2014 (11) TMI 480 - HC - Income Tax

Method adopted for preparation of books of accounts Difference in accounting method - EMI method to account the finance charges for the income tax purposes - hire purchase agreement - Held that - Assessee relied on the decision of Commissioner of Income Tax v. Ashok Leyland Finance Ltd. 2012 (7) TMI 590 - Madras High Court - Section 145(1) of the Income Tax Act prior to its amendment by the Finance Act, 1995 provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee - many assessees are following the hybrid method in a manner that does not reflect the correct income - The Finance Act, 1995 has amended section 145 of the Income Tax Act to provide that income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee - Prior to this amendment, the first proviso to sub-section (1) of section 145 gave an option to the assessee to determine the income by adopting any one of the methods - the assessee are justified insofar as following one system of accounting for the purpose of books of accounts and another for the purpose of determination of tax Decided in favour of assessee.

Summary

Issues:
1. Assessment of Hire Purchase Finance charges on Sum of Digits basis vs. Equated Monthly Installments basis.
2. Treatment of interest income accrued under the Sum of Digits method and Mercantile system of accounting.
3. Entitlement of the appellant to maintain books on the Sum of Digits method and offer income on Equated Monthly Installment basis.

Analysis:

Issue 1: Assessment of Hire Purchase Finance charges
The appellant, engaged in hire purchase and leasing, maintained books on Sum of Digits (SOD) technique but offered income on Equated Monthly Installment (EMI) technique for tax purposes. The assessing officer added the differential amount between SOD and EMI techniques to determine tax liability. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision, citing that income accrued as per the contracts should be assessable on the SOD basis. The Tribunal followed a Special Bench decision, binding on all divisional benches, to confirm the Assessing Officer's stand. The appellant contested this, relying on a previous court decision in a similar case.

Issue 2: Treatment of interest income
The appellant argued that interest income accrued only under the SOD method and formed part of the Mercantile system of accounting. The Tribunal found that the appellant did not maintain books on EMI basis, leading to income assessable on the SOD basis. The Tribunal's decision aligned with the Special Bench ruling, emphasizing adherence to the method chosen by the assessee in maintaining books.

Issue 3: Entitlement to maintain books on SOD method
The appellant's counsel referenced a court decision to support the appellant's position. The respondent cited a circular specifying that income computation should align with either cash or mercantile system, effective from 1997-98 onwards. Considering the circular and the prior provision allowing the hybrid method, the court concluded that the appellant was justified in adopting different accounting methods for bookkeeping and tax determination before the amendment. As a result, both tax case appeals were allowed in favor of the appellant for the assessment years 1995-96 and 1996-97.

In summary, the court ruled in favor of the appellant, allowing the appeals and answering the substantial questions of law in favor of the appellant against the Revenue for the assessment years in question.