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TMI Blog2007 (8) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... n force relating to tax on income, profits or gains, the National Dairy Development Board shall not be liable to pay income-tax or any other tax in respect of its income, profits or gains derived." 3. With effect from 1st April, 2003 the said s. 44 was omitted by the Finance Act, 2002 and the present assessment year chargeable to tax is asst. yr. 2003-04, the appeal of which is before us. 4. The first dispute is with regard to the addition of Rs. 1,05,27,02,724 on account of interest which was actually received during the year under consideration. The background of the addition is that though the board was not chargeable to tax, it was following hybrid system i.e., cash system for accounting the interest income and mercantile system for accounting expenditure upto financial year 2000-01. During the financial year 2001-02, the board had changed the system and henceforth accounting the income on accrual basis as against cash basis being followed in the earlier year. During the year under consideration i.e., financial year 2002-03 relevant to asst. yr. 2003-04, the same accrual system was continued. The change is stated to be in consonance with the requirement of Accounting Standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished inaccurate particulars of income, proceedings under s. 271(1)(c) of the Act are initiated." 5. The CIT(A) upheld the order of the AO by observing: "The above given instructions issued by the Central Government required the appellant to disclose specifically prior period items in the P&L a/c of the current financial year 2002-03, so that their impact on the profit and loss in the current previous year could be appropriately perceived. The appellant failed to mention such major part of its interest income (Rs. 1,05,27,20,724) which it had diverted to the prior year on accrual basis in the P&L a/c of the current year for ascertaining its impact on the income of the appellant in the current year. Thus, the appellant has faulted on various counts in presenting its accounts correctly. The appellant's contention that the appellant had every right to change its system of accounting from cash to mercantile cannot be disputed but doing it in the manner and in the circumstances as stated above, is hard to digest and makes it difficult to believe that the action of the appellant to change its method of accounting was a bona fide one. The appellant had been following consistently cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 145 stood amended. But the appellant chose the option only in the post-enactment of Finance Act, 2002 that too retrospectively by passing the resolutions on 13th May, 2002 and 27th May, 2002. The change in the system of accounting from cash to mercantile authorized by the board resolutions dt. 13th May, 2002 and 27th May, 2002 for the period preceding 31st March, 2002 definitely gave a retrospective angle to the whole affair. The exercise resulted in the drastic jump in the interest income declared for the financial year 2001-02 vis-a-vis interest income declared for the financial year 2000-01. As against the interest income of Rs. 246 crores only declared in the financial year 2000-01, the interest income for the financial year 2001-02 jumped to Rs. 774 crores. In the given background, the whole exercise to adopt a different system of accounting was not transparent one, as it shifted the incidence of tax on interest amount of Rs. 1,05,27,20,724 to the tax-free time zone i.e. prior to 31st March, 2002 and accordingly, nullified the tax effect. Thus, in the circumstances, the AO was justified in bringing to tax the interest amount of Rs. 1,05,27,20,724 by invoking the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Reform Flour Mills (P) Ltd. v. CIT [1978] 114 ITR 227 (Cal); (iii) The Supreme Court in the case of Union of India & Anr v. Azadi Bachao Andolan [2003] 184 CTR (SC) 450: [2003] 263 ITR 706 (SC); (iv) The Punjab & Haryana High Court in the case of CIT v. Punjab State Industrial Development Corporation Ltd. [2002] 176 CTR (P&H) 434 : [2002] 255 ITR 351 (P&H); (v) The Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 (Cal); (vi) The Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT [1989] 77 CTR (Mad) 107 : [1990] 182 ITR 1 (Mad); (vii) The Gujarat High Court in the case of CIT v. Atul Products Ltd. [2001] 170 CTR (Guj) 371: [2002] 255 ITR 85 (Guj); and (viii) The Supreme Court in the case of United Commercial Bank v. CIT [1999] 156 CTR (SC) 380 : [1999] 240 ITR 355 (SC). 7. The learned Departmental Representative, on the other hand, supporting the orders of the Revenue authorities, submitted that s. 44 of the NDDB Act, 1987 exempts the assessee for non-payment of tax, which does mean that assessee was not an assessee under the IT Act, because of this specific provisions of s. 44 in the NDDB Act, 1987, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting policy was received. The income-tax guidelines stipulates that interest be recognized as income when due. We have also studied the guidelines issued by the Reserve Bank of India on income recognition, which also considered interest as income on accrual basis. It may be mentioned that the NDDB's statutory auditors have since long been commenting on the policy with regard to recognition of income on interest. Considering all the above, it is proposed to account for interest an accrual basis w.e.f. 1st April, 2001 in respect of all term loans, the repayment of which (including payment of interest due) is not in default for more than two quarters." 