The Commissioner Of Income-Tax, Coimbatore v. M/S. Annamalai Finance Ltd

Date:- 02.11.2009 Coram The Honourable Mr. Justice K. RAVIRAJA PANDIAN and The Honourable Mr. Justice M.M. SUNDRESH Tax Case(Appeal) No.1087 of 2009 The Commissioner of Income-tax,Coimbatore. ... Appellant ..vs.. M/s. Annamalai Finance Ltd. ... Respondent Tax Case Appeal against the order dated 25.4.2008 passed by the Income-tax Appellate Tribunal, 'D'Bench, Chennai in ITA No.102/Mds/2002. For Appellant : Mr. T. Ravi Kumar JUDGMENT (Judgment was delivered by K. RAVIRAJA PANDIAN, J.) The Revenue has come forward with this tax case appeal against the order dated 25.4.2008 passedby the Income-tax Appellate Tribunal, 'D' Bench, Chennai in ITA No.102/Mds/2002 relating to theassessment year 1997-98, by formulating the following questions of law:- " (i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law inholding that overdue charges on accrual basis not accounted the books of account is not to bebrought to tax? (ii) Whether on the facts and circumstances of the case, the Tribunal was right in holding that theadditional financial charges (overdue charges) are not to be added as income of the assessee?" 2. The facts, as culled out from the memorandum of grounds, are as follows: During the previousyear ended on 31.3.1997, the assessee Company had admitted overdue financial charges on hirepurchase and lease transactions on cash basis i.e. on receipt basis and not on accrual basis. In thecourse of the assessment proceedings, the assessee Company was informed that since it had beenfollowing mercantile system of accounting for all incomes and expenses, the same has to be adoptedin respect of overdue financial charges as mandated by Section 145 of the Income-tax Act. 3. From the assessment year 1997-98, in the case of Companies, the method of accounting is to be followed strictly the mercantile system of accounting i.e. on accrual basis including that of overduecharges of hire purchase and lease for standard and non-standard assets. The assessee-Companyfiled the details and it is found that the overdue charges on accrual basis in respect of hire chargesand lease in respect of the amount of Rs.82,23,892/- and Rs.24,37,922/- respectively aggregating toan amount of Rs.1,06,61,814/- had not been admitted by the assessee on accrual basis. 4. The assessee had submitted that in respect of overdue charges, the assessee Company, keeping inline with the norms of the Reserve Bank of India as well as the credit rating agency, has beenrecognising income by way of overdue charges only to the extent of actual collection i.e. theassessee is admitting income only on cash basis. The assessee Company has also placed relianceupon the Accounting Standard 9 of ICAI which lays down that when undertainties exist regardingdetermination of the amount or its collectability, the revenue shall not be treated as accrued andhence shall not be recognised until collection. 5. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions viz. therevenue is measurable and that the revenue is collectable without any uncertainty. Taking intoaccount these standards also, the assessee submitted that the overdue on financial charges on hirepurchase and lease had been admitted only on cash basis. Rejecting the said submission, theAssessing Officer passed the assessment order. 6. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income-tax(Appeals), who dismissed the appeal, upholding the finding of the Assessing Officer. The Assesseepreferred a further appeal before the Income-tax Appellate Tribunal and the Tribunal allowed theappeal of the assessee, following the judgment of the Division Bench of this Court in assessee's owncase reported in VOL.275 (2005) ITR 451 (COMMISSIONER OF INCOME-TAX v. ANNAMALAIFINANCE LTD.) in respect of assessment years 1992-93, 1993-94 and 1994-95. The revenue hasfiled the present appeal against the order of the Tribunal formulating the questions of law referredto above. 6. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income-tax(Appeals), who dismissed the appeal, upholding the finding of the Assessing Officer. The Assesseepreferred a further appeal before the Income-tax Appellate Tribunal and the Tribunal allowed theappeal of the assessee, following the judgment of the Division Bench of this Court in assessee's owncase reported in VOL.275 (2005) ITR 451 (COMMISSIONER OF INCOME-TAX v. ANNAMALAIFINANCE LTD.) in respect of assessment years 1992-93, 1993-94 and 1994-95. The revenue hasfiled the present appeal against the order of the Tribunal formulating the questions of law referredto above. 7. Mr. T. Ravi Kumar, learned counsel appearing for the Department submitted that the issue iscovered by the decision in respect of assessee's own case decided by the Division Bench of thisCourt reported in 275 ITR 451(cited supra), wherein the third question of law was considered, whichis as follows:- " Whether on the facts and circumstances of the case, the Tribunal was right in upholding the actionof the assessee in changing the method of accounting of overdue interest alone on a cash basis,when the system of accounting of the assessee was mercantile?" 