AO cannot deny legitimate exp. of business simply because assessee has changed its method of accounting: ITAT

Case details: DCIT v. Hinduja Leyland Finance Ltd. - [2021] 128 taxmann.com 148 (Chennai - Trib.)

Judiciary and Counsel Details

• • V. Durga Rao | Judicial Member, and G. Manjunatha | Accountant Member.
  • Suresh Periasamy, Jt. CIT for the Appellant
  • R. Sathyanarayanan, CA for the Respondent

Facts of the Case

Assessee was engaged in the business of Non-banking Financial services and asset financing. The main source of assessee’s income was interest income from financing activities for which the assessee had incurred certain expenses. In its books of account, Assessee had classified these expenses as prepaid expenses and amortized the same over the period of loans up to Assessment Year (AY) 2015-16. However, for the first time, assessee had filed a revised return for AY 2016-17 and changed its method of accounting for the treatment of expenses incurred for long-term finance business and claimed that entire expenses were deductible in the year of payment.

The case was taken for scrutiny assessment. During assessment proceedings, Assessing Officer (AO) was of the opinion that assessee had changed its method of accounting for accounting of various expenses and treated the same as revenue expenditure deductible in the year of payment. However, such expenditure was treated as prepaid expenses up to AY 2015-16 and amortized over the period of loan by following matching concept principles of accounting. No explanation had been furnished to justify a change of method of accounting for said expenses. Therefore, the prepaid expenses incurred while lending long-term finance should be spread over the term loan period. Accordingly, AO rejected the claim of assessee towards deduction.

ITAT Held

On appeal, Chennai ITAT held that merely because by virtue of the change in method of accounting employed by assessee its taxable income stands reduced in a particular year, it could by no stretch of imagination be treated as a factor that said the action was undertaken with an intent to reduce the tax burden deliberately. Assessee was entitled to change its method of accounting as long as said change in method of accounting is bonafide. Section 145 nowhere provides that if an assessee follows one method of accounting for many years, it couldn’t change the same in a subsequent year. Assessee could very well change the method of accounting to give better treatment to various income and expenses in books of account to give true and correct income. But such change should be disclosed in notes to account, and its effects on taxable income for the year on account of change of method of accounting should also be disclosed.

In assessee’s case, it had changed the method of accounting to give better treatment to prepaid expenses shown in the financial statement. Such change was supported by the decision of the Hon’ble Supreme Court, where it was categorically held that once an expenditure is incurred and payment is made, the same needs to be allowed to assessee irrespective of treatment given in books of account. In the case of Kedarnath Jute Mfgr Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), the Hon’ble Supreme Court held that entries in books of account are not determinative and conclusive. The matter was to be examined on the touchstone of provisions contained in the Income-tax Act. Thus, the assessee should be allowed a deduction for said expenses as revenue expenditure.

Case Review

• • Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC)(para 11) followed.

List of Cases Referred to

• • Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC) (para 4)
  • Kedarnath Jute Mfgr Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 7).