SHAHABAD COOP. SUGAR MILLS LTD. V. CIT KARNAL

ITA/235/2009

AI Insights

The case involves The Shahabad Cooperative Sugar Mills Ltd. appealing against the decision of the Income Tax Appellate Tribunal, which upheld the addition of interest income from sticky loans to the assessee's taxable income. The primary legal issue was whether the Tribunal was justified in confirming the denial of deduction on account of interest on sticky loans, which was considered doubtful of recovery and had been credited to a suspense account. The appellant argued that the interest should not be taxed as income until it was actually received, referencing judgments from the Supreme Court and the High Court. However, the respondent countered that the assessee followed a mercantile system of accounting, making all accruing income taxable, and cited amendments to Section 145 of the Income Tax Act, 1961, which supported this view.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 746326 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 24-10-2013
• Assessment Year: misc
• Other Referred Cases: UCO Bank v. CIT (1999) 237 ITR 889 (SC), Commissioner of Income Tax v. Punjab Financial Corporation Ltd. (2007) 295 ITR 510 (P&H), Godhra Electricity Co. Ltd. v. Commissioner of Income Tax (1997) 225 ITR 746
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: YOGESH PUTNEY
• Assessee Lawyers: S K MUKHI
• Keywords: Income Tax; Interest on Sticky Loans; Suspense account; Mercantile System of Accountancy; Doubtful Recovery
• Section: 143(1); 145; 260A

