1989-VIL-93-ITAT-
Equivalent Citation: ITD 032, 315,
Income Tax Appellate Tribunal BOMBAY
Date: 03.03.1989
INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED.
Vs
INSPECTING ASSISTANT COMMISSIONER.
BENCH
Member(s) : R. P. GARG., S. P. KAPUR.
JUDGMENT
Garg, AM --- This is an appeal by the assessee against the order of the CIT(A) for the assessment year 1985-86. The first ground in this appeal is against the assessment of interest on sticky loans. In its business of financing the assessee used to give development loan to a number of institutions in private sector. Some of these institutions fall sick or otherwise unable to repay the debt of even the interest. The assessee is generally following mercantile system of accounting. From assessment year 1974-75 it had stopped the practice of crediting the interest to its profit and loss account on such sticky advances on the ground that otherwise the company would be paying tax on interest not realised or incapable of being recovered. It, however, debited the account of the parties for the interest on the loan amounts with the corresponding credits to interest suspense account. From assessment year 1979-80, no entries regarding interest on such loans, as have been considered to be sticky, were made either in the suspense account or otherwise. It adopted a, practice whereby the company treated the interest as its income by crediting to the profit & loss account only when the interest is actually received. On the basis of some proforma records kept by the assessee, a statement of interest deemed to have accrued for the previous year was submitted before the assessing authority, wherein the amount of interest was calculated at Rs. 15,49,97,781. This amount of interest was claimed to be not taxable in the hands of the assessee on the plea that it was following cash system of accounting insofar as the interest on sticky loans was concerned. An alternate claim was also made before the assessing authority that at least a sum of Rs. 14.54,47,904 should not be assessed to tax in view of the Circular F.No. 201/21/84, dated September, 1984. Reliance was also placed on the later Circular of the CBDT in No. 491 dated 30th June, 1987, wherein the Board has instructed the department to accept the cash system of accounting of interest and not to try to tax the amount of interest accruing on sticky loans in such circumstances following the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337. Reference was also made to the Tribunal order dated 15th April, 1987 for the assessment year 1980-81 claiming that the Tribunal had accepted the system of accounting followed by it. The assessing authority did not accept the contentions of the assessee as in his opinion the matter was fully covered by the decision of the Supreme Court in the case of State Bank of Travancore and brought the entire sum of Rs. 15,49,97,781 to tax. The assessee also met with failure before the CIT(A).
2. The learned counsel for the assessee, Sri S.P. Mehta submitted that the assessee having followed the cash system of accounting for such interest regularly its income should be computed on the basis of that system as provided in section 145 of the Income-tax Act, 1961. He further submitted that the system of accounting has been accepted by the Tribunal in the appeal for the assessment year 1980-81. Referring to the Circular No. 491 dated 30th June, 1987, wherein it has been stated that State Financial Corporations are governed by the directives of the Reserve Bank of India and the Industrial Development Bank of India and if these authorities are satisfied that the change in the system of accounting of interest from mercantile to cash basis by the concerned State Finance Corporation is legal, valid and bona fide, the Income-tax Department may accept the cash system of accounting of interest. When the system of cash accounting is being followed by the assessee, which could not have been followed without the directions of the Reserve Bank of India, the case of the assessee is squarely covered by the Circular and, therefore, the entire amount of interest chargeable on the sticky loan was not taxable. He further submitted that in any case, the interest on such loans, where there had been no recovery for a continuous period of three years, should not have been added to the income of the assessee in view of the 1984 Circular of the Board. He has also referred to the decision of the Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847 wherein it has been held that where an assessee regularly employs a method of accounting, its income has to be computed in accordance with such regular method ; that the assessee is, however, entitled to change this regular method of accounting by another regular method and that an assessee is also entitled to follow one method of accounting in respect of one income from one source and another method in respect of other source.
