Commissioner Of Income Tax Chennai v. The Tamil Nadu Small Industries Development Corporation

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA Commissioner of Income TaxChennai... Appellant/Respondent Vs The Tamil Nadu Small IndustriesDevelopment Corporation1, Paulawala RoadKathipara Junction, GuindyChennai-600 015... Respondent/Appellant PRAYER: Appeal under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, 'B'Bench, Chennai dated 30.06.2005 in I.T.A.No. 494/Mds/2000 forthe assessment year 1993-94 against the order of theCommissioner of Income Tax (Appeals) Chennai 600 034 dated2.12.99 in ITA.No.8/99-2000 against the Joint Commissioner ofIncome Tax Special Range III Chennai 600 034, dated 12.3.99 andmade in PAN/GIR.No.3T for the Asst year 1993 - 94. The above tax case appeal is directed against the order ofthe Income-tax Appellate Tribunal dated 30.06.2005 made inI.T.A.No.494/Mds/2000 for the assessment year 1993-94, settingaside the orders of the authorities below. 2.1. The facts in a nutshell are that the assessee, acompany wholly owned by the State Government, filed its returnof income for the assessment year 1993-94 admitting an income ofRs.49,40,823/-, and the assessment was completed under Section143(3) of the Income Tax Act on a total income of https://hcservices.ecourts.gov.in/hcservices/ Rs.56,19,300/-. On noticing that some income escaped assessment,a notice under Section 148 of the Act was issued to the assessee,who filed a revised return admitting the income as per theoriginal return, viz., Rs.49,40,823/-. The assessing officer,finding that though the assessee followed mercantile system ofaccounting, only with respect to the interest received on depositsfrom M/s.Andhra Bank Financial Services Ltd. the assessee followedcash system of accounting, treated the interest accrued during therelevant period as income on mercantile basis. 2.2. On appeal, before the Commissioner of Income Tax(Appeals), the assessee submitted that the interest on depositwith M/s.Andhra Bank Financial Services Ltd., has not accrued tothe assessee company since the principal was in doubt and for thatreason alone, the assessee company has been accounting for theinterest on receipt basis. But, the Commissioner of Income Tax(Appeals), taking note of the order of the CIT(A)-III dated9.3.1998 in I.T.A.No.95/96-97, for the assessment year 1994-95,confirming the addition of interest accrued on the amount due fromM/s.Andhra Bank Financial Services Ltd., upheld the addition ofRs.40 Lakhs being interest accrued and receivable from M/s.AndhraBank Financial Services Ltd., for the assessment year 1993-94 andconfirmed the order of the Assessing Officer. 2.3. On further appeal by the assessee, the Tribunal, takingnote of its orders in the assessee's own case for the assessmentyears 1994-95 and 1995-96 and also the judgment of this Court inCIT v. Pondicherry Industrial Promotion Development InvestmentCorporation Ltd., [2002] 254 ITR 748, wherein it is held that cashsystem of accounting can be followed insofar as the interest andrent are concerned, held that the assessee is entitled to followcash system of accounting with regard to interest, thereby settingaside the orders of the authorities below and upholding the claimof the assessee. 2.4. Hence, the present appeal by the Department raising thefollowing substantial questions of law: (i)Whether on the facts and circumstances of the case theTribunal was right in holding that interest from AndhraPradesh Financial Corporation should be taxed only oncash basis, while the assessee was following mercantilesystem of accounting? And (ii)Whether on the facts and circumstances of the case theTribunal was right in applying the ratio of the decisionof this Court in the case of Pondicherry IndustrialPromotion Development Investment Corporation Ltd., [2002]254 ITR 748? https://hcservices.ecourts.gov.in/hcservices/ 2.4. Hence, the present appeal by the Department raising thefollowing substantial questions of law: (i)Whether on the facts and circumstances of the case theTribunal was right in holding that interest from AndhraPradesh Financial Corporation should be taxed only oncash basis, while the assessee was following mercantilesystem of accounting? And (ii)Whether on the facts and circumstances of the case theTribunal was right in applying the ratio of the decisionof this Court in the case of Pondicherry IndustrialPromotion Development Investment Corporation Ltd., [2002]254 ITR 748? https://hcservices.ecourts.gov.in/hcservices/ 3. The main argument of the learned Counsel for the Revenueis that since it is agreed by M/s.Andhra Bank Financial ServicesLtd. that interest would be paid to the assessee after paying theprincipal amount due to them, it should be construed that theinterest is actually received by the assessee. 4. It is the case of the assessee that the interest ondeposit with M/s.Andhra Bank Financial Services Ltd., has notaccrued to the assessee company since the principal was in doubt,and that M/s.Andhra Bank Financial Services Ltd. defaulted in thepayment of interest during the financial year 1992-93 andtherefore, from that year onwards the assessee company has beenaccounting for the interest on receipt basis. 5. When an issue regarding hybrid accounting came up beforethe Apex Court in UCO Bank v. CIT, [1999] 237 ITR 889, wherein theassessee while following the mercantile system of accountingconsidered the income by way of interest pertaining to doubtfulloans as not real income in the year in which it accrued, but onlywhen it was realised, the Apex Court held that such a mixed systemof accounting was in accordance with the accounting practice. 6. This Court in Commissioner of Income-tax v. PondicherryIndustrial Promotion Development Investment Corporation Ltd.,[2002] 254 ITR 748, having regard to the decision of the Apexcourt, referred supra, that it cannot be said that it wasimpermissible for the assessee to have followed a mixed or ahybrid system of accounting and that while following themercantile system, it was permissible for it to adopt a cashsystem of accounting so far as interest and rent were concerned,held that the assessee cannot be held to be disentitled to changethe method of accounting even when it is genuine solely on theground that such a mixed system of accounting would result in lossto the Revenue for that year. 7. The ratio laid down in the decisions referred supra, issquarely applicable to the facts and circumstances of the case onhand. Finding therefore no substantial question of law, thisappeal is dismissed.sasiSd/Asst.Registrar/true copy/ Sub Asst.Registrar To: 1. The Assistant Registrar, Income-tax Appellate Tribunal, 'B' Bench Rajaji Bhavan, Besant Nagar, Chennai 600 090. 2. The Commissioner of Income-tax (Appeals), XII Chennai.34 3. The Commissioner of Income Tax Tamil Nadu-III, Chennai. 4. The Joint Commissioner of Income Tax Special Range III, Chennai 600 034. 5. The Commissioner of Income Tax, Chennai. + 1 cc to Mr. Pushya Sitaraman, Advocate SR No. 49863 T.C.(A) No.2400 of 2006 TEJ(CO) SR/4.11.2006