2016 (11) TMI 1187 - HC - Income Tax

Court confirms accounting decisions, dismisses appeal on tax treatment under Section 43D. Bad debts provision not added back.

Commissioner of Income Tax Versus M/s. Sriram City Union Finance Ltd.

Commissioner of Income Tax Versus M/s. Sriram City Union Finance Ltd. - TMI Issues:1. Accounting treatment of additional finance charges under mercantile system and cash basis.2. Permissibility of following a hybrid accounting system for Company Law and Income Tax purposes.3. Tax treatment of additional finance charges under Section 43D of the Income Tax Act, 1961.4. Inclusion of provision for bad debts while computing book profits under Section 115JB.Issue 1: Accounting Treatment of Additional Finance ChargesThe appeal raised questions regarding the accounting treatment of additional finance charges under the mercantile system and on a cash basis. The Income Tax Appellate Tribunal allowed the assessee to account for only the additional finance charges on a cash basis, deviating from the mercantile system. The Court referred to previous judgments and held that overdue charges should be taxed only on a cash receipt basis, not on accrual basis. Consequently, the questions related to this issue were decided in favor of the assessee.Issue 2: Permissibility of Hybrid Accounting SystemThe Tribunal's decision allowing the assessee to follow a hybrid system of accounting for Company Law and Income Tax purposes was challenged. However, based on previous judgments, the Court upheld the Tribunal's decision, stating that the assessee could indeed follow a mercantile system for Company Law and a hybrid system for Income Tax purposes. This issue was resolved in favor of the assessee.Issue 3: Tax Treatment under Section 43D of the Income Tax ActThe main contention under this issue was the tax treatment of additional finance charges under Section 43D of the Income Tax Act, 1961. The Court clarified that Section 43D applies to specific entities like Public Financial Institutions, Scheduled Banks, etc., which the assessee did not fall under. As the assessee did not meet the criteria specified in Section 43D, the provisions of this section were not applicable to the case. Consequently, the Court dismissed the appeal on this issue.Issue 4: Inclusion of Provision for Bad DebtsThe question of whether the provision for bad debts could be added back while computing book profits under Section 115JB was raised. The Court noted that a Division Bench had previously ruled against the assessee on this matter. Therefore, the issue was settled against the assessee based on the earlier judgment.In conclusion, the Court upheld the Tribunal's decisions on the accounting treatment of additional finance charges and the permissibility of a hybrid accounting system. The appeal was dismissed concerning the tax treatment under Section 43D, as the assessee did not fall within its scope. Additionally, the provision for bad debts could not be added back while computing book profits, as per the previous Division Bench ruling.