2009 (2) TMI 399 - HC - Income Tax

Court emphasizes consistency in accounting methods, rules for assessee. Revenue must justify deviations.

COMMISSIONER OF INCOME-TAX Versus (1) HEERALAL KATARIA (2) SHRI HEERALAL GIANCHAND (HUF)

COMMISSIONER OF INCOME-TAX Versus (1) HEERALAL KATARIA (2) SHRI HEERALAL GIANCHAND (HUF) - [2010] 322 ITR 342 (Raj) Issues:1. Disallowance of interest payment under 'Finance commission'2. Disallowance of liability claimed for accrued hire purchase commission3. Treatment of finance commission deduction in the year of hire purchase agreementIssue 1: Disallowance of interest payment under 'Finance commission'The Tribunal referred questions regarding the disallowance of interest payments claimed by the assessee under the head 'Finance commission' for an assessment year. The Revenue argued that since the title of the vehicle was not transferred to the assessee in a hire purchase agreement, the finance commission paid in subsequent years cannot be claimed as an expenditure in the year of the agreement. The counsel for the assessee contended that the mercantile accounting system allowed claiming the entire finance commission in the year of the agreement, and past practices were followed. Citing the judgment in CIT v. Bilahari Investment P. Ltd., the counsel argued for consistency in accounting methods accepted by the Department. The court noted the long-standing practice of permitting such deductions and ruled in favor of the assessee, emphasizing the need for valid reasons to change accounting methods.Issue 2: Disallowance of liability claimed for accrued hire purchase commissionThe Tribunal also questioned the disallowance of liability claimed by the assessee for accrued hire purchase commission, arguing that only interest related to the relevant accounting year should be deductible. The Revenue contended that the entire amount of finance commission could not be deducted in the year of the agreement. The assessee's counsel highlighted the historical acceptance of their accounting method and argued for consistency based on past practices and legal precedents. The court, considering the facts and the judgment in Bilahari Investment P. Ltd., ruled in favor of the assessee, emphasizing the need for valid reasons to deviate from accepted accounting practices.Issue 3: Treatment of finance commission deduction in the year of hire purchase agreementThe court analyzed the assessee's practice of claiming finance commission deductions in the year of the hire purchase agreement, even if payments were made in subsequent years. The Revenue challenged this practice, arguing for spreading the deduction over the payment years. The assessee's counsel relied on past acceptance of their accounting method and legal precedents to support their position. The court, considering the consistent application of the accounting method and the lack of valid reasons for changing it, ruled in favor of the assessee, emphasizing the importance of maintaining consistency in accounting practices unless valid reasons justify a change.In conclusion, the court decided in favor of the assessee in all issues, emphasizing the importance of consistency in accounting methods unless valid reasons exist for deviation. The judgment highlighted the need for the Revenue to provide sound justifications for altering accepted accounting practices and upheld the assessee's right to follow historical practices in claiming deductions.