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2008 (5) TMI 301 - AT - Income TaxDisallowance made u/s 40A - business of financing second hand motor vehicles on hire-purchase basis - AO treated the cash payment as expenditure incurred on account of purchases made in respect of vehicles purchased for hire-purchase sale falling within the ambit of provisions of section 40A(3) - disallowed 20 per cent of such cash payments - CIT upheld the stand taken by AO - Assessee submitted that he is not a trader, but a financer - HELD THAT - In the light of decision of Hon'ble Kerala High Court in the case of Modern Plastics Industries 1982 (7) TMI 259 - KERALA HIGH COURT , we find that all the characteristics are in existence in the assessee's case. The assessee is not dealer in second hand motor cars he lets out. The entire amount is not financed by the assessee. A part of the purchase price is made by the hirer and the balance is financed by the assessee. Thus, his involvement is usually less than the price of the asset. His past behaviour also indicates that he does not intend to deal in the assets. The invoice is usually made in the name of user. The financier by entering into hire-purchase agreement makes itself prone to the loss on account of bad debts and also of defective vehicles, which might become its property due to hire-purchase transactions. The assessee does not earn any profit on purchase and sale of vehicles. It earns income on hire-purchase transactions. Entries recorded in the books of account - It is settled law as held in the case of Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT , that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter some misapprehension or mistake fails to make an entry in the books of account and if under the law, a deduction must be allowed by the AO, the assessee will not lose the right of claiming or will not be debarred from being allowed that deduction. The word 'expenditure' has not been defined in Income-tax Act. As held in Indian Molasses Co. Ltd. v. CIT 1959 (5) TMI 5 - SUPREME COURT , 'expenditure' is what is 'paid out or away' and is something which is gone irretrievably. In the case before us, the assessee has not claimed the cost of vehicles debited in profit and loss account as expenditure which is set off by credit entries of equal amount. The assessee is receiving back the amount in instalments along with financial charges. Thus, the amount paid by assessee to the purchaser of a vehicle is not gone irretrievably. The assessee is holding the vehicles as movable assets and not as trading commodity. When amounts paid have not been claimed as deductible expenditure while computing business income, provisions of section 40A(3) cannot be applied. Mere entries in the books of account as observed earlier will not change the character of financial transactions. We may also like to say that the provisions section 40A(3) are not attracted where parties are identified and there is no material on record to doubt about the genuineness of payment. It is not the case of AO that the transactions were not genuine. Therefore, the assessee's case is squarely covered by the decision of Hon'ble Delhi High Court in the case of Ramditya Investment 2003 (5) TMI 56 - DELHI HIGH COURT and the decision in the case of Walford Transport (Eastern India) Ltd. 1999 (10) TMI 59 - GAUHATI HIGH COURT . Therefore, the authorities below were not justified in invoking the provisions of section 40A(3) in respect of vehicles against which the money was advanced by the assessee. We, accordingly, set aside the orders of the authorities below and direct the AO to delete the addition made u/s 40A(3) of the Act. In the result, the appeal filed by the assessee is allowed.
Issues Involved:
1. Non-adjudication of certain issues by the CIT (Appeals). 2. Confirmation of additions made under section 40A(3) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Non-adjudication of Certain Issues by the CIT (Appeals): - Observation: Ground No. 2 pertained to issues not adjudicated by the CIT (Appeals). - Resolution: The assessee's representative did not press this ground during the hearing, leading to its dismissal. 2. Confirmation of Additions under Section 40A(3) of the Income-tax Act: - Facts of the Case: The assessee, engaged in financing second-hand motor vehicles on a hire-purchase basis, showed a purchase price of Rs. 79,14,700 and a corresponding sale on hire-purchase. The Assessing Officer (AO) identified cash payments exceeding Rs. 20,000, totaling Rs. 23,37,000, and proposed a disallowance of 20% under section 40A(3). - Assessee's Argument: The transactions were loan transactions, not expenditures. The assessee relied on CBDT Notification S.O. No. 624 (14-2-1969), which clarified that loan transactions are not expenditures deductible in computing taxable income. The assessee cited several judicial pronouncements, including Ramkrishna & Co. v. CIT [1973] and Ramditya Investment v. CIT [2003]. - CIT (Appeals) Decision: The CIT (Appeals) upheld the AO's decision, stating that the transactions were in the nature of hire-purchase, thus falling under section 40A(3). The CIT (Appeals) noted that the assessee had treated these transactions as hire-purchase under the Interest-tax Act but claimed them as loans under the Income-tax Act. - Assessee's Further Argument: Before the Tribunal, the assessee reiterated that it was engaged in financing, not trading. The vehicles were purchased by the purchasers directly, and the assessee only financed these purchases. The assessee argued that the true nature of the transactions was financial, not trading, citing decisions like Delhi Stock Exchange Association Ltd v. CIT [1961] and CIT v. Shoorji Vallabhdas & Co. [1962]. - Revenue's Argument: The revenue argued that the assessee had shown vehicles as stock-in-trade and thus, payments for these stocks were subject to section 40A(3). The revenue emphasized that the assessee could not change its stance between different tax proceedings. - Tribunal's Analysis: The Tribunal found that the assessee was engaged in hire-purchase business, not trading in vehicles. The vehicles were shown as stock on hire, and income was derived from finance charges, not from the sale of vehicles. The Tribunal referred to the decision in State of Kerala v. Modern Plastic Industries [1984], which characterized similar transactions as financial agreements. The Tribunal concluded that the transactions were financial, not trading, and thus, section 40A(3) was not applicable. - Conclusion: The Tribunal held that the authorities were not justified in invoking section 40A(3) and directed the AO to delete the addition of Rs. 4,67,400. Final Judgment: - The appeal filed by the assessee was allowed, and the addition made under section 40A(3) was deleted.
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