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2022 (3) TMI 465 - AT - Income TaxAccrual of income - revenue recognition - Addition made to the income of the assessee on account of interest on farmer's loan - interest on farmers' loan not recognized in the books of accounts on account of change of accounting policy - HELD THAT - As 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 be recognized when there is no uncertainty as to its collectability. As per the accrual/mercantile system of accounting, revenue is to be recognized as accrued only when the amount of revenue is determinable and its collectability is also certain. In the event of any of the two factors being unfulfilled, even under the accrual/mercantile system of accounting, revenue is not recognized. Considering this position of accounting for revenue under the mercantile system and applying it to the facts of the case before us, we are in agreement with ld. Counsel for the assessee that in the present case, in view of the uncertainty in the collectability of the interest income, the same could not be said or treated as accrued. The assessee therefore, we hold, had rightly accounted for the same on receipt basis and there was no understatement of interest as per the mercantile system as alleged by the Revenue. In view of the same, the addition made to the income of the assessee on account of interest on loans under-stated is directed to be deleted. Disallowance of farmer's loan and interest which was written off in the books of the assessee - HELD THAT - 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. Contention of 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. 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, though this may not be treated as our decision on the issue. What is necessary therefore for adjudicating the issue of eligibility to claim of write off of principal loan amount is the nature of the transaction resulting in the loan being granted to farmers. It is only thereafter it can be decided as to whether the assessee is eligible to claim write off of the same as per law and under which provision. We therefore deem it necessary to restore the issue back to the AO to determine the facts in which the impugned loans have arisen and thereafter adjudicate the issue in accordance with law. Needless to add the assessee be granted due opportunity of hearing in this regard. Disallowance of Soil Conservation Expenses - Addition of 10% Soil Conservation Expenses for the reason that the assessee failed to produce the vouchers and hence prove their genuineness - 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 - HELD THAT - A detail of the impugned expenses incurred from AY 2008-09 to AY 2012-13 was filed before us showing the quantum of such expenses incurred in those years, which we find ranged from 2.85 crores to 5.36 crores, Copies of financial statements of the said years was also filed as evidence. Further assessment orders passed u/s. 143(3) of the Act for the said years was also filed showing that except in the impugned year no disallowance was made by the Revenue either in the preceding or succeeding years. Considering the entire facts and circumstances as above, we hold that an ad hoc disallowance of 10% of the total expenses for failure to substantiate the claim in entirety with evidences in the impugned year is highly unjustified and a disallowance of ₹ 5 lacs would be justified. We accordingly direct the AO to restrict the disallowance of soil conservation expenses to ₹ 5 lacs.
Issues Involved:
1. Addition of interest income on farmers' loans. 2. Disallowance of farmers' loan and interest written off. 3. Disallowance of soil conservation expenses. Detailed Analysis: 1. Addition of Interest Income on Farmers' Loans: The primary issue was whether the interest on loans to farmers, amounting to ?6.14 crores, should be added to the income of the assessee. The Assessing Officer (A.O.) noted that the assessee had changed its accounting method from accrual to cash basis for interest on farmers' loans, resulting in an understatement of interest income. The A.O. contended that the assessee was following a hybrid system of accounting, which is barred by law, and thus added the understated interest income to the total income. The assessee argued that the interest income was not recognized due to the uncertainty of its collectability, in line with Accounting Standard 9 (AS-9) issued by the Institute of Chartered Accountants of India (ICAI). The assessee demonstrated that the recovery of both principal and interest had been negligible over the years, thereby justifying the non-recognition of interest income. The Tribunal agreed with the assessee, stating that the collectability of interest was highly uncertain, and as per AS-9, revenue should only be recognized when there is no significant uncertainty as to its collectability. Therefore, the addition of ?6.14 crores was deleted. 2. Disallowance of Farmers' Loan and Interest Written Off: The assessee claimed a write-off of ?12,15,71,474/- as expenditure/loss, which included both principal and interest. The A.O. disallowed this claim, stating that the loan write-off was on capital account and should have been deducted from the respective fund, not debited to the profit and loss account. The A.O. also denied the claim of interest waived, arguing that it was not proven that the interest had become bad. The Tribunal held that the interest portion written off should be allowed as bad debts since it had been returned as income in earlier years and written off in the impugned year. This was in line with the Supreme Court decision in TRF Ltd. vs. CIT and CBDT Circular 12/2016. However, for the principal amount written off, the Tribunal restored the issue to the A.O. to determine the facts and adjudicate the claim in accordance with the law. 3. Disallowance of Soil Conservation Expenses: The A.O. disallowed 10% of the soil conservation expenses amounting to ?47,03,26,795/- due to the absence of physical verification of bills/vouchers, questioning the genuineness of the expenses. The assessee contended that the accounts were subjected to multiple audits (internal, statutory, and CAG) and no discrepancies were reported. The assessee also argued that such expenses were incurred annually and had never been disallowed in previous scrutiny assessments. The Tribunal found the 10% disallowance to be ad hoc and unjustified, especially considering the multiple levels of audit and the recurring nature of the expenses. The Tribunal directed the A.O. to restrict the disallowance to ?5 lacs, acknowledging the lack of a concrete basis for the 10% disallowance. Separate Judgments: The judgments for the assessment years 2008-09 and 2012-13 were consistent with the findings for the assessment year 2011-12, allowing the appeals based on similar grounds. Conclusion: - The addition of ?6.14 crores as interest income was deleted. - The write-off of interest as bad debts was allowed, while the write-off of the principal was remanded for further verification. - The disallowance of soil conservation expenses was reduced to ?5 lacs. - Appeals for the assessment years 2008-09 and 2012-13 were allowed based on the same rationale.
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