9911796707
TMI Blog2004 (7) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, this expenditure had not been considered as one which had accrued during the year. When we were dealing with recognition of income in the form of interest, lease rental and finance charges on hire purchase agreement, emphasis was laid on the accrual of the income based on the method of accounting regularly employed by the assessee. We have also held that the method of accounting was consistent and the conduct of the party in treating the income in a particular manner is a material evidence as to whether the income has accrued or not. When on the issue of recognition of income we have given emphasis to AS I, concepts such as consistency , prudence , method of accounting etc. can it be said that when it comes to expenditure, the method of accounting etc. has no relevance? We do not think so. The only issue in both these cases is as to what is the time of accrual . Applying the same principle to the accrual of expenditure, we have necessarily to hold that the expenditure had not accrued to the assessee during the year based on the consistent method of accounting being followed by the assessee. Accrual of expenditure or income under the mercantile system cannot be differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with prudential norms prescribed by Reserve Bank of India for income recognition which are binding on the company, an amount of Rs. 1,23,59,180 was not included. In this connection, the Assessing Officer asked the assessee to explain in detail the reasons for non-recognition of income and non-inclusion of the same in the total income. The assessee furnished a detailed explanation stating that during the accounting year relevant for assessment year 1999-2000 the assessee company had not included the following unpaid finance charges as income in the accounts:- On hire purchase agreement 24,00,077 On lease rental 97,50,771 On loans and advances 2,08,332 The assessee further mentioned that the principal amounts due in respect of the aforesaid amounts had not similarly been paid for a long time and were extremely doubtful of recovery. The Assessing Officer set out the arguments of the assessee in this behalf at pages 3 and 4 of the assessment order. For the reasons mentioned in his order at pages 4 to 6, the Assessing Officer rejected the claim of the assessee and included the total amount of Rs. 1,23,59,180 in the total income of the assessee. According to the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudential norms initially through its Circular No. DFC. COC. No. 1707.174.93-94 dated 13-6-1994, a copy of which has been placed at pages 120-128 of the paper book. Para 2.1 of the said prudential norms clearly laid down that income from non-performing assets (NPA) may not be recognized merely on the basis of accrual. An asset becomes non-performing when it ceases to yield income. The income from NPAs should be recognized only when it is actually received. It was further stated by the RBI in the said circular that interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from 31st March, 1995. Similarly, para 2.3 of the said circular further laid down that where lease rentals/hire purchase instalments were overdue for more than six months, the entire dues from the lessee/hirer should be treated as NPA. The learned counsel stated that the assessee company started obeying and following these prudential norms from the financial year ending 31-3-1995 corresponding to assessment year 1995-96. 5. The learned counsel further submitted that in the course of financial years corresponding to assessment years 1995-96, 1996-97, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge number of cases no payments had been received by the assessee company for a very long time. All these cases were NPA as per the Directions of the RBI under Notification No. DFC. 119/DG (SPT) - 98 issued under section 45JA of the Reserve Bank of India Act, 1934, viz., "Non Banking Financial Companies Prudential Norms (Reserve Bank) Direction 1998" dated 31-1-1998. The assessee company, therefore, did not provide in its books of account for the 'unpaid hire finance charges' in the aggregate sum of Rs. 24,00,077 and 'unpaid lease finance charges' in the aggregate sum of Rs. 97,57,771, in its books of account drawn for the financial year ending 31-3-1999 corresponding to assessment year 1999-2000, since these were past due and outstanding for more than 12 months as on 31-3-1999. Similarly, Rs. 2,08,332 represented the unpaid interest (Rs. 2,88,192 minus tax deductible at source Rs. 79,860) for the period April 1998 to September 1998, due and receivable from M/s. Share Medical Care, which party did not make any payment from 1-4-1998 onwards till 31-3-2000, as is evident from pages 70, 71 and 74A of the paper book of the assessee. This interest was outstandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the CIT(A). 8. The arguments of the learned counsel for the assessee are summarized as under:- Both the Assessing Officer and the CIT(A) did not appreciate the basic fact that there was no accrual of income in the facts and circumstances of the instant case. It is by now well settled by several judicial pronouncements that there can be no accrual of interest or finance-charges on hire purchase/leases/loans & advances, even under the mercantile system of accounting, when the principal amount itself is doubtful of recovery. Regular mode of accounting only determines the mode of computing taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted, it cannot be said that income has accrued merely on the ground that the assessee has been following mercantile system of accounting. If no income has materialized, there can be no liability to tax a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IIB of the said Act were statutory regulations. Non-banking