Accrual accounting and genuine sale-leaseback support deduction and depreciation where no defect or sham is proved.

Construction and incremental expenses were treated as deductible on accrual basis even though the corresponding sale receipts were recognised on receipt basis, because the accounting method reflected accepted commercial practice and no defect in estimation or legal bar was shown. Depreciation on cinematograph films was also allowed in a sale and leaseback arrangement, since the transaction was supported by documentation, cheque payment and transfer of title, and suspicion alone could not establish a sham or colourable device. The article states that, on these facts, the tax appeals failed and the findings in favour of the assessee remained undisturbed.

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Issues: (i) Whether the assessee was entitled to claim construction expenses and incremental expenses on accrual basis while recognising the corresponding income on receipt basis under its accounting method; (ii) Whether depreciation on cinematograph films in a sale and leaseback transaction could be disallowed on the ground that the transaction was not genuine or was a colourable device to evade tax.

Issue (i): Whether the assessee was entitled to claim construction expenses and incremental expenses on accrual basis while recognising the corresponding income on receipt basis under its accounting method.

Analysis: The accounting treatment was examined in the light of the accepted commercial practice and the principle that an accrued liability connected with business receipts may be deducted even where the corresponding receipts are brought to tax on a different timing basis. The method adopted by the assessee was treated as permissible because the sale consideration of flats was credited at booking stage, while the estimated construction expenditure was debited as incurred liability, and the record did not show any specific defect in the estimation or any prohibition against such treatment.

Conclusion: The claim for construction expenses and incremental expenses was held allowable, and the issue was decided in favour of the assessee.

Issue (ii): Whether depreciation on cinematograph films in a sale and leaseback transaction could be disallowed on the ground that the transaction was not genuine or was a colourable device to evade tax.

Analysis: The transaction was treated as a recognised business arrangement supported by lease documentation and payment by cheque, with title in the films transferred to the assessee. Mere suspicion regarding the sequence of purchase and leaseback was held insufficient to disallow depreciation in the absence of material showing that the transaction was sham, nominal, or otherwise unlawful. The appellate findings were accepted as having correctly applied the law to the facts.

Conclusion: Depreciation on the cinematograph films was held allowable, and the allegation of a colourable device was rejected in favour of the assessee.

Final Conclusion: The substantial questions of law were answered against the Revenue, and the tax case appeals were dismissed, leaving the concurrent findings in favour of the assessee undisturbed.

Ratio Decidendi: A permissible accounting method supported by accepted commercial practice cannot be disturbed absent a demonstrable defect, and depreciation cannot be denied on a genuine sale and leaseback transaction merely on suspicion without material evidence of sham or illegality.

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