TMI Blog2007 (8) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956, for the common objectives of development of rural masses. It was dissolved and its undertaking got vested in the National Dairy Development Board (hereinafter referred to as "NDDB"), a corporation constituted under the NDDB Act, 1987, which came into effect on 12th day of October, 1987. Sec. 44 of this Act provided that the NDDB would not be liable to pay income-tax or any other tax on its income, profits or gains derived. The said s. 44 read as under: "44. Notwithstanding anything contained in the IT Act, 1961 or any other enactment for the time being in force relating to tax on income, profits or gains, the National Dairy Development Board shall not be liable to pay income-tax or any other tax in respect of its income, profits or gains derived." 3. With effect from 1st April, 2003 the said s. 44 was omitted by the Finance Act, 2002 and the present assessment year chargeable to tax is asst. yr. 2003-04, the appeal of which is before us. 4. The first dispute is with regard to the addition of Rs. 1,05,27,02,724 on account of interest which was actually received during the year under consideration. The background of the addition is that though the board was not char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either cash or mercantile system of accounting regularly employed. The method of accounting interest income for the relevant previous year, was not followed in the year prior to the assessee became a taxable entity. Hence, provisions of s. 145(3) r/w s. 145(1) of the Act are required to be invoked to bring to tax, interest income pertaining to the period prior to financial year 2002-03 but actually received during the year. Accordingly, for the reasons mentioned in details as above, an amount of Rs. 1,05,27,20,724 is added to the total income. Since the assessee has furnished inaccurate particulars of income, proceedings under s. 271(1)(c) of the Act are initiated." 5. The CIT(A) upheld the order of the AO by observing: "The above given instructions issued by the Central Government required the appellant to disclose specifically prior period items in the P L a/c of the current financial year 2002-03, so that their impact on the profit and loss in the current previous year could be appropriately perceived. The appellant failed to mention such major part of its interest income (Rs. 1,05,27,20,724) which it had diverted to the prior year on accrual basis in the P L a/c of the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployed by the assessee. Thus, the hybrid system of accounting which enabled an assessee to keep different systems of accounts for different heads/parts of its business was completely done away with. The assessee had to maintain its accounts either on cash or on mercantile system, whichever provided true determination of its income/profit. If the assessee genuinely wanted to change the system of accounting then appropriate course for it would have been to change the system from hybrid to mercantile system of accounting w.e.f. 1st April, 1997, from which date the law laid down under s. 145 stood amended. But the appellant chose the option only in the post-enactment of Finance Act, 2002 that too retrospectively by passing the resolutions on 13th May, 2002 and 27th May, 2002. The change in the system of accounting from cash to mercantile authorized by the board resolutions dt. 13th May, 2002 and 27th May, 2002 for the period preceding 31st March, 2002 definitely gave a retrospective angle to the whole affair. The exercise resulted in the drastic jump in the interest income declared for the financial year 2001-02 vis-a-vis interest income declared for the financial year 2000-01. As ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier years. The change was as per the requirement of Accounting Standard, whereby hybrid system of accounting is not permitted, which was being followed by the assessee prior to financial year 2001-02. It is also submitted that change was bona fide and saving of tax is no criteria. The assessee is following the system year to year, the Department has no right to reject the same and for this, he relied upon the decisions: (i) The Gujarat High Court in the case of CIT v. Ganga Charity Trust Fund [1986] 53 CTR (Guj) 365: [1986] 162 ITR 612 (Guj); (ii) The Calcutta High Court in the case of Reform Flour Mills (P) Ltd. v. CIT [1978] 114 ITR 227 (Cal); (iii) The Supreme Court in the case of Union of India Anr v. Azadi Bachao Andolan [2003] 184 CTR (SC) 450: [2003] 263 ITR 706 (SC); (iv) The Punjab Haryana High Court in the case of CIT v. Punjab State Industrial Development Corporation Ltd. [2002] 176 CTR (P H) 434 : [2002] 255 ITR 351 (P H); (v) The Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 (Cal); (vi) The Madras High Court in the case of G. Padmanabha Chettiar Sons v. CIT [1989] 77 CTR (Mad) 107 : [1990] 182 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 1st April, 2001 in respect of all the term loans, the repayment of which (including payment of interest) is not in default for more than two quarters, as set out in the agenda note." 10. The background note relating to the said resolution, reads as under: 'To consider recognition of income on term loans on accrual basis with effect from the financial year beginning 1st April, 2001. The present accounting policy by the NDDB in respect of interest on long-term loans