Commissioner Of Income Tax,Panchkula v. M/S. Haryana Financial Corporation,Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 209 of 2011Date of decision: 21.7.2011 Commissioner of Income Tax,Panchkula --- Appellant Versus M/s. Haryana Financial Corporation,Chandigarh --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELACTING CHIEF JUSTICE HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. Yogesh Putney, Senior Standing Counsel for theappellant-revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act,1961 (for short “the Act”) has been filed by the revenue against theorder dated 15.10.2010, passed by the Income Tax AppellateTribunal, Chandigarh Bench ‘A’, Chandigarh (in short “the Tribunal”)in ITA No. 179/CHANDI/2010, relating to the assessment year 2006-07. 2.The following substantial questions of law have beenclaimed for determination of this Court: “ (i)Whether on the facts and circumstances of the case, the Ld.ITAT has erred in deleting the addition of Rs.2,06,23,367/-made by the A.O. by treating the deposits received by theITAT has erred in deleting the addition of Rs.2,06,23,367/-made by the A.O. by treating the deposits received by the assessee against settlement pending as income of theassessee despite the fact that the assessee is maintainingits accounts on cash basis. (ii) Whether on the facts and circumstances of the case, the Ld.ITAT has erred in deleting the addition of Rs.2,06,23,367/-made by the A.O. accepting the method of accountingfollowed by the assessee which results in postponement ofits tax liability as per discretion of the assessee, since thetax on interest received is neither being paid on accrual noron cash basis. 3. The facts, in brief, necessary for adjudication as narrated inthe appeal, are that the respondent-assessee is an Undertaking ofthe Government of Haryana which is engaged in the business offinancing, merchant banking, leasing etc. The assessee filed itsreturn for the assessment year 2006-07 on 9.10.2006/21.11.2006declaring current income of Rs. 1,09,60,635/-. The assessee aftersetting off the brought-forward losses of the earlier years declaredthe income at NIL. Return was processed under Section 143(1) on8.5.2007. During the course of assessment proceedings, theassessing officer vide order dated 22.12.2008, inter alia, madeaddition of an amount of Rs. 2,06,23,367/- treating the depositscredited under the head ‘Current liabilities’ in the balance sheet, asincome. The assessing officer observed that the assessee wasmaintaining its account on cash basis, and in the absence of anybifurcation of the principal amount and the interest, the entire amountwas to be treated as having been received on account of interest. 4.The Commissioner of Income Tax (Appeals) [for short“the CIT(A)”], accepted the plea of the assessee and observed vide order dated 30.11.2009 that the system of accounting for bifurcationof the amount received from the defaulting borrowers into principaland interest was being regularly followed by the assessee and unlessthe accounts were finally settled with the defaulting borrowers, it wasdifficult to apportion the interim receipts between the principal andthe interest. 5.Though the appeal filed by the revenue was partlyallowed by the Tribunal vide the order dated 15.10.2010 on otheraspects, but qua the issue under discussion it put its seal ofaffirmation on the observations of the CIT(A), noticed above. 6.Still aggrieved, the revenue is in appeal before us.7.We have heard learned counsel for the appellant andhave perused the record. order dated 30.11.2009 that the system of accounting for bifurcationof the amount received from the defaulting borrowers into principaland interest was being regularly followed by the assessee and unlessthe accounts were finally settled with the defaulting borrowers, it wasdifficult to apportion the interim receipts between the principal andthe interest. 5.Though the appeal filed by the revenue was partlyallowed by the Tribunal vide the order dated 15.10.2010 on otheraspects, but qua the issue under discussion it put its seal ofaffirmation on the observations of the CIT(A), noticed above. 6.Still aggrieved, the revenue is in appeal before us.7.We have heard learned counsel for the appellant andhave perused the record. 8.Learned counsel for the revenue submitted that the CIT(A) as well as the Tribunal were not justified in deleting the additionof Rs. 2,06,23,367/- as the sum received by the assessee againstsettlement which was pending included interest, component and,therefore, would be revenue receipt. According to the learnedcounsel, especially when the assessee was following the ‘cashsystem’ of accountancy, it was for the assessee to furnish details ofthe amounts showing element of interest and principal therein. In theabsence of the same, the Department was justified in treating theentire amount as taxable in the year of receipt. 