ORDER DR. O. N. TRIPATHI, A. M. :
The appellant is a State Public Sector Undertaking whose entire share capital is owned by the Government of Uttar Pradesh. It is registered under the Companies Act, 1956 and is, therefore, governed by the provisions of that Act. It is engaged in the business of financing medium and large scale industries in U. P. In addition to interest income on financing, the appellant has also earned income from lease rent on plant and machinery, lease management fees, interest on delayed lease rent and dividends on shares. Thus, the appellant is also engaged in the business of leasing in addition to the business of financing.
2. The first ground taken in this appeal is as under :
"1. That the learned CIT(A) did not give any decision or finding on the following grounds of appeal before him, namely :
1. That there was no justification for declaring the return filed on 9th July, 1992 as non est.
2. That the facts and particulars furnished in and along with the return should have been taken into account while making the assessment under s. 143(3).
16. That no credit of interest on the amount of refund for the asst. yr. 1989-90 has been taken into account while adjusting it against the demand for the asst. yr. 1990-91."
It was contended by the learned counsel for the appellant that the above grounds, though taken before the CIT(A) were not dealt with and disposed of by him. It was pointed out that the appellant was not serious in pressing the first two grounds while with reference to third ground relating to adjustment of refund, if any, for the asst. yr. 1989-90 against the demand of the year under appeal, the matter may be restored to the file of Assessing Officer (AO). We think it is a reasonable request. We, therefore, treat the first two grounds as not pressed. We further direct the AO to look into the grievance of the appellant contained in ground No. 16 before the first appellate authority and deal with it according to law and facts on record.
3. Grounds No. 2 and 3 taken in the appeal relate to disallowance of a part of the expenditure claimed in earning the interest income. The facts in this connection are that the appellant had originally been following mercantile system of accounting which continued till 31st March, 1988, i.e., upto the asst. yr. 1988-89. Sec. 209 of the Companies Act, 1956 deals with the maintenance of the books of account by a company. Earlier a company was free to adopt any method of accounting. However, a change was brought about by the Companies (Amendment) Act, 1988 by adding cl. (b) to s. 209(3) of the above Act. After the amendment, the said clause reads as under :
"Sec. 209(3). For the purposes of sub-ss. (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein :
(b) if such books are not kept on accrual basis and according to the double entry system of accounting."
The effect of the above amendment was that it became obligatory on all the companies to maintain their accounts on mercantile system only and it was no more open to them to follow cash system of accounting. However, the Department of Company Affairs, Ministry of Industry issued the following Notification on 16th May, 1989 :
MINISTRY OF INDUSTRY (Department of Company Affairs) New Delhi-1 the 16th May, 1989.
NOTIFICATION G. S. N. 1440 (E). - In exercise of the powers conferred by sub-s. (1) of s. 620 of the Companies Act, 1956 (1 of 1956), the Central Government hereby directs that the provisions of cl. (b) of sub-s. (3) of s. 209 of the said Act shall not apply to a Government company, engaged in the business of financing industrial projects and approved by the Central Government under s. 36(1)(viii) of the IT Act, 1961 (43 of 1961) to the extent it relates to income from interest on loans and advances, provided that such accrued income which is not accounted for in the books of accounts, is disclosed by way of note in the annual accounts. A copy of this notification has been laid in draft before both the Houses of Parliament as required by sub-s. (2) of s. 620 of the said Act.