Judgement Text

"ITA No. 235 of 2009 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 235 of 2009 (O&M) Date of Decision: 24.10.2013 The Shahabad Cooperative Sugar Mills Ltd. ....Appellant. Versus CIT, Aayakar Bhawan, Sector 13, Karnal ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH. PRESENT: Mr. S.K. Mukhi, Advocate for the appellant. Mr. Yogesh Putney, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This order shall dispose of a bunch of three appeals bearing ITA Nos. 235 of 2009, 105 and 129 of 2012 as according to the learned counsel for the parties, the substantial question of law and the issue involved therein are identical. For brevity, the facts are being extracted from ITA No. 235 of 2009. 2. ITA No. 235 of 2009 has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 30.1.2009 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 988/Chd/2008 for the assessment year 2001- 02. The appeal was admitted vide order dated 28.4.2010 for consideration of the following substantial question of law:- Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -2- “Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified on facts and in law in confirming the findings of the authorities below while denying deduction on account of interest on sticky loans being the interest doubtful of recovery and having been credited to suspense account in view of the established Principles of Law and that of accountancy as supported by the judgment of Hon'ble Supreme Court of India in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC)?” 3. Few facts necessary for adjudication of the present appeal as narrated therein may be noticed. The assessee filed its return of income on 29.10.2001 for the assessment year 2001-02 at a loss of ` 69,617/- and the same was processed under Section 143(1) of the Act on 17.7.2002. According to the Assessing Officer the society had credited interest income of ` 54,08,245/- under the head 'Current Liability and Provisions' whereas the same had to be credited to the 'Profit and Loss Account'. The Assessing Officer vide order dated 7.11.2007 (Annexure A-3) concluded that the assessee was following mercantile system of accountancy and, therefore, the amount on account of interest receivable was its income. Accordingly, an amount of ` 54,08,245/- was treated as income of the assessee. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”]. The CIT(A) vide order dated 18.8.2008 (Annexure A-2) rejected the appeal. Still dissatisfied, the assessee approached the Tribunal by way of appeal who vide order dated 30.1.2009 dismissed the appeal. Hence, the instant Income Tax Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -3- Appeal. 4. Learned counsel for the assessee-appellant submitted that the revenue was in error in making an addition on account of interest which was to be received on sticky loans by the assessee in view of the judgment of the Hon'ble Apex Court in UCO Bank v. Commissioner of Income Tax (1999) 237 ITR 889 and of this Court in Commissioner of Income Tax v. Punjab Financial Corporation Ltd. (2007) 295 ITR 510 (P&H. It was argued that the amount was given by way of loans in the year 1991-92 and the same was not recoverable. In such a situation, the interest which was accruing on the same was also not being received and its recovery was also doubtful. In such circumstances, the same could not be said to be the real income of the assessee as held by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. v. Commissioner of Income Tax (1997) 225 ITR 746. 5. On the other hand, controverting the aforesaid submissions, learned counsel for the revenue submitted that the Finance Act, 1995 had amended provisions of Section 145 of the Act with effect from 1.4.1997 relating to assessment year 1997-98 and subsequent years, whereby after the amendment only either cash system of accountancy or mercantile system of accountancy could be followed by the assessee. It was not disputed that in the present case, the assessee was following mercantile system of accountancy. In such circumstances, the interest accruing on the loans advanced to M/s Bhuna Cooperative Sugar Mills and M/s Panipat Cooperative Sugar Mills was rightly assessed to tax by the Assessing Officer, CIT(A) and the Tribunal. It was submitted that the judgments in UCO Bank and Punjab Financial Corporation's cases Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -4- (supra) were prior to amendment in the year 1995 and, therefore, would not help the assessee. Elaborating the said submission, it was argued that those cases related to the assessment year prior to 1997-98 and the assessee therein was following the mixed system of accountancy. It was in those circumstances that the Hon'ble Apex Court had held that the amount was not exigible to tax till the time it was received. 6. After hearing learned counsel for the parties, we do not find any merit in these appeals. 7. We analyze the concerned provision first. Section 145 of the Act relates to method of accounting. Originally enacted, Section 145 provided that income under the head “profits and gains of business or profession” or “income from other sources” shall be computed in accordance with the method of accounting regularly followed by an assessee. Accordingly the assessee was entitled to choose any one of the following system of accountancy:- (a) cash or receipts system; or (b) mercantile or accrual system; or (c) mixed or hybrid system. 8. Finance Act 1995 with effect from 1.4.1997 relating to assessment year 1997-98 and subsequent years, substituted Section 145 which reads thus:- “145 (1). Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -5- Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” 9. Board vide circular No. 717 dated 14.8.1995 [(1995) 215 ITR St 70] explained the scope and object of the said provision as under:- “Methods of accounting and accounting standards for computing income.- 44.1 Section 145 (1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the methods of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assessees are following the hybrid method in a Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -6- manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub- section (1) of section 145 has been deleted. 