recognized interest as income only when it is actually received. With the income of the NDDB now subject to tax, the above accounting policy was received. The income-tax guidelines stipulates that interest be recognized as income when due. We have also studied the guidelines issued by the Reserve Bank of India on income recognition, which also considered interest as income on accrual basis. It may be mentioned that the NDDB's statutory auditors have since long been commenting on the policy with regard to recognition of income on interest. Considering all the above, it is proposed to account for interest an accrual basis w.e.f. 1st April, 2001 in respect of all term loans, the repayment of which (including payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year under consideration, but had accrued in the earlier year, would not be assessable merely because, it has been received in the impugned year. The Supreme Court in the case of United Commercial Bank v. CIT (supra) held that for the purpose of income-tax, what is to be seen is the real income which is deduced on the basis of the accounting system regularly maintained by the assessee and that processing was done by the assessee in the present case. 13. The observations of the Revenue authorities that the income of Rs. 1,05,27,20,724 received by the assessee in the year under consideration would escape tax, are not fully correct in the sense that it is not the income of the year under consideration. It was the income of the earlier year, and in that year, the assessee was not liable to tax. As the assessee is following the system of accounting as accrual, such income cannot be assessed on cash basis when it had accrued in the earlier years. 14. The adoption of the system of mercantile for accounting for the income is a recognized method under the Accounting Standard issued under s. 145(2) of the Act. It is also as per the requirement of Accounting Standard issued by the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the assessee was not liable to pay tax, would not be assessable in the year of receipt. The Gujarat High Court in the case of CIT v. Atul Products Ltd. (supra) held "that the Tribunal found that the change made in the method of stock valuation by the assessee was not with a mala fide intention. Simply because by virtue of the change introduced by the assessee, the taxable income of the assessee had been reduced, by no stretch of imagination, it could be said that the assessee had an intention to deliberately undervalue its stock so as to reduce its taxation. The new method which was adopted had been continuously followed in the subsequent years. The assessee had changed the method so as to see that the method adopted by the assessee was also as per the method adopted by other business units in the industry. In the subsequent years, the Revenue had not objected to the change made by the assessee in the method of stock valuation. Therefore, the Tribunal was right in confirming the order of the CIT(A) deleting the addition of Rs. 2,93,56,000 representing the alleged undervaluation of closing stock." Again it is, held by the Calcutta High Court in the case of Reform Flow Mills ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,080 7. Bijapur District Co-op. Milk Prod. (-) 15,05,802 8. Rajpur Sahakari Dugdh Utpadak ,(-) 56,996 9. Ujjain Sahakari Dudgh Utpadak (-) 1,65,426 10. National Dairy Research Institute (-) 2,270 11. Lucknow Producers Co-op. Milk Union (-) 16,64,094 12. Kanpur Sahakari Dudgh Utpadak (-) 1.910 13. Moradabad Sahakari Dudgh Utpadak (-) 10,87,301 14. Noida Dairy (-) 2,18,119 15. Varanasi Sahakari Dudgh (-) 6,37,612 16. Yavatmal DCMP Union (-) 2,59,880 17. Sabarmati Salt Farmers Society (-) 71,80,900 TOTAL., (-) 1,59,82,471 19. This interest is reduced from the project interest of Rs. 1,05,95,29,647. The assessee claimed that these are rectification entries due to error/omission and reallocation of receipts between interest and principal for the earlier years. The AO noted the admission of the fact by the assessee that whatever errors committed or made in accounting the interest income of the preceding years when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to how such entries got crystalised during the year. The appellant has claimed that '...The AO did not accept the contention and made the addition only in respect of negative income, however, he did not reduce the income on the similar ground by Rs. 1,51,57,315 being interest income which was pertaining to earlier year but accounted for in current year.' And also submitted 'that as per RBI Prudential norms adopted by the appellant for income recognition, interest accrued on standard loans was Rs. 1,04,43,72,332 as against Rs. 1,05,95,29,647 shown actually. The amount of difference of Rs. 1,51,57,315 has been offered to tax though it pertained to period prior to March, 2002.' The above claim of the appellant has no logic for the simple reason that the appellant by its own admission had introduced mercantile system of accounting w.e.f. finance year 2001-02 onwards, therefore, in no way it can claim that the interest amount of Rs. 1,51,57,315 which pertained to the earlier years was accounted for in the current year. Further, during the year the appellant was not a public finance institution on which the RBI Prudential norms would apply for income recognition. As stated above, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken to the balance sheet. The expenditure incurred from such funds was also not debited to the P L a/c. The TDS on such interest income amounted to Rs. 18,59,510. The assessee claimed that the interest had accrued on such funds of specific project and therefore was not the real income of the assessee as the assessee was acting only as a nodal agency, and that the income ultimately belonged to the project/Government. The AO however, held that the interest income from the project fund had passed through the books of the assessee and that the assessee had retained control over the amounts so credited till the amounts were spent or refunded to the Government/agency, therefore, the said income accrued directly to the assessee and accordingly, he brought to tax the interest amount of Rs. 3,02,48,447. 