2007 (8) TMI 633 - AT - Income Tax

Income - Chargeable as - Held that the income of the assessee was chargeable to tax from the assessment year-in-question and it was for that year when the income of the assessee was to be determined. In the year under consideration, the assessee was following the mercantile system of accounting and interest income was to be assessed on that basis. The income that had not accrued in the year under consideration, but had accrued in the earlier year, would not be assessable merely because it had been received in the assessment year-in-question. Thus, addition of such interest income was unjustified

Issues Involved:
1. Addition of interest income of Rs. 1,05,27,02,724.
2. Addition of Rs. 1,59,82,471 on account of negative interest.
3. Addition of Rs. 2,66,62,002 on account of interest income earned on project funds.
4. Addition of Rs. 44,99,03,516 on account of interest income not charged on doubtful loans.
5. Disallowance of Rs. 26,16,20,204 out of depreciation claimed.
6. Disallowance of Rs. 9,90,00,000 under section 36(1)(viii).
7. Disallowance of Rs. 10,31,34,920 under section 36(1)(xii).
8. Disallowance of Rs. 5,61,56,408 towards contribution to gratuity fund.
9. Addition of Rs. 11,91,424 as prior period expenditure.
10. Disallowance of Rs. 7,87,165 out of repairs and maintenance expenses.
11. Disallowance of Rs. 2,52,818 towards contribution to employee's recreation trust.
12. Disallowance of Rs. 61,627 on account of amortization of leasehold land.
13. Disallowance of Rs. 8,550 on account of delay in making payments of provident fund.
14. Disallowance of deduction under section 80G in respect of donation of Rs. 51,26,305.
15. Charging of interests under sections 234B, 234C, and 234D.

Issue-wise Detailed Analysis:

1. Addition of Interest Income of Rs. 1,05,27,02,724:
The assessee switched from a hybrid to an accrual system of accounting in FY 2001-02, following Accounting Standards. The AO added the interest income received during the year but pertaining to earlier years, invoking section 145(3). The CIT(A) upheld the addition, suspecting the change in accounting method was to avoid tax. The Tribunal found the change bona fide and consistent with Accounting Standards, and ruled that income accrued in earlier years when the assessee was tax-exempt should not be taxed in the current year. The addition was deleted.

2. Addition of Rs. 1,59,82,471 on Account of Negative Interest:
The AO added negative interest entries as income, suspecting adjustments for errors/omissions from earlier years when the assessee was non-taxable. The CIT(A) upheld the addition, rejecting the assessee's explanation. The Tribunal agreed with the CIT(A) but directed the AO to verify and delete Rs. 1,51,57,315, which pertained to earlier years.

3. Addition of Rs. 2,66,62,002 on Account of Interest Income Earned on Project Funds:
The AO taxed interest on project funds, considering it accrued to the assessee. The CIT(A) allowed exemption for EEC Project Implementation Agreement Fund but upheld the addition for other funds due to lack of specific clauses for interest utilization. The Tribunal directed the AO to verify and allow the claim for Assistance to Cooperatives and Bhuj Hospital Fund if interest was refunded or used as per agreements.

4. Addition of Rs. 44,99,03,516 on Account of Interest Income Not Charged on Doubtful Loans:
The AO added interest on doubtful loans, rejecting the assessee's application of RBI Prudential norms. The CIT(A) upheld the addition, stating the assessee was not a public financial institution during the year. The Tribunal remitted the matter back to the AO to examine under section 43D, considering the notification for public financial institution status.

5. Disallowance of Rs. 26,16,20,204 out of Depreciation Claimed:
The AO reduced depreciation by notional depreciation for earlier years when the assessee was non-taxable. The CIT(A) upheld this, considering wear and tear of assets. The Tribunal directed the AO to allow depreciation on the original cost, rejecting the notion of deemed depreciation.

6. Disallowance of Rs. 9,90,00,000 under Section 36(1)(viii):
The AO disallowed the claim, stating the assessee was not a public financial institution during the year and did not provide long-term finance for industrial/agricultural development. The CIT(A) upheld this, noting the assessee's activities did not qualify as industrial development. The Tribunal agreed, noting non-compliance with conditions of section 36(1)(viii).

7. Disallowance of Rs. 10,31,34,920 under Section 36(1)(xii):
The AO disallowed grants to co-operatives, considering them conditional loans. The CIT(A) upheld this, noting the possibility of funds returning to the assessee. The Tribunal agreed, stating grants with conditions do not qualify as expenditure.

8. Disallowance of Rs. 5,61,56,408 towards Contribution to Gratuity Fund:
The AO disallowed the contribution, stating the gratuity trust was not approved during the year. The CIT(A) upheld this, noting the trust was inoperative for 15 years. The Tribunal agreed, stating the contribution to an unapproved fund is not deductible.

9. Addition of Rs. 11,91,424 as Prior Period Expenditure:
The AO added prior period expenses, stating they pertained to earlier years. The CIT(A) allowed sales-tax demand but disallowed other expenses due to lack of evidence. The Tribunal upheld the CIT(A)'s decision, noting the expenses were not crystalized in the current year.

10. Disallowance of Rs. 7,87,165 out of Repairs and Maintenance Expenses:
The AO treated repairs as capital expenditure. The CIT(A) allowed part as revenue and part as capital. The Tribunal reversed the CIT(A), allowing the entire claim as revenue expenditure.

11. Disallowance of Rs. 2,52,818 towards Contribution to Employee's Recreation Trust:
The AO disallowed the contribution under section 40A(9). The CIT(A) upheld this, stating the expenses were not for business purposes. The Tribunal agreed, noting the disallowance was upheld in a previous case.

12. Disallowance of Rs. 61,627 on Account of Amortization of Leasehold Land:
The AO disallowed amortization, treating the lease as a capital asset. The CIT(A) upheld this. The Tribunal agreed, citing the Supreme Court's decision in Enterprising Enterprises v. Dy. CIT.

13. Disallowance of Rs. 8,550 on Account of Delay in Making Payments of Provident Fund:
The AO disallowed delayed PF contributions. The CIT(A) allowed part within the grace period but upheld the rest. The Tribunal agreed, noting the amendment to section 43B was prospective.

14. Disallowance of Deduction under Section 80G in Respect of Donation of Rs. 51,26,305:
The AO disallowed the claim, stating the donation was shown as an advance. The CIT(A) allowed deduction for the utilized part but disallowed the advance. The Tribunal agreed, allowing the deduction in the subsequent year when utilized.

15. Charging of Interests under Sections 234B, 234C, and 234D:
The Tribunal noted these were consequential and directed the AO to grant relief accordingly.

Conclusion:
The Tribunal allowed the appeal partly, providing relief on several grounds while upholding disallowances on others. The decision emphasized adherence to accounting standards, proper classification of expenses, and compliance with statutory provisions.

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