursed to milk and oil co-operatives on accrual basis irrespective of default and to make a corresponding provision for doubtful receipts, as set out in the agenda note, be and is hereby ratified.
11. It might be true that the policy of accounting the interest income was reviewed because NDDB was made subject to tax under the provisions of IT Act and that the resolutions were passed subsequent to passing of Finance Act, 2002 but that by itself cannot be a ground for applying the provisions of Section 145(3) r/w Section 145(1) of the Act to bring to tax, interest income pertaining to the period prior to financial year 2002-03 but actually received during the year. The income of the assessee is chargeable to tax from the assessment year in question and it is this year when the income of the assessee is to be determined for. In the year under consideration, the assessee was following mercantile system of accounting and interest income is to be assessed on that basis. The income that has not accrued in the year under consideration, but had accrued in the earlier year, would not be assessable merely because, it has been received in the impugned year.
The Supreme Court in the case of United Commercial Bank v. CIT (supra) held that for the purpose of income-tax, what is to be seen is the real income which is deduced on the basis of the accounting system regularly maintained by the assessee and that processing was done by the assessee in the present case.
12. The observations of the Revenue authorities that the income of Rs. 1,05,27,20,724 received by the assessee in the year under consideration would escape tax, are not fully correct in the sense that it is not the income of the year under consideration. It was the income of the earlier year, and in that year, the assessee was not liable to tax. As the assessee is following the system of accounting as accrual, such income cannot be assessed on cash basis when it had accrued in the earlier years.
13. The adoption of the system of mercantile for accounting for the income is a recognized method under the Accounting Standard issued under Section 145(2) of the Act. It is also as per the requirement of Accounting Standard issued by the ICAI. Therefore, the Revenue is not justified in stating that change was not bona fide. The Gujarat High Court in the case of CIT v. Ganga Charity Trust Fund (supra) held that there being no finding of fact that the switchover to the cash system of accounting in the previous year relevant to the asst. yr. 1972-73 was not bona fide and that this change lacked durability or regularity and was merely a stop gap arrangement to avoid payment of tax. The assessee trust was entitled to switchover to the cash method of accounting in view of the peculiar circumstances in which the trust was placed. The Punjab & Haryana High Court in the case of CIT v. Punjab State Industrial Development Corporation Ltd. (supra) also held that the assessee was a Government company. It had adopted a procedure after thorough examination of the matter. This procedure was not violative of Section 145 of the IT Act, 1961. The view taken by the Tribunal was a possible view. The Tribunal was justified in accepting the change in the method of accounting. The Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT (supra) held that the assessee was entitled to change its method of accounting from the mercantile system to the cash system in respect of the credits in the interest account and the sums of Rs. 1,97,657 and Rs. 2,01,517, being interest accrued during the relevant years but not received, could not be included in the assessments for the asst. yrs. 1971-72 and 1972-73.
14. The assessee was also conscious about the decision of Madras High Court in the case of G. Padmanabha Chettiar &. Sons (supra) holding that the same basis has to be adopted for receipt and payment of interest and having regard to the mercantile system of accounting adopted by the assessee during the assessment years in question, the assessee could not be permitted to adopt the mercantile basis for payment of interest by it and claim the benefit of the cash system in respect of interest received by it. The assessee had to adopt either accrual or cash system as against hybrid system it was following in past to set itself right.
15. The contention of the Revenue, that the system was adopted in order to avoid tax on the receipt of interest, is also of no help particularly in view of the fact that the assessee is following mercantile system of accounting and any income which pertains to the earlier year when the assessee was not liable to pay tax, would not be assessable in the year of receipt. The Gujarat High Court in the case of CIT v. Atul Products Ltd. (supra) held "that the Tribunal found that the change made in the method of stock valuation by the assessee was not with a mala fide intention. Simply because by virtue of the change introduced by the assessee, the taxable income of the assessee had been reduced, by no stretch of imagination, it could be said that the assessee had an intention to deliberately undervalue its stock so as to reduce its taxation. The new method which was adopted had been continuously followed in the subsequent years. The assessee had changed the method so as to see that the method adopted by the assessee was also as per the method adopted by other business units in the industry.
In the subsequent years, the Revenue had not objected to the change made by the assessee in the method of stock valuation. Therefore, the Tribunal was right in confirming the order of the CIT(A) deleting the addition of Rs. 2,93,56,000 representing the alleged undervaluation of closing stock." Again it is held by the Calcutta High Court in the case of Reform Flour Mills (P) Ltd. v. CIT (supra) that "It is settled law that a taxpayer is entitled to adjust his own affairs in such a way that his tax burden is thereby reduced. He is also entitled to adopt any lawful means for the aforesaid purpose. Section 145(1) of the IT Act, 1961, does not postulate any agreement or contract between any taxpayer and any person, whoever he may be, regarding the method of accounting to be employed by a taxpayer and also does not lay any embargo on his altering the method of accounting. It cannot, therefore, be contended that the assessee cannot change his method of accounting unilaterally." The Supreme Court in the case of Union of India and Anr.
v. Azadi Bachao Andolan and Anr. (supra) clarified that "If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it is not permissible for the Court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests." 16. It is also a fact on record that the accrual system is being followed by the assessee from the earlier year and in subsequent years thereafter consistently. In these circumstances, in our opinion, the Revenue authorities were not justified in bringing the sum of Rs. 1,05,27,20,724 to tax in the year under consideration. We, accordingly delete the addition and allow the assessee's ground on this issue.
17. Ground No. 2 is against confirming the addition of Rs. 1,59,82,471 on account of reduction in interest income. The AO noticed that against the name of certain parties, negative interest is shown in respect of following seventeen parties: 18. This interest is reduced from the project interest of Rs. 1,05,95,29,647. The assessee claimed that these are rectification entries due to error/omission and reallocation of receipts between interest and principal for the earlier years. The AO noted the admission of the fact by the assessee that whatever errors committed or made in accounting the interest income of the preceding years when the assessee was a nontaxable entity, the same are being corrected by reducing the current year's amount to this extent when the assessee has become taxable. Finding no valid reason for reducing the income, the AO, therefore, brought the same to tax. The assessee also submitted that the interest accrued on the standard loan in the earlier year was Rs. 1,04,43,72,332 as against Rs. 1,05,95,29,647 and the difference of Rs. 1,51,57,315 (i.e., Rs. 1,05,95,29,647 - Rs. 1,04,43,72,332) related to the earlier year and would not be assessable to tax, was also not accepted by the AO. I have considered the submissions, rejoinder of the appellant and the findings/comments of the AO and observe that most of the individual entries pertaining to negative interest constitute of figures running (into) lacs and the biggest entry is of Rs. 71.80 lacs shown against Sabarmati Salt Farmers Society. It is noted that the letter dt. 26th May, 2005, through which the appellant has claimed to have given exhaustive explanation during the assessment proceedings pertaining the said entries was in fact only a brief and general reply. The same is reproduced as under (It may also be mentioned that there was no mention of negative interest issue in the assessee's second letter dt. 1st Sept., 2004 submitted before the AO): As regards negative figures aggregating to Rs. 1,59,82,471 appearing in the statement of interest income recognized during the financial year 2002-03, it is submitted that these are rectification entries due to errors/omissions and reallocation of receipts between interest and principal for the earlier years. In this connection, we would like to submit that as per RBI Prudential norms adopted by the NDDB for income recognition, interest accrued on standard loans was Rs. 1,04,43,72,332 but the actual interest accounted is Rs. 1,05,95,29,647. Based on the reconciliation, in respect of doubtful and loss assets, amount of Rs. 2,99,82,116 was credited to interest income and Rs. 1.48,24,801 was debited. Net amount of Rs. 1,51,57,315 was offered to tax, though it pertained to period prior to March, 2002.
Thus, the reply given by the appellant was quite general in nature without giving any specific explanation for each and every substantial entry mentioned above. The appellant has not given any specific reply as to how such entries got crystalised during the year. The appellant has claimed that '...The AO did not accept the contention and made the addition only in respect of negative income, however, he did not reduce the income on the similar ground by Rs. 1,51,57,315 being interest income which was pertaining to earlier year but accounted for in current year.' And also submitted 'that as per RBI Prudential norms adopted by the appellant for income recognition, interest accrued on standard loans was Rs. 1,04,43,72,332 as against Rs. 1,05,95,29,647 shown actually. The amount of difference of Rs. 1,51,57,315 has been offered to tax though it pertained to period prior to March, 2002.' The above claim of the appellant has no logic for the simple reason that the appellant by its own admission had introduced mercantile system of accounting w.e.f. finance year 2001-02 onwards, therefore, in no way it can claim that the interest amount of Rs. 1,51,57,315 which pertained to the earlier years was accounted for in the current year. Further, during the year the appellant was not a public finance institution on which the RBI Prudential norms would apply for income recognition. As stated above, the appellant has not given any specific explanation for the individual substantial negative interest entries. Moreover, the interest income for which the said errors and omissions have been claimed pertain to the preceding years when the assessee was a non-taxable entity. Since such amounts were not charged to tax in earlier years, therefore, the appellant has no justification for claiming such errors and omissions pertaining to those exempt interest amounts in the current year against its taxable income. Further, there is no logic in the appellant's arguments that the disallowance of the claim of negative interest of Rs. 1,59,82,471 would amount to double addition to its income. As stated above the said amounts pertained to earlier years and as such could not have been shown as part of the total interest in the current year, specially when the appellant is following mercantile system of accounting. Hence, in view of above, the submissions of the appellant are rejected and the disallowance made by the AO regarding negative interest of Rs. 1,59,82,471 is confirmed.
20. Insofar as the taxability of Rs. 1,59,82,471 is concerned, we agree with the CIT(A) that it was an omission pertaining to the earlier years when the income of the assessee was exempt, and therefore, a reduction from the current income cannot be said to be justified. However, the other interest income of Rs. 1,51,57,315 would have to be given credit because it also pertained to the earlier year and therefore, could not be said to have accrued to the assessee in the year under consideration. For the similar reasons as given by us in the first ground of this order, the income of Rs. 1,51,57,315 is to be deleted.
We, accordingly, direct the AO to delete the same subject to verification that it really pertains to the earlier years income.