23. The CIT(A) held that it is only in the case of the EEC Project Implementation Agreement, there is a clear term that "any accruing interest will be used to finance additional activities within the scope of the projects of the special programme". No such specific clear term of utilizing such kind of interest appears to be available in cases of other projects and copies of other agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to project funds, as the assessee retained the control over such interest accrued on the grants with the respective project funds. Therefore, in these cases coupled with the provisions of s. 199 as per which the TDS on such interest amounts had been deducted on behalf of the assessee would be treated as the income accrued to the assessee. 24. The learned counsel submitted that the assessee was entrusted to run certain projects for which grants were received from donor agencies. As per the agreements entered into with such agencies, funds including interest thereon were to be used only for the purpose specified in the said agreement and accordingly, interests received/accrued on the said funds were credited to the project fund account and carried directly in the balance sheet. The assessee is only acting as a nodal agency and the interest income ultimately has to go to the project/Government and the assessee is only supposed to utilize it either as per the directions given or refund it to the Government. Further, the same has to be utilized as per the agreements entered into before receipt of such income, and that in case of non-utilisation the same has to be refunded to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at funds or interest are used for the assessee's business. On the contrary, the terms of agreement clearly provide that the assessee is required to spend interest also on the project and/or to refund to the concerned parties. 28. We have heard the parties and considered their rival submissions. We find that on the said interest received tax has been deducted at source. This has been claimed credit against its own tax liability. This cannot be claimed as a credit unless the income belongs to and offered in its assessment. During the year appellant had following project funds: 1. North Kerala Dairy Project Fund. 2. EEC-Project Implementation Agreement (PIA) Fund 3. Bhuj Hospital 4. Assistance to co-operatives. 29. Insofar as North Kerala Dairy Fund is concerned, no details have been submitted by the assessee either before the AO or before the CIT(A) or even before us and, therefore, it cannot be said that the interest has not accrued to the assessee. The interest has also not been shown to have been paid to them. Under these circumstances, we uphold the orders of the Revenue authorities in assessing the interest relatable to this project. 30. As regards Bhuj Hospital, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest earned by NDDB is to be refunded to the Government of India by demand draft in favour of Pay Accounts Officer, Department of Animal Husbandary Dairying, Ministry of Agriculture under intimation to this Department." 32. The interest money was actually refunded in the next year as is evident from the letter dt. 21st May. 2003 towards interest for a sum of Rs. 31,11,214. This indicates that the interest might not have accrued to the assessee as otherwise should not have been refunded in the subsequent year. This fact also, the AO may verify and allow the necessary relief to the assessee by ascertaining the fact whether the interest was the income of the assessee or it belonged to Government of India and has diverted at source. 33. The fourth ground is addition of Rs. 44,99,03,516 being income not charged on doubtful loans. The facts of the case are that the assessee advanced money to certain corporations and an interest of Rs. 44.99 crores was due from them but since there was no certainty of recovery and claiming itself to be a public financial institution the assessee applied RBI Prudential norms for not accounting the accrued interest on the said principal amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agency. Corporation provided unilateral interest on deffered payment on the commission receivable and therefore the Court held that there was no enforceable right to charge interest, which did not accrue and that there was no income at all either accrued of received by the assessee. In CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC) by agreement entered into with the concerned party rate of commission receivable was altered. Therefore, income on account of commission as accrued in the books was different than what was received by the concerned party on the basis of agreement entered into subsequent to the end of the year. Therefore, the Court held that the income can be stated as not resulted at all. In T.C.I. Finance Ltd. v. Asstt CIT [2005] 92 TTJ (Hyd) 238: [2004] 91 ITD 573 (Hyd), the facts were found different from the facts of the case under consideration as the assessee had a valid and legal right to enforce the recovery through Courts. 