Gujarat State Land Development Corporation Ltd., Gandhinagar V. The Dy.CIT, Gandhinagar Circle, Gandhinagar

ITA 2538/AHD/2014

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8259 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 14-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts; Revenue expenditure; Reassessment proceedings
• Section: 143(3); 43D; 250; 274; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Ms. Madhumita Roy, Judicial Member Gujarat State Land Development Corporation Limited Balram Bhavan, Sector 10A. Gandhinagar- 382010 PAN: AACCG2870P (Appellant) Vs Dy. Commissioner of Income-tax, Gandhinagar Circle, Gandhinagar (Respondent) Appellant by : Ms. Arti N. Shah, A.R. Respondent by : Shri Mohd Usman, CIT/DR Date of hearing : 10-01-2022 Date of pronouncement : 23-02-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:- These appeals relate to the same assessee , having been filed against separate orders passed by the Commissioner of Income Tax (Appeals), Gandhinagar(in short CIT(A) ,for assessment years2011-12 , 2008-09 & 2012-13, (in short referred to as CIT(A)), dated 01-07-2014, &30-07-2015 respectively, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”). ITA No. 2538 /Ahd/2014 For A.Y. 2011-12 & ITA Nos. 2630 & 2632/Ahd/2015 For A. Ys. 2008-09 & 2012-13 I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 2 2. It was common ground that the issues involved in all the appeals were identical, therefore they were heard together and are being disposed of by this common order for the sake of convenience. 3. At the outset, Ld. Counsel for the assessee pointed out that the appeal for assessment year 2008-09 in ITA No. 2630/Ahd/2015 arose against the orders passed in reassessment proceedings while that pertaining to assessment year 2011-12 and 2012-13 in ITA No. 2538/Ahd/2014 & 2632/Ahd/2015 arose against orders passed in regular assessment proceedings. She thereafter stated that the appeal of the assessee for assessment year 2011-12 in ITA No. 2538/Ahd/2014 was the lead case and therefore needed to be argued first. Accordingly the appeal of the assessee in ITA No. 2538/Ahd/2014 for A.Y. 2011-12 was first taken up for hearing. ITA No. 2538/Ahd/2014 for A.Y. 2011-12 4. Giving a brief background about the asessee, Ld. Counsel for the assessee stated that the assessee corporation was engaged in activities benefiting the farmers like deepening of farm ponds, Khet talavadi, Sim talavadi, water harvesting structure, vegetative measures and other agriculture activities and was primarily funded by the Central and State Government for carrying out these activities. She stated that a part of the amount spent on these activities was treated as loans advanced to farmers and recovered from them with interest in installments as per norms of the Government .It was stated that the corporation was engaged in such activities since 1978. Our attention was drawn to the letter filed to the Assessing Officer during assessment proceedings for the impugned year, dated 3 rd December 2013 , pointing out the afore-stated facts, placed at paper book page no. 47 as under: “Our Corporation is engaged in providing various activities to the farmers like deepening of farm ponds khet talavadi, Sim talavadi, water harvesting structure, vegetative measures and other agriculture- activities. The said activities are-met by us through fund I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 3 provided by State and Central Government, and as such, debit to the farmers' account is created on account of activities done for farmers, in other words, partial amount is raised recoverable from fanners and the same is shown under the head ‘Loan to Farmers', which is recoverable in instalment as per the norms of the Government, with interest. The Corporation is engaged in such activities since 1978 on account of huge activities carried out by the Corporation, for the benefit of farmers huge amount is recoverable from the farmers.” 5. Thereafter, Ld. Counsel for the assessee stated that in the backdrop of the aforesaid activities carried out by the assessee corporation, various additions/disallowances had been made during assessment proceedings which were upheld by the Ld. CIT(A) and against which the assessee has come up in appeal before us. 6. Taking up ground no. 1 raised before us, Ld. Counsel for the assessee contended that the same related to addition made to the income of the assessee on account of interest on farmer’s loan amounting to Rs. 6.14 crores. Ground No. 1 reads as under: “The Learned Commissioner of Income Tax (Appeals)-Gandhinagar, Ahmedabad has erred in law and on facts of the case by holding that the Assessing Officer has rightly added Rs.6,14,00,000/- being interest on farmers' loan not recognized in the books of accounts on account of change of accounting policy.” 7. Drawing our attention to the facts of the case, Ld. Counsel for the assessee took us to page no. 2 para no. 4 of the assessment order where the A.O. had dealt with the issue, pointing out therefrom that the A.O. had noticed that while finalizing the assessment for AY 2008-09, the audited accounts and annual report of the assesse for the said year mentioned change in the method of accounting with regard to interest on farmer’s loan from accrual to cash system. The auditors had also mentioned that due to this change, there was under-statement of interest income. The A.O. noticed that the change in accounting system was prevalent in the impugned year also and I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 4 accordingly show caused the assessee as to why the under-stated interest income be not subjected to tax. Our attention was drawn to para 4 of the assessment order as under: 4. While finalizing the assessment for AY 2008-09, it was noticed that, in the audited accounts and annual report for that year, there is a mention of change in accounting method with regard to interest on farmers' loan from accrual to cash basis.