1995 (5) TMI 60 - AT - Income Tax

Summary

Issues Involved:
1. Change in the accounting method for interest income.
2. Applicability of Section 209(3) of the Companies Act.
3. Computation of interest income on cash vs. accrual basis.
4. Directions issued by the CIT(A) for the assessment years 1989-90, 1990-91, and 1991-92.
5. Applicability of Section 43B in respect of interest payable to IDBI.
6. Additional ground raised by the assessee regarding deduction under Section 36(1)(viii) of the IT Act.

Detailed Analysis:

1. Change in the Accounting Method for Interest Income:
The assessee, a State-owned Government Company, had adopted a hybrid system of accounting up to the assessment year 1988-89, where interest income on loans and advances was accounted only to the extent it was considered realizable. From the assessment year 1989-90 onwards, the assessee changed to a cash basis for accounting interest income, recognizing it only upon actual receipt. The Assessing Officer did not accept this change and computed interest on an accrual basis, including both good and sticky advances.

2. Applicability of Section 209(3) of the Companies Act:
Section 209(3) of the Companies Act, amended effective 15th June 1988, mandated that companies maintain accounts on an accrual basis. However, a notification dated 16th May 1989 exempted Government companies engaged in financing industrial projects from this requirement, provided that accrued income not accounted for is disclosed in the annual accounts. The assessee argued that this notification applied to the assessment year 1989-90, as it was placed before Parliament on 2nd November 1988.

3. Computation of Interest Income on Cash vs. Accrual Basis:
The CIT(A) concluded that the change to the cash basis for interest income was bona fide and legally sanctioned by the notification. However, the CIT(A) directed that both interest income and related expenditure (interest payable to outsiders) should be computed on the same basis, i.e., cash basis. This meant accrued interest receivable would be excluded from total income, and accrued interest payable would be disallowed.

4. Directions Issued by the CIT(A) for the Assessment Years 1989-90, 1990-91, and 1991-92:
For the assessment years 1989-90 and 1990-91, the CIT(A) upheld the assessee's change to the cash basis for interest income. However, for the assessment year 1991-92, a different CIT(A) upheld the Assessing Officer's decision to tax interest income on an accrual basis. The Tribunal favored the view of the CIT(A) for the assessment years 1989-90 and 1990-91, emphasizing judicial discipline and precedence.

5. Applicability of Section 43B in Respect of Interest Payable to IDBI:
Section 43B of the IT Act mandates that deductions for certain expenses, including interest payable to public financial institutions, are allowed only on a cash basis. The CIT(A) invoked Section 43B to disallow the accrued interest payable to IDBI. The Tribunal upheld this view, stating that both receipts and expenditures related to interest should be on the same basis for income tax purposes.

6. Additional Ground Raised by the Assessee Regarding Deduction Under Section 36(1)(viii) of the IT Act:
The assessee raised an additional ground for the first time, seeking a deduction under Section 36(1)(viii) of the IT Act, claiming the Assessing Officer should have allowed it a reasonable opportunity to create the necessary special reserve. The Tribunal declined to entertain this ground, noting that the assessee had not created the special reserve and had not satisfactorily explained the reasons for this omission.

Conclusion:
The Tribunal dismissed the Revenue's appeals for the assessment years 1989-90 and 1990-91 and the cross-objections of the assessee. The assessee's appeal for the assessment year 1991-92 was allowed. The Tribunal upheld the CIT(A)'s direction to compute both interest income and related expenditure on a cash basis for the assessment years 1989-90 and 1990-91.