institutions are bound to comply with such directions and non-compliance thereof attracts penal action. This principle was reiterated by Hon'ble Supreme Court in RBI v. Peerless General Finance & Investment Co. Ltd. [1996] 1 SCC 642. In view of the aforesaid decisions of the Supreme Court, the Assessing Officer and the CIT(A) were not right in alleging and/or observing that the assessee company had changed its accounting policy according to its convenience, and had not observed certain standards. The assessee had not changed its accounting policy or system in not providing for the unrealized interest and finance charges totaling Rs. 1,23,59,180. No interest or finance charges can accrue even under the mercantile system when the recovery of the principal itself is doubtful, which is the admitted and undisputed case here. Mercantile system does not talk about hypothetical accrual. Even assuming for the sake of argument, but not admitting, that there was a change in the method of accounting employed by the assessee, the so-called change did not take place in the previous year relevant to the assessment year under appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re claimed by the assessee in that case to be applicable and/or sought to be applied there. That apart, the provisions of Chapter IIIB, more particularly sections 45JA, 45K and/or 45L and/or 45Q were not brought to the notice of and/or considered by the Tribunal in that case. The decision of the Supreme Court in Peerless General Finance & Investment Co. Ltd's case as to the binding nature of these directives and the provisions of Chapter IIIB and the directions issued thereunder being statutory in nature, had not been brought to the notice of the Tribunal. In that case, the Tribunal considered a question as to whether losses on account of revaluation of securities held by the bank should be allowed in computing the total income under the Income-tax Act. In paragraph 7 at page 77 of the report, the Tribunal noted that the shares and securities held by the assessee bank were all along held as investments and not as stock-in-trade and that such securities in the books of account had been valued at cost and the revaluation was done only for income-tax purposes. The Tribunal, referring to the decision of Calcutta High Court in UCO Bank's case, held that the loss on revaluation c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full and final settlement of all its dues. The assessee wrote off the balance sum of Rs. 2,47,123. However, instead of debiting Rs. 2,47,123 directly to profit and loss account, the assessee deducted the said amount from the gross interest received/receivable. The net effect, however, was the same. The learned counsel submitted that in view of the settlement, the balance interest of Rs. 2,47,123 was no longer realizable and cannot lawfully be assessed on deemed accrual basis. 11. In view of the aforesaid submissions, the learned counsel contended that the additions on account of unrealized finance charges, unrealized lease rentals and unrealized interest, sustained by the first appellate authority, should be deleted. 12. On the other hand, the learned departmental representative supported the decision of the revenue authorities on the issues before us. He submitted that the submissions of the learned counsel for the assessee in support of the contention that the income in question could not be said to have accrued even under the mercantile system of account on account of real income concept, are not correct. He submitted that Income-tax Act levies charge of income-tax on the Tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts on mercantile basis and therefore income should have been computed on the basis of accrual, in view of clear provisions of section 5 and section 145 of the Income-tax Act, 1961. As far as accounting standards prescribed by Government vide Notification No. SO 69(E) dated 25-1-1996, are concerned, the learned DR submitted, it is clearly stated in paragraph 5 of Part A that fundamental accounting assumptions are relating to accrual. Accrual has been further explained in para 6(b). As for the reference of the learned counsel for the assessee to paragraph 9 which falls in ASH relating to disclosure of prior period and extraordinary items and changes in accounting policies, the learned DR submitted that in the present case we are not concerned with prior period or extraordinary items and para 13(c)-proviso clearly states that income or expenses arising from the ordinary activities shall not qualify as extraordinary items. Thus the norms set out by the RBI regarding recognition of income will not override the provision of computation of income as prescribed by section 145 read with Notification No. SO 69(E) in respect of computation of income of an assessee. In this connection, he refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the assessee has not discharged the onus in any manner, there was no validity of taking this ground at the stage of appeal before the ITAT, without any evidence having been furnished case-wise before the lower authorities. The learned DR further submitted that the decisions of Hon'ble Supreme Court in State Bank of Travancore's case, CIT v. UP State Industrial Development Corpn. [1997] 225 ITR 703 and Godhra Electricity Co. Ltd.'s case relied upon by the learned counsel for the assessee, actually support the department's stand rather than the assessee's case since it has been held in the aforesaid decisions that the concept of real income has to be applied in the reality of the situation and mere improbability of recovery cannot result into non-accrual of income. It has also been held that the concept should not be so read as to defeat the provisions of the Income-tax Act. The assessee's claim was always based on the mechanical norms of RBI rather than any considerations of real income concept, and hence the benefit of this thereof should not be allowed to the assessee. 