21. The third ground is against the addition of Rs. 2,66,62,002 on account of interest income earned on project fund. Facts of the case are that the assessee had received grants for implementation of certain projects from Government/agencies, during the year under consideration from (i) North Kerala Dairy Project Fund, (ii) EEC-Project Implementation Agreement (PIA) Fund, (iii) Bhuj Hospital Fund and (iv) Assistance to co- , operatives. It had received interest of Rs. 3,02,48,447 on such funds, which was credited to the project fund account and was directly taken to the balance sheet. The expenditure incurred from such funds was also not debited to the P&L a/c. The TDS on such interest income amounted to Rs. 18,59,510. The assessee claimed that the interest had accrued on such funds of specific project and therefore was not the real income of the assessee as the assessee was acting only as a nodal agency, and that the income ultimately belonged to the project/Government. The AO however, held that the interest income from the project fund had passed through the books of the assessee and that the assessee had retained control over the amounts so credited till the amounts were spent or refunded to the Government/agency, therefore, the said income accrued directly to the assessee and accordingly, he brought to tax the interest amount of Rs. 3,02,48,447.
22. The CIT(A) held that it is only in the case of the EEC Project Implementation Agreement, there is a clear term that "any accruing interest will be used to finance additional activities within the scope of the projects of the special programme". No such specific clear term of utilizing such kind of interest appears to be available in cases of other projects and copies of other agreements were also not furnished.
He observed that the assessee has filed an evidence in the form of a letter dt. 7th Feb., 2003 written to the Department of Animal Husbandry, Ministry of Agriculture, wherein, the assessee has made a reference of refunding of interest through a demand draft. An acknowledgement of refunding an amount of Rs. 31,11,214 through DD dt.
19th May, 2003 (under the scheme "Assistance to Co-operatives") has also been enclosed. He however, observed that no evidence in the form of any agreement has been furnished by the assessee, wherein, it has been specifically mentioned that interest on grants given for specific projects would be required to be refunded. No evidence pertaining to North Kerala Dairy Project Fund and Bhuj Hospital in this regard has been produced. Even the documentary evidence regarding refunding of interest of Rs. 31 lakhs to the Department of Animal Husbandry pertains to the next financial year 2003-04 and not to the current year. He rejected the assessee's claim that the income had been diverted by an overriding title to the project funds before its accrual to the assessee in view of the facts that except, in the case of EECProject Implementation Agreement Fund. In the case of the EEC Project, it is clear that the interest had to be utilized for the purpose of financing additional activities of the project programmes. Therefore, in the said case, it can be concluded that as per the principles laid down in the decision of the Supreme Court in CIT v. Travoncore Sugar & Chemicals Ltd. and relied upon by the assessee that there was an overriding title to divert the interest income to the project fund.
Accordingly, he held that the interest of Rs. 35,86,445 accrued on the EEC Project Implementation Fund, would be treated as application of amounts for project activities by an overriding title as the interest accrued in this case would partake the character of grant which is also not credited to the P&L a/c. Hence, the AO was directed to allow the interest accrued on such fund during the year after due verification of its application in the project activities. In other cases, where there was no specific clause in the agreements that the interest accrued on the project funds would be utilized for the project activities, he held there was no diversion of interest income by an overriding title to project funds, as the assessee retained the control over such interest accrued on the grants with the respective project funds. Therefore, in these cases coupled with the provisions of Section 199 as per which the TDS on such interest amounts had been deducted on behalf of the assessee would be treated as the income accrued to the assessee.
23. The learned Counsel submitted that the assessee was entrusted to run certain projects for which grants were received from donor agencies. As per the agreements entered into with such agencies, funds including interest thereon were to be used only for the paurpose specified in the said agreement and accordingly, interests received/accrued on the said funds were credited to the project fund account and carried directly in the balance sheet. The assessee is only acting as a nodal agency and the interest income ultimately has to go to the project/Government and the assessee is only supposed to utilize it either as per the directions given or refund it to the Government.
Further, the same has to be utilized as per the agreements entered into before receipt of such income, and that in case of non-utilisation the same has to be refunded to the agencies. All these facts establish that such money and interest thereon never became the income of the assessee. It is a case where the income was diverted by an overriding title and it never reached the assessee. Even if the assessee collects such income it never was its income; it was not its income because such income was not collected as part of assessee's own income, but for and on behalf of agencies who have entrusted the assessee with the projects and given funds for the same. It was, in any case, to be refunded back.
24. It is stated that in respect of these project funds, the interest accrued thereon has to be utilized to finance additional activities within the scope of the project and cannot be used at the will of NDDB for its other objects. Further, in case of 'Assistance to Co-operatives' the terms clearly provide that the amount of interest earned by the NDDB is to be refunded to the Government of India. The assessee has actually refunded the interest to the Government and evidence of such refund was filed before the officer. It is therefore submitted that at no point of time income accrued to the assessee.
25. The assessee placed reliance on the decision of the Supreme Court in the case of CIT v. Travancore Sugar and Chemicals Ltd. (supra) and in the case of Shri Chatrapatl Sahkari Shakar Karkhana Ltd. v. CIT and the Tribunal decision in the case of GNFC 2 1TD 1 (And) [sic-correct citation is Gujarat Nardmade Valley Fertilizer Co.
Ltd. v. ITO (1983) 15 TTJ (Ahd) 403 : (1982) 2 ITD 51 (And)--Ed.].
Expenditure/utilization from the project funds has not been claimed as an expenditure and if at all the interest received on project funds is to be treated as the income of the assessee, then the expenditure incurred on such projects should be allowed as a deduction.
26. The money received was in fixed deposits lying in the name of the assessee, therefore, the bank has deducted the tax in assessee's account. However, it may be noted that gross income inclusive of TDS accounted for and utilized/refunded without reducing portion of TDS, therefore, there is no justification in considering the income taxable on the ground that the assessee has claimed credit for TDS. The assessee further submitted that the funds are lying separately in the banks in the form of fixed deposits and the AO has not alleged that funds or interest are used for the assessee's business. On the contrary, the terms of agreement clearly provide that the assessee is required to spend interest also on the project and/or to refund to the concerned parties.
27. We have heard the parties and considered their rival submissions.
We find that on the said interest received tax has been deducted at source. This has been claimed credit against its own tax liability.
This cannot be claimed as a credit unless the income belongs to and offered in its assessment. During the year appellant had following project funds : 28. Insofar as North Kerala Dairy Fund is concerned, no details have been submitted by the assessee either before the AO or before the CIT(A) or even before us and, therefore, it cannot be said that the interest has not accrued to the assessee. The interest has also not been shown to have been paid to them. Under these circumstances, we uphold the orders of the Revenue authorities in assessing the interest relatable to this project.
29. As regards Bhuj Hospital, a letter dt. 16, Oct., 2001 is filed before us from the assessee to the Joint Secretary, PM Office stating the requirements for the project for the first quarter of Rs. 15 crores required to be relcased to NDDB at the earliest. Clause 4 of this letter states that on "the funds released will not be treated as loan/grant to the NDDB but to the authority in whom the ownership of the hospital will vest." Pursuant to this letter of the assessee, PM Office issued a cheque of Rs. 15 crores in favour of the assessee on 16th Oct., 2001. From this letter, the assessee submits that the interest was not to accrue to the assessee because it was not treated as a loan. The learned Counsel for the Revenue, on the other hand, submitted that it does not say anything about the accrual of interest and, therefore, the interest accrued to the assessee by deposit of this money was its income and was rightly assessed by the Revenue authority.
Clause 4 of the aforesaid letter which has been relied upon by the learned Counsel only states that the funds released will not be treated as loan/grant to NDDB. On a correct reading of Clause 4 it would be evident that this clause states that it will be a loan/grant to the authority in whom the ownership of the hospital will vest. What will happen to the interest accrued or earned is not specifically dealt with. The accrual of income cannot be postponed. It has to accrue to somebody. What is that authority or person to whom the project ultimately belong is not known. Till then the assessee is to be assessed and interest paid back would be then allowable to it. We therefore set aside the matter on this issue to the file of the AO to verify as to what happened to interest earned on this money and whether it was actually refunded to the authority in whom the ownership of the hospital vests or to the Government and with a direction to decide the matter in pursuance thereof and in accordance with law.
30. As regards the assistance to the co-operatives, a letter dt. 7th Feb., 2003 by the Ministry of Agriculture, Department of Animal Husbandary & Dairying was written to the Pay & Accounts Officer for release of grant-in-aid. Clause 5 of this letter reads: Till such time the above condition is fulfilled, the funds released by Government of India to NDDB shall be kept in a separate account and shall not be used for any other purpose. The amount of interest earned by NDDB is to be refunded to the Government of India by demand draft in favour of Pay & Accounts Officer, Department of Animal Husbandary & Dairying, Ministry of Agriculture under intimation to this Department.
31. The interest money was actually refunded in the next year as is evident from the letter dt. 21st May. 2003 towards interest for a sum of Rs. 31,11,214. This indicates that the interest might not have accrued to the assessee as otherwise should not have been refunded in the subsequent year. This fact also, the AO may verify and allow the necessary relief to the assessee by ascertaining the fact whether the interest was the income of the assessee or it belonged to Government of India and has diverted at source.
32. The fourth ground is addition of Rs. 44,99.03,516 being income not charged on doubtful loans. The facts of the case are that the assessee advanced money to certain corporations and an interest of Rs. 44.99 crores was due from them but since there was no certainty of recovery and claiming itself to be a public financial institution the assessee applied RBI Prudential norms for not accounting the accrued interest on the said principal amounts during the current year. The AO was of the view that since the RBI Prudential norms were applied by the assessee retrospectively by passing the board resolution on 31st July, 2003 (which is also the date of finalization of its accounts) and also that the assessee was not a public financial institution during the year, the RBI norms could not be applied. The assessee applied it only as a ploy to reduce its income. Accordingly, he added the sum to the income of the assessee.
33. The CIT(A) confirmed the addition made by the AO by observing as under: Since, the appellant is following mercantile system of accounting and the appellant can enforce the terms of agreements signed with cooperatives under various laws and recover the disputed amounts and since the income has not been surrendered but only a mere improbability exists, therefore, keeping in view the judgment of the Court given in the State Bank of Travancore v. CIT wherein, the Court has held that in the mercantile system of accounting the interest accrued on sticky loans during the year has to be brought to tax, irrespective of the fact whether income would be realized or not, I hold that interest which has accrued during the year on advances given to various co-operative societies has to be brought to tax in the current year.
