Karnataka Food & Civil Supplies Corporation Ltd. V. The Commissioner of Income-tax Karnataka

ITRC/2/2008

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The case revolves around the Karnataka Food & Civil Supplies Corporation Ltd., which sought to claim a deduction for deferred interest liability amounting to Rs.1,07,12,452 for the assessment year 1985-86. The interest was related to the stock of food grains, some of which were sold in the previous year and some in the relevant assessment year. The lower authorities disallowed the claim, leading to an appeal to the High Court. The main legal contention was whether the assessee could claim deductions for expenses that were not claimed in the previous year but were incurred for the stock sold in the relevant assessment year. The court examined the principles of accounting and the provisions of the Income Tax Act, particularly focusing on the transition from a cash to a mercantile system of accounting by the assessee.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 804551 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 26-08-2014
• Assessment Year: misc
• Other Referred Cases: MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX VS. STANDARD RADIATORS (P) LTD.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: S PARTHASARATHI; JINITA CHATTERJI; GURUNATHAN
• Keywords: Cash system of accounting; Food grains; Interest Expenditure; Mercantile system of accounting; Deferred interest liability
• Section: 256(2)

Judgement Text

": : 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 26TH DAY OF AUGUST 2014 PRESENT THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MRS.JUSTICE RATHNAKALA ITRC NO.2/2008 BETWEEN: Karnataka Food & Civil Supplies Corporation Ltd., 147, Kambli Bhavan, Infantry Road Bangalore. …Petitioner (By Sri.S.Parthasarathi, Sri.Jinita Chatterji and Sri.Gurunathan, Advocates) AND: The Commissioner of Income-tax Karnataka, Bangalore. ...Respondent (By Sri.K.V.Aravind, Advocate) : : 2 Assistant Registrar, Income Tax Appellate Tribunal has made a reference under Section 256(2) of the Income Tax Act, 1961 for the decision of the Hon’ble High Court, the question of law as made in the statement of case therein, for the opinion of the Hon’ble High Court of Karnataka. ITRC coming on for Hearing, this day, N.KUMAR, J., delivered the following: J U D G M E N T In pursuance of the directions given by this Court under Section 256(2) of the Income Tax Act, the Tribunal has referred the following two substantial questions of law for our consideration :- “1. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the appellant was not entitled to the deduction of Rs.1,07,12,452/- : : 3 being the deferred interest liability especially when the appellant had not claimed the deduction of the same in the previous year and when the same was attributable to the value of the stock of food grains not sold in the previous year but sold in the relevant assessment year? 2. Whether on the facts and circumstances of the case, the Tribunal was right in law in disallowing the claim of deduction of the deferred interest liability relating to the stock of food grains purchased, during the previous assessment year but sold during the relevant assessment year especially when this method of accounting was consistently been followed?” 2. The assessee is an undertaking of the Government of Karnataka and is an apex body to look : : 4 after the food and civil supplies activities in the State of Karnataka. The assessee was following a mixed system of accounting i.e., cash and mercantile system of accounting. For the assessment year 1985-86, the assessee claimed total interest expenditure of Rs.5,15,65,580/-, out of which Rs.1,07,12,452/- was stated to be of the nature of deferred interest of the last year. The Assessing Authority held that there is no concept of allowing the deferred revenue expenditure under the Income Tax Act. Accordingly, he disallowed the claim of the assessee in respect of the claim of Rs.1,07,12,452/-. Aggrieved by the same, assessee preferred an appeal. The Commissioner of Income Tax (Appeals) found that immediate to the preceding year the assessee was following a mixed system of accounting for the liabilities incurred towards interest during the year. A part of the said interest was debited : : 5 to the Profit and Loss Account. This portion of the interest actually related to the sale of food grains effected during the year on which interest was actually realized. The second part of the interest was being shown in the accounts as interest recoverable from Government. The third part of the interest which related to the closing stock of food grains being carried forward to the next year was not being charged to Profit and Loss Account but being carried forward in the balance sheet as deferred revenue expenditure. Such deferred revenue expenditure was, however, being claimed in the next year along with the interest as actually debited to the Profit and Loss Account for the said next year. From the Assessment Year 1985-86, however, the assessee discontinued the above practice and no deferred revenue expenditure was being carried forward in the balance sheet. So far as assessment : : 6 year 1985-86 is concerned, the assessee claimed the entire expenditure for the said year as well as the deferred revenue expenditure which was brought forward from the earlier year. The Appellate Commissioner was of the view that as the deferred revenue expenditure was not claimed in the assessment for the assessment year 1984-85, the same should not be allowed in the assessment year 1985-86. The reason being the said amount did not represent the interest relatable to the year of the account. Accordingly, the order of the Assessing Authority was upheld. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal on re-appreciation of the entire material on record held that the interest amount of Rs.1,07,12,452/- which pertains to the assessment year 1984-85, was not actually claimed as expenses in that year. Had it been so claimed, the entire amount : : 7 should have been again added to the cost of the food grains as an element of cost in the matter of procurement of the food grains. The closing stock would also have been required to be increased by the corresponding amount and the net revenue results for the assessment year 1984-85 would have therefore been nil, even if the entire amount had been claimed in that year. In such a case, when the entire stock for the assessment year 1984-85 was sold out in the assessment year 1985-86, the amount would have come as an increase in the debit side by way of enhanced opening stock and in that way, the amount could have been allowed for the assessment year 1985- 86. Therefore, the Tribunal upheld the view of the lower authorities and dismissed the appeal. Aggrieved by the said orders, the assessee is before this court. : : 8 3. The learned Counsel for the assessee assailing the impugned order contended that earlier the assessee was following a particular accounting system in which the claim of interest deduction was made only in respect of the goods sold. The claim in respect of unsold goods was carried forward. But from 1985-86, they have changed the accounting pattern and adopted mercantile accounting in which year the entire claim of interest whether goods were sold or not was claimed during as the deferred claim of interest of the previous year. When an assessee changed over to the new system, for one year, there is no double benefit which has accrued to the assessee. All the three authorities have not considered this aspect of the matter and committed a serious error in not allowing the deductions. : : 9 4. Per contra, learned Counsel appearing for the revenue submitted that when once the assessee switched over to the mercantile method of accounting, he cannot claim any benefit for the period earlier to the same and therefore, he submits that the order passed by the authorities are in accordance with law and no case for interference is made out. 5. From the aforesaid facts, it is clear that the assessee in order to purchase food grains was getting government aid. However, they were claiming deductions of the interest proportionate to the food grains sold and in respect of the interest relatable to the food grains unsold was carried forward to next year and after the sale of food grains, deductions was claimed. This is the practice which was followed by the assessee. However, from 1985-86, they switched on to mercantile system of accounting. In that year, they : : 10 claimed deductions of interest in respect of food grains which were sold and unsold and also the interest proportionate to the food grains sold which were of the previous year. There was no double claim. The authorities proceeded with an assumption that there is a double benefit claim. They also proceeded on the assumption that once mercantile system is adopted, the assessee looses the benefit of claiming deductions of interest which should have been claimed in the previous year. 6. The Apex Court in the case of MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX explaining the meaning of the expenditure, held that, the “expenditure” is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although : : 11 it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure.” 7. The Gujarat High Court in the case of COMMISSIONER OF INCOME TAX VS. STANDARD RADIATORS (P) LTD., reported in (2006) 286 ITR 207 (GUJ) at para 8 held as under:- “8. During the year under consideration, because the assessee switched over from cash system of accounting to mercantile system of accounting, it appeared that the assessee had claimed double deduction: one on the basis of cash payment, and another on the basis of mercantile system of accounting, namely, provision made. However, apart from the fact that this might be a necessary concomitant in the year of : : 12 change of system of accounting, what is more material is the assessee had been consistently paying bonus on cash basis in the past after the end of the accounting period and the same modality was adopted in the year under consideration. Therefore, to state that this was payment relatable to earlier year is not absolutely correct.” 8. In view of the aforesaid judgments, the denial of the appellant’s claim by the authorities is not justifiable. The assessee is entitled to the benefit of claiming the said deductions relatable to the previous year i.e., for the assessment year 1985-86. Accordingly, (a) the questions of law are answered in favour of the assessee and against the revenue. : : 13 (b) The impugned orders passed by all the three authorities are hereby set aside. (c) Directions are issued to the Assessing Authority to give the benefit of deduction as claimed by the assessee. Ordered accordingly. Sd/- JUDGE Sd/- JUDGE Prs* "