11. Another resolution ratifying the proposal dt. 27th May, 2002, reads as under: "To ratify the proposal approved by the Chairman, NDDB considering recognition of income on all loans on accrual basis with effect from the financial year 2001-02. The board vide resolution No. 06/65/09/2002-2003 approved recognition of interest income on project loans as revenue on accrual basis with effect from the financial year beginning 1st April, 2001, in cases where the repayment is not in default for more than two quarters. However, our tax c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scape tax, are not fully correct in the sense that it is not the income of the year under consideration. It was the income of the earlier year, and in that year, the assessee was not liable to tax. As the assessee is following the system of accounting as accrual, such income cannot be assessed on cash basis when it had accrued in the earlier years. 14. The adoption of the system of mercantile for accounting for the income is a recognized method under the Accounting Standard issued under s. 145(2) of the Act. It is also as per the requirement of Accounting Standard issued by the ICAI. Therefore, the Revenue is not justified in stating that change was not bona fide. The Gujarat High Court in the case of CIT v. Ganga Charity Trust Fund (supra) held that there being no finding of fact that the switchover to the cash system of accounting in the previous year relevant to the asst. yr. 1972-73 was not bona fide and that this change lacked durability or regularity and was merely a stop-gap arrangement to avoid payment of tax. The assessee trust was entitled to switchover to the cash method of accounting in view of the peculiar circumstances in which the trust was placed. The Punjab & Hary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinuously followed in the subsequent years. The assessee had changed the method so as to see that the method adopted by the assessee was also as per the method adopted by other business units in the industry. In the subsequent years, the Revenue had not objected to the change made by the assessee in the method of stock valuation. Therefore, the Tribunal was right in confirming the order of the CIT(A) deleting the addition of Rs. 2,93,56,000 representing the alleged undervaluation of closing stock." Again it is, held by the Calcutta High Court in the case of Reform Flow Mills (P) Ltd. v. CIT (supra) that "It is settled law that a taxpayer is entitled to adjust his own affairs in such a way that his tax burden is thereby reduced. He is also entitled to adopt any lawful means for the aforesaid purpose. Sec. 145(1) of the IT Act, 1961, does not postulate any agreement or contract between any taxpayer and any person, whoever he may be, regarding the method of accounting to be employed by a taxpayer and also does not lay any embargo on his altering the method of accounting. It cannot, therefore, be contended that the assessee cannot change his method of accounting unilaterally." The Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and principal for the earlier years. The AO noted the admission of the fact by the assessee that whatever errors committed or made in accounting the interest income of the preceding years when the assessee was a non- taxable entity, the same are being corrected by reducing the current year's amount to this extent when the assessee has become taxable. Finding no valid reason for reducing the income, the AO, therefore, brought the same to tax. The assessee also submitted that the interest accrued on the standard loan in the earlier year was Rs. 1,04,43,72,332 as against Rs. 1,05,95,29,647 and the difference of Rs. 1,51,57,315 (i.e. Rs. 1,05,95,29,647 - Rs. 1,04,43,72,332) related to the earlier year and would not be assessable to tax, was also not accepted by the AO. 20. The CIT(A) upheld the addition by Observing as under : "I have considered the submissions, rejoinder of the appellant and the findings/comments of the AO and observe that most of the individual entries pertaining to negative interest constitute of figures running (into) lacs and the biggest entry is of Rs. 71.80 lacs shown against Sabarmati Salt Farmers Society. It is noted that the letter dt. 26th May, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted for in the current year. Further, during the year the appellant was not a public finance institution on which the RBI Prudential norms would apply for income recognition. As stated above, the appellant has not given any specific explanation for the individual substantial negative interest entries. Moreover, the interest income for which the said errors and omissions have been claimed pertain to the preceding years when the assessee was a non-taxable entity. Since such amounts were not charged to tax in earlier years, therefore, the appellant has no justification for claiming such errors and omissions pertaining to those exempt interest amounts in the current year against its taxable income. Further, there is no logic in the appellant's arguments that the disallowance of the claim of negative interest of Rs. 1,59,82,471 would amount to double addition to its income. As stated above the said amounts pertained to earlier years and as such could not have been shown as part of the total interest in the current year, specially when the appellant is