ACIT,, CHENNAI vs. M/S. INTEGRATED FINANCE COMPANY LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No.1430/Mds/2012 :- 2 -:

2006 passed u/s.143(3) r.w.s.263 and 250 of the Income Tax Act, 1961.

The Revenue has raised two substantive grounds on the 2. issue of deletion of rebate on Hire purchase written off by the Commissioner of Income Tax (Appeals) and also deletion of addition on additional Finance charges on account of change in method of accounting from Mercantile basis to Cash basis.

The Brief facts of the case are that the assessee company is 3. engaged in the business of Hire Purchase, leasing, factoring and real estate works. For the assessment year 2005-2006, the assessment u/s.143(3) of the Act was completed on 04.12.2007 determining total loss of �17,73,71,490/- and subsequently under rectification u/s.154 of the Act dated 18.08.2008 the total loss was recomputed to �19,39,20,047/- and assessee has filed an appeal aggrieved by the Assessing Officer order and partial relief was granted by Commissioner of Income Tax (Appeals) and subsequently, both assessee and department were in appeal before the Tribunal. The Tribunal vide order dated 24.07.2009 remitted the issue to the file of the Assessing Officer with certain directions and the case was refixed for hearing.

When the matter was pending before the Assessing Officer, the ld. Commissioner of Income Tax under provisions of Sec.263 of the Act

ITA No.1430/Mds/2012 :- 3 -: passed an order setting aside the earlier assessment to examine the issue on rebate on Hire purchase and accounting policy in respect of additional financial charges and non recognition of income in the current year. The Assessing Officer issued notice u/s.142(1) and called for the details. In compliance to notice, the ld. Authorised Representative filed explanations and submitted details called for from time to time. The Assessing Officer on the directions of Commissioner of Income Tax has called for the clarifications about rebate on hire purchase �4,11,66,754/-. Further, the assessee has not entered into any new hire purchase agreement during the previous year 2004-2005.

The ld. Authorised Representative explained that the hire purchase rebate represents residual balances of parties after settlement of accounts which are irrecoverable and claimed as deduction. The Assessing Officer disallowed the claim as assessee company has not fulfilled the conditions of the provisions under 36(1)(vii) of the Act and not produced ledger accounts of parties disclosing amount written off in books. Further, the Assessing Officer on perusal of profit and loss account found �5,74,75,603/- income from operations comparatively less than earlier assessment year 2004-2005. On examining the Audited accounts and notes on accounts found additional financial charges on account of delayed or non remittance of installment dues pertaining to hire purchase and ITA No.1430/Mds/2012 :- 4 -: financial lease contracts are not recognized. The Assessing Officer issued notice and called for the explanations on disputed issue and the assessee filed written submissions and explained that due to change in method of accounting and also non-remittance of installments in earlier year, income is not recognized on accrual basis. Since the assessee has changed method of accounting from accrual system to cash system the ld. Assessing Officer without considering change in accounting system made an addition and completed assessment.

Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

ITA No.1430/Mds/2012 :- 5 -: and also ledger accounts copies submitted in appellate proceedings and gave a categorical finding, relying on the provisions of Sec.36(1)(vii) of the Act and directed the Assessing Officer to delete the addition.

4.1 On the next ground of the additional finance charges of �23,81,38,000/- the ld. Authorised Representative reiterated his submissions made before the Assessing Officer and explained the provisions of Companies Act in respect of NPA and also filed written submissions alongwith judicial decisions and the ld.CIT(A) perused the directors report and also accounting policies in Annual report and found reduction in the finance charges compared to earlier years due to deep financial crisis owing to poor recoveries and interest, were the recoveries of principle component in majority of hire purchase transaction has become doubtful. In such circumstances, charging of additional finance charges on over due default payment of installment is not good business practice. The assessee company analyzed the various factors to change the accounting policy by not recognizing AFC on the overdue installment of recoveries and supported the case with Jurisdictional High Court decision in the case of CIT vs. Annamalai Finance Ltd (2010 (186 Taxman 296) (Mad) and ld. Commissioner of Income Tax (Appeals) observed at page No.13 of the order as under:-

ITA No.1430/Mds/2012 :- 6 -:

‘’Section 145 of the Income Tax Act, 1961- Change of method of accounting – assessment year 1997-98 – Assessee was a finance company – during relevant assessment year, it admitted overdue financial charges on hire purchase and lease transactions on cash basis i.e. on receipt basis, and not on accrual basis -Assessing Officer held that since assessee had been following mercantile system of accounting for all incomes and expenses, same had to be adopted in respect of overdue financial charges as mandated by section 145.

