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TMI Blog2012 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... alments paid by hirers to the assessee. The assessee had itself credited Rs.12,33,700/- under this head in its profit and loss account. However, in its return of income the finance charges were reduced to Rs.6,71,326/- on the ground that the amount of Rs.5,62,374/- did not accrue as income though credited as such in the profit and loss account during the assessment year. The Assessing Officer (AO) however did not accept this deduction and took into account the credited amount of Rs.12,33,700/- while computing the income under this head. The AO also disallowed the deductions on the other two counts. Dissatisfied with this assessment, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) III, Andhra Pradesh, Hyderabad. By order dated 30.11.1990, the Commissioner accepted the stand of the assessee and allowed the appeal. Aggrieved, the Revenue carried the matter in appeal before the Income Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad, in I.T.A.No.463/Hyd/91. The two issues raised before the Tribunal related to the finance charges and the loss on revaluation of its shares. By order dated 30.12.1998, the Tribunal allowed the Revenue's appeal and reverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting, it would suffice to extract the hypothetical example adopted by the Commissioner of Income Tax (Appeals): 6. To illustrate the difference in accounting of incomes as per the indexing method and the mercantile system, a hypothetical transaction involving hiring of machinery worth Rs.100/- is taken, on which hire purchase finance charges recoverable in 5 years is Rs.70/-. The following are the amounts of recovery shown in the books of account and in the computation of income as per the return filed. Total value of machinery Rs.100/- Finance charges Rs. 70/- Rs.170/- Year As per books based on Indexing Method As per income tax return based on Mercantile System Principal Finance charges Total Principal Finance Charges Total 1 7 27 34 20 14 34 2 15 19 34 20 14 34 3 22 12 34 20 14 34 4 26 8 34 20 14 34 5 30 4 34 20 14 34 100 70 170 100 70 170 Receipt of finance charges for the first and second years under the indexing system would thus be far higher than that reflected in the mercantile system of accounting. That is what has happened in the present case. The issue however is whether the income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the decision in DEPUTY COMMISSIONER OF INCOME TAX V/s. NAGARJUNA INVESTMENT TRUST LIMITED 1998(62) TTJ (HYD) (SB) 33 = 65 ITD 17 (SB), wherein a Special Bench of the Tribunal at Hyderabad held that finance charges/interest in relation to hire purchase agreements recognized by the assessee on the basis of the method of accounting employed by it and reflected in its books of account has to be considered as the real income which accrued and which was liable for assessment. In consequence, the Tribunal accepted the Revenue's stand in so far as this aspect was concerned. Sri A.V.Krishna Koundinya, learned counsel for the appellant/assessee, would contend that adoption of the mercantile system of accounting for assessment purposes was valid and correct as the same would show the real income that had accrued and arisen on account of finance charges. With regard to the practice of the assessee in resorting to the indexing or SOD system of accounting in its books of account, the learned counsel stated that the same was done so as to lift the financial standard of the assessee in the eyes of the public, though it did not legitimately receive that much interest. Reliance was placed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1), or accounting standards as noticed under sub- section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144." In SANJEEV WOOLEN MILLS V/s. COMMISSIONER OF INCOME-TAX (2005) 279 ITR 434 (SC), the Supreme Court observed that the choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee's choice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... components and once such apportionment was voluntarily made by the assessee, it would constitute the 'real income' of the assessee. There was nothing 'hypothetical' about it as the same apportionment was, in fact, shown by the assessee in its books of account. It may be noticed that unlike in UNITED COMMERCIAL BANK (1999) 240 ITR 355 (SC), the assessee in the present case was not statutorily compelled to adopt different systems of accounting. As pointed out by the assessee itself, adopting of dual systems was only for the purpose of building up its public image by boosting its financial strengths. As the practice of those involved in hire purchase and leasing transactions was to account for such income on the basis of the Indexing System of accounting and as such system was voluntarily adopted and followed by the assessee itself, there was no valid reason for it to resort to a different system of accounting only for tax assessment. In NAGARJUNA INVESTMENT TRUST LIMITED 1998(62) TTJ (HYD) (SB) 33 = 65 ITD 17 (SB), the hire purchase agreement did not give the apportionment or bifurcation of each equated monthly instalment between the principal and interest components. The Spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court held that the right to receive an amount under a contract accrues or arises depending upon the terms of the particular contract. In other words, income has to be computed even under the accrual system of accounting only on the basis of accrual as provided for in the agreements evidencing the transactions. In short, there can be no accrual of income de hors the terms and conditions of the agreement. Viewed in this light, the Madras High Court held that the technique of accounting followed by the assessee (Reducing balance method or the SOD method) in its books of account for recording the transactions cannot determine the accrual of income. The Court held that accrual would depend on the terms and conditions of the contract between the parties, but not at the whims of either party. Upon perusing sample copies of the agreements, the Madras High Court held that it was not open to the assessee to adopt the SOD method or the reducing balance method when the agreement was to the contrary. Examination of the above judgment reflects that the case before the Madras High Court differed from the present one on crucial factual aspects. The Madras High Court found on facts that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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