AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (3) TMI 465
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....arose against the orders passed in reassessment proceedings while that pertaining to assessment year 2011-12 and 2012-13 in ITA No. 2538/Ahd/2014 & 2632/Ahd/2015 arose against orders passed in regular assessment proceedings. She thereafter stated that the appeal of the assessee for assessment year 2011-12 in ITA No. 2538/Ahd/2014 was the lead case and therefore needed to be argued first. Accordingly the appeal of the assessee in ITA No. 2538/Ahd/2014 for A.Y. 2011-12 was first taken up for hearing. ITA No. 2538/Ahd/2014 for A.Y. 2011-12 4. Giving a brief background about the assessee, Ld. Counsel for the assessee stated that the assessee corporation was engaged in activities benefiting the farmers like deepening of farm ponds, Khet talavadi, Sim talavadi, water harvesting structure, vegetative measures and other agriculture activities and was primarily funded by the Central and State Government for carrying out these activities. She stated that a part of the amount spent on these activities was treated as loans advanced to farmers and recovered from them with interest in installments as per norms of the Government. It was stated that the corporation was engaged in such activities....
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....cash system. The auditors had also mentioned that due to this change, there was under-statement of interest income. The A.O. noticed that the change in accounting system was prevalent in the impugned year also and accordingly show caused the assessee as to why the under-stated interest income be not subjected to tax. Our attention was drawn to para 4 of the assessment order as under: 4. While finalizing the assessment for AY 2008-09, it was noticed that, in the audited accounts and annual report for that year, there is a mention of change in accounting method with regard to interest on farmers' loan from accrual to cash basis.-The auditors had also mentioned that, due to this change, there is understatement of interest income. Since the changed method prevailed during the year as well, the assessee was asked to show cause as to why such understatement should not be brought to tax. It was also noticed that, such understatement (as reported in the audit report of AY 2008-09) was not highlighted in the audit report for the year under consideration. The assessee was therefore asked to quantify such understatement of interest income. 8. Due reply was field by the assessee r....
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....ements. Since following of mixed system of accounting is barred by law, the method adopted by the assessee to account interest on farmers' loan, from accrual basis to cash basis, is not acceptable. c. So far as assessee's reliance on section 43D is concerned, it is stated here that, this reply is misplaced as section 43U is applicable to a finance company. However, the assessee is not a finance company and it is not its business to grant loans. As per the audit report, the objective of the corporation is to develop the agricultural land, to increase agriculture production by reclaiming land and to undertake its allied activities on watershed basis as laid down in the memorandum of association. There is nothing on record which can prove that loans were irrecoverable. Section 43D pertains to banking/NBFC cases and is in respect to interest on bad/non performing assets which is not the case of the assesses. Therefore interest on loans given to farmers, to the extent understated by the assessee, is required to be added as income of the assessee. 4.3 Since the extent of understatement was not quantified in the audit report for the year under consideration, as done so in the ....
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....nal amount which was advanced to farmers is even not recoverable and the Directors of the company decided to not offer the interest on such advances on accrual basis is not justified by any reason available under the IT Act. In view of the above, the action of the AO is justified and the addition made of Rs. 6,14,00,000/- being the farmers' loan interest is confirmed and the relevant ground of appeal is dismissed. 10. Before us, Ld. Counsel for the assessee reiterated the contentions made before the lower authorities. Briefly summarized the thrust of her argument was that the basis of making the addition of interest income, being that the assessee was following mixed/hybrid system of accounting, i.e. cash basis for accounting the interest income and accrual basis for rest of the transactions, was incorrect and the fact was that it was following the accrual system only. She contended that considering the fact that the principal loan and the interest thereon was irrecoverable, even as per the accrual system of accounting, the interest income was not to be treated as income of the impugned year due to the impossibility of recoverability of the same. In this regard, she drew our....
