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TMI Blog1989 (11) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... s the only remedy available to the assessee on the facts and in the circumstances of the case. We reject the above mentioned 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 s. 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 s. 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, dt. 13th July, 1973, of Agriculture and Co-operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p for consideration before the Gujarat High Court in GUJARAT INDUSTRIAL DEVELOPMEN CORPN. vs. CIT (1985) 45 CTR (Guj) 68 : (1985) 151 ITR 255 (Guj) 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 that Corporation. The Gujarat State Industrial Corporation was not such a Corporation and was not entitled to exemption under s. 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 since in which the Gujarat High Court has interpreted the word development of village. The object of the Legislature in insertin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gers. 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 amount 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. Uptil 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: S. No. Asstt. yr. Interest income as per Mercantile System Actual int. Received from cultivators Loan advanced to cultivator 1. 1978-79 Nil Nil Nil 2. 1979-80 Nil Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 system of accounting to mixed accounting system which means that income would be brought to account when actually realised and expenses would be looked when the liability would arise. 11. The assessee pleaded before the IAC that the change of method of accounting was bona fide and that the said changed method was being followed consistently in the subsequent years. The IAC (Asst) observed that the method has been changed to reduce the tax liability. According to him the assessee could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as second aspect 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 interest accrues to the assessee. That is merely incidental. The main purpose is not to earn that income. The affairs are not run on professional or commercial basis. They are run as per the policy of the government to improve the quality of land and to provide other facilities to lower strata of the rural society. It is in this background that we have to consider the above question. We have to take into account all the surrounding circumstances. The figures given above indicate that although the so-called accrued income runs into lakhs of rupees, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 vs. GANGA CHARITY TRUST FUND (1986) 53 CTR (Guj) 365 : (1986) 162 ITR 612 (Guj), when the assessee experienced difficulty because of non-receipt of income from interest from two parties with which it had placed its funds by way of deposits, it decided to switch over to the cash system of accounting so that it may not be required to pay income-tax on notional income. The ITO held that the assessee could not change the method of accounting but the Tribunal accepted the change. The High Court held that there was no finding that the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BANK OF TRAVANCORE vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC). These decisions lay down as to when interest income is said to accrue when mercantile system of accounting is followed. These decisions to 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 ITA No. 6448(Bom)/83 in the case of MAHARASHTRA STATE TEXTILE CORPORATION LTD., BOMBAY decided on 26th Aug., 1988. In that case, the assessee was a Government Company and had taken over sick mills. Huge amounts had been advanced to the silk units and the assessee was not receiving either the principal or the interest. The assessee was bound to lend because of the policy of the Government. The assessee changed the method of accounting from mercantile to cash only in respect of interest receivable from the sick units. The Tribunal held that in the circumstances of the case the change ..... X X X X Extracts X X X X X X X X Extracts X X X X
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