Commissioner of Income Tax vs Kailash Auto Finance Ltd.

In the present appeal filed u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Commissioner of income tax-II, Kanpur, has raised the following substantial questions of law:

Whether on the facts and in the circumstances of the case, the hon''ble Income Tax Appellate Tribunal was legally justified in granting relief from out of addition made by the Assessing Officer u/s 68 of the Income Tax Act, treating the deposits as genuine without properly appreciating the facts, and reasons for addition, as mentioned by the Assessing Officer in his order ?

Whether on the facts and in the circumstances of the case, the hon''ble Income Tax Appellate Tribunal was justified in law in deleting the additions made by the Assessing Officer on account of hire charges and lease rentals without appreciating the fact that it was incumbent upon the assessee to account for the entire income on mercantile basis only and the assessee cannot be permitted to exclude any part of the accrued income (even if relating to NPAs) under the mercantile system which is to be strictly adopted under the amended provisions of Section 145 of the Income Tax Act ?

The aforementioned substantial questions of law is said to be arising in the order of the Income Tax Appellate Tribunal dated June 14, 2005.

The present appeal relates to the assessment year 1997-98. The respondent-assessee is a public limited company incorporated under the provisions of the Companies Act, 1956. It is a non-banking financial company registered with the Reserve Bank of India (RBI) and derives income from hire purchase business and leasing of transport vehicles and machinery. During the course of assessment proceedings for the assessment year 1997-98, the Assessing Officer noticed deposits of Rs. 1,75,000 from one Smt. Sheela Rani and Anr. of Rs. 13,00,012, relating to security deposit from one Sri Jagar Singh. The aforesaid amounts were added by the Assessing Officer u/s 68 of the Act. The assessing authority has also noticed that the respondent-assessee had not charged lease rental on non-performing assets, which he calculated at Rs. 43,47,117 and had also excluded the hire charges relating to the non-performing assets which were added as income. The Commissioner of Income Tax (Appeals) deleted both the additions, which order has been confirmed by the Tribunal.

We have heard Sri A. N. Mahajan, learned standing counsel for the Revenue and Sri S. D. Singh, learned Counsel for the respondent-assessee.

So far as the deletion of Rs. 1,75,000 and Rs. 13,00,012 made by the Commissioner (Appeals) in respect of the amount added by the assessing authority u/s 68 of the Act is concerned, the Tribunal had noted the fact that Smt. Sheela Rani had a Tata Sumo on hire purchase from the respondent-assessee and the said amount of Rs, 1,75,000, which was shown as deposit in her account, was later on transferred to her in the hire purchase account. Similarly, a sum of Rs. 13,00,012 was given as security deposit by one Sri Jagar Singh by an account payee cheque/draft from his bank account No. 3732 with Canara Bank, Branch Noa Mundi, West Singh Bhum, Bihar and the Tribunal has held that the onus had been discharged and the amount shown as deposit was genuine. The finding recorded by the Tribunal on this issue is based on appreciation of evidence and material on record and cannot be said to be arbitrary or illegal.

So far as the question of deletion of Rs. 1,01,616 being hire charges and Rs. 43,47,117 being lease rental on non-performing assets is concerned, we find that the respondent-assessee had excluded the same as they related to non-performing assets as per the Reserve Bank of India (RBI), guidelines, which provided that the income relating to substandard assets/non-performing assets, which was outstanding for more than six months, was not to be treated as income/profits. The Tribunal further found that the respondent-assessee being a non-banking financial-company was bound to follow the guidelines issued by the Reserve Bank of India and if the guidelines were not followed, the assessee would face de-recognition/de-registration from the Reserve Bank of India.

We also find that the apex court in the case of United Commercial Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, has held that the interest shown by the bank on sticky advance and doubtful loans and not brought into the profit and loss account cannot be included in the income of the assessee till such time interest is not actually received. Similar view has been taken by the apex court in the case of Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, Bombay City-III, The principle laid down in the aforesaid cases by the apex court would equally be applicable in the present case as the respondent-assessee was obliged not to provide for hire charges and lease rental on non-performing assets in view of the Reserve Bank of India guidelines.

In view of the foregoing discussion, we are of the considered opinion that the appeal does not involve any substantial question of law and is dismissed in limine.