2005 (10) TMI 55 - HC - Income Tax

Contingency account investment t allowance - Held that the amounts collected by the assessee from the hire purchaser as sales tax were not really sales tax at all because the sale at that time had not taken place and the sales tax is payable when the sale takes place and in the case of hire purchase, the sale takes place only at the time mentioned in the hire purchase agreement or at the option of the hirer, if so provided in the agreement. Hence, there was no sales tax liability on the assessee at all when he collected the amounts from the hire purchaser and, therefore, the amounts in contingency account No. II had to be treated as income of the assessee in the assessment year in which it made the collection. further, as the sale under the hire-purchase agreement takes place only at the time mentioned in the agreement or at the option of the hirer, if so provided in the agreement, the dealer s margin or profit under the hire purchase agreement did not accrue to the assessee on the execution of the agreement by the hirer, therefore, Tribunal was correct in holding that the entire dealer s margin or profit under the hire purchase agreement did not accrue to the assessee on the execution of the agreement by the hirer further, held that computer does manufacture or produce within the meaning of section 32A of the Act and hence is entitled for investment allowance

Issues involved:
1. Accretion in contingency account No. II
2. Tax treatment of accretion in contingency account No. II
3. Conclusion of sale under hire purchase agreement
4. Accrual of dealer's margin under hire purchase agreement
5. Eligibility of computer for investment allowance under section 32A of the Income-tax Act, 1961

Accretion in Contingency Account No. II:
The High Court addressed the issue of accretion in contingency account No. II, where the Assessing Officer added sums related to sales tax realized and dealer's margin on sales of vehicles to the assessee's total income. The Commissioner of Income-tax (Appeals) had deleted these additions based on a previous Tribunal decision. However, the High Court, following a precedent, held that the amounts collected as sales tax were not actual sales tax due to the timing of the sale in hire purchase agreements. Consequently, the amounts in contingency account No. II were deemed as the assessee's income in the relevant assessment year. The court ruled in favor of the Revenue on this issue.

Tax Treatment of Accretion in Contingency Account No. II:
Regarding the tax treatment of the accretion in contingency account No. II, the High Court reiterated that the sales tax collected by the assessee from hire purchasers did not constitute actual sales tax due to the nature of hire purchase agreements. Since the sale occurs only at a specified time or at the hirer's option, the court concluded that the amounts in the contingency account should be treated as income in the assessment year of collection. Consequently, the court ruled in favor of the Revenue on this matter as well.

Conclusion of Sale under Hire Purchase Agreement:
The court examined whether the sale of vehicles under hire purchase agreements is concluded only upon full compliance with the agreement terms by the hirer or upon the exercise of the option to purchase. Based on the nature of hire purchase agreements, the court determined that the sale occurs as per the agreement terms or the hirer's option, leading to the conclusion that the dealer's margin or profit does not accrue to the assessee upon the mere execution of the agreement by the hirer. Therefore, the court ruled in favor of the assessee on this issue.

Accrual of Dealer's Margin under Hire Purchase Agreement:
In analyzing the accrual of the dealer's margin under hire purchase agreements, the court emphasized that the dealer's profit does not accrue to the assessee upon the execution of the agreement by the hirer. As the sale under such agreements only takes place per the agreement terms or the hirer's option, the court ruled in favor of the assessee on this matter.

Eligibility of Computer for Investment Allowance:
The court deliberated on the eligibility of a computer for investment allowance under section 32A of the Income-tax Act. The Assessing Officer had denied the investment allowance claim for a computer installed in the assessee's office, stating it was not used for manufacturing or production purposes. However, the Commissioner of Income-tax (Appeals) allowed the claim, considering the computer's use in the workshop for job work. Upholding the decision, the High Court ruled in favor of the assessee, stating that the investment allowance was admissible for the computer under section 32A.

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