TaxTMI 
TaxTMI 
2015 (11) TMI 122
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....A)No.1225 of 2007), 1999-2000 (T.C.(A) No.1222 of 2007) and 2000-2001 (T.C.(A) No.1227 of 2007). In all these assessment years, the assessee was accounting AFC on accrual basis in the books of accounts maintained for the purpose of the Companies Act, whereas, for the purpose of Income Tax, it was accounted on cash basis. The Assessing Officer was of the view that the respondent/assessee was following mercantile system of accounting and therefore, it was bound to show income arising out of AFC on accrual basis and therefore, additions on account of AFC was made in respect of each year. The Assessing Officer was also of the view that AFC should be included in the head 'profits and gains of business or profession' and therefore, subjected to tax. The Assessing further held that the AFC is an income accrued consequent on the failure on the part of the person concerned to pay the Equated Monthly Instalments (EMI). Further, since the assessee - company had shown the said amount, namely AFC in the profit and loss account maintained for the purpose of Companies Act, that amount should be reflected for the purpose of income tax as well. 3. Aggrieved by the said order of the Assessing Off....
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....mely, for the assessment year 1997-98 onwards, as the scope of such amendment was considered by this Court in the above-said decision, in which case also, the assessment year involved is 1997-98, which is post amendment. The Tribunal, therefore, came to hold that AFC is an income arises only at the time of actual receipt. Holding so, the Tribunal dismissed the appeals answering the issue in favour of the assessee and against the Department. 8. As against the said order of the Tribunal, the Revenue is before this Court. 9. Mr.J.Narayanasamy, learned Standing Counsel appearing for the Revenue argued in extenso as follows: In order to explain the nature of the Department's claim on the tax on AFC, he suggested an illustration as follows: If the assessee had financed a sum of Rs. 1,20,000/- at the rate of interest at 20% per annum, the instalment will be Rs. 10,000/- per month; in case of default on the monthly instalment, the assessee charges Rs. 1,000/- as AFC or ODC. The assessee is reporting the monthly instalment of Rs. 10,000/- on mercantile system of accounting in terms of Section 145 of the Income Tax Act. However, the assessee should have accounted the said Additio....
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....appearing for the Revenue is that the concept of real income as contended by the assessee cannot be applied to the present case, since there is no material shown by the assessee that AFC income is impossible of realisation; in any event, the assessee is entitled to claim it as bad debts in the subsequent years if the AFC is not realisable. 13. In support of his contention, learned Standing Counsel placed reliance on the decisions reported in [2010] 320 ITR 577 (SC) (Southern Technologies Ltd. v. Joint Commissioner of Income-tax); [2010] 321 ITR 546 (Commissioner of Income Tax & Anr. v. United Breweries Ltd.) and (2012) 210 Taxman 62 (Madras) to state that if the assessee had not received the said AFC, the same could be claimed as bad debts in the subsequent year. 14. Countering the arguments of the learned Standing Counsel appearing for the Revenue, Mr.R.Sivaraman, learned counsel appearing for the assessee/respondent submitted that Additional Finance Charges is an enabling penal provision in the agreement entered into between the parties. It is the additional burden on the borrower who is not prompt in repaying the borrowed money and the interest thereon in the form of Equat....
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....fession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine : Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee : Provided also that nothing contained in this subsection shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year. (2)Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly ....
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.... is not collected, there is no basis for making out a case that the additional overdue charges payable by the parties would be collectible with certainty. The terms of the agreements which enable the assesseecompany to demand overdue charges is only an enabling provision and that enabling provision does not guarantee the collection of overdue charges. It only gives a cause of action to the assessee. In such cases it is very difficult to recognize income against overdue charges. We are, therefore, of the considered opinion that the Tribunal has rightly deleted the additions made towards overdue charges, acknowledging the change of method of accounting of overdue interest alone on cash basis." (emphasis supplied) 20. The facts in the above-said decision was that during the assessment years in question, the Assessing Officer during the course of reassessment found that the assessee had changed the method of accounting from mercantile system to cash system for overdue charges alone and held that the same is not permissible. Accordingly, the Assessing Officer added the overdue charges to the income of the assessee, which was upheld by the first Appellate Authority. On appeal by....
