TMI Blog1995 (9) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... t the facts and particulars furnished in and along with the return should have been taken into account while making the assessment under s. 143(3). 16. That no credit of interest on the amount of refund for the asst. yr. 1989-90 has been taken into account while adjusting it against the demand for the asst. yr. 1990-91." It was contended by the learned counsel for the appellant that the above grounds, though taken before the CIT(A) were not dealt with and disposed of by him. It was pointed out that the appellant was not serious in pressing the first two grounds while with reference to third ground relating to adjustment of refund, if any, for the asst. yr. 1989-90 against the demand of the year under appeal, the matter may be restored to the file of Assessing Officer (AO). We think it is a reasonable request. We, therefore, treat the first two grounds as not pressed. We further direct the AO to look into the grievance of the appellant contained in ground No. 16 before the first appellate authority and deal with it according to law and facts on record. 3. Grounds No. 2 and 3 taken in the appeal relate to disallowance of a part of the expenditure claimed in earning the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. There is no dispute that the above notification applied to the appellant also. The appellant in conformity with the above mandatory notification brought out an amendment in its method of accounting. As submitted by the learned counsel for the appellant, the latter at first casted it accounts according to mercantile system of accounting as per s. 209(3)(b) of the Companies Act and then, following the above notification, it substituted the figure of actual receipt of interest on loans and advances for the accrued amount of interest. The actual receipts were less by Rs. 12.46 crores as compared to accrued amount of interest. The extra amount of Rs. 12.46 crores was then disclosed by way of a note in the annual accounts of the appellant. It was, thus, contended on behalf of the appellant, that its accounts came to be maintained in accordance with s. 209(3)(b) of the Companies Act, 1956 as amended by the aforesaid notification. It was also stated before us on behalf of the appellant that the above system of accounting was adopted for and from the asst. yr. 1989-90 and is continuing till date. 4. The learned Assessing Officer (AO) did not accept the profit as shown by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned CIT(A), however, held that it would be fair and reasonable to hold that the expenses attributable to the unrecorded income of Rs. 12.46 crores bear the same proportion to the outstanding expenses which the receipt on mercantile basis bears to the receipt on cash basis. He, accordingly, directed the AO to apportion the outstanding expenses of Rs. 8,31,71,272 in the aforesaid proportion and disallow proportionate expenses only. It was brought to our notice that such disallowance finally came to Rs. 2,30,88,862 only. 6. The assessee is now in appeal before us against the disallowance of a part of the expenditure which, as stated above, finally came to Rs. 2,30,88,862. The learned counsel for the appellant, Shri Prakash Narain, submitted before us that under s. 145(1) of the IT Act, income chargeable under the head "profit and gains of business" was compulsorily to be computed in accordance with the method of accounting which was regularly employed by the assessee. He clarified that the method of accounting obviously meant one which was a recognised one. According to him, there was no dispute that the method of showing interest income on cash basis and the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext submitted that ss. 14, 15, 16, 28 and 56 of the IT Act, 1961 all referred to 'gross income' and that the deductions from such gross income were provided through other sections to arrive at the taxable income. His additional submission was that the appellant had different types of incomes and it had incurred a large number of expenses and it was impossible to co-relate any particular expenditure to any particular income so as to arrive at 'net income' from any particular source. According to him, this also went to prove that the notification in question referred only to 'gross income'. 8. The learned counsel for the appellant made the following further submissions: "1. The appellant had followed the method of accounting as provided in s. 209(3)(b) of the Companies Act and as modified by the said notification and, therefore, it was a recognised method of accounting. Its accounts were examined by Comptroller General of India, Accountant General, Industrial Development Bank of India and several other statutory authorities including its own auditors and they had all approved that the accounts were maintained in accordance with the mandatory notification issued by the Central G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission, therefore, was that the lower authorities were not legally correct in disallowing a part of interest and other expenses. 9. The learned Departmental Representative, on the other hand, submitted that s. 29 of IT Act clearly laid down that income referred to in s. 28 was to be computed in accordance with the provisions contained in ss. 30 to 43C, which meant the 'net income'. He strongly submitted that the term 'income' referred to in the notification meant 'net income' and not 'gross income'. According to him, income did not mean 'gross receipts' but 'net income' after deduction of expenses incurred in earning such income or relating thereto. In this connection, he referred to the decision of Hon'ble Supreme Court reported in 183 ITR 1 (SC). He also referred to the decision of the Supreme Court in CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) holding that it is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. The officer is not bound to accept the system of accounting regularly employed by the assessee, the correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for in the books of account, is disclosed by way of a note in the annual accounts. In other words, such a company was allowed to show its income from interest on loans and advances on cash system provided the extra income on accrual basis was disclosed in a note to the accounts. There is no dispute before us that the appellant is a Government company which is engaged in the business of financing industrial projects and is also approved by the Central Government under s. 36(1)(viii) of the IT Act. Thus, the above notification fully applies to the case of the appellant. The accrued income which has not been accounted for in the books of account and amounts to Rs. 12.46 crores has also been shown by way of a note in the annual accounts. Further, it has also maintained its books according to mercantile system in regard to all other incomes and expenses except income from interest on loans and advances earned by it which alone has been shown on cash basis. The only question for our consideration is whether this is a correct approach or the appellant should have deducted the expenses and interest paid by it to its own creditors and then only 'net receipts' on cash basis should have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on mercantile basis in accordance with s. 209(3)(b) of the Companies Act. The various authorities cited before us on behalf of the appellant fully support the above finding arrived at by us. Further once the accounts are maintained in accordance with s. 209(3)(b) of the Companies Act as amended by the said notification, they have to be treated as having been maintained according to a recognised method of accounting within the provisions of s. 145(1) of IT Act, 1961. It has been held that the choice of selecting a method of accounting is with the appellant although that choice is subject to the provisions of s. 209(3)(b) r/w the said notification. 13. Since the appellant has been following a recognised method of accounting as held by us above and that too regularly since the amendment of s. 209(3) and the issue of the notification, its income must be computed according to the said method. If this is done, then the income declared by it from interest on loans and advances must be accepted without making any disallowance out of the interest paid by it to its own creditors or any expenditure relating thereto. The cases relied on by the learned CIT(A) are all distinguishable on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the submission of the counsel for the appellant that for claiming deduction of bad debt after 1st April, 1989 what is necessary is it should have been written off in the books in the year of claim. The year in which it actually became bad was no more relevant. In view of this amendment to s. 36(1)(vii), which obviously seems to have been overlooked by the lower authorities, the claim of the appellant deserves to be allowed in the year under appeal in which it has been written off although it became bad in an earlier year. The addition of Rs. 2,23,891 is accordingly deleted. 17. The next ground being ground No. 5 relates to disallowance of Rs. 17,099 as expenditure on gifts. The learned AO found that the details of presentation articles in excess of Rs. 50 on each article had been filed in Annexure 'B' to the tax audit report according to which disallowance under r. 6B of the IT Rules worked out to Rs. 17,099. He, accordingly, disallowed the above amount and added it to total income of the appellant. 18. The assessee appealed to CIT(A). It was contended before him on behalf of the appellant that since the articles of presentation and items of gifts made by the appellant were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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