44.2 The Finance Act, 1995 has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which as assessee will have to follow in computing his income under the head “Profits and gains of business or profession” or “Income from other sources”. These accounting standards will be laid down in consultation with expert bodies like the Institute of Chartered Accountants. 44.3 The amendment will take effect from Ist April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.” 10. The Central Government is empowered by the amended provision to specify the accounting standards which are required to be followed by an assessee for computing income under the head “Profits and gains of business or profession” or “Income from other sources”, by notifying the same in official gazette. It may be noticed that the Central Government has issued notification No. SO69(E) dated 25.1.1996 Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -7- published in [(1996) 218 ITR St. 1] in exercise of power under Section 145 (2) of the Act for assessees following mercantile system of accounting. 11. On plain reading of the said Section, it is concluded that prior to amendment by Finance Act, 1995 w.e.f. 1.4.1997, assessee had option of choosing any one of the method of accountancy, i.e. (a) cash system; (b) mercantile system or (c) hybrid or mixed system. However, after the amendment, as assessee has an option to adopt either cash system or mercantile system only. Therefore, income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is to be computed in accordance with either cash/ receipt basis; or mercantile/accrual system of accounting regularly employed by the assessee. Under cash system of accountancy, the assessee is liable to pay tax on the income on the basis of cash receipts during the year under consideration whereas under the mercantile system of accountancy, the liability of an assessee is determined according to accrual of the income relating to the assessment year in question. 12. Adverting to factual matrix involved in the present case, it has to be noticed that the Tribunal while upholding the findings of CIT(A) had recorded as under:- “8. The relevant facts relating to this issue are that the assessee had advanced loans to some other cooperative societies. The interest was being provided on such loans at the agreed rates. The assessee claimed that no interest had been received from specified cooperative society since 1992-93. Interest in respect of such loans according to the Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -8- assessee was credited to the suspense account. It was claimed that since the recovery of interest was doubtful, the assessee had made a claim for deduction. The Assessing Officer has disallowed the claim and the Commissioner of Income-tax (A) has confirmed the disallowance by pointing out that the assessee had not proved that the recovery of interest was doubtful. It has been pointed out that in the case of Bhuna Co-op. Sugar Mills the assessee has charged interest of Rs.55,37,651/- but the assessee claimed that no interest was received from the said party since assessment year 1992-93. The assessee had advanced another loan of Rs.54 lacs to this very concern in financial year 2000-01. According to the Commissioner of Income-tax (A), this loan has been received back during the year under appeal. The Commissioner of Income-tax (A) has further pointed out that the assessee had advanced Rs.25 lacs to Panipat Cooperative Sugar Mill during the financial year 1991-92 and received back part of the loan and interest amount of Rs.55,12,500/- in assessment year 1993-94. The Commissioner of Income Tax (A) has further held that the assessee has failed to produce any document whatsoever to support the claim that the recovery of interest from the two concern was doubtful. The Commissioner of Income-tax (A) has accordingly upheld the addition.” Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -9- 13. Further, the assessee was following the mercantile system of accountancy wherein any income accruing even though not received was subject to tax. The assessee had not claimed any amount by way of bad debts under the provisions of the Act and in such a situation, the interest accrued thereon also cannot be said to be not arising to the assessee. Moreover, the findings recorded by the Assessing Officer, CIT (A) and the Tribunal have not been shown to be erroneous or perverse in any manner. 14. The judgments relied upon by the learned counsel for the assessee in UCO Bank and Punjab Financial Corporation's cases (supra) being prior to the amendment in Section 145 of the Act would not come to the rescue of the assessee-appellant. Further, the Godhra Electricity Co. Limited's case (supra) was decided by the Apex Court on its own factual matrix involved therein which is not the position here and, therefore, it has no applicability to the facts of the present case. 15. In view of the above, the substantial question of law is answered against the assessee and in favour of the revenue. Accordingly, there is no merit in the appeals and the same are hereby dismissed. (AJAY KUMAR MITTAL) JUDGE October 24, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -10- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 105 of 2012 (O&M) Date of Decision: 24.10.2013 The Shahabad Cooperative Sugar Mills Ltd. ....Appellant. Versus The ACIT, Kurukshetra Circle, Aayakar Bhawan, Kurukshetra ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH. PRESENT: Mr. S.K. Mukhi, Advocate for the appellant. Mr. Yogesh Putney, Advocate for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 235 of 2009 (The Shahabad Cooperative Sugar Mills Ltd. v. CIT, Aayakar Bhawan, Sector 13, Karnal). (AJAY KUMAR MITTAL) JUDGE October 24, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 235 of 2009 -11- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 129 of 2012 Date of Decision: 24.10.2013 The Shahabad Cooperative Sugar Mills Ltd. ....Appellant. Versus The ACIT, Kurukshetra Circle, Aayakar Bhawan, Kurukshetra ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH. PRESENT: Mr. S.K. Mukhi, Advocate for the appellant. Mr. Yogesh Putney, Advocate for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 235 of 2009 (The Shahabad Cooperative Sugar Mills Ltd. v. CIT, Aayakar Bhawan, Sector 13, Karnal). (AJAY KUMAR MITTAL) JUDGE October 24, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.11.18 12:10 I attest to the accuracy and integrity of this document High Court Chandigarh "