ACIT, CIRCLE- 3, NAINITAL vs. KUMAON MANDAL VIKAS NIGAM LTD., NAINITAL

These appeals of the Revenue for the Assessment Years (hereinafter, the ‘AY’) 2012-13 and 2013-14 are directed against orders dated 24.11.2016 and 30.11.2017 of the Commissioner of Income Tax (Appeals), Haldwani [hereinafter, the ‘CIT(A)’].

Vide 8 grounds of appeal; the Revenue has raised following issues:

The facts of the case giving rise to these appeals are that the assessee, a Government Corporation, filed its Income Tax Returns (hereinafter, the ‘ITR’) of AYs 2012-13 and 2013-14 declaring tentative losses of (-) Rs.76,05,926/- and (-) Rs.20,48,070/- respectively. These cases were picked up for scrutiny and consequential assessments were completed under section 143(3) of the Income Tax Act, 1961 (hereinafter, the ‘Act’), wherein various additions/disallowances were made. During the course of the assessment proceedings, the Assessing Officer (hereinafter, the ‘AO’) noted that the assessee had declared losses based on its tentative Profit & Loss accounts annexed with ITRs. As per the assessee, the C & AG had not appointed any auditor; therefore, its books of accounts were not audited and the ITRs had been filed based on tentative Profit & Loss accounts. Therefore, the AO directed the assessee to get its books of accounts of both years duly audited under section 142(2A) of the Act. Based on the outcomes of the audits, the AO made assessments at & 1200/Del/2018 KMVNL incomes of Rs.6,98,72,190/- and Rs.4,80,41,520/- of AYs 2012-13 and 2013-14 respectively. In appeals, the assessee got part reliefs in both years. However, the assessee did not challenge any issue decided against it, by the Ld. CIT(A), in these years. But the most of the reliefs allowed to the assessee by the Ld. CIT(A) were challenged by the Revenue. Hence, these appeals are with us.

We have heard both parties and have perused the material available on records.

The first issue raised by the Revenue in the case of AY 2012-13 is that whether the loss declared in the ITR at (-) Rs.76,05,926/- should be taken as a base for computing income or the loss of (-) Rs.96,68,009/- worked/determined out/by the auditor appointed by the Revenue. The Ld. Counsel contended that the Revenue had taken all the adverse findings pointed out by the auditor appointed by the Revenue but not the loss determined by the auditor appointed by the Revenue. It was submitted that since the loss worked/determined out/by the auditor happened to be more than the loss declared in the ITR; therefore, the AO did not accept the loss worked/determined out/by the auditor. The Ld. Counsel, emphasizing on the fact that the Revenue should take one stand; either the adverse finding of the auditor or favourable finding. Accepting the & 1200/Del/2018 KMVNL finding suitable to Revenue by the AO was strongly objected to. In case, the loss had to be assessed as per the ITR then the additions/disallowance were required to be made based on the tentative Profit & Loss accounts annexed with ITRs. Otherwise, the auditor report should be taken as a whole for computing income. Pick and choose should not be done. The Ld. Sr. DR did not able to answer the query raised by the Ld. Counsel. The reliance placed by the Ld. Sr. DR on the decision of the Hon’ble Supreme Court in the case of Goetz India Ltd. is of no help as the same is held distinguishable on the facts. We find merit in the argument of the Ld. Counsel on the simple reasoning that the Revenue has to believe the audit report in toto or not as the pick and choose cannot go together. We do not find any infirmity in the finding of the Ld. CIT(A). We therefore, decline to interfere with the finding of the Ld. CIT(A). Thus, the ground raised by the Revenue fails.

The second issue is in respect of the disallowance made on account of delay in payments of Employee Contributions to PF and ECGI. There is delay in payment of Employees’ Contributions to provident fund trust and group insurance aggregating to Rs.76,22,211/- and Rs.8,26,865/- respectively. The AO had taxed the same in accordance with the provisions of Section 2(24)(x) r.w.s. 36(1)(va) and 43B of the Act. The Ld. Senior Departmental Representative (hereinafter ‘Ld. DR’), placing reliance on the decision of the Hon’ble Supreme Court in the case of Checkmate Services & 1200/Del/2018 KMVNL P. Ltd. [(2022) 448 ITR 518 (SC)], requested for upholding of the disallowances, to which the Ld. Counsel seemed to be in agreement. We find merit in the submission of the Ld. Sr. DR. We therefore, following the reasoning given by the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. (supra), uphold the disallowance of Rs. 76,22,211/- and Rs. 8,26,865/- respectively in case these sums were not paid within the due date including grace period as per the law dealing with the PF fund and Group Insurance. We direct the AO to verify the disallowance of Rs. 76,22,211/- and Rs. 8,26,865/- again in view of the finding of the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. (supra) and make the disallowance accordingly. The Revenue succeeds as above in this ground.

