The Honourable Mr v. M/s.Shriram Transport Finance Co. Ltd

In the High Court of Judicature at MadrasDated : 17.07.2007Coram :The Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mr.Justice P.P.S.JANARTHANA RAJATax Case (Appeal) Nos.752 & 753 of 2007The Commissioner of Income TaxChennai.Appellant/ in both the AppealsVsM/s.Shriram Transport Finance Co. Ltd.,123, Angappa Naicken StreetChennai 1. Respondent/in both the AppealsTAX CASE (APPEALS) under Section 260-A of the Income Tax Act againstthe order of the Income Tax Appellate Tribunal Madras 'B' Bench dated16.11.2005 made in ITA.Nos.1556/Mds/98 and 1349/Mds/98 for the assessmentperiod 1994-95.against the order of the Commissioner of Income Tax(appeal)II Chennai.34 dated 30.4.98 in ITA No.50/97-98 againt the order ofThe Assistant Commission of Income Tax Central Circle I (4) chennai 34dated 27.3.97 in PA No.AAA-CS-7018-R.For Appellant : Mrs.Pushya Sitaraman Senior Standing Counsel forIncome TaxJUDGMENT(Judgment of the Court was delivered by K.RAVIRAJA PANDIAN, J.) The Tax Case Appeal No.752 of 2007 is filed against the order ofthe Income Tax Appellate Tribunal 'B' Bench dated 16.11.2005 made inI.T.A.No.1556/Mds/98. The relevant assessment year is 1994-95. Thefollowing substantial questions of law are formulated :1.Whether on the facts and circumstances of the case, theTribunal was right in holding that the assessee is entitled toaccount for only the "additional finance charges" on a cash https://hcservices.ecourts.gov.in/hcservices/ basis, while it is otherwise following a mercantile system ofaccounting and also accounting for the very same transactionon a mercantile basis under Company Law ?2.Whether on the facts and circumstances of the case, theTribunal was right in holding that the assessee may bepermitted to follow a mercantile system of accounting withrespect to Company Law and a hybrid system of accounting withrespect to Income Tax ?3. The facts necessary for disposal of the appeal are as follows:The assessee is a non-banking financial company. It has beenaccounting all its income and expenditure on mercantile basis until theassessment year 1993-94. From 01.04.1993 onwards in respect of incomeunder the head "Additional Finance Charges" on hire purchase/leasetransactions, it changed the method of accounting to cash for income taxpurposes alone, while it was accounting the same under mercantile basis inthe annual report as per the Companies Act. The assessing officer, on thereasoning that the assessee has followed the cash system of accounting inrespect of additional financial charges on hire purchase lease transactionalone and the very same transaction has been accounted on mercantile basisin the returns filed under the Companied Act, held that it was notpermissible and brought to assessment. On appeal by the assessee, theCommissioner of Income Tax (Appeal) allowed the appeal in respect of theabove issue by following his own earlier order. The Revenue aggrieved bythe finding arrived at with regard to the system of accounting followed bythe assessee in respect of additional finance charges, filed an appealbefore the Tribunal. The Tribunal, in a common order dated 16.11.2005 madein ITA.No.1556 of 1998, decided the issue in favour of the assessee anddismissed the appeal. 3. In this appeal it is contended that the the assessee had accountedfor the additional finance charges on mercantile basis in their accountsfiled with the Registrar of Companies, but, only for income tax purpose ithas accounted for it on cash basis, which is impermissible in law. It isfurther contended that the respondent assessee is supposed to maintain itsaccounts on a cash or mercantile basis and the assessee being a Companycould only maintain the accounts in one system i.e., on a mercantilesystem of accounting. The respondent assessee cannot choose specificitems and account for the same on cash basis and other items on mercantilebasis. The Tribunal rejected the plea of the revenue on the reasoningthat while considering an identical issue with regard to additionalfinance charges or additional lease rentals, which was otherwise known asoverdue charges, in ITA Nos.99 to 103/Mds/2002, the Tribunal has taken theview that the assessee could have cash system of accounting for thepurpose of accounting additional finance charges or overdue charges.Following the said earlier order, the Tribunal dismissed the appeal. 4. From the records it could be seen that the assessee being a nonbanking financial company entered into a lease agreement with its https://hcservices.ecourts.gov.in/hcservices/ customers. One of the clause in the agreement provides for if the monthlyinstalments have not been paid, that would carry additional financecharges in the prescribed rate. Such clause is incorporated as a measuredeterrence to instil some kind of fear in the minds of lessees andcustomers so that they keep paying the instalments regularly. Since suchclause is inserted it cannot be said that such finance charges has beenaccrued to the assessee company or if the entries were made in the booksof accounts maintained for the purpose of the Companies Act, it cannot beconclusively said that such additional finance charges had really accruedto the assessee company. We also find the change in the method ofaccounting has not caused a real loss to the revenue because such chargeshave been received by the assessee company, the