16. The learned DR submitted that the question whether the provisions of section 45Q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI Act, because these Acts operate in different fields. For the proposition that Income-tax Act and RBI Act have different fields of operation, the learned DR place relianced on the following case laws:- Coca-Cola Export Corpn. v. ITO [1998] 231 ITR 200 (SC) CIT v. Super Scientific Clock Co. [1999] 238 ITR 731 (Guj.) CIT v. Kodak India Ltd. [2002] 253 ITR 445 (SC) UCO Bank [1999] 240 ITR 355 (SC) 17. The learned DR lastly submitted that the ground taken by the learned counsel for the assessee that RBI guidelines have to be followed in the matter of taxation also notwithstanding the accrual of income under the income-tax law, is devoid of any legal merit and such contention would make the charging section of the Income-tax Act, section 5, nugatory. In this connection, he placed reliance upon the decision of Hon'ble Supreme Court in the case of S. Mohan Lal v. R. Kondiah AIR 1979 SC 1132, wherein the following observations have been made: "It is not a sound principle of construction to interpret expressions used in one Act with reference to their use in another Act; more so if the two Acts in which the same word is used are not cognate Acts. Neither the meaning n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcutta Bench of the ITAT in the case of Jayanti Commerce Ltd. v. Asstt. CIT [1997] 61 ITD 183, and the decision of Hon'ble Calcutta High Court in CIT v. Hindustan Motors Ltd. [1993] 202 ITR 839 and that of Hon'ble Rajasthan High Court in S.M.S. Investment Corpn. (P.) Ltd. v. CIT [1993] 203 ITR 1001, also advance the same principle. 19. As regards unpaid interest of Rs. 2,47,123 in the case of Godavri Capital Ltd., the learned DR argued that the letter filed at page 66 of the assessee's paper book, showing that there was a mutual settlement between the parties as per which the amount was written off, was not found on the record of the Assessing Officer. The contentions of the letter had not been considered by either the Assessing Officer or the CIT(A) and, therefore, the said letter should not be admitted as evidence. On the legal issue, the learned DR placed reliance upon the decision of Hon'ble A.P. High Court in the case of N. Annajee Rao & Bros. v. CIT [1974] 97 ITR 265, as per which voluntary surrender of debt does not enable the assessee to claim an amount as bad debt. 20. Countering the arguments of the learned DR, the learned counsel for the assessee submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance charges cannot be said to accrue merely on the ground that the assessee has been following the mercantile system of accounting. The question whether real income has materialized to the assessee has to be considered with reference to commercial and business realities of the situation and not with reference to the assessee's system of accounting. The decision of Hon'ble Supreme Court in State Bank of Travancore's case, went against the assessee only because of the conduct of the assessee bank in continuing to debit the debtors account with the interest and crediting such interest to interest suspense account. The Hon'ble Supreme Court in that case laid great emphasis on the concept of real accrual taking into account the actuality of the situation, viz., the probability or improbability of realization in a realistic manner. In the instant case, the assessee had not provided for interest or finance charges to the account of the concerned debtors as was done by the assessee in the case before Hon'ble Supreme Court. The learned counsel further submitted that the Directives issued by the RBI under the RBI Act only support the concept of real accrual insofar as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in the instant case is quite different. The issue here is whether there has been any accrual of interest/finance charges in the real sense in the facts and circumstances of the instant case and the decision of the Special Bench in Nagarjuna Investment Trust Ltd.'s case does not deal with this issue. 23. As regards Government's Accounting Standard reported in 218 ITR (St.) 1, the learned counsel for the assessee submitted that it only helps the assessee insofar as it talks about prudence as a major consideration in the matter of adopting accounting policy as explained in paragraph 4(a) thereof and the fact that it also talks about change in accounting policies being made if it is required by statute. He further submitted that the term 'extraordinary items' in paragraph 13(c) of the said standard, referred to by the learned DR, has been dealt with in paragraph 8 thereof and this paragraph relates to disclosure in the profit and loss account. He submitted that the extraordinary item as dealt with in that standard has no connection with the issue involved in the instant case. 24. The learned counsel also submitted that the letter dated 14-7-1998 which confirms t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;profits and gains of business or profession' or 'income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." Central Board of Direct Taxes, vide Notification No. S.O. 69(E), dated 25-1-1996 [218 ITR (St.) 1], notified the following standard: "A. Accounting Standard I relating to disclosure of accounting policies.