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Facts
The assessee, M/s Jharkhand State Forest Development Corporation Ltd., challenged several additions made by the Assessing Officer for AY 2013-14, including interest income from a building construction fund, disallowance for change in accounting method regarding provision for Raiyats, a non-quantifiable loss due to theft, and disallowance of royalty payments. The Revenue also filed an appeal against the CIT(A)'s deletion of the theft loss addition, and the assessee filed a cross-objection.
Held
The Tribunal partly allowed the assessee's appeal, directing that interest income from earmarked funds be treated as income but allowed as expenditure upon return to the Forest Department. Provisions for Raiyats were allowed as expenditure in the year of payment, and royalty payments pertaining to prior periods were similarly allowed in the year of payment. The Tribunal upheld the CIT(A)'s decision to delete the major portion of the theft loss addition, confirming the actual loss at a lower figure, and dismissed the Revenue's appeal and the assessee's cross-objection.
Key Issues
Whether interest income from an earmarked fund is taxable, the allowability of provisions for payments to land owners and royalty payments, the quantum and allowability of loss due to theft, and the chargeability of interest under sections 234A and 234B.
Sections Cited
Section 56, Section 250, Section 143(3), Section 43B, Section 234A, Section 234B, Section 37(1)
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Income Tax Appellate Tribunal, RANCHI BENCH, RANCHI
Before: SHRI GEORGE MATHAN, JM & SHRI RATNESH NANDAN SAHAY, AM
O R D E R has been filed by the assessee and ITA No.38/Ran/2018 is an appeal filed by the revenue against the order passed CO No.03/Ran/19 by the ld. CIT(A), Ranchi, dated 20.11.2017 for the assessment year 2013- 2014. The assessee has also filed cross objection being CO No.03/Ran/2019 in revenue’s appeal being ITA No.38/Ran/2018. 2. The assessee in its appeal has raised the following grounds :-
In the matter of M/s Jharkhand State Forest Development Corporation Ltd., H/o BMS Electricals, Near Hinoo Bridge, Hinoo, Ranchi Appeal before Hon'ble Income Tax Appellate Tribunal, Ranchi Bench, Ranchi Assessment Year: 2013-14 Appeal against the order passed u/s 250 by the C.I.T. (Appeals), Ranchi Grounds of Appeal:
1. For that Ld. C.I.T.(A) was not justified to confirming the addition of interest amount of Rs.20,73,527/- u/s 56 under the head "Building Construction Fund" on the ground that this interest income was not credited in Profit and Loss account. The Ld. C.I.T.(A) totally overlooked the fact that same amount was debited in Short term Deposit account and also credited directly in to "Building Construction fund", which net impact will be zero. As this income was generated for earmarked fund as such the addition has ne legs to stand and fit to be deleted.
2. For that Ld. C.I.T. (A) was not justified for confirming the addition of Rs.1,61,16,136/- under the head "Change in the method of accounting employed vis-à-vis the method employed in the immediate preceding year". The addition cannot be made merely on the basis of comment written by Ld. Auditor. The Ld. A.O. also could not establish on which section the addition was made. As such order passed by Ld. C.I.T. (A) is illegal and bed in the eye of law.
3. For that Ld. C.I.T. (A) was not justified for confirming the addition of Rs.13,35,52,240/- u/s 43B. Ld. C.I.T.(A) was totally surpassed the fact that during the year consideration there was no liability created. The liability was carried forward from the previous years, as such in the year consideration the addition cannot be made. Therefore order passed by Ld. C.I.T.(A) is illegal and fit to be deleted.
4. For that Ld. C.I.T. (A) was not justified to confirming the addition of Rs.4,10,34,520/- under the head "Welfare Expenses". The expenses were incurred for the welfare of primary collectors of Kendu Leaves. As such the addition must be deleted.
CO No.03/Ran/19 5. For that interest u/s 234A and 2348 is to be charged on returned income and not on assessed income following the decision of Hon'ble Jharkhand High Court.
For that other grounds in details will be argued at the time of hearing.
Ld.AR has also filed his written submissions on the issues as follows:- M/s Jharkhand State Forest Development Corporation Ltd. (PAN "AABCJ1402H"), H/o LAXMI SINGH, Near Hinoo Pawan colony, Hinoo Chowk, Ranchi-834002.
