1989 (11) TMI 127 - AT - Income Tax

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

Detailed Analysis:

1. Deduction of Earlier Year Expenses:
Issue: The assessee claimed a deduction of Rs. 15,36,568 for earlier year expenses, which was denied by the CIT(A).

Judgment: The Tribunal noted that the expenses pertained to earlier years and the assessee followed the mercantile system of accounting. Therefore, these expenses could not be allowed in the current year. The Tribunal suggested that the assessee could seek relief under Section 264 of the IT Act for the years to which those expenses pertained. The ground was rejected.

2. Exemption under Section 10(20A) of the Income Tax Act:
Issue: The assessee claimed exemption under Section 10(20A), which was denied by the CIT(A).

Judgment: The Tribunal examined the purpose of Section 10(20A) and concluded that the assessee-Corporation did not qualify for the exemption. The Tribunal referred to the Gujarat High Court decision in GUJARAT INDUSTRIAL DEVELOPMENT CORPN. vs. CIT and noted that the assessee-Corporation was not constituted under any law for the purposes mentioned in Section 10(20A). The grounds were rejected.

3. Change in the Method of Accounting:
Issue: The assessee changed its method of accounting from mercantile to mixed system for interest income, which was contested by the department.

Judgment: The Tribunal held that an assessee is entitled to change the method of accounting if it is bona fide and consistently followed. The change was considered bona fide due to the peculiar circumstances where the assessee was unable to recover accrued interest, leading to substantial tax liabilities on unrealized income. The Tribunal directed the ITO to accept the mixed system of accounting where income is accounted for on a cash basis and expenses on an accrual basis. The CIT(A)'s direction to follow the cash system for all items was set aside.

4. Addition of Earlier Years' Expenses:
Issue: The IAC (Asst) added Rs. 1,45,740 for earlier years' expenses, which was corrected to Rs. 1,95,739.94.

Judgment: The Tribunal noted the correction made under Section 154 of the Act and dismissed the ground as it did not survive.

5. Reduction of Addition by CIT(A):
Issue: The CIT(A) reduced the addition of Rs. 2,03,229 to Rs. 66,363.

Judgment: The Tribunal found no reason to interfere with the CIT(A)'s order, as the remaining items were very small amounts (Rs. 2850 and 2977). The ground was rejected.

6. Disallowance of Penal Interest:
Issue: The CIT(A) disallowed Rs. 1,84,999 regarding penal interest payable to the Command Area Development Authority.

Judgment: The Tribunal noted that this issue did not arise out of the order for the assessment year 1985-86 and thus rejected the ground.

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

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