2019 (9) TMI 353 - HC - Income Tax

Appropriate method of income recognition in hire purchase transaction - internal rate return (IRR) method OR Even Spread Method (ESM) - HELD THAT - As decided in own case 2019 (3) TMI 1068 - MADRAS HIGH COURT referring to decision of Commissioner of Income Tax Vs. Ashok Leyland Finance Ltd. 2012 (7) TMI 156 - MADRAS HIGH COURT and Shri Chakra Financial Services Ltd. Vs Commissioner of Income Tax 2012 (5) TMI 70 - ANDHRA PRADESH HIGH COURT 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, in this case. - Decided in favour of assessee. Provision made in the earlier years in respect of Non Performing Assets which was reversed during the current assessment year - HELD THAT - What is required to be seen is, for the assessment years under consideration, whether the provisions were allowed as deduction in the respective assessment years. Therefore, we are of the considered view that the matter requires fresh consideration by the Assessing Officer on this aspect. For the above reasons, we are of the view that the matter should be remanded back to the Assessing Officer, who will take a fresh decision on the merits of this issue. In the result, this appeal is allowed and the matter is remanded back to Assessing Officer to take a fresh decision in the matter noting the factual and legal position

Summary

Issues:
1. Application of internal rate return (IRR) method vs. Even Spread Method (ESM) in income recognition for hire purchase transactions.
2. Taxability of provision reversal for non-performing assets.

Issue 1: Application of IRR vs. ESM:
The Tax Case Appeal challenged the Income Tax Appellate Tribunal's decision on the appropriate method for income recognition in hire purchase transactions. The Tribunal favored the internal rate return (IRR) method over the Even Spread Method (ESM) traditionally used by the appellant. The High Court analyzed previous judgments, including the case of Ashok Leyland Finance Ltd., and the decision of Andhra Pradesh High Court in Shri Chakra Financial Services Ltd. The High Court noted that the Assessee had consistently followed the EMI method for bifurcation of income into principal and interest components. The Court emphasized that the change to the Sum of Digits (SOD) method did not alter the tax position, as the EMI method had been approved in previous assessments. Therefore, the High Court allowed the Assessee's appeal, stating that the IRR method was not suitable in this case, and upheld the taxability based on the EMI method.

Issue 2: Taxability of provision reversal for non-performing assets:
Regarding the taxability of the provision reversal for non-performing assets, the Senior Standing Counsel for the revenue argued that the issue was not raised before the CIT(A) or the Tribunal as it was conceded based on a previous decision. The High Court observed that the factual position was not adequately analyzed in the earlier proceedings. The Senior Standing Counsel referred to the Supreme Court's decision in Southern Technologies Ltd. vs. Joint Commissioner of Income Tax, emphasizing that provisions for doubtful debts could not be claimed as deductions under Section 37. The High Court disagreed with the revenue's submission that there was no substantial question of law, highlighting the need for examination by the Assessing Officer if the provision was not allowed as a deduction in previous years. The Court referenced the case law in Narayanan Chettiar Industries vs. Income Tax Officer, stating that the revenue could add a sum to the assessee's income only if it was proven that the allowance or deduction had been made in the previous year. Consequently, the High Court remanded the matter back to the Assessing Officer for a fresh decision, emphasizing the necessity for a thorough examination of the provisions' taxability in previous assessments.

In conclusion, the High Court's judgment addressed the issues of applying the IRR method in hire purchase transactions and the taxability of provision reversals for non-performing assets. The Court favored the EMI method over the IRR method for income recognition and emphasized the need for a detailed examination by the Assessing Officer regarding the tax treatment of provision reversals.