8. In the said decision, the Division Bench held as follows:- " It is a settled proposition vide the decision of a Division Bench of the Calcutta High Court in HelaHoldings Pvt. Ltd. v. CIT (2003) 263 ITR 129 that the assessee is entitled to change his regularmethod of accounting by another regular method. It would be open to the assessee to producerecords and show that it had followed such changed accounting method in the subsequent years. Inthe said decision, the Calcutta High Court also laid down the following general principles regardingtax avoidance and tax evasion, while dealing with the validity of the change in the method ofvaluation, change in accordance with the accounting practice and change followed in subsequentyears. The general principles are : "(i) the distinction between tax evasion and tax avoidance is still prevalent. (ii) generally speaking, tax evasion is the result of such things as illegality, suppression,misrepresentation and fraud. (iii) tax avoidance is the result of actions taken by the assessee, none of which is illegal or forbiddenby the law in itself and no combination of which is similarly forbidden or prohibited. (iv) the permissibility of a tax avoidance, will fall to be decided, when and only when, on the basis ofthe facts and transactions truly and correctly disclosed by the assessee, a point of law arises,whether on a certain reasonable construction of one part of the taxing statute, as applied to theassessee's case, tax which would otherwise be payable by the assessee, becomes not payable in thecase in hand. (v) when the court is faced with a task of construction in the above manner, the court is not bound tomake the construction in favour of the assessee merely on proof by the assessee, that it has enteredinto no illegality and made no prohibited transaction. (vi) the court would have to assess, in the facts and circumstances of each case, upon generalprinciples of conscience and justice, whether the arrangement of affairs by the assessee, so as tocause the possibility of a reduction of tax incidence, can fairly be permitted to the assessee, as agenuine and legal means of tax reduction, employed by it in a commercial fair sense, or whetherallowing the assessee to earn the reduction, in the facts and circumstances of the particular case, isopposed to the public policy of not encouraging citizens to engage themselves in dealings andtransactions designed primarily for the purpose of non-payment of tax only." (vi) the court would have to assess, in the facts and circumstances of each case, upon generalprinciples of conscience and justice, whether the arrangement of affairs by the assessee, so as tocause the possibility of a reduction of tax incidence, can fairly be permitted to the assessee, as agenuine and legal means of tax reduction, employed by it in a commercial fair sense, or whetherallowing the assessee to earn the reduction, in the facts and circumstances of the particular case, isopposed to the public policy of not encouraging citizens to engage themselves in dealings andtransactions designed primarily for the purpose of non-payment of tax only." In the instant case, learned counsel for the Revenue is not in a position to demonstrate or satisfy usthat due to the change of accounting method adopted by the respondent/assessee, which ispermissible in law as per the ratio laid down in (i) CIT v. Matchwell Electricals (I.) Ltd. (2003)263ITR 227 (Bom) and (ii) Hela Holdings Pvt. Ltd. v. CIT (2003) 263 ITR 129 (Cal), the Revenue sufferedany loss or such a change of methodology attracts tax evasion. Concededly, there is no finding tothat 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 an assessee, does not create any income; but the method ofaccounting only recognizes 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 overduecharges receivable `by the assessee from various parties on the basis of hire-purchase and leaseagreements. As per the terms of the agreements, overdue charges are payable by the partiesconcerned to the assessee when they make defaults in paying the instalments as per the schedule ofpayments. When the instalment itself is overdue, is not collected, there is no basis for making out acase 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 onlyan enabling provision and that enabling provision does not guarantee the collection of overduecharges. It only gives a cause of action to the assessee. In such cases it is very difficult to recognizeincome against overdue charges. We are, therefore, of the considered opinion that the Tribunal has rightly deleted the additions madetowards overdue charges, acknowledging the change of method of accounting of overdue interestalone on cash basis." the revenue has been answered affirmatively against the Revenue. Hence the appeal filed by therevenue is dismissed. ssa. To The Commissioner of Income-taxCoimbatore