34. He also noted certain decisions relied upon by the assessee but observed as of no help. UCO Bank v. CIT , he held, was not applicable as the assessee in the present case, had no rigor relating to following the accrual method of accounting since on basis of its own submission, accounting of interest income on accrual basis is Rs. 105.90 crores whereas amount of interest actually received is Rs. 193.72 crores. In Godhra Electricity Co. Ltd. v. CIT the assessee enhanced electricity charges on unilateral basis and against Court sanction and also against the wish of the Government. Therefore, the Supreme Court has held that entries made in the books in respect of income on account of enhanced electricity charges represented only hypothetical income. In National Handloom Development Corporation Ltd v. Dy. CIT the facts were that the corporation was getting commission from user agency. Corporation provided unilateral interest on deffered payment on the commission receivable and therefore the Court held that there was no enforceable right to charge interest, which did not accrue and that there was no income at all either accrued or received by the assessee.
In CIT v. Shoorji Vallabhdas & Co. by agreement entered into with the concerned party rate of commission receivable was altered. Therefore, income on account of commission as accrued in the books was different than what was received by the concerned party on the basis of agreement entered into subsequent to the end of the year.
Therefore, the Court held that the income can be stated as not resulted at all. In T.C.I. Finance Ltd. v. Asstt. CIT (2005) 92 TTJ (Hyd) 238 : (2004) 91 ITD 573 (Hyd), the facts were found different from the facts of the case under consideration as the assessee had a valid and legal right to enforce the recovery through Courts.
35. The assessee's submission that it had been granted status of public financial institution for which an application was made within the previous year relevant to the impugned assessment year, though actually notified on 23rd Feb., 2004 after the close of the year and therefore the RBI Prudential norms were applicable, was also rejected by the CIT by observing: The appellant has also relied on the case of Marshall Sons and Co.
v. ITO 88 Comp Cos 528 for the purpose of supporting its arguments that the gap between the date of application and the date of issue of notification is only a procedural matter, therefore, the date of application should be taken as the effective date for granting status of PFI to the appellant. On examination of the said case law cited by the appellant, it is observed that it pertains to the date of amalgamation between a holding and a subsidiary company. In the said case it has been held that the amalgamation would take effect from the date of transfer specified in the 'scheme of amalgamation' and not the date of the Court's order, however, the Court has the authority to modify the date prescribed in the scheme of amalgamation. In this regard I would like to observe that the issue of amalgamation in the case cited by the appellant cannot be equated with the date of application filed by the appellant for seeking PFI status. Under the Company Laws there is a compulsion on the parties to state a specific date of amalgamation under the 'scheme of amalgamation', whereas, there is no such mandate incorporating a specific date for the PFI status in the application to be submitted in this regard. Hence, it cannot be argued that the date of application for applying the status of PFI should be taken as the date of actual grant of such status through a notification.
Therefore, in the circumstances of the case and the reasoning given on pre-pages, I hold that the appellant was not justified in omitting the interest receivable of Rs. 44,99,03,516 on doubtful recoveries. Accordingly, the addition made by the AO on this account is sustained.
36. We have heard the parties and considered the rival submissions. As regards this ground for the addition of Rs. 44,99,03,516 representing the income not charged on doubtful loans, our attention is drawn to the provisions of Section 43D which provides for the special provision in the case of public financial institution, etc. It reads as under : 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,-- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its P&L a/c for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.
(a) 'National Housing Bank' means the National Housing Bank established under Section 3 of the National Housing Bank Act, 1987 (53 of 1987); (i) which is a public company within the meaning of Section 3 of the Companies Act, 1956 (1 of 1956); (ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and (iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under Section 30 and Section 31 of the National Housing Bank Act, 1987 (53 of 1987); (c) 'public financial institution' shall have the meaning assigned to it in Section 44 of the Companies Act, 1956 (1 of 1956); (d) 'scheduled bank' shall have the meaning assigned to it in Clause (ii) of the Explanation to Clause (viia) of sub-Section (1) of Section 36; (e) 'State financial corporation' means a financial corporation established under Section 3 or Section 3A or an institution notified under Section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (f) 'State industrial investment corporation' means a Government company within the meaning of Section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects.
37. The assessee applied for the status of public financial institution on 10th July, 2002, i.e., within a year under consideration. The notification granting this status was granted to it on 23rd Feb., 2004.
The notification once granted, in our opinion, would relate back to the date of application in view of the decision of Marshall Sons & Co. v.ITO 88 Comp Cas 528. The gap between the date of application and the date of issue of notification is only a procedural matter and ministerial work therefore, the date of application should be taken as the effective date for granting status of public financial institution.
It is true that the case law pertains to determine the date of amalgamation between a holding and a subsidiary company but as a proposition of law it was held that the amalgamation would take effect from the date of transfer specified in the 'scheme of amalgamation' applied for and not the date of the Court's order. The CIT(A), in our opinion, is not right in observing that the issue of date of amalgamation in the case cannot be equated with the date of application filed by the appellant for seeking PFI status. The fact that under the Company Law, there is a compulsion on the parties to state a specific date of amalgamation under the 'scheme of amalgamation', whereas, there is no such mandate incorporating a specific date for the PFI status in the application to be submitted in this regard has no bearing in adopting the ratio of the decision. In these circumstances we set aside the order of the CIT(A) and that of the AO and remit the matter back to the file of the AO for examining the case of the assessee in the light of these provisions of Section 43D of the Act. Accordingly, the alternate claim of the assessee to the effect that no real income had accrued, requires no consideration.
38. The fifth ground is against the disallowance of Rs. 26,16,20,204 out of depreciation claimed of Rs. 33,75,40,636. The facts of the case are that the assessee had claimed depreciation of Rs. 33,75,40,636 on full amount of original cost of assets. The AO, however, was of the view that besides reduction of the grants amount from the cost of assets, notional depreciation also should have been reduced as if the assessee had been a taxable entity and accordingly, had been allowed depreciation since the date of its inception. The assessee claimed that as per the provisions of Section 43(6) the WDV had to be computed by reducing the depreciation actually allowed against the cost of the assets and that there was no concept of mental calculations of the depreciation as having been allowed in the tax-free period. Therefore, the depreciation during the current year has to be computed on the original cost of the assets. The AO rejected the contention of the assessee, as in his view, the principle governing the depreciation allowance is the effective life of the depreciable assets and the expenditure incurred on its wear and tear for the period of its consideration and since the assessee had been using the assets in question for years, such assets must have depreciated greatly by their use and some of them might have reached the stage of being discarded, hence, in order to arrive at the correct income, normal wear, and tear of the assets had to be taken into account. The AO also took into consideration the provisions of Sections 10A and 10B of the Act as an analogy for computing the WDV at the end of the exemption period on notional basis. On remand, the AO also stated that the assessee has applied literal meaning of WDV of assets as defined under Section 43(6) of the Act, which if accepted, would amount to taking these assets as brand new for the purpose of allowing depreciation on the basis of actual cost, though for all practical purposes, such assets might have got depreciated greatly by their user over the years and even some of the assets might have reached to the stage of discarding and some other might have almost reached zero WDV. According to him, it is equally important to see that the vigour, strength, capability, etc. of every asset gradually gets exhausted by the factor of use and time. Since the assets eventually aid the assessee to earn income from the business or profession conducted, provision is made for proper recompensation of such diminution in the vigour, strength, capability etc, of the assets to arrive at the correct picture of profit of the business or profession. The underlining principles governing the depreciation allowance is effective life of depreciable assets and expenditure on its wear and tear during the year under consideration in order to arrive at correct income of a commercial organization. The allowance of depreciation based on notional actual cost, as the assessee is claiming, results into incorrect income for the year, even though the assets have depreciated considerably in effect. This is not the intention of the Act. It is not that since NDDB has been exempted from paying income-tax, it had also been exempted from not preparing its accounts of income and expenditure. In fact, public money has been utilized in the form of grant/subsidy by the Central Government and accounts have to be prepared and income has to be computed, though NDDB was exempt from paying income-tax. If depreciation or any other expenses are not included as per the prevalent accounting principles, it will give distorted picture of the accounts of the assessee.
39. The CIT(A) noted the facts that the assessee was a non taxable entity ever since its inception in 1987 and remained so till 31st March, 2002. The current year is the first year in which the assessee has become a taxable entity due to omission of Section 44 of the NDDB Act. As a result, for the purpose of IT Act, the assessee had neither claimed nor been allowed any depreciation in the prior period.
Therefore, during the first year of its taxability, the assessee has claimed the depreciation on the original cost of the assets as adjusted by the amount of grants received by it from the Government/agencies (for meeting a part or full cost of such assets). He sustained the addition made by the AO by observing as under: The arguments of the appellant do have some force on plain reading of the provisions but when the Act has to be read as a whole with implied intentions of the legislation, then the literal meaning of the words alone do not suffice. The hidden real meaning has to be dug out for projecting a correct picture of the terms used in the provisions.
For deciding the issue, it has to be kept in mind that the depreciation is a measure of computing the fruitful life span of an asset which has been subjected to wear and tear in normal course of its use.
The object of providing for depreciation is to spread over the expenditure incurred on the asset over its effective life time. The amount written off as depreciation during an accounting period is intended to represent the proportion of such expenditure which has been consumed during the period. For the purpose of determining true profits in the commercial sense or under the proper principles of accountancy, the wear and tear of the assets utilised by an assessee for the purpose of earning its profit will have to be considered and due allowance shall have to be made for its wear and tear. This is what is notionally understood as depreciation [CIT v. Bombay State Transport Corporation ]. The allowable depreciation amount (whether claimed or not) is a capital loss to the depreciable asset which must be replaced to give a true and correct picture as otherwise there is bound to be a distorted picture in the P&L a/c G.R. Govindarqjulu Naidu v. CIT . Hence, the depreciation allowance is claimed if the asset in question is shown to be capable of diminishing in value on account of any factor known to accounting or commercial practice CIT v. Elecon Engg. Co. Ltd. (2001) 170 CTR (Guj) 267. It is a matter of fact that appellant came into being with enactment of the NDDB Act, 1987 and ever since then, the appellant has been promoting its objects of the development of dairy co-operatives. In the process, it had acquired certain assets, over the years for fulfilling its objectives as a nodal agency on behalf of the Government and other agencies. Since, such assets have been put to use in the intervening period, therefore, their normal wear and tear is a certainty, which no one can deny. As per appellant's own admission, some of the assets have been discarded in the process. Similarly, there must be many more assets which would be in the queue of being discarded, if not in the current year may be in the following years. Hence, taking the WDV of such assets at cost ignoring the normal wear and tear which consumed the effective life of such assets to a great extent would lead us to the concept of 'superconductivity', a phenomenon where loss due to friction is nil in absolute terms. In practical commercial world such a phenomenon does not exist.