36. The assessee's submission that it had been granted status of public financial institution for which an application was made within the previous year relevant to the impugned assessment year, though actually notified on 23rd Feb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by she public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its P L a/c for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. Explanation . For the purposes of this section, (a) 'National Housing Bank' means the National Housing Bank established under s. 3 of the National Housing Bank Act, 1987 (53 of 1987); (b) 'public company' means a company, (i) which is a public company within the meaning of s. 3 of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate for the PFI status in the application to be submitted in this regard has no bearing in adopting the ratio of the decision. In these circumstances we set aside the order of the CIT(A) and that of the AO and remit the matter back to the file of the AO for examining the case of the assessee in the light of these provisions of s. 43D of the Act. Accordingly, the alternate claim of the assessee to the effect that no real income had accrued, requires no consideration. 39. The fifth ground is against the disallowance of Rs. 26,16,20,204 out of depreciation claimed of Rs. 33,75,40,636. The facts of the case are that the assessee had claimed depreciation of Rs. 33,75,40,636 on full amount of original cost of assets. The AO, however, was of the view that besides reduction of the grants amount from the cost of assets, notional depreciation also should have been reduced as if the assessee had been a taxable entity and accordingly, had been allowed depreciation since the date of its inception. The assessee claimed that as per the provisions of s. 43(6) the WDV had to be computed by reducing the depreciation actually allowed against the cost of the assets and that there was no concept of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en exempted from paying income-tax, it had also been exempted from not preparing its accounts of income and expenditure. In fact, public money has been utilized in the form of grant/subsidy by the Central Government and accounts have to be prepared and income has to be computed, though NDDB was exempt from paying income-tax. If depreciation or any other expenses are not included as per the prevalent accounting principles, it will give distorted picture of the accounts of the assessee. 40. The CIT(A) noted the facts that the assessee was a non-taxable entity ever since its inception in 1987 and remained so till 31st March, 2002. The current year is the first year in which the assessee has become a taxable entity due to omission of s. 44 of the NDDB Act. As a result, for the purpose of IT Act, the assessee had neither claimed nor been allowed any depreciation in the prior period. Therefore, during the first year of its taxability, the assessee has claimed the depreciation on the original cost of the assets as adjusted by the amount of grants received by it from the Government/agencies (for meeting a part or full cost of such assets). He sustained the addition made by the AO by obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets have been discarded in the process. Similarly, there must be many more assets which would be in the queue of being discarded, if not in the current year may be in the following years. Hence, taking the WDV of such assets at cost ignoring the normal wear and tear which consumed the effective life of such assets to a great extent would lead us to the concept of 'superconductivity', a phenomenon where loss due to friction is nil in absolute terms. In practical commercial world such a phenomenon does not exist. Thus, if the words, 'actually allowed' are given their literal meaning then unrealistic results would emerge and distorted picture of income and profits would be projected. Invariably, the correct WDV of an asset should be proportionate to its scrap value. That shows if the asset is on verge of being discarded on being consumed by its normal wear and tear over the years, then scrap value of such an asset in general, would also be low or negligible; correspondingly, its written down value (WDV) should also match the same levels. Therefore, taking the original cost of the asset as its WDV in such situation would lead to absurd results. Hence, WDV of an asset, whether use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to have been to enforce correct computation of the depreciation/WDV as per law and discourage or disallow the arbitrary and wrong claims made by the assessees (or to restrain the AO from allowing the claims as during the course of the assessment proceedings). 