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2022 (11) TMI 573 - AT - Income TaxDiversion of income by overriding Title - Taxability of Money received for distribution as per Govt. Scheme - The excess amount over and above 0.50% of the amount transferred to TDF/WDF. - RIDF/STCRC are schemes framed by the Government of India and it has appointed the assessee as implementing agency. - assessee is allowed to retain a margin of 0.50% - HELD THAT - the Government of India has devised schemes for promotion of investments in agriculture and rural development. As per the scheme the banks were directed to deposit shortfall amounts in giving priority sector lending by banks with the assessee herein which in turn would lend the said money to State Governments to carry out various schemes of agriculture and rural development. The net surplus between the interest income and interest expenditure under this scheme was directed to be appropriated as per the scheme - i.e. the assessee herein should take 0.50% as its income. and the excess amount of surplus over and above 0.50% referred above shall be transferred to TDF/WDF. The AO has taken the view that since the assessee did not keep the funds pertaining to TDF/WDF in separate bank accounts and used it for its own business purposes the amount so transferred to these funds would constitute income of the assessee. The assessee has acted as nodal or implementing agency for the schemes framed by GOI. Hence the amounts transferred to TDF/WDF are diverted at source itself and hence the same does not belong to the assessee. Accordingly the amounts so diverted to TDF/WDF cannot be brought to tax in the hands of the assessee. Disallowance of expenditure incurred on promotional activities - capital expenditure - 36(1)(xii) - Since the notification was not available for the year under consideration the Ld CIT(A) confirmed the disallowance on the ground that the assessee is not a notified u/s 36(1)(xii) of the Act during the year. - HELD THAT - When the notifying authority itself has mentioned that the assessee is being notified from AY 2013-14 onwards we are of the view that the assessee cannot be deemed to have been notified in the year under consideration being AY 2010-11. Accordingly we confirm the disallowance made by the AO. Further in the preceding paragraphs we have held that the amounts transferred to Watershed Development Fund (WDF) is a case of diversion of income by overriding title. We have also held that the assessee is not the owner of funds so transferred WDF. If the above said amount of Rs.44.70 crores have been spent out of the funds so transferred to WDF as per the directions issued by GOI/RBI the assessee could not claim such expenditure incurred out of WDF held as not belonging to assessee as deduction. Assessment of service charges on accrual basis - HELD THAT - There is no dispute with regard to the fact that the assessee has been following consistent accounting policy to recognize income by way of Service charges on receipt basis. The assessee submitted that there was uncertainty in recovering service charges. There should not be any dispute that an income can be recognized under mercantile system of accounting also only if there is certainty of its recovery. Considering the past consistent practice followed by the assessee we are of the view that this addition is not justified. Accordingly we set aside the order passed by CIT(A) on this issue and direct the AO to delete this addition. Claim for deduction of Education cess as allowable expenditure - HELD THAT - In view of the retrospective amendment brought in by Finance Act 2022 in the Income tax Act the claim of the assessee is not allowable. Accordingly we reject the same.
Issues Involved:
1. Relief granted in respect of interest receipts transferred to Tribal Development Fund (TDF). 2. Relief granted in respect of interest receipts transferred to Short Term Co-operative Rural Credit Fund (STCRC)/Watershed Development Fund (WDF). 3. Disallowance of expenditure incurred on promotional activities. 4. Treating the service charges not accrued as income of the assessee. 5. Claim for deduction of Education Cess. Detailed Analysis: Issue 1: Relief Granted in Respect of Interest Receipts Transferred to Tribal Development Fund (TDF) The assessee, a Government of India undertaking, claimed that Rs. 682.55 crores credited to TDF were not its income but were transferred as per RBI/GOI directions. The AO disagreed, treating it as the assessee's income, arguing that the funds were under the assessee's control and used for its business purposes. The Ld CIT(A) sided with the assessee, stating that only the margin of 0.50% retained by the assessee constituted its income. The Tribunal upheld the CIT(A)'s decision, concluding that the funds were diverted at source and did not belong to the assessee. Issue 2: Relief Granted in Respect of Interest Receipts Transferred to STCRC/WDF Similar to the TDF issue, the assessee transferred Rs. 4.88 crores to WDF under the STCRC scheme. The AO considered this amount as the assessee's income, but the CIT(A) and Tribunal upheld that the surplus funds were not the assessee's income but were transferred as per RBI/GOI directions. Issue 3: Disallowance of Expenditure Incurred on Promotional Activities The assessee incurred Rs. 82.92 crores on promotional activities from various funds created by appropriating profits. The AO disallowed the deduction, stating that such expenses are allowable under section 36(1)(xii) only if the entity is notified by the Central Government. The CIT(A) confirmed the disallowance as the assessee was not notified for the relevant year. The Tribunal upheld this decision, noting that the notification was applicable from AY 2013-14 onwards and did not cover the year under consideration. Issue 4: Treating the Service Charges Not Accrued as Income of the Assessee The AO added Rs. 4,92,922 as income, representing service charges accrued but not received, despite the assessee's practice of accounting for service charges on a receipt basis due to uncertainty of recovery. The CIT(A) confirmed this addition but directed the AO to exclude any double taxation. The Tribunal, considering the consistent accounting practice and the total income declared, deleted this addition. Issue 5: Claim for Deduction of Education Cess The assessee claimed education cess as an allowable expenditure. However, due to the retrospective amendment brought by Finance Act, 2022, the Tribunal rejected this claim, aligning with the amended provisions of the Income Tax Act. Conclusion: The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, affirming the CIT(A)'s decisions on the major issues and providing relief where justified based on consistent accounting practices and legal provisions.
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