Thus, if the words, 'actually allowed' are given their literal meaning then unrealistic results would emerge and distorted picture of income and profits would be projected. Invariably, the correct WDV of an asset should be proportionate to its scrap value. That shows if the asset is on verge of being discarded on being consumed by its normal wear and tear over the years, then scrap value of such an asset in general, would also be low or negligible; correspondingly, its written down value (WDV) should also match the same levels. Therefore, taking the original cost of the asset as its WDV in such situation would lead to absurd results. Hence, WDV of an asset, whether used by a taxable entity or a nontaxable entity should be on par with each other. The same asset should be given the same treatment as far as determination of WDV is concerned. In other words likes should be treated alike. The WDV in both the cases should be based on the parameter of its wear and tear and not on the literal meaning of the term 'actually allowed' which leads to illusory perceptions. Since, such terms can be subjected to meaning more than one, therefore, legislation in its wisdom has started clarifying its intentions in the provisions like Sections 10A and 10B, under which an assessee is required to take into consideration, the wear and tear of an asset suffered during the course of tax holiday period for arriving at the WDV for the purpose of computing depreciation allowance subsequent to the end of the tax holiday period. In other words the allowance of depreciation on depreciable assets would be based on notional allowance deemed to have been given to an assessee during its tax holiday period. Similarly, it has been clarified under the presumptive tax provisions like Sections 44AD, 44AE and 44AF that on estimating income under those provisions, all expenditures/deductions under Sections 30 to 38 including depreciation would be deemed to have already been allowed to the assessee. Since, the appellant (during its tax exemption period) had been on a higher platform incentive-wise than the assessees, who are covered under the presumptive tax provisions, therefore, it would be reasonable to deem that the depreciation for those years had already been allowed to the appellant.
40. He then referred to the Gujarat High Court decision in the case of Addl CIT v. RustamJehangir Vakil Mills Ltd. and held that the intention behind the use of words under Section 43(6) that the WDV of an asset would be the actual cost less depreciation actually allowed could be, that many a times, the assessees do charge higher depreciation allowance than what is permitted under the Act/Rules and the same is normally set right by the AO during the assessment proceedings. Therefore, the assessees as well as the AO are expected to adopt correct rate of depreciation and correct WDV permitted under the provisions, which are based on the normal accepted norms of wear and tear of such assets. So the intention behind incorporating such provisions appears to have been to enforce correct computation of the depreciation/WDV as per law and discourage or disallow the arbitrary and wrong claims made by the assessees (or to restrain the AO from allowing the claims as during the course of the assessment proceedings).
41 Before us, the assessee submitted that as the assessee was not taxable entity earlier, the question of allowing depreciation to it did not arise. The approach of the Revenue authorities to arrive at WDV by deducting notional depreciation for earlier years is not tenable in the eyes of law because the words "actually allowed" appearing in Section 43(6) should be given a meaning as allowed actually and that no notional allowance of depreciation is contemplated in the section. The language of the section is very clear. In view of clear provisions of law, the logic, the intention of the law or irony interpreted by the AO, is not relevant. The WDV is the amount of cash (sic.-cost) of assets as reduced by allowance of depreciation actually allowed and it is so held in various cases relied upon the decisions in CIT v. Straw Product Ltd. ; CIT v. Dharampur Leather Co. Ltd. ; CIT v. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 (SC); Madev Upendm Sinai v. Union of India and Ors.
.
42. It is a settled law when there is no ambiguity, literal interpretation Should be made. The intention etc. would be relevant only if there is ambiguity in the provisions of law, which is not the case here. It is settled law. The Courts have, time and again, held that in absence of ambiguity literal interpretation should be made; namely, (i) Sarala Birla v. CWT and (ii) Gem Granite v. CIT . Even otherwise it is submitted that depreciation, as held by the Supreme Court in the case of Mahendra Mills (supra) is optional and assessee may decide not to claim the deprecation.
43. We have heard the parties and considered the rival submissions.
Section 32 provides for the depreciation on the WDV of the asset.
Section 43(6) defines the WDV to mean in case of asset acquired in the previous year like building plant and machinery, furniture and fixtures etc. the actual cost to the assessee and in other case the actual cost to the assessee less all depreciation actually allowed to him under the Act. The short controversy is, as to whether, the "Written Down Value' (WDV) of the asset is to be taken at their original cost or as reduced by the notional depreciation accounted for in the books of assessee and deemed to have been allowed in the earlier years when the assessee was not chargeable to tax. The term "actually allowed" came up for consideration before the Supreme Court in the cases of Straw Products Ltd. (supra), Dharcunpur Leather Co. Ltd. (supra), Mahendra Mills (supra), Madeu Upendra Sinai v. Union of India and Ors. (supra) wherein it has been held that the term "actually allowed" means allowed actually under the Act and not notionally. Accepting the theory propounded by the AO, as upheld by the CIT(A) and thereby reducing notional depreciation for computing the depreciation to arrive at the so-called real expenditure has no force and is contrary to the provisions of law and the decisions of the Supreme Court referred to above. In the earlier year the assessee was not liable to tax and therefore the question of allowing any depreciation to the assessee would not arise. In our opinion, the depreciation of the exempted period cannot be said to have been allowed to the assessee. Wherever the legislature has wanted to reduce the WDV to be ascertained after allowing (notional depreciation), it has specifically provided so, e.g.
in Section 10A(6) providing for the deemed allowance of depreciation for the assessment years ending before 1st day of April, 2001. Section 10B(6) also provides for similar deemed allowance of depreciation for any of the relevant assessment years ending before the 1st day of April, 2001. These are specific exclusions and not exposition of law that depreciation of the exempted period has to be assumed to have been allowed and notionally allowed. In our opinion, in the present case, there is no such specific provision for deemed allowance under the Act and, therefore, the WDV is to be ascertained by actual cost of the assets. As the income of the assessee was exempt until earlier year, no notional depreciation can be assumed and, therefore, it would be entitled to the depreciation on the original cost of the assets. We accordingly direct the AO to allow the depreciation in accordance therewith.
44. The sixth ground is against the disallowance of Rs. 9,90,00,000 made under Section 36(1)(viii) of the Act. The facts of the case are that the assessee claimed itself to be a provider of long-term finance for agricultural and industrial development and accordingly, claimed deduction of Rs. 9.90 crores under Section 36(1)(viii) of the Act, which is equivalent to the reserve created for the purpose. The AO declined the deduction in view of the fact that the notification was issued on 23rd Feb., 2004, notifying it as a public financial institution, a date which falls in the subsequent year. He also disallowed the claim by following the decision of Orissa High Court in the case of State of Orissa v. Ramchandra Chaudhary wherein it is stated that the activity of the dairy business cannot be termed as agricultural activity. Alternative claim classifying itself as food processing industry (under Clause 27) of the First Schedule to the Industrial Development Regulation Act), wherein as food processing industry is stated to include (i) canned fruits and food products, (ii) milk food, (iii) malted foods, (iv) flour, and (v) other processed foods, was also rejected by the AO by stating that finances advanced to dairy cooperatives which basically are producing and marketing milk could not be covered under item (ii) milk food. He also held that since the section also required that the aggregate of the amounts carried to special reserve account created for the purpose should not exceed twice the amount of the paid-up share capital, it could not create any reserve as there is no paid-up share capital, and therefore, the limit upto which special reserve can be created was indeterminable. The AO also held the assessee being not a PFI during the year was not otherwise also entitled to claim deduction under Section 36(1)(viii) of the Act.
45. The CIT(A) upheld the order of the AO by observing that the basic requirements of Section 36(1)(viii) of the Act are not fulfilled. These are--(i) the assessee has to be a financial corporation, (ii) it should be engaged in providing long-term finance for industrial and agricultural development or development of industrial facility, (iii) it maintains a special reserve, and (iv) the aggregate of the amount carried to special reserve account from time to time should not exceed twice the amount of the paid-up share capital and of the general reserve. He also observed that while adjudicating the issues under earlier ground he had held that the assessee did not have the status of a public financial institution during the current year. He therefore held that the basic requirement for claiming deduction under Section 36(1)(viii) that special reserve has to be created and maintained by a financial institution is not fulfilled. He also held the contention of the assessee that it has been providing long-term finance for industrial or agricultural development to various dairy cooperatives, is also not tenable, as its activity of extending long-term finances to the dairy co-operatives could not be termed as long-term finance given for agricultural and industrial development. He held that it dealt directly with the "Department of Animal Husbandry and Dairying" in the Central Government and that by itself showed that its activities pertained to "Dairying' than the agricultural activities. Taking into consideration decisions in CIT v. R. Venkataswamy Naidu (1956) 29 ITR 529 (SC); CIT v. Kokine Dairy, (1938) 6 ITR 502 (Rang); The Producers Cooperative Distributing Society Ltd. v. Commr. of Taxation (1948) 16 ITR 87 (Suppj (PC); and State of Orissa v. Ramchandra Chaudhary (supra) he held that the dairy farming cannot be classified as an agricultural activity as well. The dairy co-operatives to whom the assessee had advanced loans could not be covered even as an industrial unit for the purpose of IT Act, though it might be claimed that they were covered as an industrial unit under some other statute like Industrial Development Regulation Act which basically pertained to the food processing industries. He also referred to the Supreme Court decision in the case of GIT v. Venkateswara Hatcheries (P) Ltd. and held that the definition of 'industry' assigned to "Dairying" under the food processing industries within the IDR Act cannot be imported for the purpose of claiming deduction available for industrial development under the provisions of Section 36(1)(viii) of the IT Act. In the Supreme Court decision in the case of Dy. CST v. Pio Food Packers 46 STC 63 (SC) also, he observed that it was only when the change or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article, that the manufacturing can be said to take place. The dairy co-operative societies to whom the long-term finances have been extended by the assessee are dealing in the production and marketing of milk in general. The process involved, at the most is pasteurization process, in which no new product is manufactured. The raw input in the process is 'milk' and even the final product in the output stage is invariably 'milk'. Hence, there is no manufacturing activity involved in the process. The milk produced by cooperative dairies therefore does not involve any manufacturing process, which in turn could be termed as part of the industrial development activities for the purpose of deduction under Section 36(1)(viii) of the Act. Accordingly, he held that the assessee was not engaged in providing long-term finance for the industrial development.