Regarding disallowance of Interest on building fund As per Assessment order U/s 143(3) The interest income of ₹20,73,527 has to be offered for taxation U/s 56 and therefore the same was added back to our total income. As per Closure Order U/s 250 The interest income has been earned from the temporary deposit of funds which were placed at its disposal for construction of building. CIT has quoted that, if the capital of a company is fruitfully utilised instead of keeping idle, the income thus generated will be of the revenue nature and not accretion of capital. Hence, it was made taxable in our hands. Ground of Appeal
Earmarked amount of 2. Crore was given by forest department for construction of building and interest accrued has to be earmarked for building construction only. "Accrued income refers to the income that a business or a person has generated through their regular activities but has not yet been collected or billed. It is shown as an asset on the balance sheet and follows the accrual accounting method that aligns revenues and expenses to the time when they happened." Here, the amount accrued on investments, made out of building fund, should not be considered as income of the corporation as the organisation does not have any legal right over the fund invested. The forest department is entitled to the interest accrued. The corporation is liable to return the unused fund along with the interest, hence, interest will be taxable in the hands of the corporation only if, the Forest department waive its legal right over the fund and interest. Diversion of Income is the process of diverting income before it is earned by the assessee. Such amount shall be excluded from the CO No.03/Ran/19 Total Income of the assessee as the income is diverted to someone else before being earned by the assessee. In case of diversion of Income there is an over-riding title of any other person on such income. So, the income before being earned by the assessee reaches such person and hence not chargeable to tax in hands of the assessee. The amount of Rs.2 crores was sanctioned from Department of Forest; Govt. of Jharkhand vide letter no. 4 budget-13/2010 dated 31.03.2011 in the FY 2010-2011. The interest earned on investments, made out of building fund, should not be considered as income of the organization as it is diversion of income and to be excluded from total income as Department of forest has an over- riding title on such income. The corporation is liable to return the unused fund along with the earned interest on total fund. Instances have occurred in other state undertakings, where Corporations were asked to return the fund along with the interest accrued on it, leading to double taxation.
Regarding change in accounting method As per Assessment order U/s 143(3) The change in the method of accounting employed was not justified. Therefore, the amount of provision i.e. ₹1,61,16,136 was added back to the income. As per Closure Order U/s 250 The amount of 1,61,16,136 is not considered as a provision but a contingent liability as there is no certainty that it will be discharged at a future date. According to CIT, there was no proper demonstration for the creation of the liability. Hence, the ground of appeal was dismissed. Ground of Appeal As per letter No. 10/2011-4048 dated 18th July, 2005, out of income generated from sale of Timber grown on Land, 90% of the income is to be received by the Raiyat (Land Owner) and 10% will be retained by the corporation for administrative expense. Hence, the corporation is legally bound to create the provision for the same. It is mentioned in the order that it is a contingent liability and it is not quantifiable, a contingent liability is a liability that may occur depending on the outcome of an uncertain future event. Contingent liabilities are recorded if the contingency is likely and the amount of the liability can be reasonably estimated. In the above aforesaid notice, it is clearly mentioned that 90% of the income from sale of timber is to be provided to the Raiyat, hence, the amount of the liability is Quantifiable and certain. Since, the provision is created CO No.03/Ran/19 according to the letter issued by the Government for a legally binding defined liability.
Regarding issue of non-quantifiable loss due to theft As per Assessment order U/s 143(3) The claimed loss was not quantifiable and documents to substantiate the claim or to quantify the claimed loss were not submitted. Therefore, the amount of 27,30,89,663 was added back to the total income. As per Closure Order U/s 250 The amount of ₹7,30,89,663 is sum total of all the 5 points mentioned as understatement of profit in Annexure A of Auditor's Report. It is not the amount of the loss of stock. This loss was a business loss as it occurred while carrying regular business activities and should be allowed. Hence, the Ground of Appeal
was allowed. Ground of Appeal Ld. DCIT in its questionnaire raised the issue of Addition of Rs. 7,30,89,663 on account of loss of old stock of 2649.445 Bags of Kendu Leaves. We have submitted detailed calculation of quantifiable loss on account of 2649.445 i.e., 16,21,327.86. With reference to Notice No: ITBA/APL/S/APL_1/2017- 18/1004870702(1), CIT has stated in the closure that the remark of the Auditor has to be taken in context. Vide Audit Comments in the Audit Report as Annexure -1 to the Audit Report 'Understatement of Income'. The auditor made 5 comments, in each comment he had stated the amount of "Understatement of Income". The total of all the comments taken together was, as per the Auditor, understatement of income. It was held that the amount of the loss on account of theft of 2649.445 Bags was not Rs. 7.30.89.663. It was Rs. 17,69,836 as per CIT. Such loss, being a loss incurred in the carrying out of regular business activities was a business loss and held allowable by CIT.
4. Regarding disallowance of Royalty As per Assessment order U/s 143(3) We had shown royalty fund of state government amounting to ₹13,35,52,240 under the head "Long Term Liabilities" in the balance sheet. We were asked to produce documentary evidence and according to the DCIT we were unable to submit documentary evidence, hence, same was disallowed and added back to our total income.
