High Court Of Rajasthan
CIT vs. Banswara Fabrics Ltd.
Sections 5, 40A(3), 260A
Asst. Year 1987-88
Rajesh Balia & O.P. Bishnoi, JJ.
IT Appeal No. 56 of 2003
12th November, 2003
Counsel Appeared
Sundeep Bhandawat, for the Appellant : Sanjeev Johari, for the Caveator
JUDGMENT
RAJESH BALIA, J. :
We have heard the learned counsel for the parties. This appeal is directed against the order of the Tribunal, Jodhpur Bench, Jodhpur dt. 28th Aug., 2002. The Tribunal has decided three appeals for asst. yrs. 1986-87, 1987-88 and 1988-89 in relation to same assessee by a common order. This appeal relates to asst. yr. 1987-88. It was an appeal by the Revenue before the Tribunal. The appellant has suggested that the following substantial questions of law arise for consideration in this appeal :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in deleting the addition on account of interest chargeable on the debit balances of (i) M/s Jai Mangal Investment and Trading Co. and (ii) M/s Banswara Textile Mills Ltd. on the group that the debit balances were trade debts, ignoring the fact that both the companies are owned by the same group of persons and non-charging of interest is not due to their poor financial position but in fact it is waiver of interest income in favour of the sister concerns which is proved by the categorical findings given by the AO in his order ?
Whether, on the facts and in the circumstances of the case, the Tribunal is justified in ignoring the fact that the assessee has been claiming interest payments to its creditors on accrual basis whereas the accounting of interest on its debts is claimed to be on ‘receipt basis’ which is not permitted under the IT Act ?
Whether, on the facts and in the circumstances of the case, the Tribunal is justified in deleting the addition on disallowance made on account of violation of provisions of s. 40A(3) of the Act treating these payments covered by the exceptional or unavoidable circumstances under r. 6DD(j) of IT Rules, 1962, when the assessee had been making transactions through bank for other purposes ?
Whether, on the facts and in the circumstances of the case, the Tribunal is justified in ignoring the fact that the whole payments made by the assessee during the previous year to M/s Banswaa Textile Mills were in violation of s. 40A(3) of the IT Act and the exceptions provided in r. 6DD(j) cannot be available throughout the year and interpretation of the rule in such a manner cannot be the intention of the legislature ?”
4. Though assessee has framed four questions. These related to two claims. One whether the AO has rightly made addition on account of notional interest on the debit balances of M/s Jai Mangal Investment & Trading Co. and M/s Banswara Textile Mills Ltd. ? Interest on these accounts had not been charged in the accounts of the assessee for the accounting period relevant to the assessment year in question. The AO was of the opinion that when the assessee is maintaining his books of accounts on mercantile system, not debiting the two parties named above with the interest accrued on the debit balances cannot absolve it from inclusion of the interest which has accrued on the debit balances during the previous year relevant to the asst. yr. 1987-88 in its total taxable income. It was the opinion of the AO that both companies are managed by the same group of persons and non-charging of interest was not due to their poor financial position but it was in fact waiver of interest income in favour of the sister concerns. The question Nos. 1 and 2 referred to above relate to this issue.
5. The second question is only an alternative stand taken by the assessee that since two debit balances represent the trading account, in ordinary course, interest would have been accounted for as and when the same is received and not on the accrual basis.
6. The CIT(A) for the assessment year in question found in favour of the assessee by considering the fact that both the parties in whose names the debit balance were shown in books of accounts to the assessee had incurred losses and cases were pending before BIFR suggesting that both the parties have negative net worth of capital. In view thereof, the CIT(A) was of the opinion that when recovery of principal itself was in doubt, the waiver of interest can be considered to be in the interest of business and not conferring any favour by transferring profits to the debtor. This finding has been affirmed by the Tribunal.
7. The Tribunal found that in the instant case, it is not disputed that barring a few exceptions, the assessee follows the mercantile system of accounting. One exception noticed was, and it is not disputed, that the assessee has been debiting interest on overdue trade debt on cash basis and further that the system has been followed by the assessee consistently. Thus, a natural corollary follows that till the amount of interest is realised, the assessee will not be charging any interest in his books of account. Generally, the basic reason to adopt the system of charging interest would depend on many factors varying from case to case. Thus, in the case before the Tribunal, indisputable the outstanding debits are trade debts, they are not advances made by the assessee to the two concerns. Also, there was nothing to show that there was a stipulation between the parties to charge interest of such debt. Further, it is also undisputed that the two concerns had gone sick and reference was pending before BIFR for the rehabilitation of the two units. It is also a fact that the assessee was not likely to recover the principal amount and accordingly there was good reason for the assessee not to charge any notional interest, on these two accounts. On these premises, the Tribunal affirmed the finding of CIT(A) deleting the addition of notional interest made by AO for the assessment year in question.
8. In our opinion, these are all findings of fact which belie the inference drawn by AO that the assessee was not charging interest from both the companies owned by the same group of persons not because of the financial position but by way of waiver of interest income in favour of the sister concern.