He also upheld AO's view that it is also not having any paid-up share capital, which is another condition of Section 36(1)(viii) for limiting the amount to be carried to the special reserve account (not exceeding twice the share capital) has remained indeterminable. Accordingly, not one but most of the vital conditions necessary for availing of deduction under Section 36{l)(viii) are not fulfilled by the assessee.
46. Before us the assessee submitted that it had made an application for being notified as PFI vide letter dt. 10th July, 2002 following which it has been notified as a public financial institution in terms of sub-Section (2) of Section 4A of the Companies Act, 1956 vide Notification dt. 23rd Feb., 2004 issued by the Ministry of Finance--Department of Company Affairs; that it had provided financial assistance to co-operative unions/federations and its subsidiaries for fulfilling its objectives; that the proviso to Section 36(1)(viii) merely provides the maximum amount that can be transferred to the special reserve for the purpose of claiming the deduction and it is nowhere mentioned that if the paid-up share capital is not there, the deduction cannot be availed and thus, the deduction can be availed even if there is no paid-up share capital and the maximum amount that can be transferred to the special reserve can very well be computed on the basis of the general fund which is a free fund and is in the nature of general reserve.
47. We have heard the parties and considered the rival submissions. As regards status of public financial institution as the assessee applied on 10th July, 2002, i.e., within the year under consideration and though the notification granting the status of public financial institution was granted to it on 23rd Feb., 2004 it would relate back to the date of application in view of the decision of Marshall Sons & Co. v. ITO (supra). The time taken by the Department of Company Law Affairs was beyond its control. In any case it is only a procedural delay and ministerial work and therefore, the date of application should be taken as the effective date for granting status of public financial institution. On this issue we do not agree with the CIT(A).
We however find that the other conditions of Section 36(1)(viii) are not complied with by the assessee. The milk produced by the assessee is not amounting to manufacture and therefore the assessee was not engaged in providing long-term finance for industrial and agricultural development or development of industrial facility and again it had no capital which is necessary to compute the aggregate of the amount to be carried to special reserve account as twice the amount of the paid-up share capital and of the general reserve. The assessee failed to comply with these other conditions and therefore it would not be entitled to the deduction.
48. The seventh ground is against the disallowance of Rs. 10,31,34,920 towards grant given to co-operative societies claimed as deduction under Section 36(1)(xii) of the Act. These grants/loans to various co-operative unions/federations were for the purpose of implementing "Perspective 2010 Plan" which was an extended part of the "Operation Flood Programme" for development of dairy industry. It was claimed as deduction under Section 36(1)(xii) of the Act. The AO examined various conditions attached for making disbursements and came to the conclusion that the amounts given to various co-operative unions were not expenditure for the purpose of allowing deduction under Section 36(1)(xii) of the Act but were basically grants. In the agreements the AO found an inbuilt condition that if the utilization of disbursement made -by the assessee is not as per the objectives/terms laid down in the agreement then such grants/disbursements would be converted either into interest-free loans or interest-bearing loans. He therefore held that there was a possibility of money coming back to the assessee and therefore such disbursement to various co-operatives unions was not expenditure. In the remand report he further stated the expenditure has to be a payment which is made irrevocably; there should not be any possibility of the money forming once again a part of the funds of the assessee. If this condition is not fulfilled there was a possibility of there being a resulting trust in favour of the assessee, and therefore the money cannot be considered to have been spent by the assessee. The assessee was disbursing amounts initially as 'grant', but it retained full control over the borrowers in respect of its (i) expenditure, (ii) in respect of the performance to be achieved at the desired level as laid down by the NDDB and (iii) in respect of furnishing half-yearly fund utilization report. Obviously, the above conditions laid down on the borrowers do not make the amount disbursed as expenditure.
Accordingly it was in fact a conditional loan.
49. The CIT(A) sustained the addition made by the AO by observing as under: I have considered the submissions/rejoinder of the appellant and the findings/comments of the AO. As stated above, the appellant has made disbursement to various co-operative unions and federations for implementing dairy development programme titled as "Perspective 2010 Plan" under the extended operation flood programme. The unions were required to submit regular audited fund utilization reports of the disbursed amounts. It is noticed that the aforesaid disbursements of the amounts by the appellant was done in the following categories: A Infrastructure facilities for procurement, processing & marketing.
Loans/Grants The appellant has claimed that though the amounts spent were shown as grants but in fact the same were expenditures incurred on the activities defined under the NDBB Act, hence, the same qualifies for deduction under Section 36(1)(xii) of the Act. The grants were also extended in some cases for purchase of equipments for dairy development activities. The conditions laid down in the grant agreements entered with the cooperative unions were in the nature of deterrence for achieving certain specified goals. Wherever the funding has been done for the purchase of equipment and machinery, such assets do not stand in the name of NDDB, therefore, such expenditures are not capital in nature as held by the Bombay High Court in the case of CIT v. State Bank of India , wherein, the subsidy given to subsidiary banks for opening new branches, though created new assets were held to be belonging to the subsidiaries and not to the State Bank of India. The appellant has also relied on CIT v. T.V. Sundaram Iyengar & Sons (P) Ltd. , wherein, it was held that the amount advanced by the assessec employer for construction of houses under subsidized industrial scheme for its employees would be in the nature of revenue expenditure. That the appellant satisfies all the conditions for claiming deduction under Section 6(1)(xii), the expenditure incurred was not capital in nature and it was incurred by a body corporate established under the Central Act in respect of objects and purposes authorised by the relevant Act.
The moot question under consideration is whether the disbursements made by the appellant to various co-operative unions in furtherance of its objectives are expenditures or a grant. The appellant in the above given submissions admits that the disbursements were conditional but the intention for laying down such conditions was basically for timely utilisation of grants and to prevent misuse of funds.
Since, the amount disbursed as grants could be transformed into interest-free loans or soft interest-bearing loans, therefore, there was always a possibility of the money so disbursed to form part of the funds of the appellant again. The appellant thus continued to exercise control over such grants disbursed to the co-operative unions. The appellant's contention that even in the eventuality of such grants/disbursements coming back to the appellant, the expenditure so claimed against such disbursements could always be reversed in view of the provisions of Section 41(1) of the Act is not tenable because such provisions can be exercised for loss, expenditure or trading liability incurred by an assessee and in the instant case the very foundation of the term is disputed.
As per the established principles of accounting the Act requires the balancing of profits and expenditure of an enterprise so that entries made on one side as income receipts are properly balanced by the expenses against them on the other side. Since, grants do not form part of the income receipts of the appellant, therefore, disbursement against them cannot be allowed as expenditure.
It is on record that the grants received by the appellant from the Government or agencies are invariably credited directly to the respective project accounts or to the concerned funds. Thus, such grants received are not taken to the income and expenditure accounts of the NDDB. The appellant is a nodal agency through which such grants are disbursed to the ultimate beneficiaries. Since, as stated above, the grants arc not routed through the P&L a/c of the appellant, therefore, any disbursement out of such grants logically cannot be allowed as an expenditure.
Even otherwise, the 'expenditure' means what is paid out and is something that, has gone irretrievably. This could be either actually paid under the cash system or accounted or as such under the mercantile basis toward a liability actually existing at that time but putting aside of money which may become expenditure on happening of an event is not an expenditure [Indian Molasses Co. (P) Ltd. v. CIT ]. Thus, expenditure covers a liability which has accrued although it may have to be discharged at a future date. A contingent liability to be discharged on a future date cannot be considered as an expenditure [Madras Industrial Investment Co. Ltd. v. CIT As stated above, the appellant has disbursed the grants to the cooperative unions on certain conditions. Thus, such disbursements of grants which may be converted into loans are extended on contingent liability, the happening or non-happening of which is not entirely certain. Further, the amounts so disbursed do not go out of the coffers of the appellant irrtrievably and absolutely. The case of CIT v. N.C. John & Sons also lays down that in order to constitute expenditure the payment has to be made irrevocably and there should not be any possibility of money forming once again a part of the funds of the assessee.
Hence, in view of the reasoning given on the pre-pages, I (concluded) that the AO was justified in disallowing the deduction claimed under Section 36(1)(xii) of the Act. Accordingly, the addition made by the AO on this account is sustained.
50. Before us the assessee submitted that the assessee satisfies all the conditions for claiming deduction under Section 36(1)(xii). The expenditure incurred was not capital in nature and it was incurred by a body corporate established under the Central Act in respect of objects and purposes authorised by the relevant Act. Grants given by the assessee are for one of its prime objectives providing financial assistance by way of loans/grants to co-operatives/unions/federations and its subsidiaries for fulfilling its objectives i.e., economic development of rural masses and improving their quality of life through co-operatives efforts as detailed in Chapter IV of the NDDB Act. The word "grant" means monetary aid or an act of providing subsidy. When it is given in fulfilment of the activities defined under the NDDB Act, it amounts to an expenditure incurred. The word "grant" used in the agreement actually refers to an expenditure and an allowable deduction under Section 36(1)(xii) of the Act while computing its income for the assessment year under consideration. The learned Counsel then referred to Explanatory Notes on the provisions of the Finance Act, 2003, relevant extract of which reads as under: 31.1 Entities that are created under an Act of Parliament have the basic object and function of carrying on developmental activities in the areas as specified in the said Acts. By the Finance Act, 2001 and Finance Act, 2002, tax exemption of certain bodies set up through an Act of Parliament was withdrawn.
Subsequent to the removal of the tax shield, a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such developmental activities may not be allowed as a deduction while computing the income under the head 'Profits and gains of business or profession.
31.2 The Act has inserted a new Clause (xii) in Sub-section (1) of Section 36 so as to provide that any expenditure (not being capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act under which such corporation or body corporate was constituted or established shall be allowed as a deduction in computing the income under the head 'Profits and gains of business or profession.
