2006 (2) TMI 264 - AT - Income Tax

Non-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.

Summary

Issues Involved:
1. Non-deduction of Statutory Reserve Fund (SRF)
2. Non-deduction of Reserve for Doubtful Debts
3. Addition of Excise Duty to Total Turnover for Deduction u/s 80HHC
4. Accrual of Retention Money as Income
5. Depreciation of Guest House Assets
6. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction u/s 80HHC
7. Disallowance of Rent Paid for Guest House Building
8. Addition to Closing Stock on Account of Modvat Credit
9. Deduction for Payment of Bonus under Section 43B

Detailed Analysis:

1. Non-deduction of Statutory Reserve Fund (SRF):
The assessee argued that the SRF should be deducted in computing income as it represented a diversion of income by overriding title. The AO and CIT(A) found that the SRF amounted to an application of income, not a diversion. The Tribunal upheld this view, stating that the SRF is created from profits and remains under the control of the assessee, thus not qualifying as a deductible expense.

2. Non-deduction of Reserve for Doubtful Debts:
The assessee claimed a deduction for a reserve for doubtful debts. The Tribunal referenced Section 36(1)(vii) and its Explanation, which excludes provisions for bad and doubtful debts from allowable deductions unless actually written off. The Tribunal upheld the CIT(A)'s decision, denying the deduction as the debts were not written off in the books.

3. Addition of Excise Duty to Total Turnover for Deduction u/s 80HHC:
The Tribunal followed the jurisdictional High Court's decision in CIT v. Sudershan Chemicals Industries Ltd., ruling that excise duty should not be included in the total turnover for computing deduction u/s 80HHC. This ground was decided in favor of the assessee.

4. Accrual of Retention Money as Income:
The revenue contested the exclusion of retention money from income. The Tribunal found that the change in accounting practice by the assessee was bona fide and aligned with legal precedents. It ruled that retention money did not accrue as income until the performance conditions were met, thus supporting the CIT(A)'s decision to exclude it from income.

5. Depreciation of Guest House Assets:
The Tribunal followed the Supreme Court's decision in Britannia Industries Ltd. v. CIT, ruling against the assessee and allowing the revenue's appeal on this issue, denying depreciation on guest house assets.

6. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction u/s 80HHC:
For the assessment year 1992-93, the Tribunal followed the decision in Sudershan Chemicals Industries Ltd., excluding excise duty and sales tax from the total turnover for computing deduction u/s 80HHC, thereby deciding in favor of the assessee.

7. Disallowance of Rent Paid for Guest House Building:
Following the Supreme Court's decision in Britannia Industries Ltd., the Tribunal dismissed the assessee's appeal on the disallowance of rent paid for the guest house building.

8. Addition to Closing Stock on Account of Modvat Credit:
The Tribunal referenced the Supreme Court's decision in CIT v. Indo Nippon Chemicals Co. Ltd., directing the AO to verify the method used by the assessee for debiting purchases and valuing closing stock accordingly. This ground was allowed for statistical purposes.

9. Deduction for Payment of Bonus under Section 43B:
The Tribunal noted the confusion regarding the year of payment of the bonus and directed the AO to verify the payment dates to determine its admissibility under Section 43B. This ground was allowed for statistical purposes.

Summary of Appeals:
- The assessee's appeals were partly allowed, with specific issues decided in their favor, such as the exclusion of excise duty from total turnover and the non-accrual of retention money as income.
- The revenue's appeals were also partly allowed, with the Tribunal upholding the disallowance of depreciation on guest house assets and directing further verification on the valuation of closing stock and bonus payments.