TMI Blog2006 (2) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... sure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961 on 25-3-1994. The assessee has taken up six grounds of appeal, out of which ground No.6 is residuary in nature, which does not require any decision from us. Ground Nos. 1, 2 3 are against non-deduction of a sum of Rs. 23,30,508/-, being the Statutory Reserve Fund (hereinafter called the SRF), in computing the income of the assessee. It is inter alia mentioned that the debit to the profit loss account in respect of the SRF amounted to diversion of income by overriding title and, therefore, because of the aforesaid reason and otherwise also, the amount represented an allowable deduction in computing the income. The 4th ground of appeal is against the non-deduction of a sum of Rs. 3,76,430/-, representing the reserve for doubtful debts, in computing the income. It is inter alia mentioned that reserve represented, in fact, bad debts. 5th ground of appeal is against adding a sum of Rs. 4,00,925/-, representing excise duty, to the total turnover, for the purpose of computing deduction u/s 80HHC of the Act. As against the aforesaid, the revenue has taken up four grounds of appeal, out of which ground Nos. 3 4 are in the nature of prayer or residuary ground. Ground No. 1 is against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute a diversion in law or by superior title, and, therefore, the disallowance is justified. Similarly, in the same case, before the Madras High Court, CIT, Tamil Nadu-V v. South Arcot District Co-operative Supply and Marketing Society Ltd., (1981) reported in 127 ITR page 467, in connection with the education fund, it was held that the transfer to the fund is only an application of income and does not result in any diversion of income at source by overriding title. Since the reserve fund in the case of the assessee is identical as in the case of Madras High Court, there is no diversion of income by any overriding titles. The disallowance claimed for deduction of special reserve is, therefore, upheld. The assessee fails on this issue. Thus, the findings of the AO and the learned CIT(A) were that the debit in respect of the SRF amounted to application of income and not diversion of income in law or by superior title. 2.3 Before us, the learned counsel of the assessee referred to the provisions governing Multi-State Co-operative Societies. Section 61 provides that a Multi-State Co-operative Society shall, out of its net profits in any year transfer an amount not less than 25% to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the sake of security of the money; and it can be utilized as per rule 7 subject to the condition that the amount so utilized shall be made good from the profits of the subsequent year or years. The condition of making good the amount utilized from the SRF can also be waived by the Central Registrar. Thus, at least one thing is clear that there is no overriding title in favour of the third party. The learned counsel also relied on the decision of Hon'ble Karnataka High Court in the case of CIT v. Pandavapura SSK Ltd. [1992] 198 ITR 690, in which the decision was the same as in the aforesaid case. 2.5 The learned counsel also relied on the decision of Hon'ble Bombay High Court in the case of Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291. That assessee was manufacturing rectified spirits out of molasses. The assessee was subjected to Ethyl Alcohol (Price Control) Amendment Order, which provided for creation of storage facilities for molasses and alcohol. The assessee transferred a sum of Rs. 43,633/- from the sale proceeds to the Storage Fund . The Hon'ble Court pointed out that what was necessary to see was whether there was diversion at source of the income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount did not accrue to it as income. In the case of Amalgamated Electricity Co. Ltd., the assessee was under statutory obligation to create a contingency reserve. The Hon'ble Court pointed out that the appropriation to the fund was not made voluntarily by the assessee and the reserves were not available to the assessee for any purpose of its own. The fund had to be utilized as per the statutory provisions, which were ultimately held the benefit of consumers, thus, it will be seen that the creation of the fund was obligatory on the part of the assessee and it could not be used for any of its purposes. Therefore, the Court came to the conclusion that there was diversion of income at source in favour of the consumers. Looking to the decision in the case of Somaiya Orgeno-Chemicals Ltd. it can be said that there need not always be a diversion of the income by overriding title in favour of third party before it can be concluded that the income did not accrue to the assessee at all. There could be an alternative situation where the money has to be statutorily set apart from the sale proceeds and to be utilized in accordance with the statutory provisions. In such a case also, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid facts, the Hon'ble Court came to the conclusion that the amount was not diverted at all by any reason of a overriding obligation or title. Therefore, it came to the conclusion that the amount represented income of the assessee. It may be pointed out that in coming to the aforesaid conclusion, the Court considered the case of Hon'ble Kerala High Court in the case of Cochin State Power Light Corporation Ltd. and the Hon'ble Bombay High Court in the case of Amalgamated Electricity Co. Ltd. The Court pointed out that in those cases, the amount was not at the disposal of the assessee in the matter of its obligation. The object of the fund to make available sufficient reserves for meeting commitments necessary for efficient running of the business. Having considered the facts of the case in hand, we find that the assessee continues to be owner of the fund, which are to be utilized by it for its own purposes. Thus, there is neither an overriding title in favour of the third party nor the assessee loses control and domain over the money. Similar issue was raised in the case of Vellore Electric Corporation Ltd. v. CIT [1997] 227 ITR 557 (SC) in which the Apex Court c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to deduct an amount of Rs. 3,76,430/-, representing reserve for doubtful debts in computing its income. The case of the assessee was that the debts were irrecoverable, though they were not actually written off from the books of account. We have considered the arguments of the assessee and its learned counsel. 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. 5. Ground No. 5 is clearly covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT v. Sud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was argued that as and when the money became unconditionally available to the assessee, the amount was transferred to the sales account. In any case, on expiry of two years of satisfactory performance period, the whole of the amount was transferred to the sales account. The learned counsel also relied on the decision of the Hon'ble ITAT, Pune A Bench, Pune, in the case of Dy. CIT v. Saj Froude Test Plant (P.) Ltd. [IT Appeal Nos. 871 (Pune) of 1994 1239 (Pune) of 1995] in which the issue was decided in favour to the assessee. 7.3 We have considered the facts of the case and rival submissions. The case of the learned DR was that the assessee has changed its method of accounting in respect of the retention money, which was not bona fide. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Industries Ltd., these grounds are decided in favour of the assessee and against the revenue. 12. 5th ground of appeal is against the disallowance of rent paid for the guest house building. This issue has been decided against the assessee by the Apex Court in the case of Britannia Industries Ltd. Respectfully following that decision, this ground of appeal is dismissed. 13. 6th ground of appeal is residuary in nature, which does not require any decision from us. 14. In result, the appeal of the assessee is partly allowed. 15. As regards to the appeal of the revenue, ground No. 1 is against the finding of the learned CIT(A) that the retention money does not accrue as income to the assessee in this year. Following our order in ITA No. 1249/PN/94, this ground is dismissed. 16. 2nd ground of appeal is against the addition made to the closing stock of the assessee on account of mod vat credit. This issue is fairly covered by the decision of the Apex Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275. The decision of the court was that the closing stock has to be valued on the same basis on which the purchases are debited in the books of account. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has to be allowed on cash basis only, subject to the condition that the allowance shall also be made if the payment has been made before the due date of filing the return u/s 139(1), as mentioned in proviso of the section. There is some confusion in the year in which the aforesaid amount was paid. Therefore, the Assessing Officer shall verify the date of payment of the bonus to the employees once again with a view to verify its admissibility in the instant year. Thus, the matter is restored to the file of the Assessing Officer for fresh adjudication after hearing the assessee. Thus, this ground is treated as allowed for statistical purposes. 23. Ground No. 7 being residuary in nature, does not require any decision from us. 24. In result, the appeal of the assessee is partly allowed. 25. Coming to the appeal of the revenue, the first ground is in relation to the retention money, amounting to Rs. 3,25,43,381/-. This issue is covered in our order in ITA No. 1249/PN/94. Relying on our decision in that appeal, this ground is dismissed. 26. 2nd ground of appeal is against the deletion of addition of Rs. 22,50,623/- made by the Assessing Officer to the value of closing stock on account ..... 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