M/S.sundaram Finance Limited v. The Joint Commissioner Of Income Tax,Special Range - Ii,Chennai – 600 006

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN M/s.Sundaram Finance Limited ...Appellant in both Appeals -Vs- The Joint Commissioner of Income Tax,Special Range - II,Chennai – 600 006. ...Respondent in both Appeals T.C.A.No.76 of 2009 is filed under Section 260A of theIncome Tax Act,1961, against the order of the Income TaxAppellate Tribunal, Chennai 'A' Bench, dated 10.03.2006, passedin ITA.No.1978/MDS/2000 for the Assessment Year 1997-98. T.C.A.No.77 of 2009 is filed under Section 260A of theIncome Tax Act,1961, against the order of the Income TaxAppellate Tribunal, Chennai 'A' Bench, dated 10.03.2006, passedin ITA.No.2021/MDS/2000 for the Assessment Year 1997-98. These appeals against the Commissioner of Income TaxAppeals-IX Chennai made in ITA No.116/2000-2001 Date of Order26.09.2000 for Assessment Year 1997-98 against the order ofJoint Commissioner of Income Tax Special Range II, Chennai -34,for the PAN No.AAAJ1000iK/16-1, dated 23.03.2000 for theAssessment Year 1997-1998. For Appellant : Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar Padmanabhan For Respondent : Mr.T.Ravikumar, Senior Standing Counsel. JUDGMENT (Judgment of the Court was delivered by Dr.Vineet Kothari,J.) Both these Appeals have been filed by theAppellant/Assessee under Section 260A of the Income Tax Act, inshort, 'Act', raising the following Substantial Questions of Lawarising from the order of the learned Income Tax AppellateTribunal, in short, 'Tribunal', dated 10.03.2006, for AssessmentYear 1997-1998. 2. T.C.A.No.76 of 2009 was admitted by a Co-ordinateBench of this Court on 03.03.2009 only on three questions quotedbelow, as the remaining above quoted six questions were alreadycovered by a Division Bench decision of this Court in T.C.No.107of 2002, dated 09.02.2009. The Admission Order of the Co-ordinate Bench of this Court, dated 03.03.2009, is quoted belowfor ready reference : “Though the Tax Case Appeal is filed byformulating as many as nine questions of lawincluding the following questions of law asquestions No.1 to 5 : 1. Whether on the facts and in thecircumstances of the case, the Tribunal wasright in law in holding that since theappellant is following Mercantile System ofAccounting, the interest income on Non-Performing Assets (sticky loans) should beassessed to tax on accrual basis ? 2. Whether on the facts and in thecircumstances of the case, the Tribunal oughtto have appreciated that the income was notaccounted on account of uncertainty ofrealisation and hence applying the ratio ofthe decision of the Supreme Court in the caseof Godhra Electric Supply Co. vs. C.I.T. (225ITR 746) held that income does not accrue evenunder Mercantile System of Accounting ? 3. Whether on the facts and in thecircumstances of the case, the Tribunal wasright in law in not following the decision ofthe jurisdictional High Court in theAppellant's own case for the Assessment Years1993-94 and 1994-95? 4. Whether on the facts and in thecircumstances of the case, the Tribunal oughtto have appreciated that RBI guidelines are also in line with the method of determiningthe real income of an assessee and it is inaccordance with the ratio of the decision ofthe Apex Court in the case reported in GodhraElectric Supply Co. vs. C.I.T. (225 ITR 746)and is also in accordance with the AccountingStandard issued by the CBDT and hence the Non-recognition of Income in line with the RBIguideline cannot be brought to tax ? 5. Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in law in holding that theAppellant is not entitled to deduction of the'provision' made in respect of Non-PerformingAssets which are considered irrecoverable ? 4. Whether on the facts and in thecircumstances of the case, the Tribunal oughtto have appreciated that RBI guidelines are also in line with the method of determiningthe real income of an assessee and it is inaccordance with the ratio of the decision ofthe Apex Court in the case reported in GodhraElectric Supply Co. vs. C.I.T. (225 ITR 746)and is also in accordance with the AccountingStandard issued by the CBDT and hence the Non-recognition of Income in line with the RBIguideline cannot be brought to tax ? 5. Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in law in holding that theAppellant is not entitled to deduction of the'provision' made in respect of Non-PerformingAssets which are considered irrecoverable ? 