The next issue is in respect of the disallowance of interest of Rs. 50,50,442/-, debited to Profit & Loss account. The auditor had pointed out that the assessee had never paid this interest but had claimed it as expenses on a yearly basis. Since, this loan was received well before the creation of the state of Uttarakhand by the State Government, and the period of loan more than 10 years had elapsed in the relevant year. Therefore, the AO disallowed the interest of Rs.50,50,442/- debited to the Profit & Loss account. This issue was decided by us in the assessee’s own case in the & 57/DDN/2023 (order dated 27.02.2025) as under: - ITA No.908/Del/2017 & 1200/Del/2018 KMVNL “7. We have heard both the parties and have perused the material available on record. We do find merit in the submission/contention/argument of the ld. Counsel that the assessee is bound to record the interest payable on loans taken from the UP Government as the assessee has followed mercantile system of accounting. The appropriation of the loan here will not determine the allowability of interest expenditure as the AO has not commented on the fact that the appellant assessee’s balance-sheet has not have non- interest-bearing fund/surplus. Further, the Revenue (AO/CIT(A)/Sr. DR) has not brought anything on the record to demonstrate that either the nature of the said interest-bearing loan has been changed by the lender; UP Government or the appellant assessee is not required to pay any interest on the said loan. It was not brought on the record by the Revenue (AO/CIT(A)/Sr. DR) that either the UP Government has waived the interest on the said loan or the UP Government has converted the said loan into non-interest-bearing loan/grant-in-aid, etc. Here, we not find any material on the record which supports the AO’s stand on the disallowance of interest of Rs.1,12,80,692/- in both years particularly when the AO, without questioning the accounting method of the appellant assessee followed over the years, has acted against the principle of consistency.

In view of the above, we are of the considered view that the Ld. CIT(A) is not justified in sustaining the disallowance of Rs.1,12,80,692/- in both years. We therefore, set aside the impugned order and delete the disallowance of interest of Rs.1,12,80,692/- made in both years. 8.1 We are of the considered view that this issue is squarely covered by our decision in the assessee’s own case in the & 57/DDN/2023. We therefore, following the reasoning given therein (ITA No. 61 & 57/DDN/2023) do not find any infirmity in the finding of the Ld. CIT(A) on this score. We therefore, decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The next issue is in respect of unutilized government funds. The auditor had reported that a sum of Rs.1,57,17,493/- was being consistently shown as a liability since 2006 onwards; therefore, the same should be taxed in the relevant year. The AO show-caused the assessee in this regard. In response, the assessee submitted an explanation in respect of Rs.74,76,881/-, which was accepted by the AO. The remaining sum of Rs.82,40,612/-, since this fund lying idle for decade, was taxed by the AO as income. The Ld. CIT(A) has passed very well-reasoned order. We are unable to understand how the Govt. loan will become income after 10 years. The Sr. DR has not brought anything on the record to demonstrate & 1200/Del/2018 KMVNL that either the nature of the said loan has been changed by the lender; UP Government or the appellant assessee is not required to show the same as liability. Here, we not find any material on the record which supports the AO’s stand particularly when the same is against the principle of consistency. No contradictory material has been brought on the record to demonstrate that the finding of the Ld. CIT(A) is not justified. We find merit in the finding of the Ld. CIT(A). We therefore, decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The next issue is in respect of accrued interest of Rs.65,56,936/-. The assessee has received certain specific fund/advances from the Government. Since such fund/advances, if not spent for the specified purpose, is kept, in the form of the FDRs, under the head “Earmarked Fund” in the books of accounts of the assessee. The assessee has accounted for the accrued interest of Rs.65,56,936/- in its books of accounts, but the same has not been Offred as income in the Profit & Loss accounts. In response the show-cause notice of the AO, the assessee has submitted that the accrued interest of Rs.65,56,936/- is credited in the “Earmarked Fund” and has been shown as liability on the advice of the C & AG. Further, it has been contended that the assessee has not any authority to use the accrued interest of Rs.65,56,936/-; hence, the same has been shown as liability by increasing the corresponding sum in the & 1200/Del/2018 KMVNL “Earmarked Fund”. The Ld. Sr. DR, placing emphasis on the comments of the auditor, vehemently argued the case supporting the AO. We find the merit in the arguments of the Ld. Sr. DR. The C & AG noting will not affect the taxability of any income under the Act. The income has to be worked out as per the provisions of the Act. Admittedly, the assessee is maintaining its books of accounts on mercantile system. There is no dispute on accrual of the interest of Rs.65,56,936/-. It is revenue in nature. No other expenses relatable to this income is required to be incurred separately after debiting each expenditure in the books of accounts. We therefore, set aside the finding of the Ld. CIT(A) on this score. We thus, uphold the taxability of the accrued interest of Rs.65,56,936/-.

