C I T JAIPUR vs. M/S R S I D CORP

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 199 / 2010 Statue Circle, Jaipur(Raj) M/s Rajasthan State Industrial Development & Investment Corporation Ltd., Udyog Bhawan, Tilak Marg Jaipur Connected With D.B. Income Tax Appeal No. 214 / 2011 D.B. Income Tax Appeal No. 362 / 2011 D.B. Income Tax Appeal No. 669 / 2011

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D.B. Income Tax Appeal No. 145 / 2015 PRINCIPAL COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR M/S RAJASTHAN STATE INDUSTRIAL DEV. & INVESTMENT CORPORATION LIMITED, UDYOG BHAWAN, JAIPUR _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay, Mr. N.S. Bhati Mr. K.D. Mathur for Mr. R.B. Mathur For Respondent(s) : Mr. P.K. Kasliwal with Mr. Priyesh Kasliwal _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 02/08/2017 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. By way of these appeals, the appellants have assailed the judgment and order of the Tribunal whereby Tribunal has allowed the appeal of the assessee and dismissed the appeal of the department. 3. This court while admitting the appeals framed following substantial question of law:- 3.1 Appeal No.199/2010 admitted on 27.9.2010 “i. Whether on the facts and circumstances of the

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deleting the addition of Rs.7,70,62,000/- made by the Assessing officer and sustained by the CIT(A) by disallowing writing off claim of maintenance charges without appreciating that neither they related to the year under consideration nor there was no specific reason for writing off the said expenditure in the year under consideration? ii. Whether on the facts and circumstances of the deleting the addition of Rs.24,79,62,000/- made by the Assessing officer and sustained by the CIT(A) by disallowing the under valuation of closing stock of land made by the assessee, without appreciating that the assessee changed the method of valuation of opening stock with the method of valuation of opening stock with the earlier method. iii. Whether on the facts and circumstances of the deleting the addition of Rs.10,61,99,000/- made by the Assessing officer and sustained by the CIT(A) ignoring that inspite of assessee following the mercantile system of accounting, it accounted the said income on cash basis, which cannot be permitted at all”. 3.2 Appeal No.214/2011 admitted on 28.3.2012 “1. Whether on the facts and circumstances of the case, the Tribunal was right and justified in deleting the

addition

Rs.36,27,091/-,

and Rs.1,23,98,670/- made by the Assessing Officer ignoring that inspite of assessee following the mercantile system of accounting, it accounted the said income on cash basis, which is not at all permissible in the eye of law? 2. Whether on the facts and circumstances of the case, the Tribunal as well as the CIT(A) was right and justified in holding the expenditure of Rs.40,00,000/- incurred by the assessee for acquiring exclusive rights of a part of the guest house as revenue expenditure?

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by the Assessing officer on account of change in accounting policy from accrual basis to case basis. 2. Whether in the facts and circumstances of law, the ITAT was justified in allowing the claim of maintenance charges of Rs.2,68,12,000/- in respect of transferred industrial areas.” 4. Counsel for the appellant has taken us to the order of the AO relevant portion of which in appeal No.362/2011 which reads as under:- “I have gone through the reply of the ld. AR of the assessee. The assessee is following mercantile system of accounting, therefore, income has to be shown by the assessee under this system whenever it is accrued. The assessee cannot be change its accounting policy as per its convenience on the plea of principle of prudence or on the basis of some accounting standard. The total income has to be disclosed as per the provisions of the Act and the provisions of the Act can not be superceded by the principle of prudence or any accounting standard. The assessee is free to show interest receipts on economic rent and service charges on cash basis in its books of accounts, but while calculating the profits under the Income Tax Act, it has to include these receipts on accrual basis since it is following the mercantile system of accounting. It is to be further noted that assessee is not allowed to include these receipts on cash basis even in its books of account because it is a company and mercantile system of accounting has to be followed by each company as per the provisions of the Companies Act. If interest is waived by the assessee, then it can write off the accrued interest in subsequent year and it is perfectlfy allowable as per the provisions of the Act. The Hon’ble Supreme Court has observed in the case of Laxmipat Singhania V/s CIT, 72 ITR 291 and in the case of Bachu Lal Kapoor, 60 ITR 74, that if income has accrued to the assessee and it liable to be include in the total income of a particular year, than it is not open to the ITO to ignore the