3. The learned Departmental Representative, on the other hand, submitted that when a partial item is isolated from the regular method of accounting, it cannot be treated a change in the method of accounting and for this proposition he referred to the decision of the Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. v. CIT [1981] 132 ITR 184 and that of the Allahabad High Court in the case of CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 728 and certain observations in the decisions of various High Courts reported in---
1. J.K Bankers v. CIT [1974] 94 ITR 107 at 111 (All.) ;
2. Sarupchand v. CIT [1936] 4 ITR 420 (Bom.) ;
3. James Finlay & Co. v. CIT [1982] 137 ITR 698 at 705 (Cal.) ;
4. Snow White Food Products Co. Ltd.'s case at 857 and 860 ;
5. Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 at 862 (Cal.) ;
6. CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.)
and the Supreme Court decision in the case of State Bank of Travancore. He further submitted that in view of the Supreme Court decision in the case of State Bank of Travancore even the Circulars would not help the assessee. He, therefore, submitted that the CIT(A) was justified in confirming the order of the assessing authority bringing to tax the interest on sticky loans.
4. We have heard the parties and considered the rival submissions. Section 4 is a charging section. It provides charge of tax in respect of total income of an assessee in accordance with and subject to the provisions of the Income-tax Act. Section 5 defines the scope of " total income " and includes in the total income all income from whatever source derived which is received or accrued or arisen to the assessee. To avoid double taxation on the same income -- once on its accrual or arisal and again on its receipt, section 145 provides that an assessee's income shall be computed in accordance with the method of accounting followed by the assessee. This section, as held by their Lordships of the Supreme Court in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 at 129 does not purport to enlarge or restrict the contents of taxable income, profits and gains under the Act.
5. The choice of system of accounting under sec. 145 lies with the assessee and the department is bound to follow the same, provided (i) it is a recognised method of accounting, (ii) the system was regularly followed by the assessee, (iii) the accounts maintained thereunder are complete and correct, and (iv) that the income of an assessee could be properly deduced therefrom.
6. Broadly speaking, two principal systems are prevalent. One cash system and the other mercantile system. In the former, a record is maintained on actual receipts and actual disbursements. Entries in this system are passed when money or money's worth is actually received, collected or disbursed. In the latter system, i.e. mercantile system, entries are made in the books on the date of the transaction, namely on the date on which the rights to accrue or liabilities are incurred irrespective of the date of receipt or payment. The practice of posting entries regarding interest on sticky loan to suspense account has been held by their Lordships of the Supreme Court in State Bank of Travancore's case to be a mercantile system of accounting. Besides these two systems, there are in numerable other systems of accounting which may be called hybrid or heterogenous -- in which certain elements and incidents of cash and mercantile systems are combined or they are prevalent side by side.
7. It is well settled that it is open to an assessee to adopt any system of accounting and even one system for one source and another system for a different source Calcutta High Court decision in the case of Snow White Food Products Co. Ltd. Having adopted a particular system of accounting, the assessee is free to switch over to another system of accounting provided the aforesaid four conditions are satisfied, namely, that it is a recognised method of accounting, that the system was regularly followed by the assessee, that the accounts maintained are complete and correct and that the income therefrom could be properly deduced. The change however, is not automatic. The ITO should be satisfied whose power is being not absolute but quasi judicial. The change is, however, normally not permissible for a particular year or a part of the year or in respect of a particular transaction.
8. In this case in regard to interest on sticky loan account, the assessee who was hitherto following mercantile system, has switched over to the cash system of accounting. The salient feature of the new method is to identify the productive accounts and the sterilised accounts. In regard to productive accounts, the interest flows in a regular manner as in the past whereas in regard to loans which have become sterilised, where even the recovery of the principal amount is doubtful, the assessee has adopted the cash system of accounting. Before an account is treated as sterilised by the assessee, there is an elaborate procedure and such procedure rules out any capricious or any arbitrary action on the part of the officials of the assessee. This is a form of hybrid system of accounting and cannot be rejected by the tax authorities in a summary manner. The power to reject the method of accounting followed by an assessee or a change in the method of accounting is not plenary. As observed earlier, if the change over is from one recognised method of accounting, to another recognised method of accounting, the tax authorities can have no grievance. In our opinion, the change effected from a particular year from one recognised method of accounting to another recognised method of accounting is unassailable and no serious exception can be taken by the tax authorities in regard to the same. It was held by the Tribunal in the appeal for assessment year 1980-81 that the change effected by the assessee was just and proper taking into consideration the nature of the business in which the company was engaged. The change was, therefore, a bona fide change and it was regularly being followed by the assessee in the subsequent years. The change was intended to reflect the true profits and gains of the business and, in our opinion, the change was a bona fide one and will have to be given effect to by the tax authorities.