The second last issue is in respect of the taxability of Rs.1,32,8,610/-. The assessee has received the sum of Rs.1,32,8,610/- for contract work after deduction of tax at source (TDS). The Ld. Counsel has submitted that the contact receipts received from the Government is shown as liability unless the project is commenced. However, the AO is of the view that the same has to be taxed as income on accrual basis as the assessee is maintaining its books of accounts on mercantile system. After commencement of the project for which the fund is received, the same is shown as income in the Profit & Loss account. Since, this amount was received only as a mobilization advance; therefore, the same has not been & 1200/Del/2018 KMVNL shown as income. Such receipts have been shown as liability in the balance sheet since decades consistently, which the Revenue has accepted in the past. Disturbing the consistent practice will affect the taxability in one year but will give cascading effect in other years which can not be modified/rectified either in the favour of the Revenue or the assessee due to limitation. Alternatively, it has been argued by the Ld. Counsel that at most the income embedded in such contract receipts can be taxed instead of entire contract receipts. The gross receipts, per se, cannot be taxed as income. We find merit in the submission of the Ld. Counsel and we therefore, following the principle of consistence as held in various judicial pronouncements, decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The last issue is in respect of disallowance of Rs.25,16,884/- under Section 14A of the Act. Since there is no exempt income (income not forming part of taxable income); therefore, keeping in view the judicial pronouncements in this regard, we decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

In nutshell, the appeal of the Revenue is partly allowed as above.

The first issue is in respect of the disallowance of Rs.9,77,145/- (employee’s contribution to Group Insurance). The AO had taxed the & 1200/Del/2018 KMVNL disallowance made on account of delay in payments of Employee Contributions to PF and ECGI. The CIT(A) deleted both disallowances. But the Revenue has not challenged both disallowances. It has challenged the disallowance of Rs.9,77,145/- (employee’s contribution to Group Insurance), which has been taxed in accordance with the provisions of Section 2(24)(x) r.w.s. 36(1)(va) and 43B of the Act. This issue has been decided above in para 7 of this order in the favour of Revenue. Following the same reasoning as above in para 7 of this order, we direct the AO to verify the disallowance of Rs.9,77,145/- again in view of the finding of the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. (supra) and make the disallowance accordingly. The Revenue succeeds as above in this ground.

The next issue is in respect of the disallowance of interest of Rs. 50,50,442/-, debited to Profit & Loss account. This issue has been decided above in para 8 and 8.1 of this order against the Revenue. Following the same reasoning as above in para 8 and 8.1 of this order, we decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The next issue is in respect of accrued interest of Rs.44,42,045/-. This issue has been decided above in para 11 of this order against the Revenue. Following the same reasoning as above in para 11 of this order, & 1200/Del/2018 KMVNL we decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The second last issue is in respect of disallowance of Rs.12,21,032/- under Section 14A of the Act. Since there is no exempt income (income not forming part of taxable income); therefore, keeping in view the judicial pronouncements in this regard, we decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

The second last issue is in respect of the taxability of Rs.28,19,265/-. This issue has been decided above in para 12 of this order against the Revenue. Following the same reasoning as above in para 12 of this order, we decline to interfere with the finding of the Ld. CIT(A). Thus, this ground raised by the Revenue fails accordingly.

In nutshell, this appeal of the Revenue is partly allowed as above.

In the result, both appeals of the Revenue are partly allowed as above.