TaxTMI 
TaxTMI 
2022 (3) TMI 465
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....sessment year 2008-09 in ITA No. 2630/Ahd/2015 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 ....
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....ccounting with regard to interest on farmer's loan from accrual to 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 suc....
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.... following hybrid system of accounting, involving both cash and mercantile system, to suit its requirements. 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 e....
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....s upto immediate ceding year and during the year under consideration and discontinued to offer such interest for taxation with the reason that the original 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 accounti....
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....l as interest component of the Farmer's Loan. Under such circumstances the corporation has rightly not recognized the interest on Fanner's Loan. 2.1 It is submitted that under the scheme of the Income Tax Act also only real income can be taxed. 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 ....
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....3,226,230.38 29,638,386.00 8,268,174.00 37,906,560.00 280,059.88 2143.27 0.31 0.03 4 1998-1999 103,226,230.38 28,465,346.78 131,631,847.85 37,906,560.00 10,530,548.00 48,437,108.00 6,142.31 53,587.00 0.01 0.51 5 1999-2000 131,631,847.85 13,822,627.16 145,445,963.76 48,437,108.00 11,633,017.00 60,070,125.00- 5,850.98 2,660.27 0.004 0.02 6 2000-2001 145,445,964.00 28,037,828.32 173,307,576.56 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 ....
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....Charity Trust Fund [1986] 162 ITR 612 (Guj.) (8) ACIT vs. Coromandal Investment P. Ltd. [2009] 316 ITR 104 (Guj.) 14. In view of the above, Ld. Counsel for the assessee contended that the addition made on interest income amounting to Rs. 6.14 crores was based on incorrect and improper appreciation of facts, was not as per law, was totally ad hoc and therefore need to be deleted. 15. Ld. D.R. on the other hand relied on the order of the authorities below. His contention being that the assessee having followed hybrid system of accounting, following the cash system for interest income and accrual for the rest, the same was not as per law and therefore the addition had been rightly upheld by the Ld. CIT(A). 16. We have carefully considered the submission of both the parties. The issue 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 ....
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....s being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. 12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists Revenue Recognition 91 regarding the 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 r....
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....isallowance of Rs. 12,15,71,474/- being the amount of farmers' loan and interest not recovered, which are debited to Profit & Loss Account and written off." 22. Drawing our attention to the facts of the case from the assessment order, Ld. Counsel for the assessee took us to para 5 of the said order pointing out there from that the A.O. had noted that the assessee had debited farmer's loan and interest to the tune of Rs. 12,15,71,474/- and claimed the same as expenditure/loss. The A.O. denied the same stating that the loan write off was on capital account and ought to have been deducted from the respective fund and not debited to the profit and loss account. The A.O. also denied the claim of interest waived for the reason that it was not proved that the interest had become bad. The relevant findings of the A.O. at para 5.2 to 5.5 of the order are as under: 5.2 The reply of the assessee has been perused but the same is not acceptable. 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 assess....
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....ant and the contention of the AO I am of the firm opinion that the contention of the AO is correct to the fact that:- * The appellant has not proved either before the AO or before me that the loan and advances to the farmers are bad or not recoverable by any evidence and circumstances which were termed by the appellant as NPA and the accrued interest on the same are claimed as deduction. * It is also to be noted that the appellant is not doing any banking business and also does not fall under NBFC cases for which the appellant has made the citations of case laws for its claim. * It is also a fact that the appellant was regularly offering the interest income to tax on such loans and advances upto immediate preceding year and during the year under consideration and discontinued to offer such interest for taxation with the reason that the original 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 ground of appeal is di....
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.... section 36(1)(vii) of the Act alongwith Section 36(2) of the Act. The relevant portion of the order reads as under: "4. This position in law is well settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee" 29. The said proposition, we have noted, has been reiterated by the CBDT in its Circular No. 12/2016 as cited by the Ld. Counsel for the assessee before us. In the facts of the present case since the assessee fulfills all the criteria of having returned the interest income to tax earlier and having written off the same in its books of accounts, its claim to the write off as bad debts is therefore, we hold, in accordance with law and we direct the same to be allowed to the assessee. Therefore, the claim of interest written off to the extent of 5.05 crores is held to be allowable to the assessee as bad debts written off as per the provisions of Section 36(1)(vii) r.w.s. 36(2) of the Act. 29.1. As for the claim of write off of principal amount of loan, the contention of the Ld. Counsel for the assesse....
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....ssment order, it was pointed out that assessee had claimed Soil Conservation Expenses to the tune of Rs. 47,03,26,795/-, 10% of which were disallowed by the A.O., in the absence of physical verification bills/vouchers and therefore the genuineness of the expenses remaining unproved. Our attention was drawn para 6.2 are as under: 6.2 The reply of the assessee is considered but the same is not acceptable. It is noticed that huge expenditure has been incurred towards soil conservation and it is also noticed that some of them are incurred on behalf of the farmers. In the absence of physical verification of bills F vouchers, the genuineness of such expenditure cannot be proved. The claim of expenses can only be verified if the assessee produces details of the same. Most of the soil conservation expenses are incurred in cash. Manipulation of vouchers is evident from the fact that no complete details were produced. Therefore, it is held that the soil conservation expenses are inflated and accordingly 10% of the same is disallowed and added back to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) is initiated for concealment of income leading to furnishing of i....
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....her, he has not brought any contrary facts to prove that expenditure is not genuine and therefore, such addition cannot be sustained. 3.4 It is also pointed out that the main activity of the Corporation is that of development of land and for such activity, the Corporation has to incur expenditure, which is incurred under the head of 'Soil Conservation Expenditure'. During the year under consideration the land development income and Government grant are of Rs. 519,89,90,184/- and the expenditure incurred towards soil conservation are of Rs. 470,32,67,954/-; whereas in the previous year, the income was of Rs. 574,01,88,517/- and the expenditure was of Rs. 536,39,08,038/- (Please see Pages 13 and 20 of the paper book). Since inception of the Corporation, such type of expenditure is being incurred and the assessments are also made u/s. 143(3) in earlier year and no such disallowance has been made by the Assessing Officer. Thus, the Department in past has also accepted the book result. The Assessing Officer is not justified in making lump sum addition without bringing any contrary evidence so as to prove that the expenditure in question is not genuine and such addition ....