9. The decision of the Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. relied on by the learned Departmental Representative turns out on its particular facts. In that case, it was held that the assessee was following a particular system of accounting and did not claim to effect any change in the accounting and hence it could not treat a particular transaction differently and separately from the method of accounting followed by it. Thus, there was no claim in that case for a change in the method of accounting. It was made clear by their Lordships of the High Court at page 189 that they were not concerned in that reference with the question whether it was permissible to maintain or keep what had been called a hybrid system of accounting though it was clarified that what the expression " hybrid " indicated. According to their Lordships, the expression " hybrid " indicated the birth of a system born out of inter-mixture of the two. When the assessee simultaneously in respect of certain transactions followed mercantile system of accounting, in respect of other followed cash system of accounting, and then the proper expression should, perhaps, in the opinion of Their Lordships, be that the assessee maintained a dual system of accounting in respect of different transactions because the expression " hybrid " would be the result of inter-mixture of the two system and something of a third system emerges. This case, in our opinion, does not advance the case of the revenue.
10. In the case of Cosmopolitan Trading Co., the Allahabad High Court held that the change of the method of accounting was not justified as the same was in respect of a particular debt on the ground that interest was not being paid. There was no question of change of the system as such. This case also, in our opinion, does not help the revenue.
11. In the case of J.K. Bankers, the Tribunal has taken the view that the assessee had advanced certain loans to a party and in respect of those loans, it was following the mercantile system inasmuch as it used to debit the party the amount of interest every year without being realised. The Tribunal thought that, in such circumstances, the assessee was not justified in not offering for assessment the rent which had accrued in its favour even though it had not been realised. That decision of the Tribunal was not accepted by Their Lordships of the Allahabad High Court. It was held that it was open to an assessee to follow one system of accounting in respect of one source and another system in respect of another source. We are at a loss to understand as to how this case can help the revenue. On the contrary helps the assessee.
12. The next case on which reliance has been placed by the Department is that of Sarupchand's case. The Bombay High Court has held in that case that it is open to the assessee to change the method of accounting if it is followed on regular basis. Here, in the present case, the assessee is following regularly the changed method of accounting insofar as it related to interest on sticky loans. This case, therefore, supports the case of the assessee rather than that of the revenue.
13. Reliance placed by the department on the decision of the Calcutta High Court in the case of James Finlay & Co. is also misplaced. This case, like the case before Their Lordships of the Supreme Court in the case of State Bank of Travancore was a case where interest has been credited to suspense account instead of crediting to profit & loss account. It was not a case of non-charging of interest in respect of sticky loans persuant to the changed method of accounting. In those circumstances, it was held by Their Lordships of the Calcutta High Court that it was only a transfer of an item to suspense account and the same could not be termed as a change in the method of accounting. This case also, in our opinion, does not advance the case of the revenue.
14. The department next placed reliance on two decisions of the Calcutta High Court in Snow White Food Products Co. Ltd., both reported in 141 ITR -- one at page 847 and the other at page 861. In the first case, the Tribunal had found that on the evidence on record, it could not be said that the assessee had decided to change its existing regular method of accounting by another regular method. The statement in the annual report only recorded that the management had decided to account for the interest receivable during the relevant year on cash basis, which indicated that the change was suggested only for the year. It was not a regular change as in the present case. There was nothing on record to indicate in that case that the change was intended to be followed regularly in future by the assessee. In the other case, the matter was re-examined for the subsequent year by the Tribunal and on further evidence, it came to the conclusion that the object of the assessee in effecting the change in its method of accounting was only in respect of interest receivable from one debtor and, therefore, the change was not bona fide. It was also doubted whether the changed method was followed in the subsequent years. In these circumstances, these two decisions of the Calcutta High Court are also not helpful to the revenue.
15. The next case on which the revenue placed reliance is that of the Bombay High Court in Confinance Ltd.'s case. In this case, there was no plea raised by the assessee for the change in the system of accounting. It was a case of non-making of entries for a particular transaction, which the Bombay High Court held, was not permissible.