CO No.03/Ran/19 As per Closure Order U/s 250 It was stated that the amount of ₹4,35,52,240 was unpaid royalty and the payment was not in terms of the provisions of section 43B of the Act. Hence, it was added back to the income of the AY 2013-14. Ground of Appeal
A.Y. OPENING ROYALTY PAID CLOSING CHARGED IN P&L 2012-13 9,35,51,600 10,00,00,000 6,00,00,000 13,35,52,240 2013-14 13,35,52,240 9,00,00,000 9,00,00,000 13,35,52,240 No provision of ₹13,35,52,240 for royalty, was created in AY 2013-
14. The amount shown under long term liabilities was carried forward from AY 2012-13. Out of 13,35,52,250, ₹9,00,00,000 was already allowed by the Ld. Assessing Officer in the remand order. We are providing documentary evidences related to the payment which was made in AY 2014-15. Following are the supporting documents made for your reference:
1. Royalty payment challan 2. Financial Statements for the A.Y. 2013-14 3. Audit Report for the A.Y. 2013-14 4. Copy of 26AS for A.Y.2013-14 for payment made 5. Documents related to Building Fund. 6. Documents related to provision of profit for sale of timber
4. It was the submission of the ld. AR that in regard to the issue of interest of building funds, forest department had granted the assessee a grant of Rs.2 crores for construction of a building. It was the submission that it was specifically provided that the said amount of Rs.2 crores was to be kept in a separate account and the same was used only for the purpose of construction of building. It was the submission that the amount had been used for consideration of the building and during the period the assessee had earned interest income of Rs.20,73,527/-, which was also claimed by the assessee as part of the said fund provided by forest department. It was CO No.03/Ran/19 the submission that during the assessment year 2017-2018 the assessee has also repaid the said Rs.2 crores to the forest department and the interest portion of Rs.20,73,527/- has not yet been paid to the forest department though the forest department is claiming for the same. It was the submission that the assessee treated the same as a current liability in his balance sheet. It was the submission that the Ao treated the same as income of the assessee. It was the submission hat the fund have not been provided by the forest department, the interest was also liable to be proved as part of the fund provided by the forest department. It was the submission that the AO treated the same as income of the assessee and ld. CIT(A) has upheld the action of the AO.
In reply, ld. CIT-DR submitted that he had no objection if such amount treated as income of the assessee was allowed as expenditure when the same is returned to the forest department.
We have considered the rival submissions. We find merit in the arguments of the ld. CIT-DR that applying the principle of real income the amount being the interest received is though part of the fund which has been kept separately in a separate bank account still the same represents the income of the assessee. Admittedly, the assessee is entitled to the claim the same amount as expenditure when the same is returned to the forest department. Thus, this issue stands partly allowed.
The next issue is in regard to the change in the accounting method. It was the submission that during the impugned assessment year 2013- 2014, the Government of Jharkhand had issued a direction that 90% of the CO No.03/Ran/19 revenues from the sale of forest produce is allowable to kept separately towards payment to the Raiyats representing the land owner and 10% was to be retained by the corporation for administrative expenses. The ld. AR has placed reliance before us a copy of the proposal by the Government of Jharkhand. It was the submission that consequently the assessee had treated 90% of the receipts from the sale of timber grown on the land as the income that is kept apart as per the said provision of the Government of Jharkhand as payable to the Raiyats. It was the submission that the AO treated the same as a provision which is not allowable. It was the submission that the ld. CIT(A) has also upheld the action of the AO.
It was submitted by the ld. CIT-DR in this case also that there was no objection to the allowance of the expenditure when the same is paid to the Raiyats. It was the submission that even the audit report in respect of assessee’s account mentioning the same as loss due to change in account.
We have considered the rival submissions. The assessee has claimed the said provision as a contingent liability. Admittedly, a provision is not allowable when as an expenditure unless the same can be shown to be quantified scientifically. In any case, the claim of the assessee is that the Government of Jharkhand has given a direction to retain separately does not come out of the letter of the Government of Jharkhand which has been placed before us. This is only a proposal. The claim by the ld. AR that there is a cabinet note in respect of the same has also not been placed before us. This being so, considering the submission of the ld. CIT-DR and as it is noticed that this amount is liable to be paid to the Raiyats, it is CO No.03/Ran/19 directed that the said amount is to be allowed as expenditure in the year in which the same has been paid to the Raiyats. With this direction, this issue is treated as partly allowed.
