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TMI Blog1989 (11) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ch those expenses pertained. That was the only remedy available to the assessee on the facts and in the circumstances of the case. We reject the abovementioned ground. 3. Ground Nos. 2 3 are as follows : " The learned CIT(A) erred in not accepting the company's claim for its income being exempt under section 10(20A). The learned CIT(A) erred in not adopting the decision of the ITAT Jaipur Bench in respect of exemption of income of Land Development Corporation under section 10(20A). " Until 13th July, 1973, the Government of Maharashtra used to undertake land development and other connected agricultural engineering activities which were aimed at preserving soil erosion, maximised utilisation of irrigation potential and other allied matters. The purpose was to effect improvement of land and water resources and agriculture production. There were several schemes for these purposes and these schemes involved large scale expenses which the State Government found difficult to meet. In order to attract institutional finance for these works, the assessee-Corporation (the Maharashtra Land Development Corporation Ltd.) was established by Government resolution No. PPL/1473/69008-N, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , towns and villages or for both. The provisions of section 10(20A) came up for consideration before the Gujarat High Court in Gujarat Industrial Development Corpn. v. CIT [1985] 151 ITR 255/21 Taxman 250 to which our attention has been drawn on behalf of the department. It was observed that developing any city, any town or any village would require roads, buildings, sanitation, parks, sports, educational institutions and several other amenities and such activity would be an integrated activity. Consequently any Corporation which was established for the purpose of developing a particular city, town or village would mean a body set up with larger purpose which could be achieved only if not only industry but several other requirements of that particular area were met by the Corporation. The Gujarat State Industrial Corporation was not such a Corporation and was not entitled to exemption under section 10(20A) of the Act. Similar would be the case with the assessee-Corporation. The objects of the assessee-Corporation have been set out by us above. It is clear that the object is not to develop the village as such in the sense in which the Gujarat High Court has interpreted the word deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted before us that in fact the assessee does not advance amounts to the villagers. What the assessee does is that the assessee executes the scheme of land improvement, etc. The amounts spent on the land of a particular cultivator is treated as loan to that cultivator and interest thereon is charged. It is this interest which is the source of income. The policy of the Government is to improve the land and as such the amount is required to be spent. The assessee does not take into consideration the point whether the amounts spent would be recovered in future or not. When land is to be improved, amount is to be spent. However, in the accounts, the amount spent is treated as loan to the particular land owner and interest thereon is also included in that account. Until the asst. yr. 1984-85 the assessee was accounting for the interest income on accrual basis because of the mercantile system of accounting followed by the assessee. Interest accrued ran into lakhs of rupees, but the assessee was not in a position to recover any amount. Following table indicates the nature of transactions : --------------------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n change in method of accounting : The Corporation maintained its books of account under mercantile system of accounting up to the year ended on 30th June, 1983. Under this system of accounting, income is taken into account irrespective of the fact whether it is actually received or not. In our case, till 30th June, 1983, we have taken credit of interest receivable from cultivation and shown it in our books of accounts which resulted in substantial amount of profit on which income-tax had to be paid as per IT Act, 1961. It is the experience of this Corporation that recovery of loan as well as interest thereon from cultivators is very low, hence it was felt that in order to show true and fair view of the affairs of the Corporation, it would be necessary to change the method of accounting as far as income is concerned and no credit should be taken in respect of income which is not received. It was, therefore, decided to maintain the books of accounts of the Corporation under Mixed Accounting System which means income would be brought into account when actually realised and expenses would be booked when the liability would arise. " Thus the assessee has changed from mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )]. When an assessee bona fide changes his method of accounting and satisfies the department that he intends to adopt changed method of accounting thereafter or that he has in fact adopted it thereafter, that satisfies the requirement of section 145, neither principle nor authority bars an assessee from substituting the method of accounting for another at his choice. In view of these principles, what is to be seen is whether the change made by the assessee was bona fide and whether that change has been consistently followed in subsequent years. As far as second aspects is concerned, there is no dispute that in subsequent years, this particular method has been consistently followed after change was effected in this assessment year. So the only question is whether change was bona fide. We have already made reference to the nature of activities of the assessee-Corporation. As already stated the main purpose of the assessee-Corporation is not to earn profits. The main purpose is to implement the schemes of the Government regarding land improvement, soil conservation, etc. The assessee is bound to spend the amounts in implementation of that scheme. In the process, some income by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was not likely to be received. It had changed the method of accounting so that true and correct state of affairs will be reflected in the accounts. The Tribunal's finding that the change over to the cash basis was more realistic and did not involve any mala fides on the part of the assessee was upheld by the High Court. The present case stands on a stronger footing. 15. In Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 (Cal.), the assessee changed its method of accounting in respect of interest income from mercantile to cash system and the changed system was regularly followed for subsequent years. It was held that when there was no specific finding that the assessee in maintaining the change in the method of accounting was not acting bona fide and when changed method was a recognised method and when the same has been followed regularly in subsequent years, same must be accepted by the department. In the present case also the method adopted by the assessee, namely, mixed system of accounting, was a recognised method and the changed method has been regularly employed in subsequent years. The circumstances indicate that the change was bona fide. 16. In CIT v. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are unable to accept the submission on behalf of the department to the effect that with the changed method, real income would not be ascertainable. Far from it, the real income would be ascertainable on account of the method it is now being adopted by the assessee looking to the peculiar facts of the present case. 18. The learned departmental representative has relied on decisions in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC), CIT v. Hira Lai Mittal Sons [1972] 86 ITR 463 (All.) and State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC). These decisions lay down as to when interest income is said to accrue when mercantile system of accounting is followed. These decisions do not lay down that the assessee was not entitled to change the method of accounting if there are genuine reasons for such change and when the changed method is followed regularly in subsequent years. Consequently, these decisions are of no assistance for deciding the point in controversy with which we are dealing. 19. We may in this connection refer to the decision of the Bombay Bench 'D' in the case of Maharashtra State Textile Corpn. Ltd. [IT Appeal No. 6448 (Bom.) of 1983 dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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