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TMI Blog2015 (11) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or good reason why we should reject the claim of the assessee. We have no hesitation to hold that collection and accrual of AFC happen simultaneously in the present case as and when received, as has been held by this Court. Hence, AFC cannot be treated as income on accrual basis. Following the decision of this Court reported in CIT V. Annamalai Finance Ltd [2004 (10) TMI 51 - MADRAS High Court] and CIT V. Annamalai Finance Ltd.(2009 (11) TMI 11 - MADRAS HIGH COURT), we hold that the terms of the agreements, which enable the assessee to demand overdue charges (AFC) is only an enabling provision and the recovery of overdue charges is not certain and is taxable on cash receipt basis and not accrual basis. Deletion of additions made towards Additional Finance Charges, also known as Overdue charges confirmed - Decided in favour of assessee. - Tax Case (Appeal) Nos.1222 and 1225 to 1228 of 2007 - - - Dated:- 15-6-2015 - MR. R.SUDHAKAR AND MS. K.B.K.VASUKI, JJ. For The Appellant : Mr.J.Narayanasamy Standing Counsel for Income Tax For The Respondent: Mr.R.Sivaraman COMMONJUDGMENT (Judgment of the Court was delivered by R.SUDHAKAR,J.) All the above Tax Case (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rieved by the order of the Commissioner of Income Tax (Appeals), the Revenue pursued the matter before the Tribunal primarily contending that in the books of accounts maintained for the purpose of Companies Act, the assessee has shown the AFC as income and therefore, the assessee cannot plead that for the purpose of income tax, it will show only the actual AFC amount received as towards income, more so, in a case where the assessee is admittedly following mercantile system of accounting. If it had accrued for the purpose of profit and loss account submitted in terms of the Companies Act, AFC should be deemed to have accrued for the purpose of income tax. On this premise, the case was urged before the Tribunal. 5. The Tribunal, however, placed much emphasis on the earlier decision of the Tribunal on the assessee s own case in respect of the assessment year 1996-97 in I.T.A.No.1222/MDS/1998 and also relying upon the decision of the Tribunal in the Case of Annamalai Finance Ltd. V. Additional CIT in I.T.A.Nos.99 to 103 (Mds)/2002, which was later on upheld by this Court in the decision reported in [2005] 275 ITR 451 (CIT V. Annamalai Finance). 6. On the core issue that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, the assessee ought not to have followed cash system of accounting for this transaction. Having opted to mercantile system of accounting, the AFC become liable to tax as in the case of EMI. In effect, as and when EMI falls due, AFC also falls due and when the EMI accrues as income, the assessee is not entitled to claim that AFC should be excluded for the purpose of tax. It is not correct for the assessee to plead that AFC should be subjected to tax as and when the assessee received the same and not on the basis of accrual in the event of default of EMI. 10. The next contention of the learned Standing Counsel appearing for the Revenue is that the decision in the case of Annamalai Finance Ltd. (Supra), on which reliance has been placed by the Tribunal stands distinguished on facts, inasmuch as the assessee during the assessment year did not account the AFC in the books of accounts maintained under the Companies Act as well as under the Income Tax Act; therefore it stands on a different footing. Insofar as the present assessment years are concerned, the assessee had accounted AFC under the Companies Act, but it did not account the same for the purpose of income tax. This di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per the provisions of Income Tax Act, when an amount is uncertain of being received cannot be taxed as income till it is realised. He further submitted that AFC does not partake the character of income and there is no bar in the Income Tax Act that the profit and loss account and balance sheet prepared under the Companies Act will have to be followed for the purpose of Income Tax Act for computation of income. 15. In support of his contention, he relied on the decision of this Court reported in [2005] 275 ITR 451 (CIT V. Annamalai Finance), to submit that when the instalment itself is overdue and is not collected, it is uncertain to recover the AFC. He further submitted that the decisions relied on by the learned Standing Counsel are distinguishable on facts, as they are dealing with bad debts. In the present case, there is no claim of deduction of bad debts. 16. Heard learned Standing Counsel appearing for the Revenue and the learned counsel appearing for the assessee and perused the materials placed before this Court. 17. Before going into the merits of the case, the provision, viz., Section 145 of the Income Tax Act, which is necessary for the disposal of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system for the purpose of Income Tax. In the event of default in payment of instalments due on the due dates, the lessee or the hirer is bound to pay AFC, otherwise, called as ODC and this claim is penal in nature imposed as a measure to ensure prompt payment of EMI. Hence, the said clause was incorporated to ensure recovery. The assessee in this case is following mercantile system insofar as EMI is concerned. The provision of Section 145 is not deviated. Insofar as AFC charges are concerned, the amount is shown on cash/receipt basis for tax purpose. The question is whether such a method is opposed to law. 19. In an identical circumstance, this Court had an occasion to consider the issue in respect of overdue charges, in the case of Commissioner of Income Tax V. M/s.Annamalai Finance Ltd. reported in [2005] 275 ITR 451 While dealing with the issue whether on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the assessee in changing the method of accounting of overdue interest alone on a cash basis, when the system of accounting of the