9. From the findings of the Tribunal two things are apparent. Firstly, that the assessee was regularly employing hybrid method of accounting in maintaining his books of accounts. While in most cases, the assessee is following the mercantile system of accounting viz., keeping accounts on accrual basis, irrespective of actual receipts, but in respect of trade debts, it is consistently maintaining the accounts of interest on receipt basis and debit balances in question were trade debts, were not disputed as noticed by the Tribunal.
10. Sec. 145 of the Act of 1961, as it stood during the relevant assessment period, permitted maintenance of accounts on such hybrid basis and the maintenance of accounts was not required to be exclusively on mercantile or cash basis, as has now been made imperative since amendment of s. 145 vide Finance Act, 1995 w.e.f. 1st April, 1997. Prior to its amendment, s. 145 envisaged that income chargeable under the head “profits and gains of business or profession” or “income from other sources” shall be computed in accordance with the method of accounting regularly maintained by the assessee, whereas after amendment, the provision envisages that income chargeable under the head “profits and gains of business or profession” or “income from other sources” is to be computed in accordance with accounts either on cash or mercantile system regularly maintained. We are concerned with the assessment for the asst. yr. 1987-88. In this case when the computation of income was to be made in accordance with the system of accounting regularly employed by the assessee, as per the Tribunal’s findings, the assessee has not accounted for interest on the trade debts standing in debit of account to charges named above as per the system of accounting regularly maintained by the assessee in respect of its trade debts and trading transactions for the purposes of accounting of the interest. This alone, in our opinion, was sufficient to hold that the amount of interest on notional basis could not have been included in the income of the assessee for the asst. yr. 1987-88, unless it may be found that the method of accounting employed by the assessee does not make it possible to correctly compute the income. Secondly, it is equally a finding of fact that the circumstances which existed during relevant assessment year, the assessee did not account for the interest when the assessee was almost certain that the dues from M/s Jai Mangal Investment & Trading Co. and M/s Banswara Textile Mills Ltd. are not likely to be recovered. Thus, the decision not to debit the interest in those accounts was directly relatable to the business expediency and, therefore, it cannot be said to be a plain and simple waiver in favour of sister concern without any business consideration.
In view thereof, we are of the opinion that question No. 1 cannot be said to be a substantial question of law as it depends purely on findings of fact reached by the Tribunal and in view of our conclusion to question No. 1. question No. 2 becomes of academic importance and need not to be dealt with in detail. Question Nos. 3 and 4 relate to making addition of amount paid in violation of the provisions of s. 40A(3) of the Act. Payments made by the assessee to M/s Banswara Textile Mills were not by account payees cheques but were paid in cash. The AO found these amounts to be not falling in any of the exceptions provided in r. 6DD and made additions of these amounts to the income of the assessee for the assessment year in question. The CIT(A) held the said amounts to falling in exception.
14. Rule 6DD (j) at the relevant time read as under : “Rule 6DD—No disallowance under sub-s. (3) of s. 40A shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified. (a) to (i) xxxxxx (j) in any other case, where the assessee satisfies the AO that the payment could not be made by a crossed cheque drawn on a bank or by crossed bank, (i) due to exceptional or unavoidable circumstances; or (ii) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof.” Referring to this, CIT(A) deleted the additions made by the assessee.
15. The Tribunal after considering the rival contentions noticing the fact that the assesseecompany as well as the BTM to whom the payment in cash has been made were running in losses and have become sick companies has recorded its conclusions as under : “The assessee has submitted that both the assessee-company as well as the payee’s company (BTM) are running in loss and have become sick companies. The bank has restricted their transactions and does not allow withdrawals from the account as and when required. The assesseecompany does not have processing facility and, therefore, dependent on BTM for getting its grey cloth processed. The assesseecompany has made payment to its company for making day-to-day payments so as to continue the production. The only source of revenue for this company was the assessee-company’s job work. Since bank does not allow the withdrawals to BTM, the payment were to be made in cash. Thus, there was a genuine difficulty in making payments through banking channels. We are of the opinion that the assessee had made payments in cash due to exceptional and unavoidable circumstances. Payment through crossed cheque or cross bank draft could have led the assessee into practical difficulties and would have caused genuine difficulty to the payee. The appellant had already established the genuineness of the payment and identity of the payee. Therefore, we hold that the learned CIT(A) Udaipur had erred in sustaining the disallowance made under s. 40A(3) amounting to Rs. 31,29,836. This disallowance made by the AO and sustained by the learned CIT(A) is hereby deleted.”
Apparently, the existence of circumstances has direct nexus with the financial difficulty that could be caused to the payee in case payment in cash was not received by it and would have also put the assessee into jeopardy because of the dependency on work done through BTM. As the finding reached by the Tribunal is a finding of fact about the existence of circumstances which would have caused genuine difficulty to the payee and such finding is ordinarily a finding of fact which does not give rise to a question of law. As the condition envisaged under r. 6DD under r. 6(j) as was operating during the relevant assessment year has been shown to exist by the assessee and found by the CIT(A) as well as the Tribunal to exist on cogent material that payment in the manner prescribed under s. 40A(3) would have caused many difficulties to the payee, is not vitiated on any ground and does not give rise to substantial question of law for consideration in this appeal. In view thereof, no case is made out for entertaining this appeal. The appeal stands accordingly dismissed.
[Citation : 267 ITR 398]
