1987 (10) TMI 106 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest payment claimed under 'Finance Commission.'
2. Disallowance of hire purchase commission liability claimed as accrued during the year.
3. Determination if the accrued hire purchase commission is actually interest projected over the hire purchase agreement period.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Payment Claimed Under 'Finance Commission':

The Tribunal examined whether the disallowance of Rs. 94,465 claimed by the assessee under the head 'Finance Commission' was justified. The department argued that this amount did not pertain to the accounting period relevant to the assessment year under reference. The assessee contended that they had been following a consistent system of accounting, charging the hire purchase commission in the year of payment. The Tribunal noted that under Section 115(1) of the Income Tax Act, income must be computed in accordance with the method of accounting regularly employed by the assessee. The Tribunal referred to the Gujarat High Court decision in Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT, which supported the view that if the department had accepted a particular method of accounting in previous years, it should continue to do so. The Tribunal concluded that since the liability had legally accrued, it was chargeable as an expenditure, irrespective of when it was paid. Therefore, no referable question of law arose from this issue, and the reference application was rejected.

2. Disallowance of Hire Purchase Commission Liability Claimed as Accrued During the Year:

The Tribunal considered whether the disallowance of Rs. 94,465 out of the total liability of Rs. 1,20,380 claimed by the assessee as accrued during the year on account of hire purchase commission was justified. The department's argument was that this was in reality interest paid on borrowed money and should be allowed only to the extent that it related to the accounting year. The assessee argued that the liability to pay the finance commission accrued as soon as the agreement was entered into. The Tribunal agreed with the assessee, noting that the liability to pay hire purchase charges became fastened on the assessee the moment the agreement was entered into. The Tribunal also emphasized that the consistent system of accounting followed by the assessee should not be rejected by the department in subsequent years. Consequently, the Tribunal upheld the deletion of the disallowance.

3. Determination if the Accrued Hire Purchase Commission is Actually Interest Projected Over the Hire Purchase Agreement Period:

The Tribunal examined whether the liability of Rs. 1,20,380 claimed by way of accrued hire purchase commission was actually interest projected over the period of hire purchase agreements. The department argued that only the interest relatable to the relevant account year should be admissible as a deduction. The Tribunal found that the hire purchase agreements indicated that the liability to pay the finance charges accrued immediately upon entering into the agreement. The Tribunal relied on the consistent accounting method followed by the assessee and previous assessments where similar deductions were allowed. The Tribunal concluded that the entire finance commission should be allowed as a deduction, as the liability had legally accrued. This interpretation was supported by the Gujarat High Court decision in Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT.

Separate Judgments Delivered by the Judges:

The Accountant Member and the Judicial Member had differing opinions on whether a referable question of law arose from the Tribunal's order. The Accountant Member believed that no questions of law arose, while the Judicial Member felt that the issue was not free from doubt and warranted a reference. The matter was referred to a Third Member, who agreed with the Judicial Member that the order passed by the Tribunal gave rise to a question of law. The Third Member emphasized that the interpretation of the document and the relevant provisions of the statute constituted a pure question of law. Consequently, the matter was referred back to the regular Bench for disposal of the reference application according to the majority view.