-The auditors had also mentioned that, due to this change, there is understatement of interest income. Since the changed method prevailed during the year as well, the assessee was asked to show cause as to why such understatement should not be brought to tax. It was also noticed that, such understatement (as reported in the audit report of AY 2008-09) was not highlighted in the audit report for the year under consideration. The assessee was therefore asked to quantify such understatement of interest income. 8. Due reply was field by the assessee raising various contentions to the effect that both the principal and the interest on the loan had become irrecoverable and therefore even as per accounting standard prescribed for revenue recognition by the Institute of Chartered Accountants of India (ICAI), AS-9, the interest income in such circumstances could not be said have accrued, that following the real income theory also no interest income was to be accounted for. The Ld. A.O. it was pointed out however rejected the contention of the assessee stating that the assessee was clearly following mixed system of accounting, being cash basis solely for interest and accrual basis for the rest ,which was barred by law. Accordingly, he held that interest income to the extent under-stated in the impugned year on account of this change in accounting was to be brought to tax. The assessee was specifically asked to quantify the same which the assessee submitted as amounting to Rs. 6.14 crores and the A.O. accordingly subjected the said interest income to tax, the relevant findings of the A.O. at para 4.2 and 4.3 are as under: 4.2 The reply of the assessee has been perused, but the same is not acceptable in view of the following reasons:- I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 5 a. Till AY 2007-08, interest on loan to farmers was shown as interest income. The statutory auditor (GA) in its auditor's report (point no. 4-c of the auditor's report dated 17th of November 2009; 30th annual accounts) had pointed out that the corporation has not provided interest on farmers loan during the FY 2007-08 relevant to AY 2008-09 resulting in underassessment of income and loans and advances. As per mercantile system of accounting, all incomes and expenses are to be accounted for on accrual basis. Therefore, assessee was required to show the said interest as income on accrual basis. However, no Interest income had been shown in respect of loans to farmers which resulted in underassessment of income. b. According to the auditor, there is a mention of change in accounting method with regard to interest on farmers' loan from accrual to cash basis. This change of accounting method was restricted to only working of interest. For all other concepts of accounting, the assessee's method is mercantile system of accounting. Therefore, in effect, the assessee is following hybrid system of accounting, involving both cash and mercantile system, to suit its requirements. Since following of mixed system of accounting is barred by law, the method adopted by the assessee to account interest on farmers' loan, from accrual basis to cash basis, is not acceptable. c. So far as assessee's reliance on section 43D is concerned, it is stated here that, this reply is misplaced as section 43U is applicable to a finance company. However, the assessee is not a finance company and it is not its business to grant loans. As per the audit report, the objective of the corporation is to develop the agricultural land, to increase agriculture production by reclaiming land and to undertake its allied activities on watershed basis as laid down in the memorandum of association. There is nothing on record which can prove that loans were irrecoverable. Section 43D pertains to banking/NBFC cases and is in respect to interest on bad/non performing assets which is not the case of the assesses. Therefore interest on loans given to farmers, to the extent understated by the assessee, is required to be added as income of the assessee. 4.3 Since the extent of understatement was not quantified in the audit report for the year under consideration, as done so in the audit report for FY 2007-08, the assessee was specifically asked to quantify the same. The assessee, vide its reply dated 7.2.2014 submitted that the understatement of interest on account of change in the method of I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 6 accounting of farmers' loan from accrual to cash system was Rs. 6,14,00,000/-. Therefore, in light of the above discussion, an addition of Rs 6,14,00,000/- is made to the assessee's total income. 9. Ld. Counsel for the assessee thereafter pointed out that despite reiterating their contentions before Ld. CIT(A) the same did not find favour with the Ld. CIT(A) who upheld the addition made by the A.O. holding at para 5.3 of his order are as under: 5.3 I have considered the facts of the case, submission of the appellant and the contention of the AO along with the case laws relied upon. The AO in his order has contended that the appellant has not maintained consistency by not offering the interest income in the year under consideration as the appellant had been offering till AY 2007- 08. Further, it is held by the AO that the appellant is not in the business of granting loans and also not proved that the loans are bad. The appellant has also not proved before the AO that the claim of interest income on loan and advances to the farmers are not recoverable by way of any evidences. All the decisions on which the appellant relied upon are related with banking/NBFC cases and the appellant is different entity from them and hence the claim was disallowed. Considering the facts placed before me by the appellant and the contention of the AO, I am of the firm opinion that the contention of the AO is correct to the fact that : > The appellant has not proved either before the AO or before me that the loan and advances to the farmers are bad or not recoverable by