Sd : V. P. Gupta Joint Secretary to the Govt. of India"
Thus the above notification made an amendment in s. 209(3) of the Companies Act in as much as cl. (b) thereof was not made applicable to the income from interest on loans and advances earned by a Government company engaged in the business of financing industrial projects, if it further fulfilled certain other conditions. There is no dispute that the above notification applied to the appellant also. The appellant in conformity with the above mandatory notification brought out an amendment in its method of accounting. As submitted by the learned counsel for the appellant, the latter at first casted it accounts according to mercantile system of accounting as per s. 209(3)(b) of the Companies Act and then, following the above notification, it substituted the figure of actual receipt of interest on loans and advances for the accrued amount of interest. The actual receipts were less by Rs. 12.46 crores as compared to accrued amount of interest. The extra amount of Rs. 12.46 crores was then disclosed by way of a note in the annual accounts of the appellant. (See Schedule I at page 68 of the printed accounts). It was, thus, contended on behalf of the appellant, that its accounts came to be maintained in accordance with s. 209(3)(b) of the Companies Act, 1956 as amended by the aforesaid notification. It was also stated before us on behalf of the appellant that the above system of accounting was adopted for and from the asst. yr. 1989-90 and is continuing till date.
4. The learned Assessing Officer (AO) did not accept the profit as shown by the appellant in its books of accounts. He asked the appellants representative to explain why interest receipts had been shown on cash basis but related expenses on accrual basis. The appellant submitted that it had switched over from cash system of accounting to mixed or hybrid system of accounting which was a permissible system of accounting. The learned AO agreed with the contention that hybrid system of accounting is also permissible. But he did not agree with the contention that the appellant had, in fact, followed hybrid system. According to him, "Accounting for income include accounting for expenses also because income cannot be determined without taking into account the expenses incurred". He was further of the view that the assessee had to choose only one system of accounting in respect of income and related expenses both. The learned AO was of the view that either he could increase the taxable income by Rs. 12.46 crores on accrual basis or if the receipts side as shown by the appellant was accepted, then an adjustment was required to be made to the expenses side by disallowing the related expenses debited to the P&L account but shown as outstanding in the balance sheet. As the appellant had been following cash system of accounting since 1st April, 1980 and as it had been permitted by the Central Government to account for the interest income on receipt basis, he thought it better to account for the expenses also on cash basis. He thus disallowed a sum of Rs. 8,31,71,272 debited to the P&L account but not paid by 31st March, 1990, i.e., till the end of the previous year.
5. The assessee appealed to CIT(A). The CIT(A) vide his order dt. 29th Oct., 1993 confirmed the finding of the learned AO that a system of accounting whereby receipt is shown on cash basis and expenses on mercantile basis for the same source of income had not been regarded as a recognised method of accounting. He held that the AO was quite justified in not accepting the method of appellants accounting of interest on cash and corresponding expenses on mercantile system.
For this purpose, he relied on the following decisions :
1. Dana Corpn. vs. ITO (1989) 28 ITD 185 (Bom);
2. Rajasthan Financial Corpn. vs. IAC (1987) 28 TTJ (Jp) 48;
3. Prajatantra Prachar Samiti vs. ITO (1991) 39 TTJ (Cut) 280;
4. Padmanabha Chettiar & Sons vs. CIT (1990) 182 ITR 1 (Mad).
The learned CIT(A), however, held that it would be fair and reasonable to hold that the expenses attributable to the unrecorded income of Rs. 12.46 crores bear the same proportion to the outstanding expenses which the receipt on mercantile basis bears to the receipt on cash basis. He, accordingly, directed the AO to apportion the outstanding expenses of Rs. 8,31,71,272 in the aforesaid proportion and disallow proportionate expenses only. It was brought to our notice that such disallowance finally came to Rs. 2,30,88,862 only.
6. The assessee is now in appeal before us against the disallowance of a part of the expenditure which, as stated above, finally came to Rs. 2,30,88,862. The learned counsel for the appellant, Shri Prakash Narain, submitted before us that under s. 145(1) of the IT Act, income chargeable under the head "profit and gains of business" was compulsorily to be computed in accordance with the method of accounting which was regularly employed by the assessee. He clarified that the method of accounting obviously meant one which was a recognised one. According to him, there was no dispute that the method of showing interest income on cash basis and the expenses on accrual basis had been regularly followed by the appellant from the asst. yr. 1989-90 till date as was evidenced from the balance sheets of all these years. He stated that the only controversy centred on the point whether the method adopted by the appellant was a recognised method.
7. The learned counsel for the appellant further submitted that the appellant had followed a method as contained in s. 209(3)(b) of the Companies Act as amended by the Government Notification of 16th May, 1989 and, therefore, it had to be held as a method recognised by law or a recognised method. In this connection, he referred to a decision of Honble Supreme Court in Collector of Central Excise vs. Parle Exports (P) Ltd. (1990) 183 ITR 624 (SC) wherein it is held that when a notification is issued in accordance with the power conferred by statute, it has statutory force and validity as if it were contained in the Act itself. The learned counsel for the appellant, having followed a method of accounting as recognised by s. 209(3)(b) of the Companies Act as amended by the notification, must also be deemed to have followed a recognised method of accounting and since it had been regularly followed, the income of the appellant from interest on loans and advances should also be computed according to the above method. The learned counsel for the appellant next submitted that the words income from interest appearing in the said notification referred to gross income before deducting any expenses relating thereto and not to net income as was wrongly understood by the lower authorities. In support of his contention, he relied on the following passage appearing at page 476 of Law of Income-tax by S. Iyengar, Vol. I (9th Ed.) :
"The reference to profits and gains as one of the classes of income means that profits and gains are income but the concept of income is not restricted to profits and gains only. Income need not necessarily be associated with the idea of profits and gains. It connotes, in the broad sense, incoming with regard to outgoings. It is a return coming in and accruing to the assessee independently and not as the net proceeds of a business carried on by him though, ultimately, it will be on the net income that tax will be payable." (The above observations are based on several judgments of the Courts which also appear on page 476 of the book).
The learned counsel next submitted that ss. 14, 15, 16, 28 and 56 of the IT Act, 1961 all referred to gross income and that the deductions from such gross income were provided through other sections to arrive at the taxable income. His additional submission was that the appellant had different types of incomes and it had incurred a large number of expenses and it was impossible to co-relate any particular expenditure to any particular income so as to arrive at net income from any particular source. According to him, this also went to prove that the notification in question referred only to gross income.
8. The learned counsel for the appellant made the following further submissions :
"1. The appellant had followed the method of accounting as provided in s. 209(3)(b) of the Companies Act and as modified by the said notification and, therefore, it was a recognised method of accounting. Its accounts were examined by Comptroller General of India, Accountant General, Industrial Development Bank of India and several other statutory authorities including its own auditors and they had all approved that the accounts were maintained in accordance with the mandatory notification issued by the Central Government.
2. There is nothing in IT Act to suggest that if income from interest is shown on cash basis, the expenses relating thereto must also be shown on cash basis.
3. Showing of interest amounting to Rs. 12.46 crores in a separate note to the balance sheet and approved by various aforesaid authorities also suggested that there was proper compliance of the mandatory notification and that the notification only referred to gross income and not to net income as wrongly understood by the lower authorities.
4. The choice of the method of accounting was with the assessee which was the basis of computation of income. The Department had not pointed out that the appellants income could not be properly deduced from the method employed by the appellant so as to apply first proviso to s. 145(1) of the Act."
The counsel also referred to a plethora of cases to support his above contentions. The counsel also submitted that the disallowance of Rs. 8,31,71,272 consisted of Rs. 7,89,98,869 being interest payable by the appellant on its own borrowings from Government and financial institutions which though accrued, remained unpaid at the end of the year. The balance amount related to other expenses which though accrued during the year also remained unpaid at the end of the year. He argued that the allowance of interest and other expenses was independent of the taxability of income from interest and these were separately governed by ss. 36(1)(iii) and 37(1) of the Act. According to him, such expenses could not be disallowed either in part or in full merely because interest income had not been fully accounted for taxation purposes. If the interest is paid on capital borrowed for the purposes of the business, it has to be allowed as deduction from the total income to arrive at taxable income. Similarly, if an expenditure has been laid out or expended for the purposes of the business, it too has to be allowed under s. 37(1). Reliance in this regard was placed on the decisions reported in Addl. CIT vs. Challapalli Sugars Ltd. (1979) 116 ITR 255 (AP) as upheld by Honble Supreme Court in CIT vs. KCP Ltd. (1991) 192 ITR 648 (SC), CIT vs. H. P. Lohia (1993) 203 ITR 928 (Cal) and Mysore Spg. & Mfg. Co. Ltd. vs. CIT (1966) 61 ITR 572 (Bom) as upheld by the Honble Supreme Court in CIT vs. Mysore Spg. & Mfg. Co. Ltd. (1970) 78 ITR 4 (SC). His submission, therefore, was that the lower authorities were not legally correct in disallowing a part of interest and other expenses.
9. The learned Departmental Representative, on the other hand, submitted that s. 29 of IT Act clearly laid down that income referred to in s. 28 was to be computed in accordance with the provisions contained in ss. 30 to 43C, which meant the net income. He strongly submitted that the term income referred to in the notification meant net income and not gross income. According to him, income did not mean gross receipts but net income after deduction of expenses incurred in earning such income or relating thereto. In this connection, he referred to the decision of Honble Supreme Court reported in 183 ITR 1 (SC). He also referred to the decision of the Supreme Court in CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC) holding that it is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. The officer is not bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. According to the learned Departmental Representative, unless expenses were taken into account mere gross income gave a lop sided picture. Referring to the decisions of Honble Supreme Court in Escorts Ltd. & Ors. vs. Union of India (1993) 199 ITR 43 (SC), he pointed out that double deduction of the expenses was not permissible, once in arriving at net income and again under other section of the Act. He finally referred to the decision of Madras High Court in the case of G. Padmanabha Chettiar & Sons vs. CIT (supra) and submitted that the same basis had to be adopted for receipts and payment of interest.
10. The learned counsel for the appellant in reply again emphasised his earlier submission and the cases already referred to by him and submitted that in the context of the facts of the present case, the expression income referred only to gross income before deduction of any expenses.
11. We have carefully considered the facts of the case and have gone through the paper book submitted by the appellant. We have also given very careful consideration to the submissions made on behalf of both the parties. A company including the appellant admittedly was required to maintain its books of account in accordance with s. 209(3) of the Companies Act, 1956 as amended from time to time. Earlier to the addition of cl. (b) to the above section, a company was free to maintain its accounts on any recognised system of accounting. However, after the inclusion of the above clause by the Companies (Amendment) Act, 1988, maintenance of the accounts on mercantile system became obligatory. The appellant had been maintaining its accounts on cash basis w.e.f. 1st April, 1980. With the introduction of cl. (b) to s. 209(3) in the above Act, it was also required to switch over to mercantile system. In the meantime, to give some concession in the form of maintenance of accounts, the Central Government came out with a notification dt. 16th May, 1989 compulsorily directing that a Government company engaged in the business of financing industrial projects and approved by the Central Government under s. 36(1)(viii) of the IT Act, 1961, shall not be bound by cl. (b) of s. 209(3) of the Companies Act, in so far as it relates to income from interest on loans and advances provided such accrued income, which not accounted for in the books of account, is disclosed by way of a note in the annual accounts. In other words, such a company was allowed to show its income from interest on loans and advances on cash system provided the extra income on accrual basis was disclosed in a note to the accounts. There is no dispute before us that the appellant is a Government company which is engaged in the business of financing industrial projects and is also approved by the Central Government under s. 36(1)(viii) of the IT Act. Thus, the above notification fully applies to the case of the appellant. The accrued income which has not been accounted for in the books of account and amounts to Rs. 12.46 crores has also been shown by way of a note in the annual accounts. Further, it has also maintained its books according to mercantile system in regard to all other incomes and expenses except income from interest on loans and advances earned by it which alone has been shown on cash basis. The only question for our consideration is whether this is a correct approach or the appellant should have deducted the expenses and interest paid by it to its own creditors and then only net receipts on cash basis should have been shown.
12. In our opinion, the words income from interest appearing in the notification must necessarily refer to gross income otherwise the condition contained in the notification that the extra income on accrual basis should be disclosed by way of a note to the accounts loses its significance. This view is also supported by the authorities quoted by the learned author, S. Iyengar at page 476 of his Commentary on Income-tax Law. We also agree with the submission of the counsel for the appellant that there is no provision in the IT Act that if the income from interest is shown on cash basis, the payment of interest and other expenses must also be accounted on the same basis. While the income of the assessee is taxable under s. 28 of the Act, in so far as it relates to business or profession, the expenses relating thereto are allowable under ss. 30 to 43C as stated in s. 29 of the Act. Sec. 28 by itself does not bring to tax only net income (except in certain circumstances for which there is no separate provision in the Act for allowance). Since there are ss. 36(1)(iii) and 37(1) for deduction of interest and other expenses, s. 28 refers to only to gross interest. Further, criteria for allowance of payment of interest and other expenses have also been laid down in the above sections on the fulfilment of which alone they will be allowed irrespective of the fact whether they result in the earning of any income or not. In our considered opinion, therefore, the appellant has correctly shown the gross interest on loans and advances on cash basis and has shown the extra amount on accrual basis by way of a note to the annual accounts. Its accounts have also been checked by Comptroller & Auditor General of India and a host of other Govt. organisations, and none of them have pointed out that they have not been maintained in accordance with s. 209(3)(b) as demanded by the said notification. As held by the Honble Supreme Court in the case of Collector of Central Excise vs. Parle Exports (P) Ltd. (supra), a notification issued by the Government has statutory force and validity as if it were contained in the Act itself. Thus, the notification was binding upon the appellant and, therefore, it was compulsorily required to show only gross income from interest on cash basis in its accounts without disturbing any other income or any expenses which were required to be shown on mercantile basis in accordance with s. 209(3)(b) of the Companies Act. The various authorities cited before us on behalf of the appellant fully support the above finding arrived at by us. Further once the accounts are maintained in accordance with s. 209(3)(b) of the Companies Act as amended by the said notification, they have to be treated as having been maintained according to a recognised method of accounting within the provisions of s. 145(1) of IT Act, 1961. It has been held that the choice of selecting a method of accounting is with the appellant although that choice is subject to the provisions of s. 209(3)(b) r/w the said notification.
13. Since the appellant has been following a recognised method of accounting as held by us above and that too regularly since the amendment of s. 209(3) and the issue of the notification, its income must be computed according to the said method. If this is done, then the income declared by it from interest on loans and advances must be accepted without making any disallowance out of the interest paid by it to its own creditors or any expenditure relating thereto. The cases relied on by the learned CIT(A) are all distinguishable on their own facts and none of them supports the stand of the Department. We, therefore, direct that deletion of the entire disallowance of Rs. 8,31,71,272 or Rs. 2,30,88,862 as finally held by the learned CIT(A).
14. Ground No. 4 relates to the disallowance of bad debt of Rs. 2,23,891. It consists of the principal of Rs. 2,08,500 and interest of Rs. 15,391. The appellant had advanced a loan to M/s Sulfer India Ltd. for setting up a sulphuric acid plant. The debtor could not run it successfully and a part of the debt could not be recovered. The appellants board of directors agreed to write it off as a bad debt in its accounts in their meeting held on 17th July, 1986. The appellant, however, waited for some more time for its recovery and finally wrote it off in the assessment year under appeal as per the approval of the appellants board of directors in their meeting held on 26th March, 1990. The learned AO held that the amount in question had become bad in the asst. yr. 1987-88 as the proposal for its write off was approved by the board in the year and accordingly rejected the claim of the appellant for its deduction from its total income. The CIT(A) confirmed the disallowance rejecting the appellants plea that there was some chance of recovery even after 1987-88 and that it was written off when no recovery at all could be affected.
15. The appellant is now in appeal before us. Dr. R. M. Lall appearing for the appellant contended before us that the amount of loan had been advanced to the party in the ordinary course of the appellants business of money lending and was written off in the books of the appellant in the year under appeal and, therefore, it should be allowed as deduction in the year under appeal itself. He further submitted that earlier under s. 36(1)(vii), it was necessary for an assessee to establish that the debt had become bad in the previous year in which it was claimed as deduction. The above section was amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989 and now the only condition was that it should have become bad and should have been written off in the year in which the claim for its deduction was made. It was not necessary that it should become bad also in the year of its write off. The learned Departmental Representative supported the orders of lower authorities.
16. We have heard the parties. We agree with the submission of the counsel for the appellant that for claiming deduction of bad debt after 1st April, 1989 what is necessary is it should have been written off in the books in the year of claim. The year in which it actually became bad was no more relevant. In view of this amendment to s. 36(1)(vii), which obviously seems to have been overlooked by the lower authorities, the claim of the appellant deserves to be allowed in the year under appeal in which it has been written off although it became bad in an earlier year. The addition of Rs. 2,23,891 is accordingly deleted.
17. The next ground being ground No. 5 relates to disallowance of Rs. 17,099 as expenditure on gifts. The learned AO found that the details of presentation articles in excess of Rs. 50 on each article had been filed in Annexure B to the tax audit report according to which disallowance under r. 6B of the IT Rules worked out to Rs. 17,099. He, accordingly, disallowed the above amount and added it to total income of the appellant.
18. The assessee appealed to CIT(A). It was contended before him on behalf of the appellant that since the articles of presentation and items of gifts made by the appellant were not intended for the purpose of advertisement, r. 6B had no application to such an expenditure and no disallowance was called for under that rule. Reliance in this regard was placed on the two decisions of Gujarat High Court reported in CIT vs. Dascroi Taluka Co-operative Purchase & Sales Union (1980) 126 ITR 413 (Guj) and CIT vs. S. L. M. Maneklal Industries Ltd. (1977) 107 ITR 133 (Guj). The learned CIT(A) while accepting the claim of the appellant that the expenditure in question did not constitute advertisement expenses held that it could still not be allowed or regarded as expenditure incurred wholly and exclusively for the purpose of the business. He, thus, confirmed the above disallowance.
19. Against the above finding of learned CIT(A), the appellant is in appeal before us. We have heard the parties. In our opinion, after having held that the gifts and presentations did not constitute expenditure on advertisement and disallowance could not be made under r. 6B, CIT(A) was not legally correct in holding that the expenditure in question was not expended wholly and exclusively for the purpose of the appellants business. It was explained before us that the gifts and presents were given to officers of various departments and institutions with whom the appellant had business dealings involving commercial expediency. We find that the case of the appellant is directly covered in its favour by the decision of the Honble Gujarat High Court in CIT vs. S. L. M. Maneklal Industries Ltd. (supra). It was held in this case that the expenditure incurred on presentations of article could never be described as capital expenditure or personal expenditure of the assessee and that it must be held to have been expended wholly and exclusively for the purposes of the business and was allowable under s. 37 of the Act. Following this decision, we also allow the entire amount of Rs. 17,099 and direct its deletion from the assessment.
20. Ground Nos. 6 and 7 relate to charge of interest under ss. 234B and 234C of IT Act and adjustment of refund in respect of the asst. yr. 1989-90 against the demand of the asst. yr. 1990-91, i.e., the year under appeal. The learned CIT(A) held that neither the charge of interest under the above sections nor the adjustment of refund against the demand were appealable. He, thus, rejected these grounds in limine, without giving any decision thereon.
21. The learned counsel for the appellant did not seriously press the above grounds. Their only contention was that the consequential relief be allowed to the appellant from the interest chargeable under ss. 234B and 234C in proportion to the reduction in the total income of the appellant as a result of this order. We agree with this request. We, accordingly, direct the learned AO to allow necessary relief to the appellant from the above interest consequent to the reduction in its total income as per this order.
22. With the above observations, the appeal is partly allowed.