The third issue is with regard to the disallowance of the Royalty. It was the submission of the ld.AR that during the impugned assessment year the assessee had shown an amount of Rs.13.35.52.240/- as royalty payable to the Government of Jharkhand. The AO had disallowed the same. The ld. CIT(A) had allowed the assessee’s claim to an extent of Rs.9 lakhs. The balance of Rs.4,35,52,240/- was disallowed on the ground that proofs have not been produced. It was the submission that even today the amount has not been paid to the Government and the same remained as a contingent liability in the account of the assessee. It was the submission that the same may be permitted to be claimed as an expenditure when the amount is paid. It was the submission that there is a fear that as the said royalty is no more allowable expenditure from the assessment year 20147- 2015, the AO might not allow the same as the same expenditure relates to the assessment year 2009-2010 but has not been paid till date.
In reply, ld.CIT-DR submitted that if the assessee is able to clearly show that the said amount pertains to a period before the assessment year 2014-2015, he had no objection if the amount was directed to be allowed in the year of payment.
We have considered the rival submissions. Admittedly, from the assessment year 2014-2015, the royalty to the Government is not allowable expenditure. The assessee categorically stated that this amount of royalty CO No.03/Ran/19 of Rs.4,35,52,240/- pertains to a period before the assessment year 2014- 2015. If the said amount is shown to be a relatable period from the assessment year 2014-2015, the same shall be allowed in the year of payment. Thus, this issue is partly allowed. 13. Accordingly, the appeal of the assessee stands partly allowed. 14. Now, we shall take the appeal of the revenue in ITA No.38/Ran/2018, wherein the revenue has raised the following grounds :-
The ld. CIT (A) is not justifiable in deleting the addition of Rs. 7,30,89,663/- made by the A.O. u/s 37(1) of the Act on account of 'issue of non-quantifiable loss due to theft since the assessee had completely failed to furnish any evidence or document to substantiate or quantify the loss due to theft of old stock of 2649.445 bags of tendu leaves despite having been allowed sufficient opportunity during the course of assessment proceedings.
15. The only issue is in regard to the deletion of addition of Rs.7,30,89,663/- made by the AO u/s.37(1) of the Act on account of issue of non-quantifiable loss due to theft. This also is a part of the cross objection filed by the assessee in CO NO.03/Ran/2019.
16. Ld. CIT-DR drew our attention to para 9 to 9.7 at pages 7 to 10 of the order of the ld. CIT(A). It was the submission that the ld. CIT(A) has not considered the issue in its correct perspective and has given relief to the assessee. The ld. CIT-DR submitted that the evidence of theft of the loss has not been shown. It was the submission that the order of the ld.CIT(A) is liable to be reversed.
17. In reply, ld. AR submitted that the actual loss claimed was only Rs.16,21,327/- but the AO had made addition of Rs.7,30,89,63/-. It was the submission that the Ao had made addition on the basis of auditor’s report CO No.03/Ran/19 without considering the same in the correct perspective. It was the submission that the ld. CIT(A) considered the issues and had also appreciated the auditor’s report and also considered the auditor’s report in its entirety to delete the addition. Ld.AR vehemently supported the order of the ld.CIT(A).
18. We have considered the rival submissions. A perusal of the para 9.4 to 9.7 at pages 7 to 10 of the CIT(A)’s order, more specifically para 9.6 shows that the FIRs have also been lodged stating that miscreants had set the godown on fire. Ld.CIT(A) had accepted the contention of the assessee that the loss was incidental to the carrying on the business. Ld.CIT(A) has also considered the auditor’s report in its entirety to delete the addition of Rs.7,30,89,663/-. Ld.CIT(A) has also considered the fact that the actual loss was only Rs.17,69,836/-. The AO has wrongly assume the same at Rs.7,30,89,663/-. The revenue admittedly has not been able to dislodge any of the findings of fact as arrived at by the ld. CIT(A). The ld. CIT(A) has considered the fact that the auditor himself had quantified the amount of Rs.7,30,89,663/- on account of various issues but the issues in regard to the loss on account of theft/fire was only Rs.17,69,836/-, which has rightly been appreciated by the ld. CIT(A). This being so, as no error in the order of the ld.CIT(A) has been pointed out by the revenue, we are of the view that the order of the ld. CIT(A) is liable to be upheld on this issue and consequently we dismiss the appeal of the revenue as also the cross objection of the assessee.
CO No.03/Ran/19 19. In the result, appeal of the assessee in ITA No.33/Ran/2018 is partly allowed and appeal of the revenue in ITA No.38/Ran/2018 along with Cross Objection of the assessee in CO No.03/Ran/2019 both are dismissed. Order dictated and pronounced in the open court on 08/10/2025.