THE STATE FARMING CORPORATION OF KERALA LTD., vs. ASSISTANT COMMISSIONER OF INCOME TAX,
What did the High Court hold?
The High Court held that the assessee, by following the mercantile system of accounting, is obligated to account for income when it accrues, irrespective of actual receipt. The decision of the Board of Directors not to show interest receivable did not absolve the assessee of its liability to offer the accrued interest as income. Under the mercantile system, interest is deemed to have accrued in the previous year relevant to the assessment year. Therefore, the High Court found no reason to interfere with the ITAT's order. The appeal was dismissed, and no costs were awarded. The issue regarding the disallowance of brought forward business loss as arrears of depreciation was not pressed by the assessee.
What were the facts?
The assessee, The State Farming Corporation of Kerala Ltd., a Government-owned company, appealed against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench. The appeal concerned assessment year(s) not explicitly stated but related to financial years ending March 31, 2004, and March 31, 2005. The primary dispute involved the addition of interest receivable from Kerala State Horticultural Corporation (Horticorp). The assessee had advanced Rs. 2 crores to Horticorp on government instructions. The assessee had initially shown Rs. 25 lakhs as interest receivable as of March 31, 2004, but subsequently, its Board of Directors decided not to provide for this interest in the financial year ending March 31, 2005. The assessee followed the mercantile system of accounting.
What were the issues?
1. Whether, following the mercantile system of accounting, the assessee could cease to provide for interest receivable on a loan advanced to Horticorp, despite a Board decision not to do so, thereby affecting the taxable income for the relevant assessment year(s)? (Question of law, concerning the application of the mercantile system of accounting and accrual of income). Assessee's contentions: The assessee argued that Rs. 2 crores was advanced to Horticorp on government instructions and that both entities are fully government-owned. The Board of Directors decided not to provide for interest on this loan for the financial year ending March 31, 2005, even though they followed the mercantile system. The assessee had previously provided Rs. 25 lakhs as interest receivable. Revenue's contentions: The revenue's arguments are not explicitly recorded in the judgment, beyond the fact that they presumably supported the ITAT's decision to tax the interest.
Which sections of the Income-tax Act were involved?
Not explicitly mentioned in the provided text, but the core issue relates to the principles of mercantile accounting and accrual of income under the Income Tax Act.
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
J U D G M E N T K.Vinod Chandran, J. The appellant-assessee is a Government owned Company. There were two issues raised in the appeal; one with respect to the addition made of interest receivable from Kerala State Horticultural Corporation (Horticorp) and the other, the question of disallowance of brought forward business loss as arrears of depreciation. The second question is not pressed by the assessee, while the matter was argued. The issue is only on the question of receivable interest from Horticorp.
The learned Senior Counsel appearing for the assessee would argue that an amount of Rs.2 crores was given to Horticorp, on instructions from the Government. The assessee herein as also the Horticorp are fully owned Government Companies. The assessee has not received a single pie towards return of principal or interest as per the agreement entered into with the Horticorp. The assessee had shown the interest receivable at Rs.25 lakhs as on 31.03.2004, but had not shown it as on 31.03.2005 pursuant to a decision taken -3- by the Board of Directors.
What assumes significance is that the assessee is following the mercantile system of accounting and the books produced for the purpose of assessment is under that system. The decision taken by the Board as seen from the Notes to the Auditor's Report forming part of the profit and loss account is as below:- “G. CHANGE IN ACCOUNTING POLICY No material change during the year except as follows: a. Valuation of Umbrella spares has been done at realizable value as against cost based on FIFO in previous year. (Difference in change in valuation Rs.1,24,104.40) b. No interest have been provided during the year on the principal loan of Rs.200 lakhs paid to M/s.Horticorp during the year 1997 as against interest of Rs.25 lakhs provided in each earlier years.”
The Board decided no material change during the year, except on two issues one of which is relevant for the consideration in this appeal. The Board had while continuing under the mercantile system, decided to provide no interest accrued on the loan to -4- the Horticorp. Having followed the mercantile system of accounting, a decision of the Board not to show the interest receivable, would not absolve the liability, since under the mercantile system, interest is deemed to have accrued in the previous year to the assessment year. We do not see any reason to interfere with the order of the Income Tax Appellate Tribunal. We, hence, dismiss the appeal. No costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE jg -5-
Appendix — schedule of exhibits
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