16. Lastly, heavy reliance was placed by the revenue on the decision of the Supreme Court in State Bank of Travancore's case. Here also, we find that the admitted position was that the assessee was following mercantile system of accounting and a particular presentation of the interest was adopted, i.e. instead of crediting the interest to the profit & loss account it was credited to suspense account on the plea that it was on sticky loans which were themselves of doubtful recovery. This case also does not help the revenue. In the present case, as already stated, the assessee had stopped accounting for the interest on sticky loans on mercantile system as it switched over to the cash system of accounting. This system of accounting has been regularly followed by the assessee in the subsequent years as well since 1979-80. In the appeal for 1980-81, the Tribunal had even accepted this method of accounting and held that the change was just and proper. In these circumstances, we hold that the CIT(A) was not justified in bringing the sum of Rs.15,49,97,781 to tax in the assessment of the assessee. We, therefore, direct the exclusion of the said sum.
17. In view of our aforesaid finding, it is not necessary to deal with the alternate claim of the assessee that the benefit of the circulars should be given to it and atleast a sum of Rs. 14,54,47,904 be deducted on the basis of 1984 circular.
18. The next ground is against the addition of write backs previously sought to be taxed amounting to Rs.83,32,437, the details of, which are---
Rs.
(i) Write back of interest written off in past years 20,29,825
(ii) L/C Commission and other charges written off in past 57,767 years.
(iii) Write back for provision for bad and doubtful debts. 13,10,030
(iv) Write back of interest suspense. 49,34,815
-----------------------
83,32,437
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As regards item No. (i), namely, write back of interest written off in past years, it may be stated that the CIT(A) has allowed the same in the assessment years 1981-82, 1983-84 and 1984-85. In the circumstances, the grievance of the assessee does not survive. We, therefore, hold that the sum of Rs.20,29,825 was rightly added to the income of the assessee. The next item, namely, L/C Commission and other charges written off in past years amounting to Rs. 57,767 has been allowed by the IAC himself in the assessment year 1984-85. In view of this position, there could be no grievance for the assessee on this score as well. The third item, namely, write back for provision for bad and doubtful debts amounting to Rs. 13,10,030, consists of two parts. Out of the said sum, an amount of Rs. 9,91,000 was allowed by the Tribunal in the assessment year 1978-79 and the remaining amount of Rs. 3,19,040 was allowed by the CIT(A). In view of this position, the assessee cannot be said to have any grievance on this point also. The last item is write back of interest suspense account amounting to Rs.49,34,815. This has been allowed in the assessment years 1975-76 to 1978-79. The assessee's contention that this amount cannot be taxed in the current year because it does not fall under any provisions of the income-tax Act nor even under section 41 on the ground that the amount has not actually been received or credited back to the revenue account has no force. The expenditure having been allowed to the assessee in the earlier years was rightly brought to tax by the revenue authorities on its write off in the year under consideration. No interference is called for on this ground.
19. The next ground is regarding disallowance under section 37(3A) of the Act amounting to Rs.27,101. This is twenty per cent of the expenditure incurred by the assessee on advertisement amounting to Rs.1,35,504. This sum consists of motor car repair expenses amounting to Rs.1,10,832, insurance on motor car amounting to Rs.15,072 and expenses on advertisement, publicity given for the purpose of holding the cause of the beneficiaries and not for any publicity of the assessee amounting to Rs. 9,600. The main contention of the assessee is, that the expenses on repair and insurance of motor car are allowable under section 31 of the Act and, therefore, unless there is a specific prohibition for disallowing the same under section 37(3A), no part thereof could be disallowed. Section 37(3A), according to the assessee, is not subject to the provisions of sec. 31 and, therefore, as held by the Tribunal in the case of American Bureau of Shipping v. ITO [1986] 19 ITD 793 (Bom.), no disallowance is called for. The learned Departmental Representative, on the other hand, submitted that there is a specific prohibition under section 37(3A) read with (3B) and the expenditure has to suffer disallowance and hence, the assessee would not be justified in taking shelter under s. 31 of the Act. We have considered the rival submissions. The provisions of section 37(3A) are subject to notwithstanding anything contained in sub-sec. (1). Section 37(1) does not deal with the expenses incurred on repair and insurance of motor car, because this sub-section excludes the provisions of sections 30 to 36. The repair and insurance expenses on motor car are allowable under sec. 31 itself. In this view of the matter, the two provisions stand side by side, namely, section 31 allows the deduction of repair and insurance expenses of any asset used for the purposes of the business or profession. There is no dispute that the motor cars were used for the purposes of the business of the assessee. On the contrary, section 37(3A) read with section (3B) provides that the expenses on the running and maintenance of the motor cars are to suffer disallowance of 20% if the total expenditure exceeds one, hundred thousand rupees. Neither of these two provisions are subject to the other. In these circumstances, in our opinion, as held by the Tribunal in the case of American Bureau of Shipping, we hold that the provision beneficial to the assessee must be followed. We therefore hold that the entire expenses on repair and insurance of the motor cars are allowable under sec. 31 and the same would not be subjected to disallowance under section 37(3A) of the Act. We may also state here that in similar circumstances, the Bombay High Court has in the case of CIT v. Chase Bright Steel Ltd. [1989] 42 Taxman 142 held as under---
" Since section 37(1) does not contemplate expenditure of the nature described in sections 31 to 36, the abovementioned expenditure allowable under sections 30 and 31 could not again fall for consideration under section 37(1). Again sub-sec. (3) of section 37 starts with non-obstante clause 'notwithstanding, anything contained in sub-section(1)...' which of necessity must relate to expenditure allowable under sub-section (1) of section 37 and no other provisions. This being so and the assessee's case, as stated above, not falling to be considered under section 37(1), the Tribunal was correct in holding that the abovementioned expenditure allowable under sections 30 and 31 could not be disallowed under section 37(3) or rules made thereunder."
