1989 (11) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of expenses for earlier years.
2. Exemption under section 10(20A) of the IT Act.
3. Change in the method of accounting.
4. Addition in respect of earlier years' expenses.
5. Reduction of addition by the CIT(A).
6. Disallowance of penal interest payable.

Issue-wise Detailed Analysis:

1. Deduction of Expenses for Earlier Years:
The assessee claimed a deduction of Rs. 15,36,568 for earlier year expenses. The Tribunal noted that the assessee followed the mercantile system of accounting, and since the expenses pertained to earlier years, they could not be allowed in the current year. The appropriate remedy for the assessee was to seek relief under section 264 of the IT Act for the relevant years. Consequently, this ground was rejected.

2. Exemption Under Section 10(20A) of the IT Act:
The assessee claimed its income was exempt under section 10(20A). The Tribunal examined the purpose and activities of the assessee-Corporation, which involved land improvement and related agricultural activities. Section 10(20A) exempts income of authorities constituted for housing or planning, development, or improvement of cities, towns, and villages. The Tribunal referred to the Gujarat High Court's interpretation, which required a broader scope of development activities. It concluded that the assessee-Corporation's activities did not fall within the ambit of section 10(20A) as they were not aimed at developing villages in the comprehensive manner envisaged by the statute. The Tribunal rejected the assessee's grounds for exemption under section 10(20A).

3. Change in the Method of Accounting:
The assessee changed its method of accounting from mercantile to a mixed system, recognizing income on a cash basis while continuing to account for expenses on an accrual basis. This change was prompted by the impracticality of recovering large amounts of accrued interest from cultivators, which was never realized. The Tribunal noted that the change was bona fide and consistently followed in subsequent years. It emphasized that the primary purpose of the assessee-Corporation was not to earn profits but to implement government schemes for land improvement. The Tribunal found the change justified and directed the ITO to accept the new system of accounting, setting aside the CIT(A)'s direction to adopt a cash system for all items.

4. Addition in Respect of Earlier Years' Expenses:
The IAC initially added Rs. 1,45,739.94 for earlier years' expenses, later corrected to Rs. 1,95,739.94. The Tribunal noted this correction and rejected the ground as it did not survive.

5. Reduction of Addition by the CIT(A):
The IAC made an addition of Rs. 2,03,229, which the CIT(A) reduced to Rs. 66,363. The Tribunal upheld the CIT(A)'s decision, noting that the department had no substantial grievance on the remaining small items of Rs. 2850 and Rs. 2977. Consequently, this ground was rejected.

6. Disallowance of Penal Interest Payable:
The CIT(A) had made observations regarding the disallowance of Rs. 1,84,999 as penal interest payable to the Command Area Development Authority. However, this issue did not arise out of the order for the assessment year 1985-86, and thus, the Tribunal rejected this ground.

Conclusion:
The assessee's appeals for the assessment years 1983-84 and 1984-85 were dismissed, while the appeal for 1985-86 was partly allowed. The departmental appeal for the assessment year 1985-86 was dismissed.