any evidence and circumstances which were termed by the appellant as NPA and the accrued interest on the same are claimed as deduction. > It is also to be noted that the appellant is not doing any banking business and also does not fall under NBFC cases for which the appellant has made the citations of case laws for its claim. > It is also a fact that the appellant was regularly offering the interest income to tax on such loans and advances upto immediate ceding year and .during the year under consideration and discontinued to offer such interest for taxation with the reason that the original amount which was advanced to farmers is even not recoverable and the I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 7 Directors of the company decided to not offer the interest on such advances on accrual basis is not justified by any reason available under the IT Act. In view of the above, the action of the AO is justified and the addition made of Rs. 6,14,00,000/- being the farmers’ loan interest is confirmed and the relevant ground of appeal is dismissed. 10. Before us, Ld. Counsel for the assessee reiterated the contentions made before the lower authorities. Briefly summarized the thrust of her argument was that the basis of making the addition of interest income ,being that the assessee was following mixed/hybrid system of accounting ,i.e cash basis for accounting the interest income and accrual basis for rest of the transactions, was incorrect and the fact was that it was following the accrual system only . She contended that considering the fact that the principal loan and the interest thereon was irrecoverable, even as per the accrual system of accounting, the interest income was not to be treated as income of the impugned year due to the impossibility of recoverability of the same. In this regard, she drew our attention to the submissions made before the Assessing Officer vide letter dated 28 th January, 2014 placed before us at paper book page no. 51 are as under: 2. Regarding waiver of interest from farmers, it is submitted that during the F.Y. 2008-09, the. corporation has changed the accounting policy for recognition of income on fanners loan which is reproduced hereunder: Schedule-XXII: . Significant Accounting Policies: 3(iii) Interest on Farmer's Loan Interest on fanner's loan is recognized only when it is reasonable certain that the ultimate collection mil be made. In earlier accounting year up to FY 06-07 relevant to AY 07-08, the accounting policy of recognition of interest income on farmer's loan was as under: . Schedule-XXII: Significant Accounting Policies: . . . I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 8 /. Interest on Loans to Farmers Interest. on loans to fanners is calculated on closing balance of control account of "farmer's loan" as at the end of the year, irrespective of transaction taken place during the year: It is submitted that the reason for making change in accounting policy is that there was poor recovery in respect of Fanner's. Loans. Even principle amount is not being recovered by-the corporation. And therefore, the Board of Directors thought that in view of poor recovery of farmer's loan and to represent correct financial state of affairs of the-corporation, it is necessary to change accounting policy in respect of recognition of interest income on Farmer's Loan, which is based on principle of recognition of income only when it is-reasonable certain and the ultimate collection will be made. This is also in accordance with principles laid down in Accounting Standard 9 - Revenue Recognition. Para 13 of the said standard is reproduced hereunder for your ready reference. 13. Revenue arising from . the use by others of enterprise resources yielding interest, royalties and dividends should only be recognized when no significant uncertainty as to measurability or collectability exists. In the case of the corporation, there is a significant uncertainty as to collectability of the principal as well as interest component of the Farmer's Loan. Under such circumstances the corporation has rightly not recognized the interest on Fanner's Loan. 2.1 It is submitted that under the scheme of the Income Tax Act also only real income can be taxed. In the present case, when the recovery of principle amount due from farmers is very poor, no interest on such farmer's loan can be taxed' on the ground that the method by the assessee is mercantile. Reliance is placed on following judgments: (i) Commissioner of Income-tax, Delhi-IV v. Eicher Ltd. (2010) 320 - ITR 410 (Delhi) (ii) Commissioner of Income-tax vs. Kailash Auto Finance Ltd. (2010) 320 ITR 394 (All) I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 9 (iii) Commissioner of Income-tax v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Delhi) (iv) Commissioner of Income-tax vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd. (2011)331 ITR 229(Mad) Commissioner of Income-tax v. Indbank Housing Ltd. (2009) 224 CTR 297 (Mad) (v) ANZ Grindlays Bank Ltd. v. Commissioner of Income-tax (2011) 250 ITR 125 (Cal) (vi) CIT vs. KICM Investments Ltd. (2009) 310 ITR (St) 4 (SC) Copies are separately enclosed in paper book. 2.2 Your attention is invited to the SC decision in case of CIT v. KICM Investments Ltd., wherein the Hon'ble Supreme Court dismissed Department's Special Leave Petition against the Judgment dated 21.06.2007 of the Kolkata HC - ITA 391/2007, whereby the High Court affirmed the order of the Tribunal holding that interest on non-performing assets, was not includible in the total income of the assessee on accrual basis, even though the assessee was following the mercantile system of accounting. 2.3 Attention is also invited to decision of Madras High Court in case of Commissioner of Income-tax vs. Indbank Housing Ltd. (2009) 224 CTR 297 (Mad), wherein it is held that where there was no dispute that assesse had filed an elaborate note on interest income on NPAs before Assessing Officer as to why same was not declared, reopening of assessment on ground that assessee had failed to admit correct income was not justified. 