42. Before us, the assessee submitted that as the assessee was not taxable entity earlier, the question of allowing depreciation to it did not arise. The approach of the Revenue authorities to arrive at WDV by deducting notional depreciation, for earlier years is not tenable in the eyes of law because the words "actually allowed" appearing in s. 43(6) should be given a meaning as allowed actually and that no notional allowance of depreciation is contemplated in the section. The language of the section is very clear. In view of clear provisions of law, the logic, the intention of the law or irony interpreted by the AO, is not relevant. The WDV is the amount of cash (sic.-cost) of assets as reduced by allowance of depreciation actually allowed and it is so held in various cases relied upon the decisions in CIT v. Straw Product Ltd. [1966] 60 ITR 156 (SC); CIT v. Dharampur Leather Co. Ltd. [1966] 60 ITR 165 (SC); CIT v. Mahen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. Wherever the legislature has wanted to reduce the WDV to be ascertained after allowing (notional depreciation), it has specifically provided so, e.g. in s. 10A(6) providing for the deemed allowance of depreciation for the assessment years ending before 1st day of April, 2001. Sec. 10B(6) also provides for similar deemed allowance of depreciation for any of the relevant assessment years ending before the 1st day of April, 2001. These are specific exclusions and not exposition of law that depreciation of the exempted period has to be assumed to have been allowed and notionally allowed. In our opinion, in the present case, there is no such specific provision for deemed allowance under the Act and, therefore, the WDV is to be ascertained by actual cost of the assets. As the income of the assessee was exempt until earlier year, no notional depreciation can be assumed and, therefore, it would be entitled to the depreciation on the original cost of the assets. We accordingly direct the AO to allow the depreciation in accordance therewith. 45. The sixth ground is against the disallowance of Rs. 9,90,00,000 made under s. 36(l)(viii) of the Act. The facts of the case are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee did not have the status of a public financial institution during the current year. He therefore held that the basic requirement for claiming deduction under s. 36(1)(viii) that special reserve has to be created and maintained by a financial institution is not fulfilled. He also held the contention of the assessee that it has been providing long-term finance for industrial or agricultural development to various dairy cooperatives, is also not tenable, as its activity of extending long-term finances to the dairy co-operatives could not be termed as long-term finance given for agricultural and industrial development. He held that it dealt directly with the "Department of Animal Husbandry and Dairying" in the Central Government and that by itself showed that its activities pertained to "Dairying' than the agricultural activities. Taking into consideration decisions in CIT v. R. Venkataswamy Naidu [1956] 29 ITR 529 (SC); CIT v. Kokine Dairy, [1938] 6 ITR 502 (Rang); The Producers Cooperative Distributing Society Ltd. v. Commr. of Taxation [1948] 16 ITR 87 (Supp) (PC); and State of Orissa v. Ramchandra Chaudhary (supra) he held that the dairy farming cannot be classified as an agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that it had made an application for being notified as PFI vide letter dt. 10th July, 2002 following which it has been notified as a public financial institution in terms of sub-s. (2) of s. 4A of the Companies Act, 1956 vide Notification dt. 23rd Feb., 2004 issued by the Ministry of Finance Department of Company Affairs; that it had provided financial assistance to co-operative unions/federations and its subsidiaries for fulfilling its objectives; that the proviso to s. 36(1)(viii) merely provides the maximum amount that can be transferred to the special reserve for the purpose of claiming the deduction and it is nowhere mentioned that if the paid-up share capital is not there, the deduction cannot be availed and thus, the deduction can be availed even if there is no paid-up share capital and the maximum amount that can be transferred to the special reserve can very well be computed on the basis of the general fund which is a free fund and is in the nature of general reserve. 48. We have heard the parties and considered the rival submissions. As regards status of public financial institution as the assessee applied on 10th July, 2002, i.e., within the year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the expenditure has to be a payment which is made irrevocably; there should not be any possibility of the money forming once again a part of the funds of the assessee. If this condition is not fulfilled there was a possibility of there being a resulting trust in favour of the assessee, and therefore the money cannot be considered to have been spent by the assessee. The assessee was disbursing amounts initially as 'grant', but it retained full control over the borrowers in respect of its (i) expenditure, (ii) in respect of the performance to be achieved at the desired level as laid down by the NDDB and (iii) in respect of furnishing half-yearly fund utilization report. Obviously, the above conditions laid down on the borrowers do not make the amount disbursed as expenditure. Accordingly it was in fact a conditional loan. 50. The CIT(A) sustained the addition made by the AO by observing as under: "I have considered the submissions/rejoinder of the appellant and the findings/comments