TaxTMI 
TaxTMI 
2008 (1) TMI 491
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....an/assistance on cash basis. The AO also noted that this factual position is admitted by the assessee in the notes attached to, and forming part of the annual accounts which, inter alia, state as follows: "The books are maintained on accrual basis, except in the case of income from interest on seed money loans (including penal interest) which is accounted for on cash basis. This is permitted to Government companies engaged in the promotion and development of industries, vide Government of India, Ministry of Industry, Department of Company Affairs Notification GSR No. 770(E) dt. 10th Sept., 1990............" 3. The AO, based on the details collected in respect of seed money loans/assistance, quantified the amount of accrued interest at Rs. 2,77,26,740. The assessee was required to show cause as to why the said amount of Rs. 2,77,26,740, being amount includible in income of the assessee computed on mercantile basis, not be added to the income of the assessee. It was explained by the assessee that the interest in question is in respect of the loans given to educated unemployed persons, which are not on commercial terms. It was submitted that in such cases, even the likelihood of....
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....ly erred in not taking note of the amended legal position when following the same decision for the post-amendment years. The CIT(A)'s decision in favour of the assessee for the asst. yr. 1997-98, which was apparently relied upon by the assessee, was thus unacceptable. It was in the backdrop of this discussion that the AO rejected the method of accounting followed by the assessee, and added the amount of Rs. 2,77,26,740 on account of accrued interest on seed money loans, to the income of the assessee. 5. Aggrieved by the stand so taken by the AO, the assessee carried the matter in appeal before the CIT(A), but without any success. Learned CIT(A) did take note of the fact that the provisions of s. 145(1) are subject to the provisions of s. 145(2) which, in turn, refer to the Accounting Standards notified by the Government of India. He, however was of the view that none of the notified Accounting Standards also come to the rescue of the assessee. He was fair enough to take on record the fact that the Accounting Standards 1 (AS-1) does lay emphasis on 'prudence', 'substance over form' and 'materiality' as considerations governing the selection and application of accounting policies,....
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....s that the provisions of s. 145(1) are subject to the provisions of s. 145(2) which, in turn, provide that the Accounting Standards, as may be notified by the Central Government from time to time, are to be followed by any class of assessee or in respect of any class of income. In other words, therefore, the notified Accounting Standards are to be followed by an assessee even if these Accounting Standards provide for an accounting treatment contrary to the mercantile system of accounting or cash system of accounting as may be regularly followed by the assessee. To that extent, the notified Accounting Standards are to have precedence. 8. One of these notified Accounting Standards, i.e. AS-1, inter alia, provides as follows: "................... (4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented by on the basis of such accounting policies. For this purpose, the major considerations governing the selection or application of accounting polities are following: (i) Prudence: Provisions should be made for all know....
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....n duly recognized by the Courts, mandates that anticipated losses are to be provided for in the computation of income but it does not permit anticipated profits to be taken into account till the profits actually arise. That is the underlying reason that in the case of unsold stock, when market rate is higher than the purchase price, the market price is ignored in computation of value of stock, and, as a result, anticipated profit on sale of such stock is ignored. However, when the market price of stock is lower than the purchase price, the market price is taken into account, and, accordingly, anticipated loss is taken into account. These dual standards in recognizing anticipated losses and anticipated profits are accepted accounting norms. In the case of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC), Hon'ble Supreme Court took note of this position and observed that 'while anticipated loss is taken into account, anticipated profit is not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now....
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....of accounts of the period in which revenues accrue, and revenue is recognized as it is earned. However, there are exceptions to this principle and such exceptions are warranted by the considerations of 'prudence' which, in any event, override the strict principles of mercantile method of accounting. In this light, let us take a look at the following extracts from 'Guidance note on accrual basis of accounting', issued by the ICAI, which unambiguously demonstrate the rationale of such exceptions: ".............. Revenue recognition: 3.2 Recognition of revenue requires that revenue is measurable and that at the time of sale of or the rendering of service or use of resources of the enterprise by others, it would not be unreasonable to expect ultimate collection. ............... 3.10 (i) interest accrues, in most circumstances, on the time basis determined by the amount outstanding and the rate applicable. ............... 3.11 When interest, royalties and dividends from foreign countries require exchange permission and when uncertainty in remittance is anticipated, revenue recognition may need to be postponed." 15. While these Guidance Notes issued by the ICAI ar....
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.... us do indeed justify that even under mercantile method of accounting, revenues in question, i.e. accrued interest on seed money loans, are recognized only when the same are actually received by the assessee. 18. There is no dispute about the fact that the assessee company is a Government corporation wholly owned by the Government of Maharashtra, and is engaged in various activities aimed at development of industries and promotion of industrialization in western region of the Maharashtra State. These activities are surely not on commercial lines and the predominant purpose of these activities is to promote growth and development in the target area. When seed money is given to an entrepreneur, the purpose of this advance is to enable him to start his business and even the repayment process starts only after the entrepreneur is able to repay the commercial loan for the purpose of business. It is more of a venture capital than a commercial funding, and let us also not lose sight of the fact that this venture capital is extended to the sections of society which are not only underprivileged but are least safe from the commercial point of view. In these circumstances, the approach of ....