2001 (7) TMI 295 - AT - Income Tax

Summary

Issues Involved:
1. Lease Equalisation Charges
2. Finance Charges on Hire Purchase Agreement

Issue-Wise Detailed Analysis:

Lease Equalisation Charges (Ground No. 1):

The assessee argued that the CIT(Appeals) erred in upholding the Assessing Officer's decision, which treated lease equalisation charges as a contingent reserve. The assessee claimed these charges were accounted for according to the guidance issued by the Institute of Chartered Accountants of India. However, the assessee did not press this ground during the hearing, leading to its dismissal without further examination.

Finance Charges (Ground No. 2):

Facts and Arguments:
The assessee, a Public Limited Company engaged in Hire Purchase and Leasing, adopted the Mercantile system of accounting. The company used the Sum of Digits (SOD) method for recognizing finance charges in its books but used the Equated Monthly Instalments (EMI) method for income tax purposes. The assessee claimed that income should be recognized based on the Hire Purchase Agreement and not the SOD method. The difference in finance charges for the assessment years 1991-92 and 1992-93 was significant.

Assessing Officer's Decision:
The Assessing Officer rejected the EMI method for tax purposes, arguing that the assessee could not adopt different accounting methods for its own purposes and for tax purposes. The Assessing Officer relied on the Delhi Bench ITAT decision in Amarpali Mercantile (P.) Ltd., concluding that the SOD method should be used for tax purposes.

CIT(Appeals) Decision:
The CIT(Appeals) upheld the Assessing Officer's decision, dismissing the assessee's appeal and confirming the addition of differential finance charges.

Tribunal's Analysis:
The Tribunal examined the terms and conditions of the Hire Purchase Agreement, concluding that the transactions were genuine hire purchase agreements and not loan transactions. The Tribunal noted that the EMI method accurately reflected the real income accrued to the assessee, as per the Hire Purchase Agreement's terms. The Tribunal also considered various CBDT Circulars and the Supreme Court's judgment in UCO Bank v. CIT, which supported the assessee's position.

Conclusion:
The Tribunal concluded that the finance charges accrued under the EMI method represented the real income for tax purposes. The Tribunal set aside the orders of the CIT(Appeals) and upheld the assessee's claim for exclusion of income amounting to Rs. 3,69,98,770 for the assessment year 1991-92 and Rs. 4,86,21,968 for the assessment year 1992-93. The appeals were allowed in favor of the assessee.