of the AO. As stated above, the appellant has made disbursement to various co-operative unions and federations for implementing dairy development programme titled as "Perspective 2010 Plan" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorised by the relevant Act. The moot question under consideration is whether the disbursements made by the appellant to various co-operative unions in furtherance of its objectives are expenditures or a grant. The appellant in the above given submissions admits that the disbursements were conditional but the intention for laying down such conditions was basically for timely utilisation of grants and to prevent misuse of funds. Since, the amount disbursed as grants could be transformed into interest-free loans or soft interest-bearing loans, therefore, there was always a possibility of the money so disbursed to form part of the funds of the appellant again. The appellant thus continued to exercise control over such grants disbursed to the co-operative unions. The appellant's contention that even in the eventuality of such grants/disbursements coming back to the appellant, the expenditure so claimed against such disbursements could always be reversed in view of the provisions of s. 41(1) of the Act is not tenable because such provisions can be exercised for loss, expenditure or trading liability incurred by an assessee and in the instant case the very foundation of the term is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g once again a part of the funds of the assessee. Hence, in view of the reasoning given on the pre-pages, I (concluded) that the AO was justified in disallowing the deduction claimed under s. 36(1)(xii) of the Act. Accordingly, the addition made by the AO on this account is sustained." 51. Before us the assessee submitted that the assessee satisfies all the conditions for claiming deduction under s. 36(1)(xii). The expenditure incurred was not capital in nature and it was incurred by a body corporate established under the Central Act in respect of objects and purposes authorised by the relevant Act. Grants given by the assessee are for one of its prime objectives providing financial assistance by way of loans/grants to co-operatives/unioris/federations and its subsidiaries for fulfilling its objectives i.e. , economic development of rural masses and improving their quality of life through co-operatives' efforts as detailed in Chapter IV of the NDDB Act. The word "grant" means monetary aid or an act of providing subsidy. When it is given in fulfilment of the activities defined under the NDDB Act, it amounts to an expenditure incurred. The word "grant" used in the agreement actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed under s. 36(1)(xii) and all such expenditures are to be otherwise allowable under s. 37(1) of the IT Act, there was no need to insert such new section providing specific relief to organizations, which are constituted under the Central Act (NDDB Act) to pursue the objectives contained in the Act itself. There is thus no justification in making the disallowance by making the distinction between grant and the expenditure. 53. The finding of the AO that the amount disbursed by the assessee to the co-operatives unions etc. did not exactly fit in the general meaning of word 'grant' because of various conditions attached and also that there is a penal clause in the grant agreements specifying that in case of falling short of standards laid down or on non-fulfilment of conditions or failing in achievements, grant amount in the agreement thereof shall become interest-free loan or 6 per cent interest-bearing loan, is submitted as not warranted. Such conditions are meant to ensure timely utilization of grant and to ensure that the grant is utilized for objectives for which it is given and in order to prevent misuse. Therefore, merely attaching suitable conditions would not change the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. There was thus a possibility of money coming back to the assessee and in that case it would not be a payment made irrevocably. There would be a resulting trust in favour of the assessee. The assessee retained full control over the money disbursed until it was expended for its due performance. In fact it is a conditional loan and not expenditure at all. 58. We have heard the parties and considered the rival submissions. The "expenditure" in its ordinary connotation means what is paid out and is something that has gone irretrievably. This could be either actually paid under the cash system or accounted for as such under the mercantile basis towards a liability actually existing at that time. Putting aside of money which may become expenditure on happening of an event, is not an expenditure as held by the Supreme Court in Indian Molasses Co. (P) Ltd. (supra) and Indian Carbons Ltd. (supra). In the case of CIT v. N.C. John Sons, (supra) also it is observed that in order to constitute expenditure the payment has to be made irrevocably and there should not be any possibility of money forming once again a part of the funds of the assessee. As stated above, the assessee has disbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the provisions of s. 41(1) of the Act, is not tenable because this provisions can be exercised for loss, expenditure or trading liability incurred by an assessee whereas in the instant case the very foundation of the term loss or expenditure is in dispute. 