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....w in the above cited case. No appeal is also filed as conceded by the learned Standing Counsel for the revenue. 24. We find no reason to depart from the said view, which has also been accepted by the Department. The real income theory propounded by the Department would be applicable only if there is a justification to come to the conclusion that AFC has become income in the hands of the assessee. When it has already been held otherwise in the above-said decision and the Department having accepted such a principle, we find no reason to depart from that view in the present case. 25. The reliance placed by the learned Standing Counsel appearing for the Revenue on the decisions reported in [2010] 320 ITR 577 (SC) (Southern Technologies Ltd. v. Joint Commissioner of Income-tax); [2010] 321 ITR 546 (Commissioner of Income Tax & Anr. v. United Breweries Ltd.) and (2012) 210 Taxman 62 (Madras) are distinguishable on facts in the following manner: 25.1. In the case of M/s.Southern Technologies Ltd vs Joint Commissioner of Income Tax reported in [2010] 320 ITR 577 (SC), while dealing with the concept of real income theory, the Supreme Court held as follows: Theory of "Real Income....
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....t was shown in the balance-sheet. The Assessing Officer disallowed the same and add back to the taxable income. On appeal, the Tribunal held that the assessee was entitled to deduction under Section 36(1)(vii), but the said view was not accepted by the High Court. On appeal, the Supreme Court held that provision for NPA in terms of the directions of Reserve Bank of India did not consistute "expense"on the basis of which deduction could be claimed by the nonbanking financial companies under Section 36(1)(vii) of the Act. In this decision, the Supreme Court held that the amount has to be written off as per the provisions of the Income Tax Act and not by the application of real income theory. 25.3. The facts in the present case are distinguishable. Here, the assessee has not recognised the AFC as income for the purpose of Income Tax Act until it is received. But for the purpose of companies Act, the assessee has accounted it. The provisions of the Companies Act require it to be so. Section 145 of the Income Tax Act provides that the income has to be computed either under cash system or under mercantile system. Whatever is termed as income will certainly fall within mercantile syste....
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....ceived certain amount. The Assessing Officer assessed the income holding that since the assessee had not written off the principal amount as well as interest on accrual basis. This was set aside by the Commissioner of Income Tax (Appeals). On appeal, the Tribunal reversed the same. On further appeal, this Court also held that the concept of real income would be applicable irrespective of whether the accounts are maintained in cash system or in the mercantile system. If the accounts are maintained in the mercantile system, it is necessary to see whether the income could be said to have really accrued taking probability or improbability of realisation in realistic manner. 25.8. In the above-said decision, the claim is related to normal interest which was received upto certain period and defaulted thereafter. In that case, the assessee created contingency reserve and did not write off the principal amount. Therefore, in the absence of specific plea or claim by the assessee, there was no improbability or realisation of interest income or for that matter, even the principal. This Court held that under the mercantile system of accounting, accrual had occurred and therefore it has to b....
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....on hire purchase and lease transactions on cash basis i.e. on receipt basis and not on accrual basis. In the course of the assessment proceedings, the assessee Company was informed that since it had been following mercantile system of accounting for all incomes and expenses, the same has to be adopted in respect of overdue financial charges as mandated by Section 145 of the Income-tax Act. 3. From the assessment year 1997-98, in the case of Companies, the method of accounting is to be followed strictly the mercantile system of accounting i.e. on accrual basis including that of overdue charges of hire purchase and lease for standard and non-standard assets. The assessee-Company filed the details and it is found that the overdue charges on accrual basis in respect of hire charges and lease in respect of the amount of Rs. 82,23,892/- and Rs. 24,37,922/- respectively aggregating to an amount of Rs. 1,06,61,814/- had not been admitted by the assessee on accrual basis. 4. The assessee had submitted that in respect of overdue charges, the assessee Company, keeping in line with the norms of the Reserve Bank of India as well as the credit rating agency, has been recognising income by ....