following mercantile system of accounting. Hence, in view of above, the submissions of the appellant are rejected and the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the projects of the special programme". No such specific clear term of utilizing such kind of interest appears to be available in cases of other projects and copies of other agreements were also not furnished. He observed that the assessee has filed an evidence in the form of a letter dt. 7th Feb., 2003 written to the Department of Animal Husbandry, Ministry of Agriculture, wherein, the assessee has made a reference of refunding of interest through a demand draft. An acknowledgement of refunding an amount of Rs. 31,11,214 through DD dt. 19th May, 2003 (under the scheme "Assistance to Co-operatives") has also been enclosed. He however, observed that no evidence in the form of any agreement has been furnished by the assessee, wherein, it has been specifically mentioned that interest on grants given for specific projects would be required to be refunded. No evidence pertaining to North Kerala Dairy Project Fund and Bhuj Hospital in this regard has been produced. Even the documentary evidence regarding refunding of interest of Rs. 31 lakhs to the Department of Animal Husbandry pertains to the next financial year 2003-04 and not to the current year. He rejected the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government. Further, the same has to be utilized as per the agreements entered into before receipt of such income, and that in case of non-utilisation the same has to be refunded to the agencies. All these facts establish that such money and interest thereon never became the income of the assessee. It is a case where the income was diverted by an overriding title and it never reached the assessee. Even if the assessee collects such income it never was its income; it was not its income because such income was not collected as part of assessee's own income, but for and on behalf of agencies who have entrusted the assessee with the projects and given funds for the same. It was, in any case, to be refunded back. 25. It is stated that in respect of these project funds, the interest accrued thereon has to be utilized to finance additional activities within the scope of the project and cannot be used at the will of NDDB for its other objects. Further, in case of 'Assistance to Co-operatives' the terms clearly provide that the amount of interest earned by the NDDB is to be refunded to the Government of India. The assessee has actually refunded the interest to the Government and eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been paid to them. Under these circumstances, we uphold the orders of the Revenue authorities in assessing the interest relatable to this project. 30. As regards Bhuj Hospital, a letter dt. 16, Oct., 2001 is filed before us from the assessee to the Joint Secretary, PM Office stating the requirements for the project for the first quarter of Rs. 15. crores required to be released to NDDB at the earliest. Clause 4 of this letter states that on "the funds released will not be treated as loan/grant to the NDDB but to the authority in whom the ownership of the hospital will vest." Pursuant to this letter of the assessee, PM Office issued a cheque of Rs. 15 crores in favour of the assessee on 16th Oct., 2001. From this letter, the assessee submits that the interest was not to accrue to the assessee because it was not treated as a loan. The learned counsel for the Revenue, on the other hand, submitted that it does not say anything about the accrual of interest and, therefore, the interest accrued to the assessee by deposit of this money was its income and was rightly assessed by the Revenue authority. Clause 4 of the aforesaid letter which has been relied upon by the learned counsel on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery and claiming itself to be a public financial institution the assessee applied RBI Prudential norms for not accounting the accrued interest on the said principal amounts during the current year. The AO was of the view that since the RBI Prudential norms were applied by the assessee retrospectively by passing the board resolution on 31st July, 2003 (which is also the date of finalization of its accounts) and also that the assessee was not a public financial institution during the year, the RBI norms could not be applied. The assessee applied it only as a ploy to reduce its income. Accordingly, he added the sum to the income of the assessee. " 34. The CIT(A) confirmed the addition made by the AO by observing as under : "Since, the appellant is following mercantile system of accounting and the appellant can enforce the terms of agreements signed with cooperatives under various laws and recover the disputed amounts and since the income has not been surrendered but only a mere improbability exists, therefore, keeping in view the judgment of the Court given in the State Bank of Travancore v. CIT [1986] 50 CTR (SC) 290 : [1986] 158 ITR 102 (SC) wherein, the Court has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of public financial institution for which an application was made within the previous year relevant to the impugned assessment year, though actually notified on 23rd Feb., 2004 after the close of the year and therefore the RBI Prudential norms were applicable, was also rejected by the CIT by observing : "The appellant has also relied on the case of Marshall Sons & Co. v. ITO 88 Comp Cas 528 for the purpose of supporting its arguments that the gap between the date of application and the date of issue of notification is only a procedural matter, therefore, the date of application should be taken as the effective date for granting status of PFI to the appellant. On examination of the said case law cited by the appellant, it is observed that it pertains to the date of amalgamation between a holding and a subsidiary company. In the said case it has been held that the amalgamation would take effect from the date of transfer specified in the 'scheme of amalgamation' and not the date of the Court's order, however, the Court has the authority to modify the date prescribed in the scheme of amalgamation. In this regard I would like to observe that the issue of amalgamation in the case cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... National Housing Bank Act, 1987 (53 of 1987); (b) 'public company' means a company,- (i) which is a public company within the meaning of s. 3 of the Companies Act, 1956 (1 of 1956); (ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and (iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under s. 30 and s. 31 of the National Housing Bank Act, 1987 (53 of 1987); (c) 'public financial institution' shall have the meaning assigned to it in s. 44 of the Companies Act, 1956 (1 of 1956); (d) 'scheduled bank' shall have the meaning assigned to it in cl. (ii) of the Explanation to cl. (viia) of sub-s. (1) of s. 36; (e) 'State financial corporation' means a financial corporation established under s. 3 or s. 3A or an institution notified under s. 46 of the State Financial Corporations Act, 1951 (63 of 1951); (f) 'State industrial investment corporation' means a Government company within the meaning of s. 617 of the Companies Act 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects." 38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of s. 43(6) the WDV had to be computed by reducing the depreciation actually allowed against the cost of the assets and that there was no concept of mental calculations of the depreciation as having been allowed in the tax-free period. Therefore, the depreciation during the current year has to be computed on the original cost of the assets. The AO rejected the contention of the assessee, as in his view, the principle governing the depreciation allowance is the effective life of the depreciable assets and the expenditure incurred on its wear and tear for the period of its consideration and since the assessee had been using the assets in question for years, such assets must have depreciated greatly by their use and some of them might have reached the stage of being discarded, hence, in order to arrive at the correct income, normal wear, and tear of the assets had to be taken into account. The AO also took into consideration the provisions of ss. 10A and 10B of the Act as an analogy for computing the WDV at the end of the exemption period on notional basis. On remand, the AO also stated that the assessee has applied literal meaning of WDV of assets as defined under s. 43(6) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rants received by it from the Government/agencies (for meeting a part or full cost of such assets). He sustained the addition made by the AO by observing as under: "The arguments of the appellant do have some force on plain reading of the provisions but when the Act has to be read as a whole with implied intentions of the legislation, then the literal meaning of the words alone do not suffice. The hidden real meaning has to be dug out for projecting a correct picture of the terms used in the provisions. For deciding the issue, it has to be kept in mind that the depreciation is a measure of computing the fruitful life span of an asset which has been subjected to wear and tear in normal course of its use. The object of providing for depreciation is to spread over the expenditure incurred on the asset over its effective life time. The amount written off as depreciation during an accounting period is intended to represent the proportion of such expenditure which has been consumed during the period. For the purpose of determining true profits in the commercial sense or under the proper principles of accountancy, the wear and tear of the assets utilised by an assessee for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, taking the original cost of the asset as its WDV in such situation would lead to absurd results. Hence, WDV of an asset, whether used by a taxable entity or a non-taxable entity should be on par with each other. The same asset should be given the same treatment as far as determination of WDV is concerned. In other words likes should be treated alike. The WDV in both the cases should be based on the parameter of its wear and tear and not on the literal meaning of the term 'actually allowed' which leads to illusory perceptions. Since, such terms can be subjected to meaning more than one, therefore, legislation in its wisdom has started clarifying its intentions in the provisions like ss. 10A and 10B, under which an assessee is required to take into consideration, the wear and tear of an asset suffered during the course of tax holiday period for arriving at the WDV for the purpose of computing depreciation allowance subsequent to the end of the tax holiday period. In other words the allowance of depreciation on depreciable assets would be based on notional allowance deemed to have been given to an assessee during its tax holiday period. Similarly, it has been clarified unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the decisions in CIT v. Straw Product Ltd. [1966] 60 ITR 156 (SC); CIT v. Dharampur Leather Co. Ltd. [1966] 60 ITR 165 (SC); CIT v. Mahendra Mills [2000] 159 CTR (SC) 381 : [2000] 243 ITR 56 (SC); Madev Upendra Sinai v. Union of India [1975] 98 ITR 209 (SC). 