The Commissioner of Income Tax vs Shriram Transport Finance Co. Ltd.

K. Raviraja Pandian, J.—The Tax Case Appeal No. 752 of 2007 is filed against the order of the Income Tax Appellate Tribunal ''B'' Bench

dated 16.11.2005 made in I.T.A. No. 1556/Mds/98. The relevant assessment year is 1994-95. The following substantial questions of law are

formulated:

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to account for only the

additional finance charges"" on a cash basis, while it is otherwise following a mercantile system of accounting and also accounting for the very same

transaction on a mercantile basis under Company Law

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee may be permitted to follow a mercantile

system of accounting with respect to Company Law and a hybrid system of accounting with respect to Income Tax

The facts necessary for disposal of the appeal are as follows:

The assessee is a non-banking financial company. It has been accounting all its income and expenditure on mercantile basis until the assessment

year 1993-94. From 01.04.1993 onwards in respect of income under the head ""Additional Finance Charges"" on hire purchase/lease transactions,

it changed the method of accounting to cash for income tax purposes alone, while it was accounting the same under mercantile basis in the annual

report as per the Companies Act. The assessing officer, on the reasoning that the assessee has followed the cash system of accounting in respect of

additional financial charges on hire purchase lease transaction alone and the very same transaction has been accounted on mercantile basis in the

returns filed under the Companied Act, held that it was not permissible and brought to assessment. On appeal by the assessee, the Commissioner

of Income Tax (Appeal) allowed the appeal in respect of the above issue by following his own earlier order. The Revenue aggrieved by the finding

arrived at with regard to the system of accounting followed by the assessee in respect of additional finance charges, filed an appeal before the

Tribunal. The Tribunal, in a common order dated 16.11.2005 made in ITA. No. 1556 of 1998, decided the issue in favour of the assessee and

dismissed the appeal.

In this appeal it is contended that the the assessee had accounted for the additional finance charges on mercantile basis in their accounts filed

with the Registrar of Companies, but, only for income tax purpose it has accounted for it on cash basis, which is impermissible in law. It is further

contended that the respondent assessee is supposed to maintain its accounts on a cash or mercantile basis and the assessee being a Company

could only maintain the accounts in one system i.e., on a mercantile system of accounting. The respondent assessee cannot choose specific items

and account for the same on cash basis and other items on mercantile basis. The Tribunal rejected the plea of the revenue on the reasoning that

while considering an identical issue with regard to additional finance charges or additional lease rentals, which was otherwise known as overdue

charges, in ITA Nos. 99 to 103/Mds/2002, the Tribunal has taken the view that the assessee could have cash system of accounting for the

purpose of accounting additional finance charges or overdue charges. Following the said earlier order, the Tribunal dismissed the appeal.

From the records it could be seen that the assessee being a non banking financial company entered into a lease agreement with its customers.

One of the clause in the agreement provides for if the monthly instalments have not been paid, that would carry additional finance charges in the

prescribed rate. Such clause is incorporated as a measure deterrence to instil some kind of fear in the minds of lessees and customers so that they

keep paying the instalments regularly. Since such clause is inserted it cannot be said that such finance charges has been accrued to the assessee

company or if the entries were made in the books of accounts maintained for the purpose of the Companies Act, it cannot be conclusively said that

such additional finance charges had really accrued to the assessee company. We also find the change in the method of accounting has not caused a

real loss to the revenue because such charges have been received by the assessee company, the same having been offered for taxation. Further, it

is pertinent to mention that hybrid system of accounting was permissible during the relevant year and such system was abolished with effect from

01.04.1997 by substitution of Section 145 of the Finance Act, 1995.

A similar issue has been considered by the Division Bench of this Court in the case of Commissioner of Income Tax Vs. Annamalai Finance

Ltd., . In that case the assessing officer found that the change in the method of accounting of overdue charges from mercantile basis to cash system

was not justified and added the overdue interest of mercantile basis. This Court while deciding the issue, observed as under:

In the instant case, learned Counsel for the revenue is not in a position to demonstrate or satisfy us that due to the change of accounting method

adopted by the respondent/assessee, which is permissible in law as per the ratio laid down in (i) Commissioner of Income Tax Vs. Matchwell

Electricals (I) Ltd., and (ii) Hela Holdings Pvt. Ltd. Vs. Commissioner of Income Tax and Another, , the revenue suffered any loss or such a

change of methodology attracts tax evasion. Concededly, there is no finding to that effect in the assessment order or in the order of the

Commissioner of Income Tax (Appeals)

The change of method of accounting of overdue charges from the mercantile basis to cash system method of accounting as followed by assessee,

does not create any income; but the method of accounting only recognises income. Therefore, either to apply the accrual system or cash system,

recognition of income is a paramount factor. In the present case, the disputed amount is the overdue charges receivable by the assessee from

various parties on the basis of hire purchase and lease agreements. As per the terms of the agreements, overdue charges are payable by the parties

concerned to the assessee when they make defaults in paying the instalments as per the schedule of payments. When the instalment itself is

overdue, is not collected, there is no basis for making out a case that the additional overdue charges payable by the parties would be collectible

with certainty. The terms of the agreements which enable the assessee company to demand overdue charges is only an enabling provision and that

enabling provision does not guarantee the collection of overdue charges. It only gives a cause of action to the assessee. In such cases, it is very

difficult to recognise the income against the overdue charges.

We are, therefore, of the considered opinion that the Tribunal has rightly deleted the additions made towards overdue charges, acknowledging the

change of method of accounting of overdue interest alone on cash basis.

The reason given in the above said decision would squarely cover both the questions of law raised in this appeal. Thus, as the questions of law

raised were already answered in the affirmative against the revenue in the above case, this appeal is dismissed.

Tax case appeal No. 753 of 2007 is filed by the revenue against the order (common) made in ITA No. 1349/Mds/98 dated 16.11.2005 along

with other appeal in ITA No. 1556/Mds/98. In the said appeal (ITA 1349/Mds/98), at the instance of the assessee two issues were taken in the

forefront which were:

(1) Confirmation of computation of written down value;

(2) Contingent deposit.

The Tribunal, after hearing both sides, found that the issue relating to carry forward of written down value was covered against the assessee by the

decision of the apex Court in the case of Karnataka Small Scale Industries Development Corporation Ltd. Vs. Commissioner of Income Tax,

Bangalore, and decided the point against the assessee. Likewise the contingent deposit for statutory payment made by the assessee was allowed to

be treated as trading receipt. That is also against the assessee. The said finding was given by following the judgment of this Court in the case of

Commissioner of Income Tax Vs. Southern Explosives Co., . Thus, the two issues raised before the Tribunal by the assessee have been rejected

against the assessee and held in favour of the revenue. In the circumstances of the matter, the revenue cannot be aggrieved by such an order. The

Tribunal''s order is in favour of the revenue and thus there is nothing for the revenue to file an appeal. Questions of law formulated by the revenue,

as given below, have nothing to do with the issue involved in this appeal:

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to account for only the

additional finance charges"" on a cash basis, while it is otherwise following a mercantile system of accounting and also accounting for the very same

transaction on a mercantile basis under Company Law ?

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee may be permitted to follow a mercantile

system of accounting with respect to Company Law and a hybrid system of accounting with respect to Income Tax

Hence, this appeal is dismissed as nothing survives for adjudication in the appeal, which factum is also admitted by the Standing Counsel for the

revenue.