6. Whether the Appellate Tribunal wasjustified in not appreciating that theprovision made in respect of Non-PerformingAssets if not allowable as a bad debt isallowable as a business loss ?, as the said six questions of law so formulated wereheld against the assessee in T.C.No.107 of 2002 on09.02.2009 by a Division Bench of this Court andthey are decided against the assessee, the aboveappeal is admitted on the following substantialquestions of law : 1. Whether on the facts and in thecircumstances of the case, the Tribunal wasright in law in holding that the differentialincome on hire purchase transaction due tothe change in the apportionment of incomefrom Sum of Digits Method (SOD) to InternalRate of Return (IRR) method effected by theappellant in the relevant previous year isnot for bonafide reasons ? 2. Whether on the facts and in thecircumstances of the case, the Tribunal erredin not appreciating that IRR is a moredefined and accepted method of accountingthan SOD and hence ought to have upheld thechange in method of accounting ? 3. Whether on the facts and in thecircumstances of the case, the Tribunal wasright in law in holding that the cost ofsoftware given on lease is capital in natureand hence not allowable as deduction ?Notice to the Respondent.” 3. T.C.A.No.77 of 2009 was admitted by a Co-ordinateBench of this Court along with T.C.A.No.76 of 2009 on 03.03.2009on the following only Substantial Question of Law : “Whether on the facts and in the circumstancesof the case, the Tribunal was right in treating theamount of Rs.2,70,675/- collected as contingentdeposit as income of the appellant ? 4. Learned Counsels at Bar fairly submitted that thequestions framed above, on which these Appeals were admitted,are now covered by a decision of this Court in the case ofAssessee itself in Sundaram Finance Limited v. AssistantCommissioner of Income Tax, (2009) 318 ITR 452, which was upheldby the Supreme Court in (2012) 349 ITR 356; Commissioner ofIncome Tax v. Elgi Finance Ltd., (2007) 293 ITR 357; andIntegrated Finance Co. Ltd. v. Joint Commissioner of Income Tax,(2015) 373 ITR 517. The relevant extracts from the aforesaidjudgments are quoted below for ready reference : (i) Sundaram Finance Limited v. AssistantCommissioner of Income Tax, (2009) 318 ITR 452 : The assessee filed an appeal against the orderof the Tribunal, Madras, 'A' Bench made in ITANo.54/Mad/2002 dt.31[st] July,2006. The relevantasst. yr. is 1998-99. The substantial questions oflaw formulated for entertainment of the appeal areas follows :'1. Whether, on the facts and in thecircumstances of the case, the Tribunal wasright in law in holding that the appellantis not entitled to deduction of the'provision' made in respect of non-performing assets which are consideredirrecoverable ?2. Whether the Tribunal was justifiedin not appreciating that the provision madein respect of non-performing assets if notallowable as a bad debt is allowable as abusiness loss ? (i) Sundaram Finance Limited v. AssistantCommissioner of Income Tax, (2009) 318 ITR 452 : The assessee filed an appeal against the orderof the Tribunal, Madras, 'A' Bench made in ITANo.54/Mad/2002 dt.31[st] July,2006. The relevantasst. yr. is 1998-99. The substantial questions oflaw formulated for entertainment of the appeal areas follows :'1. Whether, on the facts and in thecircumstances of the case, the Tribunal wasright in law in holding that the appellantis not entitled to deduction of the'provision' made in respect of non-performing assets which are consideredirrecoverable ?2. Whether the Tribunal was justifiedin not appreciating that the provision madein respect of non-performing assets if notallowable as a bad debt is allowable as abusiness loss ? 3. Whether, on the facts and in thecircumstances of the case, the Tribunal wasright in treating the amount ofRs.36,47,585/- collected as contingentdeposit as income of the appellant ?' 2. The facts of the case as culled out from thegrounds of appeal are as follows :3. The appellant-company is engaged in thebusiness of hire purchase financing, equipment leasing and allied activities. For the asst. yr.1998-99, the appellant filed a return of income on30[th] Nov., 1998, declaring a total income ofRs.50,38,16,950. The regular assessment under s.143(3) was completed on 30[th] March, 2001, determiningthe total income at Rs.79,16,75,880. Whilecompleting the assessment, the AO disallowed thededuction for provision for non-performing assetsand contingency deposit. Aggrieved against theabove order, the appellant preferred an appeal tothe CIT(A). The CIT(A) by following the earlierorder of his predecessor for the asst. yr. 1995-96allowed the appeal. Aggrieved against the order ofthe CIT(A), the Revenue preferred an appeal beforethe Tribunal. The Tribunal following the decisionof this Court in T.N.Power Finance & InfrastructureDevelopment Corporation Ltd. vs. Jt. CIT (2007) 213CTR (Mad) 610 : (2006) 280 ITR 491 (Mad) decided theissue against the appellant. With regard to thecollection of contingency deposits, the Tribunalfollowed its order for the earlier assessment yearsand reversed the order of the CIT(A). Thecorrectness of the said order is now put in issuebefore this Court. 