2.4 We would also like to point out that our accounts are also subject matter of C&AG Audit and they have not made any comments on this issue. 11. Referring to the above reply, she contended that as per the accounting standard for revenue recognition issued by the Institute of Chartered Accountants of India I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 10 (ICAI), AS-9, revenue should be recognized when there is no significant uncertainty as to its collectability. She pointed out that in the present case, it had been demonstrated both to the A.O. and the CIT(A) that collectability of interest as also the principal amount was highly uncertain since Financial Year 2004-05 onwards by way of chart which was placed before us at paper book page no. 78: SR. NO FINANCIAL YEAR OUTSTANDING LOAN (O/B) LOAN GIVEN DURING THE YEAR OUTSTANDING LOAN TOTAL (C/R) INTEREST ACCRUED & DUE O/B INTEREST CHARGED INCOME DURING THE YEAR INTEREST ACCRUED & DUE C/B RECOVERY DURING THE YEAR PER. OF RECOVE RY PRINCIP AL PER. OF RECOVERY INTEREST PPRINCIPAL INTEREST 1 1995-1996 63,313,050.57 9,754,294.82 72,947,938.25 16,615,422.00 5,822,432.00 22,437,854.00 106,014.26 13,392.88 0.17 0.23 2 1996-1997 72,947,938.25 17,633,682.62 90,044,953.85 22,437,854.00 7,200,532.00 29,638,386.00 533,603.05 3,063.97 0.73 0.04 3 1997-1998 90,044,953.85 13,463,479.68 103,226,230.38 29,638,386.00 8,268,174.00 37,906,560.00 280,059.88 2143.27 0.31 0.03 4 1998-1999 103,226,230.38 28,465,346.78 131,631,847.85 37,906,560.00 10,530,548.00 48,437,108.00 6,142.31 53,587.00 0.01 0.51 5 1999-2000 131,631,847.85 13,822,627.16 145,445,963.76 48,437,108.00 11,633,017.00 60,070,125.00- 5,850.98 2,660.27 0.004 0.02 6 2000-2001 145,445,964.00 28,037,828.32 173,307,576.56 60,070,125.00 13,864,605.00 73,934,730,00 176,215.76 0 0.12 0.00 7 2001-2002 173,307,576.56 26,302,324.17 199,598,511.13 73,934,730.00 15,521,476.00 89,456,206.00 11,389.60 0 0.01 0.00 8 2002-2003 199,598,511.13 15,604,237.20 215,122,014.27 89,456,206.00 16,454,155.00 105,910,361.00 80,734.06 0 0.04 0.00 9 2003-2004 215,122,014.27 29,419,326.45 244,295,488.72 105,910,361.00 18,607,931.00 124,518,292.00 245,852.00 0 0.11 0.00 10 2004-2005 244,295,488.72 52,594,122:39 296,889,611.11 124,518,292.00 22,227,078.00 146,745,370.00. 0 0 0.00 11 2005-2006 296,889,611.11 98,249,662.32 395,139,273.43 146,745,370,00 28,794,522.00 175,539,892.00 0 0 0.00 12 2006-2007 395,139,273.43 112,802,042.2 9 507,941,315.72 175,539,892.00 36,043,708.0.0 211,583,600.00 0 0 0.00 13 2007-2008 507,941,315.72 97,251,469.38 605,192,785.10 211,533,600.00 - 211,583,600.00 0 0 Than onwards no interest provision made 14 2008-2009 605,192,785.10 28,793,953.13 633,986,738.23 211,583,600.00 - 211,583,600.00 0 0 Rs. 20,55,16,233/- waived in the current year 15 2009-2010 633,986,738.23 192,882,353.9 3 826,869,092.16 211,583,600.00 - 211,583,600.00 0 0 Rs. 4,17,26,218/- waived in the current year 16 2010-2011 826,869,092.16 131,946,103.1 2 958,315,195.28 211,583,600.00 - 211,583,600.00 7,194.00 - Rs. 12,15,71,474/- waived in the current year - 12. Referring to the said table, it is pointed that from the financial year 2004-05 onwards both the principal and the interest was not being recovered, that even in the earlier years, the recovery of interest was very low ranging from 0.004% of the principal to 0.73% only. Considering this situation where the recovery of interest was virtually negligible all throughout from the year 1995-96 onwards and from the I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 11 Financial Year 2004-05 onwards, no interest and principal was being recovered, it was evident that the collectability of interest was highly uncertain and therefore as per AS- 9 also the interest income could not be treated as accrued in such situation. 13. Ld. Counsel for the assessee, relied on the following case laws in support of the proposition that where the collectability of income was uncertain, the income could not be said as accrued: (1) CIT vs. Eicher Ltd. [2010] 320 ITR 410 (Delhi) (2) CIT vs. Abbas Wazir (P.) Ltd. [2005] 274 ITR 448 (3) CIT vs. Motor Credit Co. P. Ltd. [1981] 127 ITR 572 (Mad.) (4) CIT vs. Giriraj Udyog (P.) Ltd. [2005] 273 ITR 495 (All.) (5) CIT vs. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) (6) Order of the High Court of Gujarat in case of Gujarat Insecticides Ltd. vs. Asst.CIT (7) CIT vs. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj.) (8) ACIT vs. Coromandal Investment P. Ltd. [2009] 316 ITR 104 (Guj.) 14. In view of the above, Ld. Counsel for the assessee contended that the addition made on interest income amounting to Rs. 6.14 crores was based on incorrect and improper appreciation of facts, was not as per law , was totally adhoc and therefore need to be deleted. 15. Ld. D.R. on the other hand relied on the order of the authorities below. His contention being that the assessee having followed hybrid system of accounting, following the cash system for interest income and accrual for the rest, the same was not as per law and therefore the addition had been rightly upheld by the Ld. CIT(A). 16. We have carefully considered the submission of both the parties. The issue before us to be adjudicated is whether the assessee has correctly accounted for and returned to tax interest on loans given to farmers on receipt basis or had understated the same to the extent of Rs. 6.14 crores as contended by the Revenue, considering the I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 12 mercantile system of accounting followed. The plea of the assessee is that since the recoverability of interest was uncertain hence it was accounted for on receipt basis. To substantiate its contention data of interest and principal recovered by the assessee since 1995-96 was placed, reflecting maximum recovery of 0.23% of the interest due for recovery during the year in 1995-96 and no recovery at all from 2000-01 onwards .Further even the principal amount of loan was not being recovered from financial year 2004-05 onwards. These facts were placed in a tabular form both before the A.O. and Ld.CIT(A) and which has not been controverted at any stage. Therefore, the fact remains that since a very long period from FY 1995-96, there was hardly any recovery of interest and no recovery at all since FY 2004-05 onwards. We therefore agree with the Ld.Counsel for the assessee that the collectability of interest was absolutely uncertain. 