assessee was mercantile, this Court held as follows: The change of method of accounting of ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court following the decision of the Calcutta High Court reported in (2003) 263 ITR 129 (Hela Holdings Pvt. Ltd. v. CIT) wherein, the Calcutta High Court had laid down certain general principles regarding tax avoidance and tax evasion, held that the Revenue was not in a position to demonstrate or satisfy that due to the change of accounting method adopted by the respondent/assessee, which is permissible in law, the Revenue suffered any loss. 22. It is pertinent to note that the provisions of Section 145 of the Income Tax Act, namely, method of accounting had also came up for consideration before this Court in the above-said decision and it would be relevant to point out that the assessment years in that case were 1992-93 and 1998-99, i.e., pre-amendment as well as post amendment to Section 145 of the Income Tax Act, was considered. In that case, the change of method of accounting in respect of AFC or ODC from mercantile system of accounting to cash system of accounting was upheld by the Tribunal and by this Court. We find the legal issue has been resolved in facts identical to the present case. 23. We find that what has been decided by this Court in the earlier decision is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the real income , i.e., the profits arrived at on commercial principles subject to the provisions of the Income Tax Act. The real profit can be ascertained only by making the permissible deductions under the provisions of the Income Tax Act. There is a clear distinction between the real profits and statutory profits. The latter are statutorily fixed for a specified purpose . To the same effect is the judgment of the Bombay High Court in the case of Commissioner of Wealth-Tax, Bombay v. Bombay Suburban Electric Supply Ltd. 103 ITR 384 at page 391, where it was observed as under: Income Tax is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions of the Income Tax Act, 1961. The real profits can be ascertained only by making the permissible deductions . The point to be noted is that the IT Act is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. Therefore, if by Explanation to Section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income Tax Anr. v. United Breweries Ltd.), the High Court of Karnakata while dealing with the bad debts held that the deduction of bad debts was not regulated by real income theory. The facts in the said decision was the assessee in the course of activity of manufacture and sale of beer furnished guarantee for repayment of certain loans and advances taken by its subsidiary companies from banks. On failure to repay the amount by the subsidiary companies, the assessee had to reimburse the same. The assessee claimed that the said expenditure qualified for deduction. The Assessing Officer as well as the First Appellate Authority rejected the request of the assessee, but the Tribunal reversed the findings of both the Authorities. On appeal, one of the issues raised before the Karnataka High Court was whether the Tribunal was correct in holding that the amount should be excluded on the principle of real income. The High Court answered the issue in favour of the Revenue. 25.5. In the present case, there is no claim of deduction of bad debts. The claim of AFC, which is in penal nature, is uncertain of recovery and hence, the same is not recognized as income accrued till it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt further held that even in mercantile system, if the amount has actually accrued, the said income has to be taxed. The said accrual has to be taken in a realistic manner. The observation of this Court in the above-said decision would make it clear that the decision of this Court in the case of Annamalai Finance (supra) on the theory of actual receipt of AFC as income stands fortified. 27. In the light of the above, we hold that the decisions relied on by the learned Standing Counsel appearing for the Revenue are distinguishable on facts. 28. It is to be noted that in the instant case, the Revenue is not in a position to show that due to the change of accounting method, the Revenue suffered loss. Admittedly, there is no finding to that effect in the assessment order. We also find that the change in method of accounting has not caused any loss to the Revenue, because AFC on receipt by the assessee-company has been offered to tax. Accordingly, we hold that the change of method of accounting of overdue charges from the mercantile basis to cash system insofar as AFC does not create any income, but the method of accounting only recognizes income. 29. The decision relied on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... faction of two conditions viz. The revenue is measurable and that the revenue is collectable without any uncertainty. Taking into account these standards also, the assessee submitted that the overdue on financial charges on hire purchase and lease had been admitted only on cash basis. Rejecting the said submission, the Assessing Officer passed the assessment order. 31. Therefore, it would not be proper for the Department to contend that post amendment to Section 145 of the Income Tax Act, the change in the method of accounting adopted by the assessee should be re-looked. In the light of the decision of this court in the case of Annamalai Finance (supra), we find no justification or good reason why we should reject the claim of the assessee. We have no hesitation to hold that collection and accrual of AFC happen simultaneously in the present case as and when received, as has been held by this Court. Hence, AFC cannot be treated as income on accrual basis. 32. The various contentions raised by the learned Standing Counsel appearing for the Department, more particularly the contention that the assessee should follow mercantile system for AFC does not merit consideration. 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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