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....d. In the present case, when the recovery of principle amount due from farmers is very poor, no interest on such farmer's loan can be taxed' on the ground that the method by the assessee is mercantile. Reliance is placed on following judgments: (i) Commissioner of Income-tax, Delhi-IV v. Eicher Ltd. (2010) 320 - ITR 410 (Delhi) (ii) Commissioner of Income-tax vs. Kailash Auto Finance Ltd. (2010) 320 ITR 394 (All) (iii) Commissioner of Income-tax v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Delhi) (iv) Commissioner of Income-tax vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd. (2011) 331 ITR 229 (Mad) Commissioner of Income-tax v. Indbank Housing Ltd. (2009) 224 CTR 297 (Mad) (v) ANZ Grindlays Bank Ltd. v. Commissioner of Income-tax (2011) 250 ITR 125 (Cal) (vi) CIT vs. KICM Investments Ltd. (2009) 310 ITR (St) 4 (SC) Copies are separately enclosed in paper book. 2.2 Your attention is invited to the SC decision in case of CIT v. KICM Investments Ltd., wherein the Hon'ble Supreme Court dismissed Department's Special Leave Petition against the Judgment dated 21.06.2007 of the Kolkata HC-ITA 391/2007, whereby the High Court affirmed the order of the Tri....
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.... 173,307,576.56 60,070,125.00 13,864,605.00 73,934,730,00 176,215.76 0 0.12 0.00 7 2001-2002 173,307,576.56 26,302,324.17 199,598,511.13 73,934,730.00 15,521,476.00 89,456,206.00 11,389.60 0 0.01 0.00 8 2002-2003 199,598,511.13 15,604,237.20 215,122,014.27 89,456,206.00 16,454,155.00 105,910,361.00 80,734.06 0 0.04 0.00 9 2003-2004 215,122,014.27 29,419,326.45 244,295,488.72 105,910,361.00 18,607,931.00 124,518,292.00 245,852.00 0 0.11 0.00 10 2004-2005 244,295,488.72 52,594,122:39 296,889,611.11 124,518,292.00 22,227,078.00 146,745,370.00. 0 0 0.00 11 2005-2006 296,889,611.11 98,249,662.32 395,139,273.43 146,745,370,00 28,794,522.00 175,539,892.00 0 0 0.00 12 2006-2007 395,139,273.43 112,802,042.2 9 507,941,315.72 175,539,892.00 36,043,708.0.0 211,583,600.00 0 0 0.00 13 2007-2008 507,941,315.72 97,251,469.38 605,192,785.10 211,533,600.00 - 211,583,600.00 0 0 Than onwards no interest provision made 14 2008-2009 605,192,785.10 28,793,953.13 633,986,738.23 211,583,600.00 - 211,583,600.00 0 0 Rs. 20,55,16,233/- waived in the current year 15 2....
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....ue before us to be adjudicated is whether the assessee has correctly accounted for and returned to tax interest on loans given to farmers on receipt basis or had understated the same to the extent of Rs. 6.14 crores as contended by the Revenue, considering the mercantile system of accounting followed. The plea of the assessee is that since the recoverability of interest was uncertain hence it was accounted for on receipt basis. To substantiate its contention data of interest and principal recovered by the assessee since 1995-96 was placed, reflecting maximum recovery of 0.23% of the interest due for recovery during the year in 1995-96 and no recovery at all from 2000-01 onwards. Further even the principal amount of loan was not being recovered from financial year 2004-05 onwards. These facts were placed in a tabular form both before the A.O. and Ld. CIT(A) and which has not been controverted at any stage. Therefore, the fact remains that since a very long period from FY 1995-96, there was hardly any recovery of interest and no recovery at all since FY 2004-05 onwards. We therefore agree with the Ld. Counsel for the assessee that the collectability of interest was absolutely uncerta....
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....amount of the consideration that will be derived from rendering the service. 13. Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases: (i) Interest : on a time proportion basis taking into account the amount outstanding and the rate applicable. (ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement. (iii) Dividends from Investments in shares : when the owner's right to receive payment is established. Disclosure 14. In addition to the disclosures required by Accounting Standard 1 on 'Disclosure of Accounting Policies' (AS 1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. 18. As is evident from a perusal of the above the fundamental principle for recognition of Revenue as per mercantile method involves there being reasonable certainty in ultimate collection. And for interest income it states that the same is to....
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....ptable. Firstly, the assessee receives fund from the Central and State Government, which is shown as advances made to the fanners. The assessee has no right to waive such loans as the fund which is advanced, does not belong to it. The assessee itself admits that, no direction for waiver of loans and interest has been received by it. It was decided by the assessee, in its board meeting on its own notion. 5.3 Secondly, waiver of loan and interest should have been reduced from the respective fund and not debited to the P & L account. Only expenditure which are revenue in nature can be debited to P & L account. This is not a revenue expenditure, but it is a capital loss. Capital loss has to be reduced from the respective funds. 5.4 Thirdly, vide submission dated 3.12.2013, the assessee submitted a break up of such waived loan and interest, which is as under:- Year Principal waived Interest waived 2001-02 2,62,90,935 1,55,21,476 '2002-03 1,55,23,502 1,64,54,155 2003-04 2,91,73;475 1,86,07,931 Total 7,09,87,192 5,05,83,562 From the above it can, be seen that, even what has been wrongly claimed and debited to P & L account, does not pertain to the year under consi....
