Punjab & Haryana H.C : The Assessing Officer accepting the method of accounting followed by the assessee which results in postponement of its tax liability as per the discretion of the assessee, since the tax on interest received is neither being paid on accrual nor on cash basis.

High Court Of Punjab & Haryana

CIT vs. Haryana Financial Corporation

Assessment Year : 2006-07

Section : 4

Adarsh Kumar Goel, Actg. CJ. And Ajay Kumar Mittal, J.

IT Appeal No. 209 Of 2011

July 21, 2011

JUDGMENT

Ajay Kumar Mittal, J. – This appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”), has been filed by the Revenue against the order dated October 15, 2010, passed by the Income-tax Appellate Tribunal, Chandigarh Bench “A”, Chandigarh (in short “the Tribunal”) in I.T.A. No. 179/Chandi/2010, relating to the assessment year 2006-07.

2. The following substantial questions of law have been claimed for determination of this court :

“(i) Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal has erred in deleting the addition of Rs. 2,06,23,367 made by the Assessing Officer by treating the deposits received by the assessee against settlement pending as income of the assessee despite the fact that the assessee is maintaining its accounts on cash basis.

(ii) Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal has erred in deleting the addition of Rs. 2,06,23,367 made by the Assessing Officer accepting the method of accounting followed by the assessee which results in postponement of its tax liability as per the discretion of the assessee, since the tax on interest received is neither being paid on accrual nor on cash basis.”

3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-assessee is an undertaking of the Government of Haryana which is engaged in the business of financing, merchant banking, leasing, etc. The assessee filed its return for the assessment year 2006-07 on October 9, 2006/November 21, 2006, declaring current income of Rs. 1,09,60,635. The assessee, after setting off the brought forward losses of the earlier years, declared the income at nil. Return was processed under section 143(1) on May 8, 2007. During the course of assessment proceedings, the Assessing Officer, vide order dated December 22, 2008, inter alia, made addition of an amount of Rs. 2,06,23,367 treating the deposits credited under the head “Current liabilities” in the balance-sheet, as income. The Assessing Officer observed that the assessee was maintaining its accounts on cash basis, and in the absence of any bifurcation of the principal amount and the interest, the entire amount was to be treated as having been received on account of interest.

4. The Commissioner of Income-tax (Appeals) (for short “the CIT(A)”), accepted the plea of the assessee and observed, vide order dated November 30, 2009, that the system of accounting for bifurcation of the amount received from the defaulting borrowers into principal and interest was being regularly followed by the assessee and unless the accounts were finally settled with the defaulting borrowers, it was difficult to apportion the interim receipts between the principal and the interest.

5. Though the appeal filed by the Revenue was partly allowed by the Tribunal, vide the order dated October 15, 2010, on other aspects, qua the issue under discussion it put its seal of affirmation on the observations of the Commissioner of Income-tax (Appeals), noticed above.

6. Still aggrieved, the Revenue is in appeal before us.

7. We have heard learned counsel for the appellant and have perused the record.

8. Learned counsel for the Revenue submitted that the Commissioner of Income-tax (Appeals) as well as the Tribunal were not justified in deleting the addition of Rs. 2,06,23,367 as the sum received by the assessee against settlement which was pending included interest component and, therefore, would be revenue receipt. According to the learned counsel, especially when the assessee was following the cash system of accountancy, it was for the assessee to furnish details of the amounts showing element of interest and principal therein. In the absence of the same, the Department was justified in treating the entire amount as taxable in the year of receipt.

9. We are unable to accept the contention of the counsel.

10. The Tribunal, while upholding the order of the Commissioner of Income-tax (Appeals), which had allowed the claim of the assessee had in paragraph 15 of the order, recorded as under :

“15. On the other hand, learned counsel for the respondent-assessee vehemently argued that the assessee being a financial institution has a large number of borrowers who default in repayments of loans and interest thereon. In order to recover such loans, policies are formulated by the Government from time to time in terms of which certain concessions/reliefs are allowed to the borrowers who deposit the outstanding amounts in instalments and thereafter the amount is bifurcated between interest and principal at the time of final settlement as per the scheme. In this regard, the accounting policy regularly followed by the assessee was that the bifurcation of interest and principal was done only at the time of final settlement had not been done, the bifurcation could not be made. Therefore, the amounts were lying credited in the relevant year of final settlement as per the accounting policy regularly followed by the assessee regarding the amount received from the defaulting borrowers for bifurcation into the principal and the interest thereon. The Commissioner of Income-tax (Appeals) has observed that unless the accounts are finally settled with the defaulting borrowers, it is difficult to apportion the interim receipts between the principal and the interest. The Commissioner of Income-tax (Appeals) has also recorded a finding that such accounting system has been regularly followed by the assessee. In our considered opinion, having regard to the submissions put forth before us, there is no material to negate the aforesaid factual findings recorded by the Commissioner of Income-tax (Appeals). Moreover, the Commissioner of Income-tax (Appeals) has observed that no reason has been adduced by the Assessing Officer to disturb the accounting system regularly being followed by the assessee. In this connection, we have perused the cryptic discussion made by the Assessing Officer in the assessment order which reads as under :

‘The above accounting policy of the assessee cannot be accepted. It cannot override the provision of the Income-tax Act and more specifically of section 145. The assessee is maintaining its accounts on cash basis. Such deposits received against settlement have been shown at Rs. 2,06,23,367 during the year. In the absence of any details given, the entire amount is taken as having been received towards interest and is brought to tax. An addition of Rs. 2,06,23,367 is, therefore, made to the income of the assessee. Evidently, the Assessing Officer has made generalised observations without pointing out any reasons to interfere with the regular accounting system followed by the assessee. There is no material to establish as to in what manner the system of accounting followed by the assessee with respect to the impugned amounts, does not lead to proper deduction of income. The Commissioner of Income-tax (Appeals), in our view, is correct in observing that till the final settlement of accounts with the defaulting borrowers, it is not possible for the appellant to bifurcate interim payments made by the defaulting borrowers between the principal and the interest till such time the settlement is finally reached. Considering the totality of circumstances, we hereby affirm the order of the Commissioner of Income-tax (Appeals) and find no justification for the addition made by the Assessing Officer. Accordingly, the ground of appeal raised by the Revenue is dismissed’.”

11. The Tribunal had concluded that till the final settlement of the accounts was made with the defaulting borrowers, it was difficult to bifurcate the interim payments which had been made by the defaulting borrowers between the principal and the interest amount. Further, the assessee had been regularly following the system adopted by it. In such a situation, the claim of the assessee could not be denied.

12. No perversity could be shown by the learned counsel for the Revenue in the aforesaid findings of the Tribunal warranting interference by this court. Thus, no substantial question of law arises for consideration of this court. There is no merit in the appeal and the same is accordingly dismissed.

[Citation : 340 ITR 288]

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