Kerala H.C : Whether, on the facts and circumstances of the case, the Tribunal was right in law, in holding that the HUDCO administration service charges collected and retained by the assessee at the time of disbursal of the loans to the urban local bodies had accrued due to the assessee at that stage itself, and, therefore, assessable to tax in the year in which the loan amount was disbursed ?

High Court Of Kerala

Kerala Urban Development Finance Corpn. Ltd. vs. CIT

Sections 5

Asst. Year 1989-90, 1991-92, 1993-94, 1994-95

G. Sivarajan & P.R. Raman, JJ.

IT Ref. Nos. 223 to 228 of 1999

5th December, 2002

Counsel Appeared

V.M. Kurian, A.V. Thomas & K.T. Thomas, for the Appellant : P.K.R. Menon & George K. George, for the Respondent.

JUDGMENT

G. SivaraJan, J. :

These IT references arise out of a common order of the Tribunal, Cochin Bench, in ITA Nos. 914, 915, 916 & 917/Coch/1994 and 290 & 291/Coch/1996 filed by the Kerala Urban Development Finance Corpn., Calicut, in respect of the asst. yrs. 1989-90, 1990-91, 1991-92, 1992-93, 1993-94 and 1994-95. At the instance of the assessee-corporation the Tribunal has referred the following common question of law for the decision of this Court :

“Whether, on the facts and circumstances of the case, the Tribunal was right in law, in holding that the HUDCO administration service charges collected and retained by the assessee at the time of disbursal of the loans to the urban local bodies had accrued due to the assessee at that stage itself, and, therefore, assessable to tax in the year in which the loan amount was disbursed ?”

The brief facts are as follows. The assessee is a company set up by the Government of Kerala. The said company, inter alia, used to act as a nodal agency for implementation of the schemes evolved by the Central Government, such as low cost sanitation, slum upgradation-cumemployment generation, etc. The said scheme is financed by loans from Housing and Urban Development Corporation (HUDCO), an undertaking of the Government of India. All the amounts, to implement such schemes, are released to the assessee by the HUDCO and the assessee in turn disburses the amounts to various urban local bodies. The loan amount is to be repaid to HUDCO over a period of time from 36 to 44 quarters. The assessee-company is entitled to receive 3 per cent of the loan amount towards administration and supervision charges (A&S charges) for implementing the schemes entrusted to it and for meeting the expenses to be incurred day-to-day in acting as a nodal agency. The assessee deducting this amount from the loan amount sanctioned by HUDCO at the time of disbursal of the same to the municipalities and local bodies. In the assessment for all the years concerned, the assessee had shown only a portion of the A&S charges so received on the ground that there is an obligation on the assessee to monitor the repayment of the loan sanctioned and disbursed to the various local bodies for over a period from 36 to 44 months and, therefore, the assessee used to spread over this amount for the entire loan repayment period which was the practice followed from the inception. This was not accepted by the AO on the ground that since the entire A&S charges were deducted at the time of disbursal of the loan itself, the same has to be treated as income of the assessee of the year of receipt itself. He accordingly included the entire A&S charges deducted from the loans disbursed to the municipalities and local bodies. In other words, the AO did not accept the spread over method adopted by the assessee. This was confirmed by both the appellate authorities. The first appellate authority has taken the view that the entire amount received by way of A&S charges has to be treated as the income of the assessee of the year of receipt itself. The Tribunal has also endorsed the said view. The Tribunal while confirming the orders of the authorities below observed that since the deduction of 3 per cent A&S charges at the time of disbursement of the loan to the municipal and local bodies by the assessee is a final deduction without any condition for apportionment, the entire receipt has to be brought to tax in the year of receipt itself.