61. The alternate contention of the assessee that in the event of disallowance of the claim under s. 36(1)(xii), such expense shall be allowed as a deduction under s. 37/28 of the Act has also no force. An item of expenditure not covered by the specific sections can only be considered under s. 37 or s. 28 of the Act. 62. For the reasons aforesaid we uphold the order of the CIT(A) in holding that the AO was justified in disallowing the deduction claimed under s. 36(1)(xii) of the Act. 63. The eighth ground is against the disallowance of Rs. 5,61,56,408 towards contribution made to NDDB Employee's Group Gratuity Funds- cum-Life Assurance Scheme of LIC claimed under s. 43B of the Act. The assessee has claimed deduction of Rs. 5,61,56,408 on account of payment of gratuity. The gratuity trust was originally approved under the IT Act vide order dt. 19th Oct., 1972 issued by the CIT, Gujarat. The contribution was covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant previous year. It was to stop this mischief that provisions of s. 43B were inserted as a result of which the deductions in respect of such statutory liabilities are to be allowed only on actual payment. The appellant has breached the trust reposed in it by allowing the gratuity policy to lapse for 15 years and meeting the gratuity liability on accrual basis without actual funding the trust. Therefore, any payment made now on actual basis without approval of the deed of variation would not qualify for the claim of deduction under s. 43B. The AO was thus, right in disallowing the contribution made to unapproved gratuity fund. Accordingly, the additions made by the AO on this account is sustained." 65. The assessee reiterated before us that corresponding to Payment of Gratuity Act the change was made in s. 10(10) of the IT Act increasing the limit to Rs. 3.5 lakhs and as per the provisions of s. 14 of the Gratuity Act, 1972, the other trusts cannot have terms less beneficial to the employees. Therefore, once the changes were made in the Gratuity Act, the assessee was supposed to make payment to retiring employees on such enhanced amount despite lower amount prescribed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, right in disallowing the contribution made to unapproved gratuity fund. Accordingly, the disallowance made by the AO on this account is sustained. 67. The ninth ground is against the addition of Rs. 11,91,424 as prior period expenditure. The AO noticed that certain short provisions of earlier years aggregating to Rs. 38,31,518 for which payments have been made in this year has been added to the income of the assessee. The AO further noticed that the assessee had claimed deduction in respect of expenses pertaining to the tax-free period. 68. The CIT(A) restricted the addition to Rs. 11,91,424 by observing as under : "I have considered the submissions of the appellant and the findings of the AO and observed that the details of short provisions of earlier years are as under: Short provisions of earlier years Amount (Rs.) Remarks Paid to sales-tax office Bhavnagar 1994-95 assessment for BVP Unit, Bhavnagar 6,59,882 Sales-tax demand for the year 1994-95 on account of Form No. 11 not collected and Form No. C rejected and therefore, turnover was taxed at higher rate. It may be noted that the demand order is passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Rs. 6,59,882 during the year. The facts show that the liability has been crystallized during the year, hence the same is an allowable expense. The Gujarat High Court's decision in the case of Sawashtra Cement Chemicals Industries Ltd. v. CIT [1994] 122 CTR (Guj) 329 : [1995] 213 ITR 523 (Guj) quoted by the appellant, wherein, the Court has held that merely because an expense relates to a transaction of an earlier year, it does not become liability payable in the earlier years because the accounts are being maintained on mercantile basis, unless the same is crystallized in the year in question, also supports the claim of the appellant, specially in view of the documentary evidence produced. As regarding the short provisions pertaining to the godown rent paid for the year 2001-02 amounting to Rs. 79,200, I would like to observe that NDDB and the IDMC both are in the organized sector, and since, the rent amount is significant, therefore, the parties are expected to have signed some sort of lease agreement for the said rent amount. Invariably, such rent agreements do contain specific terms regarding the dates on which the rent would become due and payable. Thus, in view of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,40,8000 and Rs. 2,95,800 is rejected. The last item pertains to various transactions aggregating Rs. 2,23,843 for which neither any details have been filed nor any explanation given. As a result, the addition made by the AO on this account is sustained." 