51. It is therefore contended that the provision is specifically inserted to provide deduction in respect of any expenditure incurred in pursuing the object of such organization. One of the prime objects of the assessee is to develop co-operatives. The funds are provided on furnishing of proof of spending on the object. It is in the nature of expenditure incurred by the assessee through the concerned co-operative union etc. Though in the books of account, it is debited under the head "Grant to subsidiary company and/or grant to union/federation", but the fact is that basically it is an expenditure incurred by the assessee for pursuing its objects and therefore, it squarely falls within the ambit of Section 36(1)(viii) [sic. 36(1)(xii)) of the Act. The approach of the AO, it is submitted is contrary to the intention of the legislature. If such expenditures on grants etc. are not allowed under Section 36(1)(xii) and all such expenditures are to be otherwise allowable under Section 37(1) of the IT Act, there was no need to insert such new section providing specific relief to organizations, which are constituted under the Central Act (NDDB Act) to pursue the objectives contained in the Act itself. There is thus no justification in making the disallowance by making the distinction between grant and the expenditure.
52. The finding of the AO that the amount disbursed by the assessee to the co-operatives unions etc. did not exactly fit in the general meaning of word 'grant' because of various conditions attached and also that there is a penal clause in the grant agreements specifying that in case of falling short of standards laid down or on non-fulfilment of conditions or failing in achievements, grant amount in the agreement thereof shall become interest-free loan or 6 per cent interest-bearing loan, is submitted as not warranted. Such conditions are meant to ensure timely utilization of grant and to ensure that the grant is utilized for objectives for which it is given and in order to prevent misuse. Therefore, merely attaching suitable conditions would not change the nature of 'grant'. Further, the penal clause relation to conversion of grant into a loan was also to ensure compliance and there has been no occasion so far to invoke in any of the cases and in fact no "grant" given has been converted into "loan" on account of violation of terms by any beneficiary. Details of grants disbursed for last ten years were given to AO.53. It is also submitted that AO is wrong in holding it to be a loan.
There is a clear distinction between the loan and such grant. Even in the IT Act, certain benefits are given putting certain conditions or restrictions, like Sections 32A, 54 and 54EC, wherein conditions are imposed about utilization of reserves or not selling of the property.
These conditions are imposed with an intention that when certain tax benefits are given, then it should serve the real objects. That, however, does not mean that the benefit/deduction would be allowed only after satisfaction of the conditions after the restrictive period is over.
54 Without prejudice to the above arguments, it is submitted that, in the event of disallowance of the claim under Section 36(1)(xii), such expense shall be allowed as a deduction under Section 37/28 of the Act.
55. The appellant relied on certain relevant case laws to support its claim in this regard. These are CIT v. State Bank of India (supra) and CAT v. T.V. Sundaram Iyengar & Sons (P) Ltd. (supra) in support of its claim. It is also stated that the facts in the case of CIT v. N.C. John & Sons Ltd. (supra) before Kerala High Court, relied upon by the AO are entirely different from the case of the assessee inasmuch as the amounts in the Kerala case were to be refunded to the assessee to indemnify it and accordingly could not be considered as expenditure incurred by assessee whereas in the case of the assessee the grants given are in no case refundable to the assessee as per the terms of the agreement entered into in this respect.
56. The learned standing counsel on the other hand supported the orders of the AO and CIT(A) and submitted that if examined various terms and conditions in the agreements for making disbursements it would be evident that these are basically grants and cannot be termed as expenditure. Such disbursements of grants were subject to conversion into loans either interest-free or with interest if the utilization were not as per the objectives/terms laid down in the agreement. There was thus a possibility of money coming back to the assessee and in that case it would not be a payment made irrevocably. There would be a resulting trust in favour of the assessee. The assessee retained full control over the money disbursed until it was expended for its due performance. In fact it is a conditional loan and not expenditure at all.
57. We have heard the parties and considered the rival submissions. The "expenditure" in its ordinary connotation means what is paid out and is something that has gone irretrievably. This could be either actually paid under the cash system or accounted for as such under the mercantile basis towards a liability actually existing at that time.
Putting aside of money which may become expenditure on happening of an event, is not an expenditure as held by the Supreme Court in Indian Molasses Co. (P) Ltd. (supra) and Indian Carbons Ltd. (supra). In the case of CIT v. N.C. John & Sons, (supra) also it is observed that in order to constitute expenditure the payment has to be made irrevocably and there should not be any possibility of money forming once again a part of the funds of the assessee. As stated above, the assessee has disbursed the grants to the co-operative unions on certain conditions.
Such disbursements of grants are subject to conversion into loans on the happening or non-happening of contingency which is not entirely certain. Further, the amounts so disbursed do not go out of the coffers of the appellant irretrievably and absolutely. An expenditure may cover a liability which has accrued and to be discharged at a future date but not a contingent liability to be discharged on a future date as observed in Madras Industrial Investment Co. Ltd. (supra).
58. The assessee is nodal agency through which such grants are disbursed to the co-operative unions, the ultimate beneficiaries. As observed by the CIT(A) it is on record that the grants received by the assessee from the Government or agencies are invariably credited directly to the respective project accounts or the concerned funds and are thus not taken to the income and expenditure accounts of the NDDB.As stated above, the grants are not routed through the P&L a/c of the assessee, therefore, any disbursement out of such grants on that very logic cannot be allowed as expenditure.
59. The grants by the assessee were in deference of achieving certain specified goals and in some cases also for purchase of equipments for dairy development activities though such assets do not stand in the name of NDDB. The disbursements were conditional and the intention for laying down such conditions was basically for timely utilisation of grants and to prevent misuse of funds but it is equally true that the grants could be transformed into interest-free loans or soft interest-bearing loan, therefore, there was always a possibility of the money so disbursed to form part of the funds of the assessee again. The assessee thus continued to exercise control over such grants disbursed to the cooperative unions until they are spent and utilized for the purposes for which they were given. It would not be expenditure till then. Reliance on State Bank of India (supra); and T.V. Sundaram Iyengar & Sons (P) Ltd. (supra) is of no help to the assessee as in these cases there is no clause of the eventuality of coming back of the amount contributed by the assessee. The assessee's contention that even in the eventuality of such grants/disbursements coming back to the assessee, the expenditure so claimed against such disbursements could always be reversed in view of the provisions of Section 41(1) of the Act, is not tenable because this provisions can be exercised for loss, expenditure or trading liability incurred by an assessee whereas in the instant case the very foundation of the term loss or expenditure is in dispute.
60. The alternate contention of the assessee that in the event of disallowance of the claim under Section 36(1)(xii), such expense shall be allowed as a deduction under Section 37/28 of the Act has also no force. An item of expenditure not covered by the specific sections can only be considered under Section 37 or Section 28 of the Act.
61. For the reasons aforesaid we uphold the order of the CIT(A) in holding that the AO was justified in disallowing the deduction claimed under Section 36(1)(xii)of the Act.
62. The eighth ground is against the disallowance of Rs. 5,61,56,408 towards contribution made to NDDB Employee's Group Gratuity Funds-cum-Life Assurance Scheme of LIC claimed under Section 43B of the Act. The assessee has claimed deduction of Rs. 5,61,56,408 on account of payment of gratuity. The gratuity trust was originally approved under the IT Act vide order dt. 19th Oct., 1972 issued by the CIT, Gujarat. The contribution was covered by a policy of the LIC and the premium payable on the policy was required to be contributed by the NDDB. However, consequent to the amendment of the Gratuity Act revising the monetary ceiling limit from Rs. 1 lakh to Rs. 3.5 lakhs the assessee amended the deed and was required to seek approval of the deed of variation. It was submitted for approval only on 23rd Sept., 2003 i.e., much after the close of the financial year 2002-03. Since the gratuity trust was not approved during the financial year as per the deed of variation, the AO concluded that contributions made to the gratuity fund amounting to Rs. 5,61,56,408 were not made to an approved fund and accordingly, by invoking provisions of Section 40A(7), he disallowed the claim.
I have considered the submissions filed by the appellant and also the findings/comments of the AO and observe that the gratuity trust of the appellant was covered under a group gratuity life assurance policy taken from the LIC. A note given in Annex.-VI of the tax audit report dealing with sums referred to under Section 43B of the Act stated that the said scheme of the trust under the policy was operative till 1988 and it remained inoperative from 1988 to 2002.
It was only at the fag end of the current financial year i.e., on 31st March, 2003, the appellant moved an application to the LIC to revive the said gratuity policy. Thus, the trust gratuity policy remained inoperative for about 15 years. This speaks of insensitiveness of the organization towards statutory obligations of its employees. The appellant, however, continued to meet the gratuity liability on accrual basis without actual funding the trust.
While adjudicating the issue in the ground No. 9 pertaining to leave encashment, I have cited apex Court judgment delivered in the case of Allied Motors (P) Ltd. v. CIT Court has observed that the object of enacting Section 4313 in the Act clearly was aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident funds etc. for long periods of time, but claimed deduction in that regard from their income on the pretext that the liability to pay these amounts had been incurred on accrual basis in the relevant previous year. It was to stop this mischief that provisions of Section 43B were inserted as a result of which the deductions in respect of such statutory liabilities are to be allowed only on actual payment. The appellant has breached the trust reposed in it by allowing the gratuity policy to lapse for 15 years and meeting the gratuity liability on accrual basis without actual funding the trust. Therefore, any payment made now on actual basis without approval of the deed of variation would not qualify for the claim of deduction under Section 43B. The AO was thus, right in disallowing the contribution made to unapproved gratuity fund. Accordingly, the additions made by the AO on this account is sustained.
64. The assessee reiterated before us that corresponding to Payment of Gratuity Act the change was made in Section 10(10) of the IT Act increasing the limit to Rs. 3.5 lakhs and as per the provisions of Section 14 of the Gratuity Act, 1972, the other trusts cannot have terms less beneficial to the employees. Therefore, once the changes were made in the Gratuity Act, the assessee was supposed to make payment to retiring employees on such enhanced amount despite lower amount prescribed under its existing scheme as approved by the CIT. The deed of variation was made on 27th March, 2003. It was given retrospective effect from 24th Sept., 1997, the variation was from gratuity from lower of the 15 months' salary or Rs. 50,000 to lower of the 12 months' salary or Rs. 3,50,000. It was intimated to the AO on 23rd Sept., 2003. Schedule IV Part C r/w Section 4(1) and (2) does not cast any obligation for fresh approval of the revised deed. It is automatically approved. In any case it was approved by the CIT on 24th Oct., 1972 w.e.f. 1st Nov., 1971. The assessee further submitted that in terms of Section 43B(b) of the Act, any contribution to gratuity fund is allowable on actual payment basis, and pending approval to deed of variation do not make the fund unrecognized.
