2019 (3) TMI 1410 - HC - Income Tax

Difference in method of accounting adopted - correct Method of accounting - one method of accounting for the income tax purpose to attract lesser tax and other method to show higher income in its balance sheet and profit and loss statement - Equated monthly instalment method to account the finance charges for the income tax purposes only - assessee justification in following the sum of digits Method to account the finance charges to arrive at balance sheet and profit and loss statements only - HELD THAT - Assessee has been following the same method of E.M.I for bifurcation of its income into Principal and interest component for all these years in question. The S.O.D method gives higher finance charges (interest) for the initial years and lower finance charges (interest) for the later years, i.e, the Sum of Digits is sum total of the number of years e.g. If the Hire Purchase Agreement is for 10 years, the SOD is 55 (1 2 3 4 5 6 7 8 9 10 55). Therefore, total financial charges for the first year would be 10/55, for the second year 9/55, for third year 8/55 and so forth which would clearly give higher financial charges for interest taxable in the first year. This SOD method even though adopted by the Assessee in its Book of Accounts on the basis of Guidelines issued by the Institute of Chartered Accountants of India was not adopted in the Returns of Income filed by it which consistently adopted EMI method for taxability of interest income all these years. Since, for the previous assessment years, this Court has already approved such bifurcation of income and has held that interest income (Finance charges) on consistently adopted basis of E.M.I. would be taxable in the hands of the Assessee, the mere change of Accounting method in its Book of Accounts on the basis of S.O.D. does not alter the position in the tax in the hands of the assessee. since in the case of the same Assessee, the Coordinate Bench of this Court 2012 (7) TMI 590 - MADRAS HIGH COURT has upheld the taxability with regard to interest income on EMI method, which has been consistently followed, there is no reason to take a different view in the matter for the present Assessment years. - decided against revenue

Summary

Issues Involved:
1. Justification of the Equated Monthly Instalment (EMI) method for accounting finance charges for income tax purposes.
2. Justification of the Sum of Digits (SOD) method for accounting finance charges for balance sheet and profit and loss statements.
3. Legitimacy of using different accounting methods for income tax purposes and financial statements.
4. Entitlement to depreciation on assets based on allegedly bogus invoices.
5. Entitlement to depreciation on assets in sale-cum-lease transactions.
6. Entitlement to depreciation on assets with enhanced value.
7. Treatment of "lease rentals" as payment of principal and interest in relation to non-existent assets.

Detailed Analysis:

1. Justification of the EMI Method for Accounting Finance Charges for Income Tax Purposes:

The Tribunal upheld the assessee's use of the EMI method for accounting finance charges for income tax purposes, which was consistent with the assessee’s historical practices. The High Court referenced a prior decision in Commissioner of Income Tax Vs. Ashok Leyland Finance Ltd., affirming that the EMI method was appropriate for tax purposes as it had been consistently used by the assessee. The Andhra Pradesh High Court's differing view in Sri Chakra Financial Services Ltd. was noted but distinguished based on specific factual differences.

2. Justification of the SOD Method for Accounting Finance Charges for Balance Sheet and Profit and Loss Statements:

The Tribunal allowed the use of the SOD method for the assessee’s financial statements, noting that while the EMI method was used for tax purposes, the SOD method was adopted in the books of accounts based on guidelines from the Institute of Chartered Accountants of India. The High Court found no issue with this dual-method approach, as it had been previously accepted.

3. Legitimacy of Using Different Accounting Methods for Income Tax Purposes and Financial Statements:

The Tribunal and the High Court supported the assessee’s use of different methods for tax reporting and financial accounting. The EMI method for tax purposes was consistently applied, and the SOD method for financial statements was based on professional guidelines. The High Court emphasized the importance of consistency and adherence to accepted accounting principles.

4. Entitlement to Depreciation on Assets Based on Allegedly Bogus Invoices:

The Tribunal ruled in favor of the assessee, allowing depreciation claims despite allegations of bogus invoices. The High Court did not find sufficient evidence to overturn this decision, emphasizing the need for concrete proof to deny depreciation claims.

5. Entitlement to Depreciation on Assets in Sale-Cum-Lease Transactions:

The Tribunal upheld the assessee’s claim for depreciation on assets involved in sale-cum-lease transactions, treating them as financial transactions where title had passed to the assessee. The High Court agreed, noting that the nature of the transaction justified the depreciation claims.

6. Entitlement to Depreciation on Assets with Enhanced Value:

The Tribunal allowed depreciation on assets with enhanced value, despite their age and original purchase price. The High Court supported this view, stating that the enhanced value reflected the current market conditions and the assessee’s investment in the assets.

7. Treatment of "Lease Rentals" as Payment of Principal and Interest in Relation to Non-Existent Assets:

The Tribunal concluded that lease rentals should be treated as payments of principal and interest, even if the assets were non-existent. The High Court affirmed this decision, emphasizing the contractual nature of the lease agreements and the consistent accounting treatment by the assessee.

Conclusion:

The High Court dismissed the Revenue's appeals, upholding the Tribunal's decisions on all issues. The questions of law were answered in favor of the assessee, affirming the legitimacy of the accounting methods used and the entitlement to depreciation claims. The Court emphasized consistency, adherence to accepted accounting principles, and the need for concrete evidence to challenge the assessee’s claims.