The Commissioner Of Income Tax Indore vs. M.P. Financial Corporation Indore

---1--- ITA.No.16/2003 HIGH COURT OF MADHYA PRADESH BENCH AT INDORE (D.B. HON'BLE JUSTICE S.C. SHARMA & HON'BLE JUSTICE SHRI SHAILENDRA SHUKLA) ITA. No.16/2003 The Commissioner of Income Tax, Indore v/s. Madhya Pradesh Financial Corporation, Finance House, Indore. ********** Parties through their counsel. ********** (ORDER) Indore Dt. 18.11.2019 The present appeal is arising out of order passed by the Income Tax Appellate Tribunal in I.T.A.No.266/IND/2000 dated 19.9.2002 for the assessment year 1995-96. 2. The facts of the case reveal that the assessment order was passed by the Assessing Officer, Special Range, Indore on 25.2.1998 under Section 143(3) of the Income Tax Act, 1961 and the Assessing Officer has allowed rebate and compounding fee to the tune of Rs.3,48,11,357. Thereafter, order was passed under Section 263 by the CIT, Indore, which was challenged by the Assessee before the Income Tax Appellate Tribunal, Indore. The Tribunal has allowed the appeal of the Assessee by quashing the order passed under Section 263 of the Income Tax Act, 1961. The Income Tax Appellate Tribunal, Indore upon examination of the record has arrived at a conclusion that the Assessing Officer has wrongly allowed the rebate and the compounding fee to the M.P. Financial Corporation Ltd. This order of the Tribunal

has been challenged by the Department under Section 260-A of the Income Tax Act, 1961. Paragraph 4 of the order passed by the Income Tax Appellate Tribunal, Indore, reads as under :- “4. We have considered the rival submissions carefully and find force in the contention of the Ld. AR. we find that this issue has been examined in detail by the AO. In his office note, he has recorded the full details how and why these rebates were debited and has also recorded his satisfaction that same were verified by him and claim of the assessee was in order. We have also examined the system of charging interest and on our specific direction copy of the debit voucher was filed before us and it was proved that originally interest is charged at a higher rate and rebate is allowed later on only if repayment is made on the basis of agreed schedule. We have also gone through the copies of accounts of six parties selected by us on random basis and details regarding which were filed during the course of hearing. From these accounts, it is clear that whenever assessee Cropn. receives the amount same is allocated towards interest first and this allocated interest is credited to income on cash basis. When the account is squared up or settled at intermediate point, a rebate is allowed for timely payment only when such rebate is claimed. From these, we are fully satisfied that assessee Corpon. has claimed the rebates and decompounding charges etc. properly. In these circumstances, we find no substance in the revisionary order passed under Section 263 by the CIT, Indore and thus quash the same.” 3. The Income Tax Department being aggrieved by the order passed by the Income Tax Appellate Tribunal has preferred this present appeal under Section 260-A of the Income Tax Act, 1961. The appeal has been admitted on the following substantial question of law :- “Whether on the facts and the circumstances of the case and in law, the ITAT was justified in holding that the assessment order on the issue of allowance of rebate, de-compounding fee etc. to the tune of Rs.3,48,11,357/- is not erroneous and prejudicial to the interest of Revenue and thereby quashing the order u/S. 263 of the Act, 1961”. ---3--- ITA.No.16/2003 4. Learned counsel appearing for the M.P. Financial Corporation Ltd has argued before this court that the controversy involved in the present case stands concluded on account of the judgment delivered in another Income Tax Appeal, ie., Commissioner of Income-Tax v/s. M.P. Financial Corporation

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., (an organization owned and controlled by Madhya Pradesh) reported in 2008 299 ITR 297 MP. Paragraphs 3 to 6 of the aforesaid judgment reads as under :- “3. The Tribunal repelled the contention of the Revenue that on shifting to the cash system of accounting the assessee was not entitled to what he would have got, had he not changed the system of accounting. The relevant observations contained in the order of the Tribunal are extracted here-under:- 2.3. We have heard the contentions of both the parties. These appeals are against the order passed under Section 143(3) of the Income-Tax Act. It is an undisputed fact that the assssee has switched over the system of accounting from mercantile system to cash system with effect from the assessment year 1991-92. The change in the system of accounting was duly approved by the IDBI and accepted by the Department. Once the assessee has changed the system of accounting from mercantile to cash system, he is required to make certain reverse entries of those amounts, which had been credited on due basis in earlier years, but in fact, have not been received so far. The waiver, decompounding or rebate is a notional payment and has to be allowed as an expenditure incurred by the assessee. We are in agreement with learned authorized representative that in case, it is not allowed, then the same may be treated as bad debt/trading loss to arrive at the correct profit of the assessee. Though the amount is recoverable on the settlement or under an agreement and as such it is allowable in both the circumstances either expenditure or bad debts. The learned Commissioner of Income-tax (Appeals) has rightly observed that the liability of rebate, decompounding and waiver of interest, etc., has arisen due to the agreements executed by the assessee with its clients and this is certainly allowable liability as the assessee duly claimed the same and the Assessing Officer was not justified in rejecting the claim of the assessee that he is now following the cash system of accounting and the rebate on interest, etc., related to the period when the assessee was following the mercantile system of accounting.