- (1) All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed. (2) The disclosure of the signifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples adopted by the assessee in the preparation and presentation of financial statements; (b) 'Accrual' refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate; (c) 'Consistency' refers to the assumption that accounting policies are consistent from one period to another; (d) 'Financial statements' means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanation notes forming part thereof; (e) 'Going concern' refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future." Hon'ble Supreme Court, in the case of UP State Industrial Development Corpn. as per head note, held as follows: "In order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income.' In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 this court has said: 'Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act.' In that case the Court has approved the following principle laid down by the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706, 707: 'The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal." 28. The argument of the learned departmental representative that under the mercantile system of accounting the interest on the non-performing assets automatically accrues and should be considered as income, does not appeal to us, for the reason that mercantile system of accounting cannot be considered a 'mere mathematical model', where 'subjective' conclusions on realisability or otherwise of an income have no place. Recognition of interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee." Thus, when the revenue could not demonstrate that the consistent method of accounting followed by the assessee is in violation of AS I, the disallowance made on that ground cannot be sustained. 29. It is significant to note that the Assessing Officer has accepted the stand of the assessee-company in respect of the reversed finance income, recognised in earlier years, in the aggregate sum of Rs. 47,90,510. This reversal was done based on the NBFC Prudential Norms RBI Directions, 1998, issued by RBI on 31-1-1998. Thus, while accepting reversal, non-recognition based on the same guidelines is disputed by the Revenue. 30. Even otherwise, the Delhi Bench 'B' of the Income-tax Appellate Tribunal, in the case of TEDCO Investment & Financial Services (P.) Ltd., dealt with the matter at length. The gist of that decision is as follows: "Section 145 of the Income-tax Act, 1961, read with sections 45Q and 45JA of the Reserve Bank of India Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business. 31. As our view is in consonance with the view of the Delhi Bench of the Tribunal, we follow the same and uphold the contention of the assessee and allow this ground of appeal. Thus, the addition of Rs. 1,23,59,180 is hereby deleted. 32. On the issue of inclusion in total income of Rs. 2,47,123 being unpaid interest from Godavari Capital Limited, the learned DR submitted that the letter given at page 66 of the paper book, showing that there was a mutual settlement between the parties as per which the amount had been written off, was not considered either by the Assessing Officer or by the CIT(A). In these circumstances, we deem it proper to set aside the issue to the file of the Assessing Officer for considering this document and disposing of the issue in accordance with law. 33. The other ground taken by the assessee in this appeal relates to disallowance of legal expenses of Rs. 21,84,009 incurred for conducting legal proceedings against the defaulting debtors. Before the Assessing Officer, the assessee filed a letter stating that they incurred legal expenses of Rs. 21,84,009 during the previous year relevant to the assessment year under consideration for conduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dues. The legal expenses were debited by the assessee company in its books of account to the account of each of the relevant debtors instead of charging the same to the debit of profit and loss account. Legal expenses were carried to the debtors' account in order to keep a track of expenditure incurred in respect of the parties. Awarding of costs to the assessee-creditor was a matter wholly in the discretion of the law courts. The legal expenses had been actually incurred by the company wholly and exclusively for its business purposes. The learned counsel therefore, submitted that these expenses are admissible and the mere fact that these were not charged to the profit and loss account was no ground to disallow the same. According to him, the treatment of an expenditure in the books of account in a particular manner or existence or absence of an entry in the books of an assessee is neither determinative nor decisive for tax proposes. In this connection, he relied upon the following decisions: (i) CIT v. Berger Paints (India) Ltd. [2002] 254 ITR 503, 506 (Cal.) (ii) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1,5 (SC) (iii) Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the facts and circumstances of the instant case. From a reading of the last paragraph at page 365 of the report, it may be noted that the legal expenses of Rs. 69,190 had not been incurred by the assessee in that case. The said expenditure had been incurred by the Hindu undivided family in different years and after the decision of the City Civil court on 30-12-1964, the said expenditure was taken over through a transfer entry by the assessee firm from the said HUF. It was in these circumstances that the High Court held that the liability of the assessee firm to pay the said sum of Rs. 69,190 by way of legal expenditure was not allowable prior to the assessment year 1966-67. At the top of page 366, the court clearly held that the expenditure in question was clearly allowable as a revenue expenditure in the assessment year 1966-67. It is true that the court also noted at page 366 of the report that till the end of the Trial Court stage was reached, it could not be predicted what the amount of expenditure would be. But, in the facts of that case, the court found that till the assessment year 1966-67, the assessee could not have claimed such expenditure as these had not been inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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