4. We heard the counsel for the appellant andperused the materials on record. 5. The first and second questions of law areinter-related to each other. Learned counselappearing for the assessee submits that the issueinvolved in these questions of law is squarelycovered by the decision of this Court in the case ofT.N. Power Finance & Infrastructure DevelopmentCorporation Ltd. (supra) against the assessee. Inthe said judgment, the Division Bench of this Courthas held that the assessee was not entitled todeduction in view of the Explanation to s. 36 (1)(viia) of the IT Act which says that the provisionfor bad and doubtful debt made in the accounts ofthe assessee is not an allowable deduction.Likewise, the third question of law is also coveredby the decision of this Court in the case of CIT vs.Sakthi Finance Ltd. (2007) 210 CTR (Mad) 300; (2007)291 ITR 83 (Mad), wherein it was held that as longas the receipt of the amount by the assessee wasclearly associated with liability to refund theamount, such receipt of the amount would not becharacterised as an income and, therefore, the samecannot be taxed vide K.C.P. Ltd. vs. CIT (2000) 162CTR (SC) 320 : (2000) 245 ITR 421 (SC) and CIT vs.Southern Explosives Co. (2000) 242 ITR 107 (Mad). Thus, the third question of law is also covered bythe decisions (sic) against the assessee. Thus, asall the questions of law raised are already answeredagainst the assessee, the questions of law soformulated need not be reconsidered by us again asthe issue is already settled.6. For the above reasons, the tax case appealis dismissed.” (ii) Commissioner of Income Tax v. Elgi FinanceLtd., (2007) 293 ITR 357 : Thus, the third question of law is also covered bythe decisions (sic) against the assessee. Thus, asall the questions of law raised are already answeredagainst the assessee, the questions of law soformulated need not be reconsidered by us again asthe issue is already settled.6. For the above reasons, the tax case appealis dismissed.” (ii) Commissioner of Income Tax v. Elgi FinanceLtd., (2007) 293 ITR 357 : “5. Heard the counsel. There is no disputethat the above issue has already been considered bythis Court by the unreported judgment cited supra.Further, the Tribunal also considered the issuewhether the income has in fact accrued at all ornot and held as follows : 'In the case of non-performing assets,in the light of the notification issued bythe Reserve Bank on classification ofassets and the AS-9 issued by the ICAI inthe matter of recognising income, and alsoin the light of the various circularsissued by the CBDT, it is to be seen thatthe question of accrual can be consideredonly after recognising income from suchassets. If no income is recognised at allfrom such assets, there is no question ofapplying the principle of accrual. Theprinciple of accrual comes into play onlywhen income is recognised. In the presentcase, the assessee has classified itsassets on the basis of the notificationissued by the RBI and found that certainassets are coming under the category ofnon-performing assets. From such non-performing assets, the assessee has notrecognised any income in consonance withthe notification issued by the RBI and AS-9issued by the ICAI. Therefore, theassessee is justified in not recognisingthe income as such. Once that is the case,there is no occasion to consider whetherthe principle of accrual would arise ornot. In view of the matter, we are of theconsidered view that the lower authoritieshave erred in treating the interest on non-performing assets as income of the assesseecompany for the asst. yr. 1998-99. We direct the AO to delete the said interestfrom the computation of taxable income.The interest from such non-performingassets. As will be taxed in theappropriate assessment years on the basisof actual receipt. The issue of interestfrom non-performing assets is thereforedecided in favour of the assessee and therelevant grounds are allowed.' From the above, it is clear that the Tribunal hadgiven a factual finding that there is no accrual ofincome during the year.” Thus, all the aforesaid questions of law are answered in termsof the judgments quoted above. direct the AO to delete the said interestfrom the computation of taxable income.The interest from such non-performingassets. As will be taxed in theappropriate assessment years on the basisof actual receipt. The issue of interestfrom non-performing assets is thereforedecided in favour of the assessee and therelevant grounds are allowed.' From the above, it is clear that the Tribunal hadgiven a factual finding that there is no accrual ofincome during the year.” Thus, all the aforesaid questions of law are answered in termsof the judgments quoted above. 