43. It is a settled law when there is no ambiguity, literal interpretation should be made. The intention etc. would be relevant only if there is ambiguity in the provisions of law, which is not the case here. It is settled law. The Courts have, time and again, held that in absence of ambiguity literal interpretation should be made; namely, (i) Sarala Btrla v. CWT [1989] 75 CTR(SC) 194 : [1989] 176 ITR 98 (SC) and (ii) Gem Granite v. CIT [2004] 192 CTR (SC) 481: [2004] 271 ITR 322 (SC). Even otherwise it is submitted that depreciation, as held by the Supreme Court in the case of Mahendra Mills (supra) is optional and assessee may decide not to claim the deprecation. 44. We have heard the parties and considered the rival submissions. Sec. 32 provides for the depreciation on the WDV of the asset. Sec. 43(6) defines the WDV to mean in case of asset acquired in the previous year like building plant and machinery, furniture and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th. 45. The sixth ground is against the disallowance of Rs. 9,90,00,000 made under s. 36(l)(viii) of the Act. The facts of the case are that the assessee claimed itself to be a provider of long-term finance for agricultural and industrial development and accordingly, claimed deduction of Rs. 9.90 crores under s. 36(1)(viii) of the Act, which is equivalent to the reserve created for the purpose. The AO declined the deduction in view of the fact that the notification was issued on 23rd Feb., 2004, notifying it as a public financial institution, a date which falls in the subsequent year. He also disallowed the claim by following the decision of Orissa High Court in the case of State of Orissa v. Ramchandra Chaudhary [1962] 46 ITR 246 (Ori) wherein it is stated that the activity of the dairy business cannot be termed as agricultural activity. Alternative claim classifying itself as food processing industry (under cl. 27) of the First Schedule to the Industrial Development Regulation Act), wherein as food processing industry is stated to include;- (i) canned fruits and food products, (ii) milk food, (iii) malted foods, (iv) flour, and (v) other processed foods, was also rejected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (Supp) (PC); and State of Orissa v. Ramchandra Chaudhary (supra) he held that the dairy farming cannot be classified as an agricultural activity as well. The dairy co-operatives to whom the assessee had advanced loans could not be covered even as an industrial unit for the purpose of IT Act, though it might be claimed that they were covered as an industrial unit under some other statute like Industrial Development Regulation Act which basically pertained to the food processing industries. He also referred to the Supreme Court decision in the case of CIT v. Venkateswara Hatcheries (P) Ltd. [1999] 153 CTR (SC) 105: [1999] 237 ITR 174 (SC) and held that the definition of 'industry' assigned to "Dairying" under the food processing industries within the IDR Act cannot be imported for the purpose of claiming deduction available for industrial development under the provisions of s. 36(1)(viii) of the IT Act. In the Supreme Court decision in the case of Dy. CST v. Pio Food Packers 46 STC 63 (SC) also, he observed that it was only when the change or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards status of public financial institution as the assessee applied on 10th July, 2002, i.e., within the year under consideration and though the notification granting the status of public financial institution was granted to it on 23rd Feb., 2004 it would relate back to the date of application in view of the decision of Marshall Sons & Co. v. ITO (supra). The time taken by the Department of Company Law Affairs was beyond its control. In any case it is only a procedural delay and ministerial work and therefore, the date of application should be taken as the effective date for granting status of public financial institution. On this issue we do not agree with the CIT(A). We however find that the other conditions of s. 36(l)(viii) are not complied with by the assessee. The milk produced by the assessee is not amounting to manufacture and therefore the assessee was not engaged in providing long-term finance for industrial and agricultural development or development of industrial facility and again it had no capital which is necessary to compute the aggregate of the amount to be carried to special reserve account as twice the amount of the paid-up share capital and of the general reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious co-operative unions and federations for implementing dairy development programme titled as "Perspective 2010 Plan" under the extended operation flood programme. The unions were required to submit regular audited fund utilization reports of the disbursed amounts. It is noticed that the aforesaid disbursements of the amounts by the appellant was done in the following categories: Category Particulars Funding pattern A Infrastructure facilities for procurement, processing & marketing. Loans/Grants B Productivity enhancement Loans/Grants C Quality and plant management Loans/Grants D Marketing development Loans/Grants