2007 (7) TMI 291 - HC - Income Tax

Court Allows Change in Accounting Method for Income Tax Purposes

The court upheld the assessee's change in accounting method for income under 'additional finance charges,' allowing a hybrid system for income tax ... From April 1, 1993 assessee changed the method of accounting from mercantile to cash, in respect of income under the head “Additional finance charges” on hire purchase/lease transactions – in view of facts of case, it cannot be said that such additional finance charges had really accrued to the assessee-company - change in the method of accounting has not caused a real loss to the Revenue – moreover, Hybrid system of accounting was permissible during the A.Y. 1994-95 – revenue’s appeal dismissed Issues:1. Discrepancy in the method of accounting for additional finance charges between income tax and company law.2. Permissibility of following a hybrid system of accounting for income tax purposes.Issue 1: Discrepancy in Accounting Method:The case involves an assessee, a non-banking financial company, changing its accounting method for income under 'additional finance charges' on hire purchase/lease transactions from mercantile to cash basis for income tax purposes while maintaining the mercantile basis for company law compliance. The Assessing Officer disallowed this practice, leading to appeals and subsequent Tribunal decisions in favor of the assessee. The Tribunal justified the cash system for specific charges based on past rulings and the lack of actual loss to the Revenue due to the change. The court emphasized that the hybrid accounting system was permissible during the relevant period and highlighted that the Finance Act, 1995, abolished this system later.Issue 2: Permissibility of Hybrid Accounting System:The Tribunal's decision was influenced by a similar case precedent where the court ruled in favor of the assessee regarding the change in accounting method for overdue charges. The court emphasized that the change in accounting method did not create income but merely recognized it, and the overdue charges were not guaranteed to be collected. The court concluded that the Tribunal rightly deleted the additions made towards overdue charges, supporting the change of accounting method to cash basis. The court found that the reasoning in the previous case applied to the current appeal, leading to the dismissal of the appeal by the Revenue.Additional Issue: Written Down Value and Contingent Deposit:Another appeal by the Revenue involved issues related to the computation of written down value and contingent deposit. The Tribunal ruled against the assessee based on legal precedents and decided in favor of the Revenue. The court noted that the questions of law raised by the Revenue were not relevant to the issues involved in the appeal, leading to the dismissal of the appeal as nothing remained for adjudication.In conclusion, the judgment addressed discrepancies in accounting methods for specific charges, the permissibility of a hybrid accounting system, and rulings on written down value and contingent deposits. The decisions were based on legal precedents, past rulings, and the lack of actual loss to the Revenue due to the accounting changes.