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TMI Blog2013 (6) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... king various additions and disallowances. The appeals filed by the assessee before Ld CIT(A) were partly allowed in all the three years. Still aggrieved, the assessee has filed appeals before us for all the three years. The revenue has filed appeal in respect of assessment year 2005-06 only. 3. We shall take up the appeal filed by the revenue. The solitary issue urged by the revenue is whether the Ld CIT(A) was justified in deleting the disallowance of claim of payment of "Service charges to the Kerala State Government" amounting to Rs.9,44,29,834/-. The assessee had paid this amount as per the executive orders of the Government of Kerala and claimed the same as expenditure. The AO, during the course of assessment proceedings sought clarification on the necessity of making this payment. Though the assessee explained that this payment is made to the Government of Kerala to compensate the support it obtained from the Government in carrying over its business activities, yet the AO took the view that the impugned payment is merely an application of income. Accordingly, he disallowed the said claim. In the appellate proceedings, the Ld CIT(A), by following his order for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the Government as it is bound to comply with the Government Orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of public sector company whether it is under the control of the State Government or Central Government. In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the Society and the State. Section 37(1) is the residuary provision provided under the Income Tax Act enabling assessee engaged in business to claim all expenditure laid out or expended wholly and exclusively for the purposes of the business. By making payment of service charge, the respondent company has discharged only the obligation under Government Orders. It cannot carry on business by violating Government Orders and remain as a defaulter to the Government. Therefore, on the face of it, payment of service charge to the Government is a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,92,812 4,41,441 51,371 3. Interest on FD 3,503 3,503 - 4. Loss on Chitty substitution 98,488 - 98,488 5. Amount payable on Terminated Chitty 1,44,178 1,44,178 - 6. Loss on foreman's investment on substitution of Chitty 2,87,904 - 2,87,904 7. Loss on foreman's investment in Chitty 15,29,954 - 15,29,954 8. Interest on FD with Treasury 65,37,059 - 65,37,059 9. Interest on new Chitty Loan 8,73,889 - 8,73,889 10. General Suspense Amount 2,08,774 2,08,774 - 11. Others 8,91,593 - 8,91,593 12. Interest on Bhadratha Deposits 2,19,119 - 2,19,119 Total 1,20,96,967 10,54,598 1,10,42,369 From the careful analysis of the order passed by Ld CIT(A), we notice that the first appellate authority has confirmed the disallowance wherever he found that the expenses were found booked during the year due to accounting errors committed in the earlier years. For example, the assessee had claimed a sum of Rs.8,09,694/- as salary relating to the prior years. The Ld CIT(A) noticed that a sum of Rs.2,56,702/- only got crystallized during the year under consideration and accordingly allowed the same. In respect of the balan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. The discount amount so distributed between the subscribers is called "Vethapalisa". The subscribers shall adjust their share of Vethapalisa against the instalments due from them, either against the current instalment or against the succeeding month's instalment, depending upon the terms of chit scheme. Since the Vethapalisa is payable to the subscribers, it is shown as a "current liability" in the books of the assessee. It was submitted that the undistributed vethapalisa got accumulated over the years and were continued to be shown as Current liability in the books of the assessee, even after the termination of a chit scheme. 8. The assessing officer took the view that the undistributed vethapalisa on terminated chitties partakes the character of income in the hands of the assessee. For this proposition, the AO placed reliance on the following case law:- (a) Popular Kuries Ltd (Cochin bench of ITAT) (b) CIT Vs. Sundaram Iyengar & Sons Ltd (SC) (c) CIT Vs. Karamchand Thapar (1996)(222 ITR 113)(SC) (d) Protos Engg. Co. P Ltd Vs. CIT (1995)(211 ITR 919)(Bom) Before the assessing officer, the assessee contended that the balance shown under the head "Vethapalisa A/c" represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer has actually assessed the annual accretion, the Ld CIT(A) confirmed the same. Aggrieved, the assessee has come up on appeal before us challenging the decision of Ld CIT(A). 10. Before us, the Ld Counsel appearing for the assessee reiterated the contentions that the Vethapalisa account represents a liability in the hands of the assessee, by placing reliance on the decision of Hon'ble Supreme Court in the case of Jacob Alexander. On the contrary, the Ld D.R strongly placed reliance on the decision rendered by Ld CIT(A). Prima facie, it cannot be denied that the Vethapalisa does not constitute income in the hands of the assessee herein. As stated earlier, the Vethapalisa determined at the end of each bid is required to be distributed to the eligible subscribers to the chit. The payment is usually made by way of adjustment against the monthly chit instalment payable by the subscribers, i.e., the subscribers usually make payment after adjusting the Vethapalisa amount. For example, if the monthly instalment is say Rs.5,000/- and the Vethapalisa amount distributed to him is Rs.1,000/-, he usually makes payment of Rs.4,000/- only to the assessee. The adjustment is permit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the whole or part of the amount due from Mr. X, then also the Vethapalisa amount relatable to Mr. X and which remains unadjusted would become the income of the assessee. Thus, it our view, the Vethapalisa amount of a subscriber can be treated as the income of the assessee only upon settlement of the account of the concerned subscriber. 13. In the instant case, the accounting treatment adopted by the assessee, the status of the settlement of accounts of the concerned subscriber, the terms and conditions regarding payment of Vethapalisa amount to the subscriber, particularly when there is a default in payment of instalment/instalments, any other terms and conditions relating to payment of Vethapalisa etc., were not brought on record. In our view, the taxability of Vethapalisa amount can be determined only upon examination of the various factors discussed supra. Hence, we are unable to agree with the view taken by Ld CIT(A) that the annual accretion to Vethapalisa account would automatically become income of the assessee. The view taken by Ld CIT(A), in our view, would be correct only if the transfer to the Vethapalisa account is related to the settled accounts. Since the facts sur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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