Cash basis income recognition, genuine share sale loss, and book-profit adjustments under section 115JB were upheld.

Additional finance charges on hire-purchase and lease transactions were to be taxed on the cash basis consistently followed by the assessee, as the agreement clause did not by itself create taxable income and the jurisdictional precedent protected the method of accounting. Loss on sale of unquoted shares to a sister concern at a negotiated price was treated as a genuine commercial transaction, and the declared long-term capital loss was not to be disallowed absent a valid basis to reject the sale price. For book-profit computation under section 115JB, provision for bad debts written off bona fide and the transfer to statutory reserve were not required to be added back, including in light of the retrospective amendment to Explanation 1.

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Issues: (i) Whether additional finance charges arising from hire-purchase and lease transactions were to be assessed on accrual basis or cash basis; (ii) whether the loss on sale of shares to a sister concern at a negotiated price could be disallowed; (iii) whether provision for bad debts and amounts transferred to statutory reserve were to be added back while computing book profits under section 115JB.

Issue (i): Whether additional finance charges arising from hire-purchase and lease transactions were to be assessed on accrual basis or cash basis

Analysis: The assessee had consistently followed the cash basis for income-tax purposes, while the Assessing Officer sought to adopt accrual basis. The issue was covered by binding jurisdictional precedent holding that the enabling clause in the finance agreement did not by itself create income and that the method consistently followed by the assessee could not be displaced in the absence of a valid basis.

Conclusion: Decided in favour of the assessee. The addition on account of additional finance charges was not sustainable.

Issue (ii): Whether the loss on sale of shares to a sister concern at a negotiated price could be disallowed

Analysis: The shares were unquoted, the investee company had incurred continuous losses, and the divestment was said to have been made in line with regulatory directions. The mere fact that the sale was to a group concern did not justify ignoring a genuine commercial transaction between separate legal entities. The Revenue failed to show any solid basis for rejecting the declared sale price.

Conclusion: Decided in favour of the assessee. The disallowance of the long-term capital loss was rightly deleted.

Issue (iii): Whether provision for bad debts and amounts transferred to statutory reserve were to be added back while computing book profits under section 115JB

Analysis: The assessee had written off the bad debts in accordance with its bona fide judgment and RBI directions. The appellate authority relied on the statutory framework governing book-profit computation and on the effect of the retrospective amendment introducing clause (i) in Explanation 1 to section 115JB. The transfer to statutory reserve was also held to fall within the adjustment contemplated by the provision, and the claim that title over the reserve stood divested under the RBI Act was rejected.

Conclusion: Decided in favour of the assessee. The additions to book profits on these counts were not warranted.

Final Conclusion: All the Revenue's appeals failed and the common appellate relief granted to the assessees was sustained in full.

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