17. Our attention was also drawn to the Accounting Standard prescribed by the Institute of Chartered accountants of India, AS-9,in support of the plea that Revenue is to be said to be accrued only when there is certainity of recovery. We have gone through the said Accounting Standard. The contents of the same are reproduced hereunder: Main Principles 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 90 AS 9 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. Explanation: The amount of revenue from sales transactions (turnover) should be disclosed in the following manner on the face of the statement of profit and loss: Turnover (Gross) XX Less: Excise Duty XX I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 13 Turnover (Net) XX The amount of excise duty to be deducted from the turnover should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognised separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty. 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. 12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists Revenue Recognition 91 regarding the amount of the consideration that will be derived from rendering the service. 13. Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases: (i) Interest : on a time proportion basis taking into account the amount outstanding and the rate applicable. (ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement. I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 14 (iii) Dividends from : when the owner’s right to receive payment is established. Investments in shares Disclosure 14. In addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. 18. As is evident from a perusal of the above the fundamental principle for recognition of Revenue as per mercantile method involves there being reasonable certainty in ultimate collection. And for interest income it states that the same is to be recognized when there is no uncertainty as to its collectability. As per the accrual/mercantile system of accounting, revenue is to be recognized as accrued only when the amount of revenue is determinable and its collectability is also certain. In the event of any of the two factors being unfulfilled, even under the accrual/mercantile system of accounting, revenue is not recognized. 19. Considering this position of accounting for revenue under the mercantile system and applying it to the facts of the case before us, we are in agreement with ld. Counsel for the assessee that in the present case, in view of the uncertainty in the collectability of the interest income, the same could not be said or treated as accrued. The assessee therefore, we hold, had rightly accounted for the same on receipt basis and there was no understatement of interest as per the mercantile system as alleged by the Revenue. In view of the same, the addition made to the income of the assessee on account of interest on loans under-stated amounting to Rs. 6.14 crores is directed to be deleted. 20. Ground of appeal no. 1 is allowed. I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 15 21. Ground no. 2 relates to disallowance of farmer’s loan and interest which was written off in the books of the assessee amounting to Rs. 12,15,71,474/-. Ground no. 2 reads as under: “The Learned Commissioner of Income Tax (Appeals)-Gandhinagar, Ahmedabad has erred in law and on facts of the case by confirming the disallowance of Rs. 12, 15,71, 474/- being the amount of farmers' loan and interest not recovered, which are debited to Profit & Loss Account and written off.” 22. Drawing our attention to the facts of the case from the assessment order, Ld. Counsel for the assessee took us to para 5 of the said order pointing out there from that the A.O. had noted that the assessee had debited farmer’s loan and interest to the tune of Rs. 12,15,71,474/- and claimed the same as expenditure/loss. The A.O. denied the same stating that the loan write off was on capital account and ought to have been deducted from the respective fund and not debited to the profit and loss account. The A.O. also denied the claim of interest waived for the reason that it was not proved that the interest had become bad. The relevant findings of the A.O. at para 5.2 to 5.5 of the order are as under: 5.2 The reply of the assessee has been perused but the same is not acceptable. Firstly, the assessee receives fund from the Central and State Government, which is shown as advances made to the fanners. The assessee has no right to waive such loans as the fund which is advanced, does not belong to it. The assessee itself admits that, no direction for waiver of loans and interest has been received by it. It was decided by the assessee, in its board meeting on its own notion. 5.3 Secondly, waiver of loan and interest should have been reduced from the respective fund and not debited to the P&L account. Only expenditure which are revenue in nature can be debited to P&L account. This is not a revenue expenditure, but it is a capital loss. Capital loss has to be reduced from the respective funds. 