2022 (1) TMI 604 - HC - Income Tax

Hybrid system of accounting - interest accrued on investments chargeable to tax - Whether ITAT erred holding that the assessee can compute its income chargeable under the head business and profession under hybrid system of accounting when Sec.145 of the Act does not allow the assessee to follow such system of accounting - HELD THAT -The issues involved herein are no more res integra in view of the ruling of the coordinate bench of this Court in the case of COMMISSIONER OF INCOME TAX VS CANFIN HOMES LTD. 2011 (8) TMI 178 - KARNATAKA HIGH COURT , whereby identical questions have been considered and answered in favour of the assessee and against the revenue. It has been categorically observed that the contention of the revenue that in respect of nonperforming assets even though it does not yield any income as the assessee has adopted mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. Therefore, substantial questions of law nos.1 2 requires to be answered in favour of the assessee and against the revenue. Also see DAVANGERE VERSUS M/S. DAVANGERE DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED 2020 (11) TMI 654 - KARNATAKA HIGH COURT and M/S. VASISTH CHAY VYAPAR LTD. 2018 (3) TMI 56 - SUPREME COURT Expenditure incurred by trust - Allowable revenue expenditure u/s 37(1) or not? - assessee has incurred the expenditure made towards M/s. Navodaya Grama Vikasa Charitable Trust with a description NGVCT Animator salary as per the directions of their controlling authority i.e., NABARD. - HELD THAT - On extensive analysis of the factual aspects, the Tribunal has arrived at a conclusion that though the assessee is promoting the formation of self help groups in the Districts of Dakshina Kannada and Udupi, and the loans are given to such self help groups for home industries like candle making, soap making and such other activities, the income generated by such self help groups come back to the assessee as deposits. The commercial exigency being established under the provisions of Section 37(1) of the Act, the same has been considered in the light of the judgment of the Hon'ble Rajasthan High Court in RAJASTHAN SPINNING AND WEAVING MILLS LTD. 2003 (10) TMI 10 - RAJASTHAN HIGH COURT , which has been rendered following the decision of the Hon'ble Apex Court in the case of SASOON J. DAVID CO. P. LTD. 1979 (5) TMI 3 - SUPREME COURT Having regard to the legally settled principles with reference to the expression 'wholly or exclusively' used in Section 37(1) of the Act, the Tribunal has dismissed the appeal filed by the revenue The expenses incurred by the assessee cannot be held to be not allowable expenses under Section 37 of the Act. The CIT (Appeals) as well as the Tribunal has analyzed the factual aspects in the background of the legal principles, which by any stretch of imagination cannot be held to be perverse or arbitrary. More over, these factual aspects recorded by the fact finding authorities cannot be interfered. Accordingly, the substantial question of law no.3 is answered in favour of the assessee and against the revenue. Amortization premium paid for acquisition of Government securities - Tribunal held as long term investment that are in the nature of capital investment is allowable as revenue expenditure? - HELD THAT - It is not in dispute that these substantial question of law raised by the revenue are squarely covered by the ruling of the coordinate bench decision of this Court in the case of COMMISSIONER OF INCOME-TAX, HUBLI VS KARNATAKA VIKAS GRAMEEN BANK 2015 (12) TMI 1420 - KARNATAKA HIGH COURT and in the case of COMMISSONER OF INCOME TAX, BANGALORE VS ING VYSYA BANK LTD. 2020 (1) TMI 1116 - KARNATAKA HIGH COURT wherein the substantial question of law being answered in favour of the assessee and against the revenue.

Summary

Issues:
1. Application of hybrid system of accounting under Section 145 of the Income Tax Act.
2. Taxability of interest accrued on investments under unrecognized hybrid system of accounting.
3. Allowability of expenditure incurred by an independent charitable trust.
4. Allowability of amortization premium paid for acquisition of Government securities as revenue expenditure.

Analysis:

Issue 1 - Application of Hybrid System of Accounting:
The appeal challenged the Tribunal's order allowing the assessee to compute income under the hybrid system of accounting, contrary to Section 145 of the Act. The revenue contended that income accrues when legally recoverable, irrespective of actual receipt, citing legal precedents. However, the High Court referred to past decisions supporting the assessee, emphasizing that revenue need not be taxed notionally for nonperforming assets. The ruling favored the assessee, citing precedents like COMMISSIONER OF INCOME TAX VS CANFIN HOMES LTD.

Issue 2 - Taxability of Interest Accrued on Investments:
The Tribunal held that interest accrued on investments under an unrecognized hybrid accounting system is not taxable. The revenue disputed this decision, but the High Court upheld the Tribunal's ruling, citing past judgments like COMMISSIONER OF INCOME-TAX, HUBLI VS KARNATAKA VIKAS GRAMEEN BANK, in favor of the assessee.

Issue 3 - Allowability of Expenditure by Charitable Trust:
The Assessing Officer disallowed an expenditure made towards a charitable trust, stating it lacked relevance to taxable income. However, the CIT (Appeals) allowed the exception, considering commercial exigency and relatable deposits to loans. The Tribunal confirmed this decision, emphasizing the commercial exigency established under Section 37(1) of the Act.

Issue 4 - Allowability of Amortization Premium:
The Tribunal held that amortization premium paid for acquiring Government securities as long-term investments is allowable as revenue expenditure. The High Court referred to past decisions like COMMISSONER OF INCOME TAX, BANGALORE VS ING VYSYA BANK LTD., favoring the assessee and confirming the Tribunal's decision.

In conclusion, the High Court dismissed the revenue's appeal, upholding the Tribunal's decisions on all issues in favor of the assessee. The judgment relied on legal precedents and interpretations of relevant provisions of the Income Tax Act to support its conclusions.