same having been offeredfor taxation. Further, it is pertinent to mention that hybrid system ofaccounting was permissible during the relevant year and such system wasabolished with effect from 01.04.1997 by substitution of section 145 ofthe Finance Act, 1995.5. A similar issue has been considered by the Division Bench of thisCourt in the case of CIT v. Annamalai Finance Ltd., 275 ITR 451. In thatcase the assessing officer found that the change in the method ofaccounting of overdue charges from mercantile basis to cash system was notjustified and added the overdue interest of mercantile basis. This Courtwhile deciding the issue, observed as under :"In the instant case, learned counsel for the revenue is not ina position to demonstrate or satisfy us that due to the change ofaccounting 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) 263 ITR 227 (Bom) and (ii)Hela Holdings Pvt. Ltd., (2003) 263 ITR 129 (Cal), the revenuesuffered any loss or such a change of methodology attracts taxevasion. Concededly, there is no finding to that effect in theassessment order or in the order of the Commissioner of Income Tax(Appeals)The change of method of accounting of overdue charges from themercantile basis to cash system method of accounting as followed byassessee, does not create any income; but the method of accountingonly recognises income. Therefore, either to apply the accrualsystem or cash system, recognition of income is a paramount factor.In the present case, the disputed amount is the overdue chargesreceivable by the assessee from various parties on the basis of hirepurchase and lease agreements. As per the terms of the agreements,overdue charges are payable by the parties concerned to the assesseewhen they make defaults in paying the instalments as per theschedule of payments. When the instalment itself is overdue, is notcollected, there is no basis for making out a case that theadditional overdue charges payable by the parties would becollectible with certainty. The terms of the agreements whichenable the assessee company to demand overdue charges is only anenabling provision and that enabling provision does not guaranteethe collection of overdue charges. It only gives a cause of action https://hcservices.ecourts.gov.in/hcservices/ to the assessee. In such cases, it is very difficult to recognisethe income against the overdue charges.We are, therefore, of the considered opinion that the Tribunalhas rightly deleted the additions made towards overdue charges,acknowledging the change of method of accounting of overdue interestalone on cash basis."6. The reason given in the above said decision would squarely coverboth the questions of law raised in this appeal. Thus, as the questions oflaw raised were already answered in the affirmative against the revenue inthe above case, this appeal is dismissed.7. Tax case appeal No.753 of 2007 is filed by the revenue against theorder (common) made in ITA No.1349/Mds/98 dated 16.11.2005 along withother 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 forefrontwhich were: (1)Confirmation of computation of written down value;(2)Contingent deposit. The Tribunal, after hearing both sides, found that the issue relating tocarry forward of written down value was covered against the assessee bythe decision of the apex Court in the case of Karnataka Small ScaleIndustries Development Corporation Ltd. v. CIT, 258 ITR 770 and decidedthe point against the assessee. Likewise the contingent deposit forstatutory payment made by the assessee was allowed to be treated astrading receipt. That is also against the assessee. The said finding wasgiven by following the judgment of this Court in the case of CIT v.Southern Explosives, 242 ITR 107. Thus, the two issues raised before theTribunal by the assessee have been rejected against the assessee and heldin favour of the revenue. In the circumstances of the matter, the revenuecannot be aggrieved by such an order. The Tribunal's order is in favourof the revenue and thus there is nothing for the revenue to file anappeal. Questions of law formulated by the revenue, as given below, havenothing to do with the issue involved in this appeal :1.Whether on the facts and circumstances of the case, theTribunal was right in holding that the assessee is entitled toaccount for only the "additional finance charges" on a cashbasis, while it is otherwise following a mercantile system ofaccounting and also accounting for the very same transactionon a mercantile basis under Company Law ?2.Whether on the facts and circumstances of the case, theTribunal was right in holding that the assessee may bepermitted to follow a mercantile system of accounting withrespect to Company Law and a hybrid system of accounting withrespect to Income Tax ? https://hcservices.ecourts.gov.in/hcservices/ Hence, this appeal is dismissed as nothing survives for adjudication inthe appeal, which factum is also admitted by the Standing Counsel for therevenue. krr/mfsd/-Asst.Registrar/true copy/Sub Asst.RegistrarTo1.The Assistant Registrar, Income-Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besant Nagar, Madras 90 2.The Assistant Commissioner of Income Tax Central Circle I (4) Chennai 34. 3. The Commissioner of Income Tax (Appeal) II, Chennai.344. The Commissioner of Income Tax, Chennai.34+ 1 cc to Mrs.Pushya sitaraman Advocate SR.NO.43620TEJ(co) RD 8.8.07Tax Case (Appeal) Nos.752 and 753 of 2007