E Institutional development Loans/Grants F. Notional Information Network Loans/Grants G Manpower Dev. & training. Grant The appellant has claimed that though the amounts spent were shown as grants but in fact the same were expenditures incurred on the activities defined under the NDBB Act, hence, the same qualifies for deduction under s. 36(1)(xii) of the Act. The grants were also extended in some cases for purchase of equipments for dairy development activities. The conditions laid down in the grant agreements entered, with the cooperative uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act requires the balancing of profits and expenditure of an enterprise so that entries made on one side as income receipts are properly balanced by the expenses against them on the other side. Since, grants do not form part of the income receipts of the appellant, therefore, disbursement against them cannot be allowed as expenditure. It is on record that the grants received by the appellant from the Government or agencies are invariably credited directly to the respective project accounts or to the concerned funds. Thus, such grants received are not taken to the income and expenditure accounts of the NDDB. The appellant is a nodal agency through which such grants are disbursed to the ultimate beneficiaries. Since, as stated above, the grants are not routed through the P&L a/c of the appellant, therefore, any disbursement out of such grants logically cannot be allowed as an expenditure. Even otherwise, the 'expenditure' means what is paid out and is something that has gone irretrievably. This could be either actually paid under the cash system or accounted or as such under the mercantile basis toward a liability actually existing at that time but putting aside of money which m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(xii) of the Act while computing its income for the assessment year under consideration. The learned counsel then referred to Explanatory Notes on the provisions of the Finance Act, 2003, relevant extract of which reads as under: "31.1 Entities that are created under an Act of Parliament have the basic object and function of carrying on developmental activities in the areas as specified in the said Acts. By the Finance Act, 2001 and Finance Act, 2002, tax exemption of certain bodies set up through an Act of Parliament was withdrawn. Subsequent to the removal of the tax shield, a doubt has arisen that some of the activities having no profit motive being carried on by such entities cannot be said to be business and, therefore, expenditure incurred on such developmental activities may not be allowed as a deduction while computing the income under the head 'Profits and gains of business or profession'. 31.2 The Act has inserted a new cl. (xii) in sub-s. (1) of s. 36 so as to provide that any expenditure (not being capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grant into a loan was also to ensure compliance and there has been no occasion so far to invoke in any of the cases and in fact no "grant" given has been converted into "loan" on account of violation of terms by any beneficiary. Details of grants disbursed for last ten years were given to AO. 54. It is also submitted that AO is wrong in holding it to be a loan. There is a clear distinction between the loan and such grant. Even in the IT Act, certain benefits are given putting certain conditions or restrictions, like ss. 32A, 54 and 54EC, wherein conditions are imposed about utilization of reserves or not selling of the property. These conditions are imposed with an intention that when certain tax benefits are given, then it should serve the real objects. That, however, does not mean that the benefit/deduction would be allowed only after satisfaction of the conditions after the restrictive period is over. 55. Without prejudice to the above arguments, it is submitted that, in the event of disallowance of the claim under s. 36(l)(xii), such expense shall be allowed as a deduction under s. 37/28 of the Act. 56. The appellant relied on certain relevant case laws to support its claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursements of grants are subject to conversion into loans on the happening or non- happening of contingency which is not entirely certain. Further, the amounts so disbursed do not go out of the coffers of the appellant irretrievably and absolutely. An expenditure may cover a liability which has accrued and to be discharged at a future date but not a contingent liability to be discharged on a future date as observed in Madras Industrial Investment Co. Ltd. (supra). 59. The assessee is nodal agency through which such grants are disbursed to the co-operative unions, the ultimate beneficiaries. As observed by the CIT(A) it is on record that the grants received by the assessee from the Government or agencies are invariably credited directly to the respective project accounts or the concerned funds and are thus not taken to the income and expenditure accounts of the NDDB. As stated above, the grants are not routed through the P&L a/c of the assessee, therefore, any disbursement out of such grants on that very logic cannot be allowed as expenditure. 60. The grants by the assessee were in deference of achieving certain specified goals and in some cases also for purchase of equipments for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be contributed by the NDDB. However, consequent to the amendment of the Gratuity Act revising the monetary ceiling limit from Rs. 1 lakh to Rs. 3.5 lakhs the assessee amended the deed and was required to seek approval of the deed of variation. It was submitted for approval only on 23rd Sept., 2003 i.e. much after the close of the financial year 2002-03. Since the gratuity trust was not approved during the financial year as per the deed of variation, the AO concluded that contributions made to the gratuity fund amounting to Rs. 5,61,56,408 were not made to an approved fund and accordingly, by invoking provisions of s. 40A(7), he disallowed the claim. 64. The CIT(A) sustained the order of the AO by observing as under : "I have considered the submissions filed by the appellant and also the findings/comments of the AO and observe that the gratuity trust of the appellant was covered under a group gratuity life assurance policy taken from the LIC. A note given in Annex.-VI of the tax audit report dealing with sums referred to under s. 43B of the Act stated that the said scheme of the trust under the policy was operative till 1988 and it remained inoperative from 1988 to 2002. It was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March, 2003. It was given retrospective effect from 24th Sept., 1997, the variation was from gratuity from lower of the 15 months' salary or Rs. 50,000 to lower of the 12 months' salary or Rs. 3,50,000. It was intimated to the AO on 23rd Sept., 2003. Schedule IV Part C r/w s. 4(1) and (2) does not cast any obligation for fresh approval of the revised deed. It is automatically approved. In any case it was approved by the CIT on 24th Oct., 1972 w.e.f. 1st Nov., 1971. The assessee further submitted that in terms of s. 43B(b) of the Act, any contribution to gratuity fund is allowable on actual payment basis, and pending approval to deed of variation do not make the fund unrecognized. 66. We have heard the parties and considered the rival submissions. The gratuity trust of the appellant was covered under a group gratuity life assurance policy taken from the LIC. It was approved by the CIT on 24th Oct., 1972 w.e.f. 1st Nov., 1971. However as per note given in Annex. VI of the tax audit report dealing with sums referred to under s. 43B of the Act it is stated that the said scheme of the trust under the policy was operative till 1988 and it remained inoperative from 1988 to 2002. It was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, 1994-95 assessment for BVP Unit, Bhavnagar 19,80,212 Sales-tax demand for the year 1994-95 on account of purchase being considered from unregistered dealer and taxed accordingly. It may be noted that the demand order is passed on 11th Sept., 2002 and the amount is paid on 22nd Dec, 2002. Copy of order and tax paid challan are attached. IDMC godown rent paid for the year 2001-02 79,200 The bill (debit note) No. 20092 dt. 31st March, 2002 was received in NDDB for payment on 22nd July, 2002 and payment for the same was released vide voucher No. 2427 dt. 21st Aug., 2002. Copy of voucher and debit note is attached. Refund of interest Pune Milk Union 51,781 The amount of Rs. 51,718 has been refunded to Pune Milk Union towards excess interest charged during the year 2001-02. The copy of voucher and correspondence attached. RMT stabling charges 1998-2002 (MTR Guage) reim. to NCDFI 5,40,800 The stabling charges have been paid as per demand letter dt. 21st Nov., 2002 from Western Railways received through National Co-operative Dairy Federation of India (NCDFI) vide their letter dt. 29th Nov., 2002 for Rs. 6,62,800 for the period 19th June, 1998 to 30th Nov., 2002 out of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the immediate preceding year, therefore, same cannot be allowed in the current year. The appellant has claimed refund of interest to Pune Milk Union amounting to Rs. 51,781 which pertains to the interest charged during the year 2001-02. No clear evidence as to how the said liability for refund towards excess interest charged during the prior period 2001-02 got crystallized during the current year has been furnished. There is also no evidence of making the payment in this respect to the Pune Milk Union. In the absence of satisfactory explanation and documentary evidence, the said claim is rejected. The next two short provisions pertained to the stabling charges payable to Indian Railways amounting to Rs. 5,40,800 and Rs. 2,95,800 for the years 1998-2002. As per documentary evidence furnished by the appellant, it is noted that the stabling charges are payable by the appellant for milk tankers/barrels belonging to the appellant and lying since 1998 onwards at various railway junctions. The stabling charges are quoted @ Rs. 40 per wagon per day. Since the charges are payable on daily basis, therefore the Railways must have been informing the appellant at least every month of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing mercantile system of accounting and therefore what arise as a liability in the impugned year alone can be allowed. The short provisions pertained to the godown rent payable to IDMC for the year 2001-02 amounting to Rs. 79,200. In view of such rent agreement having been signed between the assessee and the owner, the liability towards rent crystallized during the year relevant to the asst. yr. 2002-03 itself. Therefore the liability which got crystallized in the immediate preceding year cannot be allowed as a deduction in this year. The CIT(A) is right in holding that same cannot be allowed in the current year. On second item of Rs. 51,781 it is claimed that the assessee has