When in terms of hire purchase/lease agreements overdue charges were payable by parties concerned to assessee when they made defaults in paying installments as per schedule of payments, there was no basis of making out a case that additional overdue charges payable by parties would be collectible with certainty.

In such cases, it was very difficult to recognize income against overdue charges and therefore, Tribunal was justified in deleting additions made towards overdue charges, acknowledging change of method of accounting of overdue interest alone on cash basis’’. and allowed the appeal of the assessee by directing the Assessing Officer to delete the addition. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the Revenue has filed an appeal before the Tribunal.

The ld. Departmental Representative on the issue of deletion 5. of rebate on hire purchase written off has submitted that the assessee company has not complied with the provisions of Sec.37 and 36(1)(vii) of the Act and also the assessee has not produced any evidence of written off in the books of accounts in the assessment proceedings.

The assessee has submitted ledger accounts of parties and details of major hire purchase transactions in appellate proceedings. The ld.

ITA No.1430/Mds/2012 :- 7 -:

Commissioner of Income Tax (Appeals) has not called for any comments or remand report from the Assessing Officer and similarly on the next issue of charging additional finance charges not recognized by the assessee due to change in method of accounting from mercantile system to cash system. Further, the ld. Departmental Representative argued that the burden lies on the assessee to support with evidence to claim deductions under the provisions of law and the ld.CIT(A) unilaterally decided the issue without calling for comments and no opportunity was provided to Assessing Officer to verify the evidences furnished by the assessee for the first time in appellate proceedings and prayed the order of ld. Commissioner of Income Tax (Appeals) to be set aside.

On the other hand, the ld. Authorised Representative relied 6. on the order of the Commissioner of Income Tax (Appeals) and substantiated his arguments with the legal decisions and also submitted paper book with details of rebate on hire purchase and additional financial charges and prayed for dismissal of Revenue appeal.

We heard the rival submissions of both the parties, perused 7. the material on record and also judicial decisions cited. The assessee company being in finance and leasing Business has claimed rebate on ITA No.1430/Mds/2012 :- 8 -: hire purchase written off in the books of accounts based upon the guidelines and accounting policies of ICAI. But no information was submitted to substantiate the claim before completion of assessment.

In the appellate proceedings, the assessee has submitted written submissions and also filed ledger copies of hire purchase accounts, which the Assessing Officer could not verify the genuiness of the transaction. In the facts and circumstances of the case, we are of the opinion that under Rule 46A additional evidence was submitted before the Commissioner of Income Tax (Appeals) without providing an opportunity to the Assessing Officer to examine the issue and the next ground is connected to Hire purchase were the assessee company has not recognized additional finance charges on NPA and changed method of accounting from mercantile system to cash system. The ld. Authorised Representative explained the hardship and constrains of the company for recoveries, were majority of hire purchase transactions have defaulted and charging of additional finance charges on NPA will not be prudent practice for the company. The ld. Authorised Representative filed paper book and drew our attention to page no.17 were list of parties on which additional financial charges not recognized during the financial year 2004-2005.

We considering the evidences submitted in appellate 8. proceedings and submissions of the ld. Departmental Representative,

ITA No.1430/Mds/2012 :- 9 -: set aside the order of the Commissioner of Income Tax (Appeals) and remit both the issues to the file of the Assessing Officer to re-examine in detail with evidence furnished after providing adequate opportunity of being heard to the assessee and decide the issue on merits. Accordingly, the appeal of the Revenue is allowed for statistical purposes.

In the result, the appeal of the Revenue is partly allowed for 9. statistical purposes.

Order pronounced on Tuesday, the 5th day of January, 2016 at Chennai.