In view of the above, we hold that the sum of Rs.1,25,904 being repair and insurance expenses on motor car is not subject to disallowance under section 37(3A). As regards the expenditure of Rs.9,600, we do not find any force in the argument of the assessee. The expenditure was in the nature of advertisement and was accordingly subject to the provisions of section 37(3A). The Tribunal decision in the case of Dalmia Cement (Bharat) Ltd. v. ITO [1986] 16 ITD 298 (Jab.) has no application to the facts of this case. That case was under the provisions prevailing in the assessment year 1979-80. That provision was omitted from the statute by Finance (No. 2) Act of 1980 with effect from 1-4-1981. We, therefore, confirm the orders of the authorities below so far as the expenditure of Rs.9,600 is concerned.
20. The next ground is against disallowance of bad debts amounting to Rs.6,42,46,421. The assessee had claimed a total deduction of Rs.14,08,32,084 as bad debt in respect of 76 debtors out of which the IAC (Asst.) allowed the claim of deduction to the extent of a small amount of Rs.43,223 in respect of five debtors and the balance was disallowed. The CIT(A) confirmed disallowance of a sum of Rs.6,42,46,421 being the provision for bad and doubtful debts in Indian currency and foreign currency loans on the ground that under the provisions of section 36(2) of the Act, only deduction for a bad debt or a part thereof could be considered for allowance and any provision made for bad and doubtful debts were plainly not allowable. The claim of the assessee, according to him, was contrary to the provisions of sec. 36(2) of the Act. The learned counsel for the assessee submitted that the amount was written off in the calendar year 1984 under the head " provisions for bad and doubtful debts " in respect of the companies which were facting financial crisis from whom the amounts were not recoverable. This write off, he submitted, had been debited to the income from operations in the revenue account. The amount due from the companies under liquidation or where the companies were taken over by the Government are written off under the head " bad debts ". However, there is no difference as far as the irrecoverability of the amount is concerned. Simply because they were debited under the head " provision for bad and doubtful debt " would not make any difference. The amounts were actually written off in the accounts of the assessee. He further submitted that a similar matter came up before the Tribunal in the assessment year 1977-78 and vide order dated 20-4-1982 in ITA No. 68/Bom./81, the Tribunal allowed the claim of the following still earlier orders in the appeals for assessment year 1975-76 and 1976-77 in ITA Nos. 1446, 1447 and 1448/Bom/1980, dated 9-4-1981. From the details placed before us, we find that the write off pertained to specific debtors and, therefore, could not be termed as a provision on ad hoc basis. There is no dispute that the debts were not bad debts as the same had become bad and irrecoverable as per the system of evaluation and the regular method of accounting followed by the assessee. The only objection taken by the authorities below for disallowing the claim is that it was a provision for bad debt. As we have stated earlier, the amount written off by the assessee pertained to specific debts and it was not mere provision made for anticipated debts. Taking a reasonable view of the matter, and also the earlier orders of the Tribunal, we hold that the CIT(A) was not justified in rejecting the claim of the assessee on this score. We therefore, direct the allowance thereof. This ground is answered in favour of the assessee.