5.4 Thirdly, vide submission dated 3.12.2013, the assessee submitted a break up of such waived loan and interest, which is as under:- I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 16 Year Principal waived Interest waived 2001-02 2,62,90,935 1,55,21,476 '2002-03 1,55,23,502 1,64,54,155 2003-04 2,91,73;475 1,86,07,931 Total 7,09,87,192 5,05,83,562 From the above it can, be seen that, even what has been wrongly claimed and debited to P&L account, does not pertain.to .the year under consideration. The assessee also submits that, the interest has been shown as income in the respective years and hence, such interest waived may be treated as bad debt. However, this contention is not acceptable because, there is nothing on record to prove that the interest had become bad. 5.5 Therefore, the claim of waiver of principal and interest made in the P&L account is disallowed and an addition of Rs. 12,15,71,474/- is made to the total income. 23. The same was upheld by the Ld. CIT(A) at para 6.2 of his order are as under: 6.2 I have considered the facts of the case, submission of the appellant and the contention of the AO. The AO in his order has contended that the appellant has not maintained the consistency not to offer the interest income in the year under consideration as the appellant had been offering of 2007-08. Further, it is held by the AO that the appellant is not in the business of granting loans and also not proved that the loans are bad. The appellant has also not proved before the AO that the claim of interest income on loan and advances to the farmers are not recoverable by way of any evidences. All the decisions on which the appellant relied upon are related with banking / NBFC cases and the appellant is different entity from them and hence the claim was disallowed. Considering the facts placed before me by the appellant and the contention of the AO I am of the firm opinion that the contention of the AO is correct to the fact that :- > The appellant has not proved either before the AO or before me that the loan and advances to the farmers are bad or not recoverable by any evidence and circumstances which were termed by the appellant as NPA and the accrued interest on the same are claimed as deduction. I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 17 > It is also to be noted that the appellant is not doing any banking business and also does not fall under NBFC cases for which the appellant has made the citations of case laws for its claim. > It is also a fact that the appellant was regularly offering the interest income to tax on such loans and advances upto immediate preceding year and during the year under consideration and discontinued to offer such interest for taxation with the reason that the original amount which was advanced to farmers is even not recoverable and the Directors of the company decided to not offer the interest on such advances on accrual basis is not justified by any reason available under the IT Act. In view of the above, the action of the AO is justified and the ground of appeal is dismissed. 24. Before us contention of the Ld. Counsel for the assessee was that the interest portion written off in the profit and loss account was to be allowed as bad debts written off since the interest had been returned as income of the assessee in earlier years. In this regard, Reliance was placed on the decision of the Hon’ble Apex Court in the case of TRF Ltd. vs. CIT (2010) 323 ITR 397 (SC) and also the CBDT Circular 12/2016 allowing claim of bad debts. Vis-à-vis amount of principal written off., Ld. Counsel for the assessee contended that the same be allowed as business loss since the assesee was in the business of granting loan to farmers and the portion of the loan which had become irrecoverable was to be allowed as business loss. 25. Ld. D.R. on the other hand relied on the order of the A.O./CIT(A). 26. We have heard both the parties. The issue is regarding the claim of the assessee to write off of interest and loans which had become irrevocable amounting to Rs. 12,15,71,474/- ,the break-up of which is reproduced at para 5.4 of the assessment order as under: 5.4 Thirdly, vide submission dated 3.12.2013, the assessee submitted a break up of such waived loan and interest, which is as under:- Year Principal waived Interest waived 2001-02 2,62,90,935 1,55,21,476 I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 18 '2002-03 1,55,23,502 1,64,54,155 2003-04 2,91,73;475 1,86,07,931 Total 7,09,87,192 5,05,83,562 27. Thus out of total write off, Rs. 7.10 crores pertained to principal written off while Rs. 5.05 crores pertained to interest written off. 28. As far as claim of interest written off is concerned the same has been denied for the reason that the assssee has not proved that the interest had become bad. It is not disputed and denied that the impugned interest of 5.95 crores had been returned as income of the assessee in the preceding years and had been written off in the impugned year and claimed as bad debt. It is settled law that the only requirement for legitimate claim of bad debts is that the assessee should have returned the said amount as income in earlier years and written off the same in its books of accounts, there being no requirement to prove the debts having bad. The Hon’ble Apex Court, in the case of TRF Ltd. (supra) settled the position of law as aforestated interpreting the provisions of section 36(1)(vii) of the Act alongwith Section 36(2) of the Act. The relevant portion of the order reads as under: “4. This position in law is well settled. After 1 st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee” 29. The said proposition, we have noted, has been reiterated by the CBDT in its Circular No. 12/2016 as cited by the Ld. Counsel for the assessee before us. In the facts of the present case since the assessee fulfills all the criteria of having returned the interest income to tax earlier and having written off the same in its books of accounts, its claim to the write off as bad debts is therefore, we hold, in accordance with law and we direct the same to be allowed to the assessee. Therefore, the claim of I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 19 interest written off to the extent of 5.05 crores is held to be allowable to the assessee as bad debts written off as per the provisions of Section 36(1)(vii) r.w.s. 36(2) of the Act. 29.1. As for the