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accrual and thereafter to tax it as income from another year on the basis of receipt.” 4.1 He contended that CIT(A) while considering the same issue in para no.1.3 observed as under:- “1.3 I have considered facts of the case and arguments taken by Sh. Parwal quite carefully. It is an undisputed fact that the provision ot charge interest on service charge and on economic rent is as per agreement and agreed terms from whom rent and service charges are received periodically by the appellant. It is universal principle that if due amount is not paid by the due date then such delayed payment has to be compensated by the interest amount at the agreed interest rate. It is held in various judicial decisions that whenever any payment is received or paid beyond the due dates and on that account if certain interest is required to be paid then certainly it is compensatory in nature and it cannot be termed as penal in the nature. To this extent the arguments taken by Sh. Parwal is far from satisfactory. Further, it is seen that the receipt of interest during the year on service charge and economic rent is more than 50% and obviously the remaining arrear is received in subsequent A.Y. Further, in extreme case, if such interest is waived fully or partly then to that extent consistently it is claimed as a reduction in the relevant year. Under these facts the change of method of accounting from mercantile to cash in respect of substantial part of income cannot be considered as bonafide and it cannot be considered to follow the concept of prudence. In fact, various decisions relied upon by Sh. Parwal are on different facts and none of the case is directly on exact and similar facts. Certainly, when service charge and economic rent is not received in time then as per agreement the appellant is entitled for the interest and such interest income is definitely is a real income and not an imaginary income. In fact, the decisions relied upon by A.O. of Hon’ble Supreme Court are directly applicable in the present facts of the case. With this discussion, in my considered view the A.O. was fully justified in making said addition of Rs.220.8 Lac on this account which is

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hereby confirmed by rejecting relevant ground of appeal.” 4.2 Counsel for the appellant has raised contention that the tribunal has committed serious error in observing as under:- “7. We are also of the view that for preparing the accounts on commercial principles section 211 of the Companies Act requires that assessee has to follow the Accounting Standards. AS-1 deals with concept of prudence and AS-9 deals with the concept of Revenue Recognition. These accounting standards categorically provided that income should not be recognized unless there is a reasonable certainty of its recoverability. It is settled law that real income is to be taxed. No notional or hypothetical income can be brought to tax. Even if an assessee following mercantile system makes an entry for hypothetical interest income, the same cannot be included in the total income where such income has neither been accrued nor received. Considering these material facts of the issue, we are of the view that the lower authorities were not justified in making and upholding the disallowances of Rs.220.8 lacs claimed on account of accrued interest on economic rent and interest on service charges by not accepting the change in the system of accounting of such income. We thus while setting aside the orders of the lower authorities in this regard, direct the AO to accept the above claim of the assessee. The ground no.1 is thus allowed.”

4.3 Counsel for the appellant contended that view taken by the tribunal is contrary to law and the income which is accrued, they are going to receive it and in view thereof the finding of AO and CIT(A) is required to be approved. 4.4 On second issue regarding deleting of addition of Rs.1,65,58,000/- made in respect of grant which is received by the assessee from the State Government is required to be not

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given for one year and it is to be spread over for a different period, therefore, the view taken by the Tribunal is required to be reversed and regarding third issue guest house charges and writing off the claim of maintenance and contribution by the assessee towards village amenities fund and skill development, the same is covered by the decision of this court in DB Tax Appeal No.64/2010 CIT Jaipur vs. Raj State Mines & Minerals decided on 1.6.2017 wherein it has been held as under:- “4. However, counsel for the respondent contended that all the three issues are covered by reasoning adopted in D.B. ITA No. 650/2009 (CIT, Jaipur vs. Rajasthan State Mines & Minerals Ltd.) decided on 30.5.2017 wherein it has been held as under:- “5. However counsel for the respondent has referred to the decision of this court in CIT, Jaipur vs. Rajasthan State Mines & Minerals Ltd. D.B. Income Tax Reference No.1/2000 decided on 15.9.2016 wherein considering the same issue, this court has held it to be revenue expenditure which was subsequently followed in tax appeal no.107/2004 (CIT vs. Rajasthan Mines & Minerals Ltd.) decided on 17.1.2017 and also followed in D.B. Income Tax Appeal No. 29/2003 (Rajasthan State Mineral Development Corporation Vs. Dy. Commissioner of Income Tax, Jaipur) decided on 14.12.2016. 6. Taking into consideration the above, the issue is answered in favour of the assessee and against the department. We hold that the expenses will be considered as revenue expenditure and not capital expenditure.” 5. In view of the above, all the three issues are answered in favour of the assessee and against the department.” 5. We have heard counsel for the parties.

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