21. The next ground is against the disallowance of the write off of foreign currency debts amounting to Rs.2,75,94,273. The said disallowance was made by the authorities below on the ground that no Reserve Bank of India permission under FERA was available for writing off the debt. The CIT(A) held that in the view of the Provisions contained in FERA, a decision to write off foreign currency loan without prior approval of the Reserve Bank of India would be contrary to a legislated law of the land, which in turn would have bearing on the decision of the revenue authorities. He observed that the assessee has not brought on record any evidence to prove that it had general or special approval to effect such write off of foreign currency loan and if it had any such approval it ought to have placed the same on record. He further held that a decision to write off foreign currency loan can be held as matured only after approval of such write off has been obtained from the Reserve Bank of India. In the circumstances of the case, the CIT(A) directed the IAC (Asst.) to look into the matter and to allow deduction on account of write off of bad debt of foreign currency loans only to the extent the assessee had obtained the necessary approval from the Reserve Bank of India, and in absence of such approval permitting the write off, the IAC (Asst.) was directed to disallow the claim of deduction on account of write off of bad debt of foreign currency loans. The learned counsel for the assessee submitted that the money was paid in Indian rupees and, therefore, there was no need for the approval of the Reserve Bank of India for writing off. The learned Departmental Representative was not in a position to comment on this aspect of the matter. In the circumstances, we also remit the matter back to the file of the IAC (Asst.) with a direction to reconsider the entire matter as a whole and if he is satisfied that the Reserve Banks permission was not necessary, the claim of the assessee may be accepted in accordance with law.
22. The next ground regarding disallowance of long term capital loss of Rs.1,99,75,931 is not pressed. This ground is accordingly rejected.
23. The next ground is against the disallowance of Rs.1,56,17,975 out of interest-tax under sec. 43B. The disallowance was made by the IAC (Asst.) on the ground that the liabilities in question were not discharged during the accounting period and allowance for deduction on account of liabilities were required to be made only on the basis of actual payment. Before the CIT(A), it was submitted that the due date for payment of the liabilities had not expired during the previous year and that the liabilities were required to be paid on or before 31st March, 1985 on financial year basis, whereas the accounts of the assessee were closed on December, 1984. It was further submitted that the liabilities were in fact discharged by actual payment before the due dates. The CIT(A), on principle, agreed with the contention of the assessee and held that the liabilities for payment of tax or duty or any other statutory liability cannot be disallowed under the provisions of section 43B of the Act, if the liability in question was paid within the due date under the relevant statute, even if the actual date of payment falls in the next accounting period. However, so far as the interest-tax liability was concerned, he held, that the same is allowed as a deduction not under the provisions contained in the Income-tax Act but under the provisions contained in the Interest-tax Act under s. 18 of the said Act, and a cursory reading of that section of the Interest-tax Act would reveal that it is of over-riding character. In view of this as also in view of the fact that the actual payment of the liabilities on account of interest-tax, rates and taxes and gratuity was made within the due time, though falling in the next accounting period, he had that no disallowance could be made under s. 43B of the I.T. Act. The CIT(A), therefore, directed the IAC (Asst.) to verify the actual date of payment of the liabilities in question and if it is found that the liabilities were discharged within the due time under the relevant statutes, not to make any disallowance under, s. 43B of the I.T. Act. He also directed the IAC (Asst.) to restrict the disallowance if any only to the extent of the statutory liabilities not discharged within the due time. The learned counsel for the assessee submitted that the crucial question is not whether the liabilities were paid within the due time but whether they, were payable before, the end of the previous year. As per his submission, the liabilities were payable only on the basis of the financial year and not on the basis of the calendar year and, therefore, the liabilities were not payable before the end of the accounting year. He referred to section 18 of the Interest-tax Act, 1974, which provides that in computing the income of a scheduled bank chargeable to income-tax under the head " Profits and gains of business or profession ", the interest-tax payable by the scheduled bank for any assessment year shall be deductible from the profits and gains o the bank assessable for that assessment year. He, therefore, submitted that no disallowance was called for under s. 43B of the Income-tax Act. The learned Departmental Representative, on the other hand, supported the order of the CIT(A) and submitted that the payments were clearly disallowable as per the provisions of s. 43B.
