KERALA URBAN DEVELOPMENT Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) These Income Tax References arise out of a common order of the Income Tax Appellate Tribunal, Cochin Bench in ITA.Nos.914, 915, 916 & 917 (Coch)/1994, 290 and 291 (Coch)/1996 filed by the kerala Urban Development Finance Corporation, Calicut in respect of the assessment years 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.

(2.) The brief facts are as follows. The assessee is a Company, inter alia, use to act as a nodal agency for implementation of the schemes evolved by the Central Government, such as Low Cost Sanitation, Slum Upgradation-cum-employment 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% of the loan amount towards Administration and Supervision Charges (A & S charges) for implementing the schemes entrusted to it and for meeting the expense 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 Assessing Officer 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 assessing officer 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% 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.

(3.) 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 Income Tax 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. If the Supreme Court in E.D.Sassoon & Co.Ltd. v. (Commissioner of Income Tax ((1954) 26 ITR) as also the decision in Commissioner of Income Tax v. Chunilal V. Mehta Sons P.Ltd. ((1971) 82 ITR 54) and Madras Industrial Investment Corporation Ltd. v. Commissioner of Income Tax ((1997) 225 ITR 802) 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.