2009 (2) TMI 399 - HC - Income Tax

Business Expenditure- the assessee has claimed deduction of finance commission which was charged as expenditure in the profit and loss account of the assessee. The aforesaid deduction was claimed in the same year in which the hire purchase agreement was entered into by the assessee irrespective of the fact that actual payment was made even in the following years. The assessee had purchased trucks trolleys etc. under an agreement with the finance companies and as per the agreement for hire purchase the assessee was to make payment of the hire purchase amount and finance commission in instalments. As per the accounting system adopted by the assessee the entire amount payable towards finance commission as per the hire purchase agreement was claimed in the assessment year in which such hire purchase agreement was entered into irrespective of the fact that the actual payment was even made in the following years. The issue raised by the Revenue is as to whether the entire amount towards finance commission can be deducted or can be claimed in the assessment year in which hire purchase agreement was entered into or the part of finance commission has to be shown for subsequent years in which actual payment was made. Held that- the department having permitted the assessee to claim the benefit of finance commission in the year in which hire purchase agreement was entered into the same system was required to be continued for the assessment year 1981-82 and this agreement was allowed looking to the peculiar facts and circumstances of the case and the fact that the amount so claimed was not much higher. The assessee was entitled to deduction of the finance commission.

Issues:
1. Disallowance of interest payment under 'Finance commission'
2. Disallowance of liability claimed for accrued hire purchase commission
3. Treatment of finance commission deduction in the year of hire purchase agreement

Issue 1: Disallowance of interest payment under 'Finance commission'
The Tribunal referred questions regarding the disallowance of interest payments claimed by the assessee under the head 'Finance commission' for an assessment year. The Revenue argued that since the title of the vehicle was not transferred to the assessee in a hire purchase agreement, the finance commission paid in subsequent years cannot be claimed as an expenditure in the year of the agreement. The counsel for the assessee contended that the mercantile accounting system allowed claiming the entire finance commission in the year of the agreement, and past practices were followed. Citing the judgment in CIT v. Bilahari Investment P. Ltd., the counsel argued for consistency in accounting methods accepted by the Department. The court noted the long-standing practice of permitting such deductions and ruled in favor of the assessee, emphasizing the need for valid reasons to change accounting methods.

Issue 2: Disallowance of liability claimed for accrued hire purchase commission
The Tribunal also questioned the disallowance of liability claimed by the assessee for accrued hire purchase commission, arguing that only interest related to the relevant accounting year should be deductible. The Revenue contended that the entire amount of finance commission could not be deducted in the year of the agreement. The assessee's counsel highlighted the historical acceptance of their accounting method and argued for consistency based on past practices and legal precedents. The court, considering the facts and the judgment in Bilahari Investment P. Ltd., ruled in favor of the assessee, emphasizing the need for valid reasons to deviate from accepted accounting practices.

Issue 3: Treatment of finance commission deduction in the year of hire purchase agreement
The court analyzed the assessee's practice of claiming finance commission deductions in the year of the hire purchase agreement, even if payments were made in subsequent years. The Revenue challenged this practice, arguing for spreading the deduction over the payment years. The assessee's counsel relied on past acceptance of their accounting method and legal precedents to support their position. The court, considering the consistent application of the accounting method and the lack of valid reasons for changing it, ruled in favor of the assessee, emphasizing the importance of maintaining consistency in accounting practices unless valid reasons justify a change.

In conclusion, the court decided in favor of the assessee in all issues, emphasizing the importance of consistency in accounting methods unless valid reasons exist for deviation. The judgment highlighted the need for the Revenue to provide sound justifications for altering accepted accounting practices and upheld the assessee's right to follow historical practices in claiming deductions.

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