24. We have considered the rival submissions. Sec. 43B which was introduced with effect from 1-4-1984, provides that notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax or duty etc. under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund, superannuation fund or gratuity fund or any other fund for the welfare of the employees shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him in computing the income referred to in sec. 28 of that previous year in which such sum is actually paid by him. Emphasis is laid on the amount payable by the assessee. If the amount of tax, duty or contribution etc. is not payable during the previous year under consideration, in our opinion, no disallowance could be made, in view of the decision of the Andhra Pradesh High Court in Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708. In the circumstances, we modify the directions issued by the CIT(A) by observing that the IAC (Asst.) should reconsider the claim of the assessee in the light of the aforesaid decision.
25. The next ground is against the disallowance of expenses incurred on presentation articles amounting to Rs. 31,566. It was submitted on behalf of the assessee that the presentation articles were not meant for advertisement and were purchased for presentation to foreign guests/delegates who could be potential lenders to the assessee. The CIT(A), however, on going through the list of presentation articles found that the assessee had purchased articles such as silver bowls, silk wall carpets, costly ash-trays, plaques of Indian deities etc. for presentation to its various guests. These disallowances, according to him, were not only justified under the provisions of Rule 6B of the Income-tax Rules but also on the ground that the expenses were not incurred wholly and exclusively for the purposes of the business. He therefore upheld the disallowance. The learned counsel for the assessee drew our attention to the details of the presentation articles furnished at pages 92-94 of the paper book. The cost of each piece of article is ranging from Rs.58 to Rs.208 except in few cases where the cost is Rs.430 and 475 for books and Rs. 528 for office bags. This expenditure, in our opinion, could not be disallowed under Rule 6B of the I.T. Rules and the CIT(A) was not justified in holding that the expenses were not incurred wholly, necessarily and exclusively for the purposes of the business. The expenditure has to be treated as normal business expenses expanded by the assessee on the basis of commercial consideration. The order of the CIT(A) on this point is reversed and the IAC (Asst.) is directed to allow the same. This ground is found in favour of the assessee.
26. The next ground is against charging of interest under section 215 amounting to Rs. 3,22,11,039. On this point, the relevant observations of the CIT(A) are as under----
" As regards charging of interest u/s. 215 of the I.T. Act, the appellant prayed for only consequential relief and there is no doubt on the matter that the IAC (Asst.) shall allow consequential relief to the appellant, on giving appeal effect to the appellate order in the matter of charging of interest u/s 215 of the I.T. Act."
In view of what is stated by the CIT(A), reproduced above, the challenge of the assessee against charging of interest under s. 215 does not arise. This ground, is therefore rejected as misconceived.
27. The next ground is against charging of interest under section 209A(1) on the assessee for its failure to deduct tax at source and to pay the same to the Government Treasury. On this issue, the CIT(A) had remitted the matter back to the file of the IAC (Asst.) for verifying the claim of the assessee and to re-determine the assessee's liability to pay interest under s. 209(1A) in accordance with law. Since the CIT(A) himself has sent back the matter to the IAC (Asst.) for verification with reasonable directions, no further relief could be given by us in these proceedings. This ground is, therefore, rejected.
28. The last ground is against disallowance of additional depreciation in respect of duplicating machines, micro processors and copying machines amounting to Rs.82,682. the IAC (Asst.) observed that the equipment in question were office equipments on which additional depreciation was not allowable. He also held that the assessee was not a manufacturing concern but only a financial institution and therefore, these equipments would partake the character of office equipments. Following the first appellate order for the assessment year 1984-85 in the assessee's own case, the CIT(A) rejected the claim of the assessee for additional depreciation. The learned counsel for the assessee referred to the decision of the Bombay High Court in CIT v. I.B.M. World Trade Corpn. [1981] 130 ITR 739. We have considered the submissions made on behalf of the assessee. In our opinion, the decision of the Bombay High Court in the aforesaid case would not help the assessee, as computers were used by the assessee in that case in its hiring business and the claim was for development rebate. However, in this case, even if it is held that the items are held plant and machinery, it would not be entitled to additional depreciation by virtue of proviso (a), to section 32(1)(ii) of the Act, which provides that no deduction shall be allowed in respect of any machinery installed in any office premises. It cannot be disputed that in the assessee's case, it was not installed in the office premises. We therefore confirm the disallowance made on this score.
29. In the result, the appeal is partly allowed.
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