1990 (8) TMI 230 - AT - Income Tax

Accounting Year, Business Expenditure, Purchase Price, Revenue Expenditure, State Financial Corporation

Summary

Issues:
Deduction of instalments of hire-purchase charges paid by the assessee for the acquisition of an industrial unit at Jaipur from Rajasthan Financial Corporation.

Comprehensive Analysis:
The appeals consolidated and disposed of by a common order due to common issues and the same assessee. The key issue involves the deduction of hire-purchase charges instalments paid by the assessee for acquiring an industrial unit at Jaipur. The assessee offered Rs. 32 lakhs as purchase price for the unit, with the total consideration being Rs. 47 lakhs. The hire-purchase agreement required the assessee to make a down payment of Rs. 10 lakhs and pay the balance in five equal instalments with interest. The ITO disallowed the deduction, treating it as capital expenditure. However, the CIT(A) relied on Circular No. 9 dated 1943, stating that hire-purchase agreements should be treated as a combination of hire charges and capital outlay, with depreciation allowed on the initial value. The CIT(A) directed the ITO to allow the instalments as deductions spread over five years, as specified by the assessee.

The revenue challenged the CIT(A)'s decision on grounds that the instalments were for acquiring a capital asset, no evidence of the asset's initial value was provided, and the circular was not applicable. The departmental representative argued that without a final agreement, the instalments should be considered capital expenditure. The assessee's counsel relied on the hire-purchase agreement, arguing it aligned with the circular, justifying the deduction. The tribunal analyzed the agreement clause and concluded that ownership was not immediately transferred to the assessee, making clause (iii) of the circular applicable. Consequently, the tribunal upheld the CIT(A)'s decision to allow the deductions, as the agreement indicated the assessee would eventually become the owner of the property.

The tribunal's detailed analysis considered the specific clauses of the hire-purchase agreement and the circular to determine the nature of the payments made by the assessee. By aligning the agreement with the circular's provisions, the tribunal justified the deduction of instalments as revenue expenditure. The decision was based on the understanding that the ownership transfer did not occur immediately, warranting the treatment of payments as a combination of hire charges and capital outlay. The tribunal's thorough examination of the agreement and relevant circular provisions supported the allowance of deductions for the assessee, emphasizing the importance of contractual terms in determining the tax treatment of hire-purchase transactions.