refunded this amount to Pune Milk Union towards excess interest charged during the year 2001-02. No clear evidence as to how the said liability for refund towards excess interest charged during the prior period 2001-02 got crystallized during the current year has been furnished. The CIT(A) also observed that there is also no evidence of making the payment in this respect to the Pune Milk Union. In the absence of satisfactory explanation and documentary evidence, the said claim is rightly rejected. As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erving as under : "I have considered the submissions/rejoinder filed by the appellant and also the findings/comments of the AO and observe that expenses of Rs. 3,04,603 which pertain to ceiling board material, wall paneling and partitions in the second floor of the office building, have been incurred for creating assets of enduring nature. Therefore the expenses are clearly capital in nature and as such cannot be allowed as revenue expenditure. The second amount of Rs. 3,35,065 has been claimed for replacing existing damaged table tops, paintings of frames and polishing beside fixing wooden partition and pelmets and decorate boxes. As per the details filed it is clear that good part of the expenses pertains to repair and maintenance of the furniture, hence 50 per cent of such expenses are held to be revenue in nature and accordingly allowed to the appellant. The third item pertains to electrical rewinding, false ceiling expenses etc. aggregating Rs. 4,50,043. It is noted as per the details furnished that the expenses are incurred on PVC sheet flooring material, false ceiling charges, electrical wiring works, dismantling and installation of furniture. The nature of expenses incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the employees to any fund, trust, society, association or person etc. would not be an allowable expense except the payment made for expenses provided for under s. 36(1)(iv) and (v) i.e. towards contribution made to provident fund, gratuity fund and approved superannuation fund. 76. We have heard the parties and considered the rival submissions. In our opinion the CIT(A) is right in disallowing the claim of the assessee. Provisions of s. 40A(9) are very clear in providing that any payment or contribution made by an employer on behalf of the employees to any fund, trust, society, association or person etc. would not be an allowable expense except the payment made for expenses provided for under s. 36(1)(iv) and (v). Admittedly the payments are (sic-not) for expenses of the nature under s. 36(1 )(iv) and (v). It is also pointed out that disallowance of a similar claim of the assessee was upheld by the Tribunal in ITA No. 5051/Ahd/1994. We accordingly, uphold the said disallowance of expenses. The addition made by the Revenue authorities on this account is confirmed. 77. The next ground is against the disallowance of Rs. 61,627 on account of amortization of leasehold land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly out of the addition of Rs. 23,490 the addition of Rs. 14,940 is deleted and the balance is confirmed." 79. We have heard the parties and considered the rival submissions. We find the order of the CIT(A) in accordance with the provisions of law as it stood at the relevant time. Reliance on the amendment in the second proviso to s. 43B cannot be of any help to the assessee and the matter now stands covered against the assessee by the decision of Madras High Court in CIT v. Synergy Financial Exchange Ltd. [2006] 205 CTR (Mad) 481: [2007] 288 ITR 366 (Mad) wherein the Court held that retrospectivity of amendment cannot be presumed; operation of amendment is prima facie prospective unless expressly or by necessary implications directed to be retrospective. Amendment to second proviso to s. 43B is held to be prospective in nature and would apply to asst. yr. 2004-05. We accordingly uphold the disallowance. 80. The next ground is against the disallowance of deduction under s. 80G in respect of donation of Rs. 51,26,305. The facts of the case are that the assessee claimed deduction of Rs. 38,25,000 under s. 80G being 50 per cent deduction on the donated amount of Rs. 76,50,000 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial year 2003-04 which has been adjusted against Rs. 51,26,305 lying in advance account as on 31st March, 2003 and the balance amount of Rs. 3,22,101 had been utilized subsequently and the NGO was to submit the utilization report for the same. It may be observed that major portion of the donation given has been already utilized. Alternatively it is claimed that without prejudice to the above, the assessee submits that the AO be given direction to allow the deduction under s. 80G in respect of the amount lying in the advance account as on 31st March, 2003 in the following assessment year in which such amount was utilized by the said NGO and adjusted by the assessee. 83. We have heard the parties and considered the rival submissions. It is true that the NGO, Kutchh Nav Nirman Abhiyan has been registered by the CIT, Jamnagar for the purpose of s. 80G(5) from 8th Oct., 2002 to 31st March, 2005, therefore any sum paid as donation to the said organization would qualify for deduction under s. 80G. The receipt from the said NGO shows the full amount of donation of Rs. 76,50,000. The assessee, however, itself shows Rs. 51,26,305 as advance on 31st March, 2003, therefore, the said amoun ..... 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