9.We are unable to accept the contention of the counsel. 10.The Tribunal while upholding the order of the CIT(A)which had allowed the claim of the assessee had in para 15 of theorder, recorded as under: “15.On the other hand, learned counsel for the respondentassessee vehemently argued that assessee being afinancial institution has large number of borrowers whodefault in repayments of loans and interest thereon. Inorder to recover such loans, policies are formulated bythe Government from time to time in terms of whichcertain concessions/reliefs are allowed to the borrowerswho deposits the outstanding amounts in instalments andthereafter the amount is bifurcated between interest andPrincipal at the time of final settlement as per thescheme. In this regard, the accounting policy regularlyfollowed by the assessee was that the bifurcation ofinterest and Principal was done only at the time of finalsettlement had not been done, the bifurcation could notbe made. Therefore, the amounts were lying credited inthe relevant year of final settlement as per the accountingpolicy regularly followed by the assessee regarding theamount received from the defaulting borrowers forbifurcation into Principal and interest thereon. The CIT(Appeals) has observed that unless the accounts arefinally settled with the defaulting borrowers, it is difficult toapportion the interim receipts between Principal andinterest. CIT (Appeals) has also recorded a finding thatsuch accounting system has been regularly followed bythe assessee. In our considered opinion, having regardto the submissions put-forth before us, there is nomaterial to negate the aforesaid factual findings recordedby the CIT (Appeals). Moreover, the CIT (Appeals) has observed that no reason has been adduced by theAssessing Officer to disturb accounting system regularlybeing followed by the assessee. In this connection, wehave perused the cryptic discussion made by theAssessing Officer in the assessment order which reads as under: observed that no reason has been adduced by theAssessing Officer to disturb accounting system regularlybeing followed by the assessee. In this connection, wehave perused the cryptic discussion made by theAssessing Officer in the assessment order which reads as under: “The above accounting policy of the assesseecannot be accepted. It cannot over-ride theprovision of Income Tax Act and more specificallyof Section 145. The assessee is maintaining itsaccounts on cash basis. Such deposits receivedagainst settlement have been shown atRs.2,06,23,367/- during the year. In the absence ofany details given, the entire amount is taken ashaving been received towards interest and isbrought to tax. An addition of Rs.2,06,23,367/- is,therefore, made to the income of the assessee.Evidently, the Assessing Officer has madegeneralized observations without pointing out anyreasons to interfere with the regular accountingsystem followed by the assessee. There is nomaterial to establish as to in what manner thesystem of accounting followed by the assessee withrespect to the impugned amounts, does not lead toproper deduction of income. The CIT (Appeals), inour view, is correct in observing that till the finalsettlement of accounts with the defaultingborrowers, it is not possible for the appellant tobifurcate interim payments made by the defaultingborrowers between Principal and interest till suchtime the settlement is finally reached. Consideringthe totality of circumstances, we hereby affirm theorder of the CIT (Appeals) and find no justificationfor the addition made by the Assessing Officer. Accordingly, ground of appeal raised by theRevenue is dismissed.” 11. The Tribunal had concluded that till the final settlement of the accounts was made with the defaulting borrowers, it was difficultto bifurcate the interim payments which had been made by thedefaulting borrowers between the principal and the interest amount.Further, the assessee had been regularly following the systemadopted by it. In such a situation, the claim of the assessee couldnot be denied. 12.No perversity could be shown by the learned counsel forthe revenue in the aforesaid findings of the Tribunal warrantinginterference by this Court. Thus, no substantial question of lawarises for consideration of this Court. There is no merit in the appealand the same is accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE July 18, 2011*rkmalik* (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE