2009 (2) TMI 194 - HC - Income Tax

Method of Accounting Hire Purchase - assessee has claimed deduction of finance commission which was charged as expenditure in the profit and loss account of the assessee. The aforesaid deduction was claimed in the same year in which the hire purchase agreement was entered by the assessee irrespective of the fact that the actual payment was made even in the following years held that - It is not in dispute that the mercantile accounting system was adopted by the assessee and was permitted by the Revenue for several years. - By virtue of the said accounting system, the assessee was claiming benefit of finance commission in the year of hire purchase agreement itself irrespective of the fact that the amount of instalments as per the hire-purchase agreement was actually paid in the subsequent years - the same system is required to be continued for the assessment years and this arrangement is allowed looking to the peculiar facts and circumstances of the case as the firms have already closed their business and the amount so claimed is not quite higher

Summary

Issues:
1. Disallowance of interest payment under 'finance commission' and interest not pertaining to relevant accounting period.
2. Disallowance of accrued liability on hire purchase commission.
3. Justification of not upholding the accrued hire purchase commission liability as interest projected over the hire purchase agreements.

Analysis:
1. The Tribunal referred questions regarding disallowance of interest payment and accrued liability on hire purchase commission. The Revenue argued that finance commission deduction should be spread over payment years, not just the agreement year. The assessee contended that past practices were followed, citing a Supreme Court judgment. The Court noted the mercantile accounting system used by the assessee and the Department's historical acceptance of the method. The Court, considering the closed business and past practices, ruled in favor of the assessee based on the Supreme Court's principle of requiring reasons for changing accounting methods.

2. The second set of questions revolved around similar disallowances on a different assessment year. The Revenue argued against the accounting method used by the assessee, claiming specific reasons for deviation. The Court examined the past acceptance of the method, the continuity of assessment, and the closure of the firms. Relying on the Supreme Court's precedent, the Court decided in favor of the assessee, emphasizing the need for valid reasons to alter accounting methods.

3. The Court's decision was influenced by the historical acceptance of the accounting method, the lack of reasons for changing it, and the specific circumstances of the closed businesses. The judgment highlighted the importance of consistency in accounting practices unless valid reasons for change are provided. The Court upheld the assessee's right to follow the accepted method, as long as it does not distort profits, in alignment with the Supreme Court's directive. The references were resolved in favor of the assessee, considering the peculiar facts and the absence of substantial impact due to the claimed amounts.