65. We have heard the parties and considered the rival submissions. The gratuity trust of the appellant was covered under a group gratuity life assurance policy taken from the LIC. It was approved by the CIT on 24th Oct., 1972 w.e.f. 1st Nov., 1971. However as per note given in Annex.
VI of the tax audit report dealing with sums referred to under Section 43B of the Act it is stated that the said scheme of the trust under the policy was operative till 1988 and it remained inoperative from 1988 to 2002. It was only at the fag end of the current financial year i.e., on 31st March, 2003, the assessee moved an application to the LIC to revive the said gratuity policy. Trust gratuity policy thus remained inoperative for about 15 years. It continued to meet the gratuity liability on accrual basis without actual funding the trust. By the deed of variation it was revived. It is almost a new deed with new terms and conditions and therefore, in our opinion, required an approval of the CIT. Until then it remained unrecognized fund and consequently no contribution can be allowed to the assessee as a deduction in computing the income of the assessee. The assessee has breached the trust reposed in it by allowing the gratuity policy to lapse for 15 years and meeting the gratuity liability on accrual basis without actual funding the trust. Therefore, any payment made now on actual basis without approval of the deed of variation would not qualify for the claim of deduction under Section 43B as it would not be allowable deduction otherwise, which is a precondition for allowance under Section 43B on actual payment basis. The AO was thus, right in disallowing the contribution made to unapproved gratuity fund.
Accordingly, the disallowance made by the AO on this account is sustained.
66. The ninth ground is against the addition of Rs. 11,91,424 as prior period expenditure. The AO noticed that certain short provisions of earlier years aggregating to Rs. 38,31,518 for which payments have been made in this year has been added to the income of the assessee. The AO further noticed that the assessee had claimed deduction in respect of expenses pertaining to the tax-free period.
67. The CIT(A) restricted the addition to Rs. 11,91,424 by observing as under: I have considered the submissions of the appellant and the findings of the AO and observed that the details of short provisions of earlier years are as under:Paid to sales 6,59,882 Sales tax demand for thetax office year 1994 95 on accountBhavnagar 1994 of Form No. 11 not95 assessment collected and Form No. Cfor BVP Unit, rejected and therefore,Bhavnagar turnover was taxed at higher rate. It may bePaid to sales 19,80,212 Sales-tax demand for thetax office, year 1994-95 on accountBhavnagar of purchase being1994-95 considered fromassessment unregistered dealer andfor BVP Unit, taxed accordingly. It mayBhavnagar be rioted that the demand order is passed on 11thIDMC godown rent 79,200 The bill (debit note) No.paid for the 20092 dt. 31st March,year 2002 was received in NDDB2001-02 for payment on 22nd July, 2002 and payment for theRefund of 51,781 The amount of Rs. 51,718interest has been refunded to PunePune Milk Union Milk Union towards excess interest charged duringRMT stabling 5,40,800 The stabling charges havecharges 1998- been paid as per demand2002 letter dt. 21st Nov.,(MTR Guage) 2002 from Westernreim. to NCDFI Railways received through National Co operativeRMT stabling 2,95,800 The stabling charges havecharges 1998 92 been paid as per demand(Trichur) reim.
letter dt. 19th March.,to 2003 from SouthernNCDFI Railways received through National Co-operative From the above given details and as per the evidence furnished it is clear that the sales-tax demand order for the year 1994-95 was passed only on 11th Sept., 2002, as a result of which the appellant has paid the demand of Rs. 19,80,212 and Rs. 6,59,882 during the year. The facts show that the liability has been crystallized during the year, hence the same is an allowable expense. The Gujarat High Court's decision in the case of Saurashtra Cement & Chemicals Industries Ltd. v. CIT (1994) 122 CTR (Guj) 329 : (1995) 213 1TR 523 (Guj) quoted by the appellant, wherein, the Court has held that merely because an expense relates to a transaction of an earlier year, it does not become liability payable in the earlier years because the accounts are being maintained on mercantile basis, unless the same is crystallized in the year in question, also supports the claim of the appellant, specially in view of the documentary evidence produced.
As regarding the short provisions pertaining to the godown rent paid for the year 2001-02 amounting to Rs. 79,200, I would like to observe that NDDB and the 1DMC both are in the organized sector, and since, the rent amount is significant, therefore, the parties are expected to have signed some sort of lease agreement for the said rent amount. Invariably, such rent agreements do contain specific terms regarding the dates on which the rent would become due and payable. Thus, in view of such rent agreement having been signed between the appellant and the owner, there would be a logical presumption that the liability towards rent must have been crystallized during the year relevant to the asst. yr. 2002-03 itself. Hence, since the liability had got crystallized in the immediate preceding year, therefore, same cannot be allowed in the current year.
The appellant has claimed refund of interest to Pune Milk Union amounting to Rs. 51,781 which pertains to the interest charged during the year 2001-02. No clear evidence as to how the said liability for refund towards excess interest charged during the prior period 2001-02 got crystallized during the current year has been furnished. There is also no evidence of making the payment in this respect to the Pune Milk Union.
In the absence of satisfactory explanation and documentary evidence, the said claim is rejected.
The next two short provisions pertained to the stabling charges payable to Indian Railways amounting to Rs. 5,40,800 and Rs. 2,95,800 for the years 1998-2002. As per documentary evidence furnished by the appellant, it is noted that the stabling charges are payable by the appellant for milk tankers/barrels belonging to the appellant and lying since 1998 onwards at various railway junctions. The stabling charges are quoted @ Rs. 40 per wagon per day. Since the charges are payable on daily basis, therefore the Railways must have been informing the appellant at least every month of the amount of stabling charges to be paid by the appellant from 1998 onwards. The appellant has chosen to ignore such demands in the prior years when it was a tax-free entity, but now in the year under consideration when it has become taxable for the first time, it is claiming all such expenses which were payable in the earlier years.
Since, such expenses had crystallized in the prior years, therefore the same cannot be allowed during the year when the appellant is following mercantile system of accounting. Further, there is also no evidence regarding the payment made to the Railways for such claims.
A simple sheet of paper has been filed on which certain figures like Rs. 3,68,800 and some other figures are scribbled. The said plain paper neither is a proper receipt nor does it bear any signature or office seal or the name of any office. Hence the claim made by the appellant for these abovementioned sums of Rs. 5,40,8000 and Rs. 2,95,800 is rejected.
The last item pertains to various transactions aggregating Rs. 2,23,843 for which neither any details have been filed nor any explanation given. As a result, the addition made by the AO on this account is sustained.
68. The assessee submitted that it has given a detailed written submission to the AO vide letter dt. 10th Nov., 2004 with a brief note enclosed stating justification for each expenditure above Rs. 50,000 giving justification as to how liability crystalised during the year.
The assessee by placing reliance on the decision of the Gujarat High Court in the case of Saurashtra Cement & Chemicals Industries Ltd. v.CIT (1994) 122 CTR (Guj) 329 : (1995) 213 1TR 523 (Guj) submitted that merely because an expense relates to a transaction of an earlier year, it does not become liability payable in the earlier year unless it can be said that the liability was determined and crystalised in the year in question on the basis of maintaining accounts on the mercantile basis. The assessee, thus, pleaded that it followed mercantile system of accounting and the liability was crystalised during the year under consideration and accordingly debited to income and expenditure account and claimed as such should be allowed as deduction. The learned Counsel for the Revenue supported the orders of the Revenue authorities.
69. We have heard the parties and considered the rival submissions. The assessee as stated above is following mercantile system of accounting and therefore what arise as a liability in the impugned year alone can be allowed. The short provisions pertained to the godown rent payable to IDMC for the year 2001-02 amounting to Rs. 79,200. In view of such rent agreement having been signed between the assessee and the owner, the liability towards rent crystallized during the year relevant to the asst. yr. 2002-03 itself. Therefore the liability which got crystallized in the immediate preceding year cannot be allowed as a deduction in this year. The CIT(A) is right in holding that same cannot be allowed in the current year. On second item of Rs. 51,781 it is claimed that the assessee has refunded this amount to Pune Milk Union towards excess interest charged during the year 2001-02. No clear evidence as to how the said liability for refund towards excess interest charged during the prior period 2001-02 got crystallized during the current year has been furnished. The CIT(A) also observed that there is also no evidence of making the payment in this respect to the Pune Milk Union. In the absence of satisfactory explanation and documentary evidence, the said claim is rightly rejected. As regards two short provisions pertained to the stabling charges payable to Indian Railways amounting to Rs. 5,40,800 and Rs. 2,95,800 for the years 1998-2002. it is found as per documentary evidence furnished by the assessee that these charges are payable for milk tankers/barrels lying since 1998 onwards at various railway junctions. The stabling charges were quoted @ 40 per wagon per day. It was known to the assessee right from the beginning. As the charges were payable on daily basis, therefore the liability accrued every month right from 1998 onwards. The liability pertained to prior years when it was a tax-free entity. The liability for such expenses had crystallized in the those years, therefore the same cannot be allowed during the year when the assessee is following mercantile system of accounting. The CIT(A) further observed that there is also no evidence regarding the payment made to the Railways for such claim. A simple sheet of paper has been field on which certain figures like Rs. 3,68,800 and some other figures are scribbled which is neither a proper receipt nor it bore any signature or office seal or the name of any office. These claims are thus rightly rejected by the CIT(A). For the last item of various transactions aggregating Rs. 2,23,843 also neither any details have been filed nor any explanation given either before CIT(A) or before us.
We therefore find no alternative but to sustain the disallowance.
70. The next ground is against the disallowance of Rs. 7,87,165 out of repairs and maintenance expenses. The assessee had claimed repair and maintenance charges in respect of (i) ceiling board material Rs. 3,04,604, (ii) carpentry work at seminar room Rs. 3,35,065 and (iii) false ceiling, electrical rewinding etc. Rs. 4,50,043, totalling to Rs. 10,89,712. These were claimed placing reliance upon the decision of the Supreme Court in the case of Empire Jute Mills Ltd. v. CIT . Madras High Court decisions in the cases of CIT v.Asher Textiles Ltd. and CIT v. Jawahar Mills Ltd. . The AO disallowed the claim of the assessee treating it as capital in nature and after allowing depreciation thereof at 10 per cent.