5. First and Second Questions of Law about Taxabilityof Apportionment of Income on Sum of Digits (SOD) Method orInternal Rate of Return (IRR) Method are covered by yet anotherdecision rendered by us in the case of Commissioner of IncomeTax v. M/s.Ashok Leyland Finance Ltd., in T.C.A.Nos.1299 and1300 of 2008, on 27.02.2019. The relevant extracts from thesaid judgment are quoted below for ready reference :“10. Having perused the aforesaid Judgments, weare of the clear opinion that the later decision ofAndhra Pradesh High Court relied on by the learnedcounsel for the Revenue does not help the case ofthe Revenue and Andhra Pradesh High Court itselfdistinguished the facts before it from the MadrasHigh Court decision admittedly, the Assessee hasbeen following the same method of E.M.I forbifurcation of its income into Principal andinterest component for all these years in question.The S.O.D method gives higher finance charges(interest) for the initial years and lower financecharges (interest) for the later years, i.e, the Sumof Digits is sum total of the number of years e.g.If the Hire Purchase Agreement is for 10 years, theSOD is 55 (1+2+3+4+5+6+7+8+9+10 = 55). Therefore,total financial charges for the first year would be10/55, for the second year 9/55, for third year 8/55and so forth which would clearly give higherfinancial charges for interest taxable in the firstyear. This SOD method even though adopted by theAssessee in its Book of Accounts on the basis ofGuidelines issued by the Institute of CharteredAccountants of India was not adopted in the Returnsof Income filed by it which consistently adopted EMImethod for taxability of interest income all these years. Since, for the previous assessment years,this Court has already approved such bifurcation ofincome and has held that interest income (Financecharges) on consistently adopted basis of E.M.I.would be taxable in the hands of the Assessee, themere change of Accounting method in its Book ofAccounts on the basis of S.O.D. does not alter theposition in the tax in the hands of the assessee.Therefore,the Judgment in the case of Sri ChakraFinancial Services Ltd. Vs. Commissioner of IncomeTax [(2013) 350 ITR 398] is distinguishable. 11. On the other hand, since in the case of thesame Assessee, the Coordinate Bench of this Courthas upheld the taxability with regard to interestincome on EMI method, which has been consistentlyfollowed, there is no reason to take a differentview in the matter for the present Assessment years. 12. Therefore, we do not find any merit inthese Appeals filed by Revenue and accordingly theseAppeals are dismissed and the questions of law areanswered in favour of the Assessee and as againstthe Revenue. No order as to costs.” 6. In view of the aforesaid submissions and discussion made,both these Appeals are disposed of in the following manner : 11. On the other hand, since in the case of thesame Assessee, the Coordinate Bench of this Courthas upheld the taxability with regard to interestincome on EMI method, which has been consistentlyfollowed, there is no reason to take a differentview in the matter for the present Assessment years. 12. Therefore, we do not find any merit inthese Appeals filed by Revenue and accordingly theseAppeals are dismissed and the questions of law areanswered in favour of the Assessee and as againstthe Revenue. No order as to costs.” 6. In view of the aforesaid submissions and discussion made,both these Appeals are disposed of in the following manner : First and Second Questions of Law on the Apportionmentof Income on SOD or IRR Method are thus answered in favour ofthe Assessee and against the Revenue. Third Question of Law, asto whether Cost of Software given on lease is 'Capital' innature or not, and the sole Question of Law in T.C.A.No.77 of2009 as to treating the amount of Rs.2,70,675/- collected asContingent Deposit as income of the appellant, on which theAppeals were admitted by a Co-ordinate Bench of this Court on03.03.2009, are not pressed by the learned counsel for theAssessee. No costs. dixit Sd/- Assistant Registrar(CS IV) //True Copy// Sub Assistant Registrar To 1.The Joint Commissioner of Income Tax, Special Range - II, Chennai – 600 006. 2. The Income Tax Appellate Tribunal, Chennai 'A' Bench, Chennai. 3. The Commissioner of Income Tax, Appeals-IX, Chennai. 4. The Commissioner of Income Tax, Special Range-II, Chennai. 5. The Assistant Registrar, Income Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besant Nagar, Chennai -90.+1cc to Mr.T.Ravikumar, Advocate, SR.No.20664+1cc to Mr.Subbaraya Aiyar, Advocate, SR.No.21243 T.C.A.Nos.76 & 77 OF 2009Kak(30/05/2019)