2011 (7) TMI 693 - HC - Income Tax

Addition - Method of Accounting - assessee is an undertaking of the Government of Haryana which is engaged in the business of financing, merchant banking, leasing, etc - accounting policy regularly followed by the assessee was that the bifurcation of interest and principal was done only at the time of final settlement had not been done, the bifurcation could not be made - Commissioner of Income-tax (Appeals) has observed that no reason has been adduced by the Assessing Officer to disturb the accounting system regularly being followed by the assessee - tribunal had concluded that till the final settlement of the accounts was made with the defaulting borrowers, it was difficult to bifurcate the interim payments which had been made by the defaulting borrowers between the principal and the interest amount - Decided in favor of the assessee

Summary

Issues:
1. Addition of deposits received against settlement pending as income.
2. Deletion of addition made by the Assessing Officer.
3. Acceptance of accounting method followed by the assessee.
4. Justification for treating the entire amount as taxable.

Issue 1: Addition of deposits received against settlement pending as income

The appellant Revenue challenged the order of the Income-tax Appellate Tribunal regarding the addition of Rs. 2,06,23,367 made by the Assessing Officer. The Tribunal affirmed the Commissioner of Income-tax (Appeals)' observations that the assessee, a financial institution, followed a system of bifurcation of amounts received from defaulting borrowers only at the time of final settlement. The Tribunal noted that the assessee's accounting policy did not allow for interim bifurcation between principal and interest until final settlement. The Tribunal found no reason to disturb the accounting system regularly followed by the assessee. The Tribunal concluded that until final settlement with defaulting borrowers, it was impractical to separate interim payments between principal and interest, and upheld the Commissioner's decision.

Issue 2: Deletion of addition made by the Assessing Officer

The Assessing Officer had added Rs. 2,06,23,367 to the assessee's income, treating deposits under "Current liabilities" as income due to the absence of bifurcation between principal and interest. The Commissioner of Income-tax (Appeals) accepted the assessee's plea, noting the regular accounting practice of bifurcation only at final settlement. The Tribunal partially allowed the Revenue's appeal but upheld the deletion of the addition based on the Commissioner's findings. The Tribunal emphasized the difficulty in apportioning amounts without final settlement and the regular accounting practice of the assessee, leading to the dismissal of the Revenue's appeal.

Issue 3: Acceptance of accounting method followed by the assessee

The Tribunal supported the Commissioner's decision to allow the assessee's claim, highlighting the challenges in bifurcating amounts between principal and interest without final settlement. The Tribunal found no justification to interfere with the regular accounting system followed by the assessee, emphasizing the need for final settlement to accurately allocate interim payments. The Tribunal affirmed the Commissioner's observations regarding the practical difficulties in apportioning amounts until final settlement with defaulting borrowers.

Issue 4: Justification for treating the entire amount as taxable

The Revenue contended that the entire amount should be taxable as the assessee failed to provide details separating interest and principal, especially when following a cash system of accounting. However, the Tribunal, echoing the Commissioner's decision, upheld the regular accounting practice of the assessee, emphasizing the impossibility of bifurcation before final settlement with defaulting borrowers. The Tribunal found no basis to disturb the accounting system followed by the assessee, leading to the dismissal of the Revenue's appeal for lack of merit.

In conclusion, the High Court dismissed the Revenue's appeal, upholding the Tribunal's decision based on the regular accounting practice of the assessee and the practical challenges in bifurcating amounts between principal and interest without final settlement with defaulting borrowers. The Court found no substantial question of law warranting consideration and affirmed the Tribunal's findings, ultimately dismissing the appeal.