claim of write off of principal amount of loan, the contention of the Ld.Counsel for the assessee before us is that it was a business loss for the assessee since it was in the business of granting loans and the same had become irrecoverable. We find that for adjudicating the issue the facts have not been clearly brought out. The Ld.Counsel for the assessee had stated that the assessee was undertaking activities for farmers .That the said activities were met by funds provided by the government and part of the expense incurred was raised as recoverable from the farmers as loan. What transpires from the above is that loan raised on farmers was a method of recovery of cost of expenditure incurred on activities undertaken for the farmers. The manner of undertaking the transaction is not clear. It is not known as a fact whether the farmers are billed for the activities undertaken. Then treating a part of it as loan would only tantamount to a different method being adopted for recovery of income by the assessee and in that case the assessee cannot be said to be indulging in the activity of granting loan. The treatment of the write-offs of such loans would then have to be viewed probably as bad debts, though this may not be treated as our decision on the issue. What is necessary therefore for adjudicating the issue of eligibility to claim of write off of principal loan amount is the nature of the transaction resulting in the loan being granted to farmers. It is only thereafter it can be decided as to whether the assessee is eligible to claim write off of the same as per law and under which provision. We therefore deem it necessary to restore the issue back to the AO to determine the facts in which the impugned loans have arisen and thereafter adjudicate the issue in accordance with law. Needless to add the assessee be granted due opportunity of hearing in this regard. 29.2. Ground of appeal No.2 is therefore allowed for statistical purposes I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 20 30. Ground no. 3, it was pointed out relates to the disallowance of Soil Conservation Expenses to the tune of Rs. 47,03,26,795/-. Ground no. 3 reads as under: “The Learned Commissioner of Income Tax (Appeals)-Gandhinagar, Ahmedabad has erred in law and on facts of the case by confirming the disallowance of Rs.47,03,26,795/- made by the Assessing Officer out of soil conservation expenditure, which is made on estimated basis.” 31. Draw our attention to the facts of the case from para 6 to 6.2 of the assessment order, it was pointed out that assessee had claimed Soil Conservation Expenses to the tune of Rs. 47,03,26,795/-, 10% of which were disallowed by the A.O, in the absence of physical verification bills/vouchers and therefore the genuineness of the expenses remaining unproved. Our attention was drawn para 6.2 are as under: 6.2 The reply of the assessee is considered but the same is not acceptable. It is noticed that huge expenditure has been incurred towards soil conservation and it is also noticed that some of them are incurred on behalf of the farmers. In the absence 0f physical verification of bills F vouchers, the genuineness of such expenditure cannot be proved. The claim of expenses can only be verified if the assessee produces details of the same. Most of the soil conservation expenses are incurred in cash. Manipulation of vouchers is evident from the fact that no complete details were produced. Therefore, it is held that the soil conservation expenses are inflated and accordingly 10% of the same is disallowed and added back to the total income of the assessee. Penalty proceedings u/s. 271(l)(c) is initiated for concealment of income leading to furnishing of inaccurate particulars of income. 32. The same was upheld by the Ld. CIT(A). 33. Before us, Ld. Counsel for the assessee contended that there was no reason for disallowing these expenses on account of the genuineness of the same as not proved since the assessee had been subjected to internal audit, statutory audit and even audited by the CAG (Comptroller of Auditor General) and nothing to this effect of any ingenuine expenditure having been booked by the assessee was pointed out by I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 21 any of the auditors. She further contended that this expenditure was being claimed by the assessee year to year and had never been disallowed even in scrutiny assessment. In this regard, our attention was drawn to the submissions made before CIT(A) placed before us at page no. 65 to 75 at para 3.2 and 3.4 are as under: 3.2 It is submitted that the Appellant also enclosed statement showing bifurcation of soil conservation expenditure (Pages 88 to 90 of the Paper Book), which has been incurred during the year under consideration. Regarding furnishing of vouchers/bills, it was explained that the soil work is being carried out all over Gujarat by various sub-division offices, which are scattered. In the head office, no supporting details are being maintained. It is submitted that the details of soil expenditure are collected by division from sub-division which are coming under their jurisdiction. Thereafter, the division forwards such data to head office and from that necessary accounting entries are being passed at head office. Under the circumstances, the details was to be called from sub- division officer and it was impracticable to collect and furnish all the details in form of vouchers etc., which are very voluminous in a short time. 3.3 It is further submitted that the books of accounts of head office, division and sub-division are subject matter of internal audit carried out by independent internal auditor, wherein 100% verification of all expenditure incurred by division and sub- division is being carried out by internal auditor. Further, the duty is also caste on internal auditor to carry out physical verification of work done by sub-division. Thus, all the expenditures incurred have been fully verified by independent agency. Inspite of this, the Assessing Officer has made disallowance of 10% of expenditure which is based on presumption and assumption. Further, he has not brought any contrary facts to prove that expenditure is not genuine and therefore, such addition cannot be sustained. 