Sri V.M. Kurian, the learned counsel appearing for the assessee, submitted that the assessee has been following a method of accounting as per which the A & S charges deducted from the loan amount sanctioned by HUDCO and disbursed by the assessee to the municipalities and local bodies was spread over for the entire period specified for repayment of the loan amount having regard to the obligation of the assessee to monitor and ensure the due repayment of the loans. He further submitted that only that amount which is attributable to the year in question was shown as income in the accounts and the balance amount was shown as current, liabilities. He further submitted that the IT Department had been accepting the said method of accounting for over a period of years and that it is for the first time, that too by way of reopening the assessment for the years 1989/90, 1990-91 and 1991-92 and for the other years by way of original assessment the Department has taken the present stand viz., the method of accounting followed by the assessee is not acceptable. The counsel further submits, that the Department should have allowed the assessee to continue the same practice which was being followed from the very beginning at least for consistency sake. The learned counsel also took us to the decision of the Supreme Court in E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) as also the decisions in CIT vs. Chunilal V. Mehta & Sons (P) Ltd. 1973 CTR (SC) 470 : (1971) 82 ITR 54 (SC) and Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC) for the proposition that it is not the date of receipt of the income that is relevant for the purpose of assessment in a case where the assessee is following the mercantile system of accounting and that what is relevant is the date of accrual. The learned counsel also submits that so far as the receipt of A&S charges are concerned, since it is in connection with the services to be rendered for over a period of years depending on the number of instalments provided for repayment of the loan, only that portion of the receipt which is relatable to the respective years can be said to accrue and the said amount alone can be brought to tax under the Act. The counsel points out that the only reason for departing from the practice followed hitherto by the Department was the receipt of the commission as a lumpsum amount which according to the counsel was not justified.

We have also heard Sri P.K.R. Menon, senior Central Government standing counsel for the respondent. The senior counsel submits that even though the Department has been accepting the system of accounting maintained by the assessee in the earlier years it does not mean that such erroneous view should be perpetrated and that even for deciding the matter on the principle of consistency the view which has been followed hitherto must be one sustainable under law. The senior, counsel further submitted that, on the facts found by the Tribunal, it is clear that both the right to receive the income and the actual receipt fell during the accounting period relating to the assessment years in question. The senior counsel also submitted that there is absolutely no justification nor any legal principle involved in the matter of apportioning the commission received in the absence of any restriction or condition imposed under the agreement between the assessee and the HUDCO or between the assessee and the municipalities/local bodies.

We have considered the rival submissions and also perused the orders of the authorities and the Tribunal. The assessee-company had received 3 per cent A & S charges from the loans which are sanctioned by HUDCO and disbursed to various municipalities/local bodies. The assessee had also deducted the entire 3 per cent A&S charges at the time of disbursal of the loan amount to the municipalities/local bodies in whose favour the loan is sanctioned. There were no special stipulations or condition regarding this deduction except that it, is towards A&S charges. The contention of the assessee is that there are certain obligations on the part of the assessee in the matter of monitoring the loans and for ensuring the repayment of the loans. However, no agreement or correspondence between the parties were produced before the authorities. There is no dispute that the assessee had received 3 per cent commission at the time of disbursement of the loan. The assessee had also not produced any material to show that in case the assessee did not honour the obligation of monitoring and ensuring the repayment of the loan to the HUDCO there is an obligation to return the A&S charges deducted or any portion thereof. In other words, the receipt of 3 per cent A&S charges was absolute and the assessee is entitled to appropriate the amount in whatever manner the memorandum of articles of the company provides.

It is true that the assessee for the purpose of its convenience, has prepared the accounts in such a way they had shown only that portion of the commission which according to them relates to a particular period. Such accounting system can be treated as one which satisfies the requirement of the company. In other words, the preparation of accounts in such a manner will not ipso facto entitle the assessee to claim the benefit of the provisions of the IT Act. If the assessee wanted the benefit available under the IT Act it must satisfy the requirement of the said statute. As observed by the Supreme Court in E.D. Sasoon & Co’s case mentioned above, the test is whether the assessee has got ‘a right to receive profits’. It is in that context the Supreme Court has observed that if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. In this case, as observed by the first appellate authority, both the right to receive the commission and the actual receipt occurred during the accounting period relating to the assessment years concerned. Therefore, there is no question of any contention being raised based on the method of accounting followed by the assessee.

The Tribunal in para 8 of the appellate order has clearly noted that deduction of 3 per cent at the time of disbursement of the loan to the municipal and local bodies by the assessee is a final deduction and that there are no conditions for the said deduction and, therefore, this is a final receipt and it has to be brought to tax in the year of deduction itself. In spite of the persuasive argument of the learned counsel for the assessee based on certain circumstances which led the assessee to maintain the accounts in a particular manner which has no legal sanction, we are unable to accept the said contention.

The question of law referred by the Tribunal as already noted is as to whether the Tribunal was right in holding that the HUDCO administration charges collected and retained by the assessee at the time of disbursal of the loans to the urban local bodies has accrued due to the assessee at that stage itself and, therefore, assessable to tax in the year in which the loan amount was disbursed.

In view of what we found above, the said question has to be answered in the affirmative i.e., in favour of the respondent and against the assessee. We do so.

[Citation : 266 ITR 226]

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