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....ustified by any reason available under the IT Act. In view of the above, the action of the AO is justified and the ground of appeal is dismissed. 24. Before us contention of the Ld. Counsel for the assessee was that the interest portion written off in the profit and loss account was to be allowed as bad debts written off since the interest had been returned as income of the assessee in earlier years. In this regard, Reliance was placed on the decision of the Hon'ble Apex Court in the case of TRF Ltd. vs. CIT (2010) 323 ITR 397 (SC) and also the CBDT Circular 12/2016 allowing claim of bad debts. Vis-à-vis amount of principal written off., Ld. Counsel for the assessee contended that the same be allowed as business loss since the assessee was in the business of granting loan to farmers and the portion of the loan which had become irrecoverable was to be allowed as business loss. 25. Ld. D.R. on the other hand relied on the order of the A.O./CIT(A). 26. We have heard both the parties. The issue is regarding the claim of the assessee to write off of interest and loans which had become irrevocable amounting to Rs. 12,15,71,474/-, the break-up of which is reproduced at par....
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.... of principal amount of loan, the contention of the Ld. Counsel for the assessee before us is that it was a business loss for the assessee since it was in the business of granting loans and the same had become irrecoverable. We find that for adjudicating the issue the facts have not been clearly brought out. The Ld. Counsel for the assessee had stated that the assessee was undertaking activities for farmers. That the said activities were met by funds provided by the government and part of the expense incurred was raised as recoverable from the farmers as loan. What transpires from the above is that loan raised on farmers was a method of recovery of cost of expenditure incurred on activities undertaken for the farmers. The manner of undertaking the transaction is not clear. It is not known as a fact whether the farmers are billed for the activities undertaken. Then treating a part of it as loan would only tantamount to a different method being adopted for recovery of income by the assessee and in that case the assessee cannot be said to be indulging in the activity of granting loan. The treatment of the write-offs of such loans would then have to be viewed probably as bad debts, tho....
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....tiated for concealment of income leading to furnishing of inaccurate particulars of income. 32. The same was upheld by the Ld. CIT(A). 33. Before us, Ld. Counsel for the assessee contended that there was no reason for disallowing these expenses on account of the genuineness of the same as not proved since the assessee had been subjected to internal audit, statutory audit and even audited by the CAG (Comptroller of Auditor General) and nothing to this effect of any ingenuine expenditure having been booked by the assessee was pointed out by any of the auditors. She further contended that this expenditure was being claimed by the assessee year to year and had never been disallowed even in scrutiny assessment. In this regard, our attention was drawn to the submissions made before CIT(A) placed before us at page No. 65 to 75 at para 3.2 and 3.4 are as under: 3.2 It is submitted that the Appellant also enclosed statement showing bifurcation of soil conservation expenditure (Pages 88 to 90 of the Paper Book), which has been incurred during the year under consideration. Regarding furnishing of vouchers/bills, it was explained that the soil work is being carried out all over Gujarat by ....
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.... is not genuine and such addition cannot be sustained. 34. Ld. Counsel for the assessee therefore contended that the disallowance to the extent of 10% of the expenses was very high and unfair and prayed that the same may be either be deleted completely or the disallowance be restricted to a smaller amount. 35. Ld. D.R. on the other hand relied on the order of the authorities below. 36. We have heard contentions of both the parties. The issue relates to disallowance of 10% Soil Conservation Expenses for the reason that the assessee failed to produce the vouchers and hence prove their genuineness. No basis, we find, has been stated for disallowing 10% of the expenses and it appears to be totally adhoc. At the same time, it is not denied that the accounts of the assessee are subjected to multiple levels of scrutiny, i.e. it is subjected to statutory audit, internal audit and CAG audit and none have reported any such infirmity in the accounts of the assessee in their audit reports. Also these are recurring expenses incurred by the assessee in the course of activities carried out by it. It has been contended before the lower authorities and even before us that no such disallowance wa....