3.4 It is also pointed out that the main activity of the Corporation is that of development of land and for such activity, the Corporation has to incur expenditure, which is incurred under the head of 'Soil Conservation Expenditure'. During the year under consideration the land development income and Government grant are of Rs.519,89,90,184/- and the expenditure incurred towards soil conservation are of Rs.470,32,67,954/-; whereas in the previous year, the income was of Rs.574,01,88,517/- and the expenditure was of Rs.536,39,08,038/- (Please see Pages 13 and 20 of the paper book). Since inception of the Corporation, such type of expenditure is being incurred and the assessments are also made u/s.143(3) in earlier year and no such disallowance has been made by the Assessing Officer. Thus, the Department in past has also accepted the book result. The Assessing Officer is not justified in making lump sum addition without bringing any contrary evidence so as to prove that the expenditure in question is not genuine and such addition cannot be sustained. 34. Ld. Counsel for the assessee therefore contended that the disallowance to the extent of 10% of the expenses was very high and unfair and prayed that the same I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 22 may be either be deleted completely or the disallowance be restricted to a smaller amount. 35. Ld. D.R. on the other hand relied on the order of the authorities below. 36. We have heard contentions of both the parties. The issue relates to disallowance of 10% Soil Conservation Expenses for the reason that the assessee failed to produce the vouchers and hence prove their genuineness. No basis, we find, has been stated for disallowing 10% of the expenses and it appears to be totally adhoc. At the same time, it is not denied that the accounts of the assessee are subjected to multiple levels of scrutiny, i.e it is subjected to statutory audit, internal audit and CAG audit and none have reported any such infirmity in the accounts of the assessee in their audit reports. Also these are recurring expenses incurred by the assessee in the course of activities carried out by it. It has been contended before the lower authorities and even before us that no such disallowance was made by the Revenue in the preceding or even succeeding year even in scrutiny assessments. A detail of the impugned expenses incurred from AY 2008-09 to AY 2012-13 was filed before us showing the quantum of such expenses incurred in those years, which we find ranged from 2.85 crores to 5.36 crores, Copies of financial statements of the said years was also filed as evidence . Further assessment orders passed u/s 143(3) of the Act for the said years was also filed showing that except in the impugned year no disallowance was made by the Revenue either in the preceding or succeeding years. 37. Considering the entire facts and circumstances as above, we hold that an adhoc disallowance of 10% of the total expenses for failure to substantiate the claim in entirety with evidences in the impugned year is highly unjustified and a disallowance of Rs. 5 lacs would be justified. We accordingly direct the AO to restrict the disallowance of soil conservation expenses to Rs. 5 lacs. I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 23 38. We may add that our decision as above has been rendered in the backdrop of the peculiar facts before us where there was no basis /data for arriving at a justified amount of disallowance and should therefore not be treated as a precedent on the issue by any of the parties in any other year. 38.1. Ground of appeal No.3 is partly allowed. ITA No. 2630/Ahd/2015 for A.Y. 2008-09. 39. Ground no. 1 raised by the assessee reads as under: “The Learned Commissioner of Income Tax, (Appeals)-Gandhinagar, Ahmedabad has erred in law and on facts of the case by confirming addition of Rs.4,24,99,683/- made by the Assessing Officer being so-called interest income on farmers' loan on the ground that the Appellant is following mercantile system of accounting.” 40. It was common ground that the issue raised in the impugned ground was identical to that raised in ground no. 1 relating to assessment year 2011-12 in ITA No. 2538/Ahd/2014. In view of the same, our decision at para no. 16 to 19 of the order will apply to the said ground also. Following the same this ground of appeal is allowed. 41. In effect appeal of the assessee is allowed. ITA No. 2632/Ahd/2015 for A.Y. 2012-13. 42. Ground no. 1 raised by the assessee reads as under: “The Learned Commissioner of Income Tax, (Appeals)-Gandhinagar, Ahmedabad has erred in law and on facts of the case by confirming addition of Rs.7,51,87,000/- made by the Assessing Officer being so-called interest income on farmers' loan on the ground that the Appellant is following mercantile system of accounting.” I.T.A No. 2538/Ahd/2014 & Ors. Page No Gujarat State Land Development Cor. vs. DCIT 24 43. It was common ground that the issue raised in the impugned ground was identical to that raised in ground no. 1 relating to assessment year 2011-12 in ITA No. 2538/Ahd/2014. In view of the same, our decision at para 16 to 19 of the order will apply to the said ground also. Following the same this ground of appeal is allowed. 44. Appeal of the Assessee is allowed. 45. In effect appeal of the Assessee in: a) ITA No.2538/Ahd/2014 for A Y 2011-12 is partly allowed for statistical purposes. b) ITA No.2630 & 2632/Ahd/2015 for A.Y. 2008-09 & 2012-13 respectively allowed. Order pronounced in the open court on 23 -02-2022 Sd/- Sd/- (MADHUMITA ROY) (ANNAPURNA GUPTA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad : Dated 23/02/2022 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद