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2006 (2) TMI 264 - AT - Income TaxNon-deduction of Statutory Reserve Fund (SRF) - Bad Debt - Method Of accounting - retention money. HELD THAT:- It is a case where the assessee has to set apart a portion of its profits and credit the amount to SRF. The money has to be invested in approved securities. This condition is imposed to ensure that investment is in sound securities and the fund is not fritted away. The money can be used for the business of the assessee as provided in the notification. Thus, there is neither diversion of income at source in favour of a third party nor the assessee loses control and domain over the money as it remains invested in its own name and it is to be used in its own purposes. The condition regarding recoupment of the money utilized also does not detract us from the facts that there is no overriding title and the assessee continues to be owner of the money in its own right. The condition merely enforces the impression that the rules are to ensure financial health of the assessee society. It is also clear from section 61 that the transfer is from the profits to the SRF and, thus, it amounts to application of income after it has reached the assessee as such. In this connection the heading of section 61 - "Disposal of net profits" may not be conclusive but only indicative, but provision itself is clear that the transfer is from profits. Thus, we are unable to persuade ourselves to the view that the transfer of the amount to the SRF is deductible in computation of income of the assessee. Therefore, we are of the view that the learned CIT(A) was right in not allowing deduction of this amount in computing the income of the assessee. Thus, ground Nos. 1, 2 & 3 of the appeal are dismissed. Bad Debt - We find that provisions of section 36(1)(vii) contain an Explanation to the effect that any debit or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts. The Explanation was inserted by Finance Act, 2001, with effect from 1-4-1989. Therefore, the statutory provision is applicable to the instant assessment year, i.e. assessment year 1991-92. The provisions contained in the Explanation are clearly against the case of the assessee as the assessee has not written off the amounts from its books of account. Therefore, we are of the view that the learned CIT(A) was right in not entertaining this claim of the assessee. Thus, ground No. 4 of the appeal is also dismissed. In result, the appeal of the assessee is partly allowed. Method of accounting for retention money - We are not in agreement with the learned DR on this issue. The reason is that the assessee is a corporate entity. Under the regulatory statute, it is bound to follow mercantile method of accounting, in which receipts and liabilities is accounted for on the basis of their accrual. The assessee has been doing so. However, in respect of retention money, its understanding was that the amount accrue as income and, therefore, the whole of the amount was accounted in the year of sale. Subsequently, decisions came in favour of the proposition that since retention money was not available to the assessee for its use unconditionally and it was tagged with the satisfactory performance in terms of quality and quantity, the money did not accrue to the assessee in the year of sale. In view thereof, it changed its practice of accounting for retention money. We are of the view that there is a distinction between the accounting method and accounting practice, the former having a force of law. The accounting practice was inappropriately used by the assessee earlier, which had the effect of preponing its tax liability. In view of the subsequent decisions on this issue, the assessee followed the correct method of accounting by changing its practice. Thus, we hold that the learned CIT(A) rightly deleted the addition made by the AO on this issue. Thus, this ground of appeal is dismissed. In result, the appeal of the revenue is partly allowed.
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