69. The assessee submitted that it has given a detailed written submission to the AO vide letter dt. 10th Nov., 2004 with a brief note enclosed stating justification for each expenditure above Rs. 50,000 giving justification as to how liability crystalised during the year. The assessee by placing reliance on the decision of the Gujarat High Court in the case of Saurashtra Cement Chemicals Industries Ltd. v. CIT [1994] 122 CTR (Guj) 329 : [1995] 213 ITR 523 (Guj) submitted that merely because an expense relates to a transaction of an earlier year, it does not become liability payable in the earlier year unless it can be said that the liability was determined and crystalised in the year in question on the basis of maintaining accounts on the mercantile basis. The assessee, thus, pleaded that it followed mercantile system of accounting and the liability was crystalised during the year under consideration and accordingly debit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim. A simple sheet of paper has been field on which certain figures like Rs. 3,68,800 and some other figures are scribbled which is neither a proper receipt nor it bore any signature or office seal or the name of any office. These claims are thus rightly rejected by the CIT(A). For the last item of various transactions aggregating Rs. 2,23,843 also neither any details have been filed nor any explanation given either before CIT(A) or before us. We therefore find no alternative but to sustain the disallowance. 71. The next ground is against the disallowance of Rs. 7,87,165 out of repairs and maintenance expenses. The assessee had claimed repair and maintenance charges in respect of (i) ceiling board material Rs. 3,04,604, (ii) carpentry work at seminar room Rs. 3,35,065 and (iii) false ceiling, electrical rewinding etc. Rs. 4,50,043, totalling to Rs. 10,89,712. These were claimed placing reliance upon the decision of the Supreme Court in the case of Empire Jute Mills Ltd. v. CIT [1980] 17 CTR (SC) 113 : [1980] 124 ITR 1 (SC), Madras High Court decisions in the cases of CIT v. Asher Textiles Ltd. [2000] 158 CTR (Mad) 409 : [1999] 240 ITR 483 (Mad) and CIT v. Jawahar Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ras High Court in the cases of CIT v. Asher Textiles Ltd. (supra) and CIT v. Jawahar Mills Ltd. (supra) these could not be capital expenditure. We accordingly reverse the order of the CIT(A) as well as of the AO and direct to allow the entire claim of the assessee as revenue in expenditure. 74. The next ground is against the disallowance of Rs. 2,52,818 towards contribution to employee's recreation trust. The AO disallowed the claim of the assessee in view of the provisions of s. 40A(9) holding that the said provisions read with the Circular No. 387 dt. 6th July, 1984 as well clearly lay down that no deduction has to be allowed in respect of any sum paid as contribution to any fund, trust or society for any purpose except contributions made to a recognized provident fund, gratuity fund or approved superannuation fund. The assessee submitted that the amount was paid to meet the deficit between actual expenses incurred by the staff club and contribution received by the club from its members and the expenses were incurred through club instead of incurring them directly and therefore,the same is not subject to the provision of s. 40A(9). 75. The CIT(A) confirmed the addition by obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. CIT [1963] 47 ITR 139 (AP) and Devidas Vithaldas Co. v. CIT 1972 CTR (SC) 28 : [1972] 84 ITR 277 (SC). We upon hearing the parties find that matter stands covered against the assessee by the recent-decision of the Supreme Court in Enterprising Enterprises v. Dy. CIT [2007] 208 CTR (SC) 433 wherein it is held that proportionate lease rent paid by the mining lessee for acquiring leasehold right for extracting minerals from mineral bearing land is a capital expenditure. We accordingly uphold the disallowance. 78. The thirteenth ground is against the disallowance of Rs. 8,550 on account of delay in making payments of provident fund. The AO disallowed a sum of Rs. 23,490 towards delayed contributions made to the PF holding that such payments were made beyond the due date. The CIT(A) confirmed the disallowance to the extent of Rs. 8,550 by observing as under: "I have considered the submissions of the appellant and the findings of the AO and observe from the above given details of delayed contributions that all payments made upto 17th Sept., 2002 amounting to Rs. 14,940 are within the grace period permitted by notifications issued under the Provident Fund Act (with the exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the findings of the AO and observe that since the NGO, Kutchh Nav Nirman Abhiyan has been registered by the CIT, Jamnagar for the purpose of s. 80G(5) from 8th Oct., 2002 to 31st March, 2005, therfore any sum paid as donation to the said organization would qualify for deduction under s. 80G. Though the receipt showing the full amount of donation of Rs. 76,50,000 has been produced from the said NGO yet, since the appellant itself has shown Rs. 51,26,305 as advance on 31st March, 2003, therefore, the said amount would not qualify for any deduction under s. 80G. However, the appellant would be entitled to 50 per cent deduction on the balance sum of Rs. 25,23,695 amounting to Rs. 12,61,847 as the amount had been passed on to the recognized organization during the year. Accordingly, the AO is directed to allow the aforementioned deduction of Rs. 12,61,847 under s. 80G of the Act to the appellant." 82. The learned counsel of the assessee submitted that the Kutch Nav Nirman Abhiyan, a NGO to whom donation was made is recognized as per s. 80G of the Act. In order to ensure proper utilization the NGO was required to submit fund utilization report periodically. Pending receipt of such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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