71 . The CIT(A) allowed a part as revenue expenditure and upheld the other part as capital by observing as under: I have considered the submissions/rejoinder filed by the appellant and also the findings/comments of the AO and observe that expenses of Rs. 3,04,603 which pertain to ceiling board material, wall paneling and partitions in the second floor of the office building, have been incurred for creating assets of enduring nature. Therefore the expenses are clearly capital in nature and as such cannot be allowed as revenue expenditure. The second amount of Rs. 3,35,065 has been claimed for replacing existing damaged table tops, paintings of frames and polishing beside fixing wooden partition and pelmets and decorate boxes. As per the details filed it is clear that good part of the expenses pertains to repair and maintenance of the furniture, hence 50 per cent of such expenses are held to be revenue in nature and accordingly allowed to the appellant. The third item pertains to electrical rewinding, false ceiling expenses etc. aggregating Rs. 4,50,043. It is noted as per the details furnished that the expenses are incurred on PVC sheet flooring material, false ceiling charges, electrical wiring works, dismantling and installation of furniture. The nature of expenses incurred under this head shows that majority of the expenses have been incurred for creating assets which would result in enduring benefit to the appellant over the years. As a result I hold that 70 per cent of the expenses incurred under this head are capital in nature and are accordingly disallowed and the balance addition is deleted.
72. We nave heard the parties and considered the rival submissions. The expenditure claimed by the assessee in our opinion is entirely revenue in nature. Ceiling board material Rs. 3,04,604, carpentry work at seminar room Rs. 3,35,065 and false ceiling, electrical rewinding etc.
Rs. 4,50,043 are all items of repair and maintenance. These are neither additions to the capital assets nor any benefit of enduring nature in capital field resulted to the assessee. In our opinion in view of the decision of the Supreme Court in the case of Empire Jute Mills Ltd. v.CIT (supra) Madras High Court in the cases of CIT v. Asher Textiles Ltd. (supra) and CIT v. Jawahar Mills Ltd. (supra) these could not be capital expenditure. We accordingly reverse the order of the CIT(A) as well as of the AO and direct to allow the entire claim of the assessee as revenue in expenditure.
73. The next ground is against the disallowance of Rs. 2,52,818 towards contribution to employee's recreation trust. The AO disallowed the claim of the assessee in view of the provisions of Section 40A(9) holding that the said provisions read with the Circular No. 387 dt. 6th July, 1984 as well clearly lay down that no deduction has to be allowed in respect of any sum paid as contribution to any fund, trust or society for any purpose except contributions made to a recognized provident fund, gratuity fund or approved superannuation fund. The assessee submitted that the amount was paid to meet the deficit between actual expenses incurred by the staff club and contribution received by the club from its members and the expenses were incurred through club instead of incurring them directly and therefore the same is not subject to the provision of Section 40A(9).
74. The CIT(A) confirmed the addition by observing that the expenses Incurred by way of reimbursement to the employee's recreation club are not wholly and exclusively incurred for the purpose of business of the assessee and also the provisions of Section 40A(9) making it very clear that any payment or contribution made by an employer on behalf of the employees to any fund, trust, society, association or person etc. would not be an allowable expense except the payment made for expenses provided for under Section 36(1)(iv) and (v) i.e., towards contribution made to provident fund, gratuity fund and approved superannuation fund.
75. We have heard the parties and considered the rival submissions. In our opinion the CIT(A) is right in disallowing the claim of the assessee. Provisions of Section 40A(9) are very clear in providing that any payment or contribution made by an employer on behalf of the employees to any fund, trust, society, association or person etc. would not be an allowable expense except the payment made for expenses provided for under Section 36(1)(iv) and (v). Admittedly the payments are (sic-not) for expenses of the nature under Section 36(1)(iv) and (v). It is also pointed out that disallowance of a similar claim of the assessee was upheld by the Tribunal in ITA No. 5051/Ahd/1994. We accordingly, uphold the said disallowance of expenses. The addition made by the Revenue authorities on this account is confirmed.
76. The next ground is against the disallowance of Rs. 61,627 on account of amortization of leasehold land which it acquired on a lease period of 99 years at a cost of Rs. 49,91,823. The assessee submitted that the acquisition of land did not result in acquisition of any permanent capital asset and therefore, amortization of land shall be allowed as revenue expenditure. The assessee relied upon the decision of the Supreme Court in the case of CIT v. Madras Auto Services (P) Ltd. . No deduction was allowed by the AO treating the property as capital asset. The CIT(A) upheld the action of the AO by observing that any amount spent on acquiring a property for such a long period of lease i.e., of 99 years would be a capital expenditure expended for acquiring at capital asset. The mere fact that the cost amount is made payable over a period of years would not convert the capital expenditure into a revenue expenditure in view of Vizagapatnam Sugars and Refinery Ltd. v. CIT and Devidas Vithaldas and Co. v. CIT . We upon hearing the parties find that matter stands covered against the assessee by the recent decision of the Supreme Court in Enterprising Enterprises v. Dy. CIT (2007) 208 CTR (SC) 433 wherein it is held that proportionate lease rent paid by the mining lessee for acquiring leasehold right for extracting minerals from mineral bearing land is a capital expenditure. We accordingly uphold the disallowance.
77. The thirteenth ground is against the disallowance of Rs. 8,550 on account of delay in making payments of provident fund. The AO disallowed a sum of Rs. 23,490 towards delayed contributions made to the PF holding that such payments were made beyond the due date. The CIT(A) confirmed the disallowance to the extent of Rs. 8,550 by observing as under: I have considered the submissions of the appellant and the findings of the AO and observe from the above given details of delayed contributions that all payments made upto 17th Sept., 2002 amounting to Rs. 14,940 are within the grace period permitted by notifications issued under the Provident Fund Act (with the exception of the payment made against item No. 2 of Rs. 2,088 for which the due date was 15th Sept., 2002 and the date of payment is 3rd Oct., 2002). The rest of the payments including the payment of Rs. 2,088 mentioned above totalling Rs. 8,550 have been made beyond the permissible grace period. Accordingly out of the addition of Rs. 23,490 the addition of Rs. 14,940 is deleted and the balance,is confirmed.
78. We have heard the parties and considered the rival submissions. We find the order of the CIT(A) in accordance with the provisions of law as it stood at the relevant time. Reliance on the amendment in the second proviso to Section 43B cannot be of any help to the assessee and the matter now stands covered against the assessee by the decision of Madras High Court in CIT v. Synergy Financial Exchange Ltd. (2006) 205 CTR (Mad) 481 : (2007) 288 ITR 366 (Mad) wherein the Court held that retrospectivity of amendment cannot be presumed; operation of amendment is prima facie prospective unless expressly or by necessary implications directed to be retrospective. Amendment to second proviso to Section 43B is held to be prospective in nature and would apply to asst. yr. 2004-05. We accordingly uphold the disallowance.
79. The next ground is against the disallowance of deduction under Section 80G in respect of donation of Rs. 51,26,305. The facts of the case are that the assessee claimed deduction of Rs. 38,25,000 under Section 80G being 50 per cent deduction on the donated amount of Rs. 76,50,000 made to one Kutchh Nav Nirman Abhiyan. Out of the total donation of Rs. 76,50,000 a sum of Rs. 51,26,305 was shown as advance on the last date of the financial year. Regarding the advance shown by the assessee, it was explained that the said NGO to whom the donation was given was required to submit fund utilization report and since, such fund utilization report was not received upto 31st March, 2003, therefore, the amount was shown as advance. The AO held that the donations were made on certain conditions attached to it, therefore, the amount was not a donation but a grant and since significant part of the amount was shown as advance as on 31st March, 2002, he disallowed the claim of deduction under Section 80G.80. The CIT(A) held the assessee to be not qualified for deduction under Section 80G in respect of Rs. 51,26,305 by observing as under: I have considered the submissions of the appellant and the findings of the AO and observe that since the NGO, Kutchh Nav Nirman Abhiyan has been registered by the CIT, Jamnagar for the purpose of Section 80G(5) from 8th Oct., 2002 to 31st March, 2005, therfore any sum paid as donation to the said organization would qualify for deduction under Section 80G. Though the receipt showing the full amount of donation of Rs. 76,50,000 has been produced from the said NGO yet, since the appellant itself has shown Rs. 51,26,305 as advance on 31st March, 2003, therefore, the said amount would not qualify for any deduction under Section 80G. However, the appellant would be entitled to 50 per cent deduction on the balance sum of Rs. 25,23,695 amounting to Rs. 12,61,847 as the amount had been passed on to the recognized organization during the year. Accordingly, the AO is directed to allow the aforementioned deduction of Rs. 12,61,847 under Section 80G of the Act to the appellant.
81. The learned Counsel of the assessee submitted that the Kutch Nav Nirman Abhiyan, a NGO to whom donation was made is recognized as per Section 80G of the Act. In order to ensure proper utilization the NGO was required to submit fund utilization report periodically. Pending receipt of such fund utilization report the amount given to such NGO has been retained as advance as on 31st March, 2003. Since, it was a donation that is to be allowed as a deduction in the year of payment it has to be allowable as a deduction. The said NGO has already submitted bills for Rs. 48,04,204 during financial year 2003-04 which has been adjusted against Rs. 51,26,305 lying in advance account as on 31st March, 2003 and the balance amount of Rs. 3,22,101 had been utilized subsequently and the NGO was to submit the utilization report for the same. It may be observed that major portion of the donation given has been already utilized. Alternatively it is claimed that without prejudice to the above, the assessee submits that the AO be given direction to allow the deduction under Section 80G in respect of the amount lying in the advance account as on 31st March, 2003 in the following assessment year in which such amount was utilized by the said NGO and adjusted by the assessee.
82. We have heard the parties and considered the rival submissions. It is true that the NGO, Kutchh Nav Nirman Abhiyan has been registered by the CIT, Jamnagar for the purpose of Section 80G(5) from 8th Oct., 2002 to 31st March, 2005, therefore any sum paid as donation to the said organization would qualify for deduction under Section 80G. The receipt from the said NGO shows the full amount of donation of Rs. 76,50,000.
The assessee, however, itself shows Rs. 51,26,305 as advance on 31st March, 2003, therefore, the said amount could not be a donation which would qualify for any deduction under Section 80G. The assessee would be at liberty to claim the said amount as deduction in the subsequent year in accordance with law.
83. The next ground Nos. 15 to 17 are in respect of charging of interests lander Sections 234B, 234C and 234D respectively are consequential in nature and, therefore, do not require any specific adjudication. The consequential relief may be granted to the assessee.