2015 (3) TMI 894 - HC - Income Tax

Accrual of interest income - Hire Purchase Finance charges - whether should be assessable to tax on sum of Digits basis as against Equated Monthly Instalments basis regularly followed by the Appellant? - Tribunal held that the appellant is not entitled to maintain its book on the Sum of Digits method and offer the income on Equated Monthly Instalment Basis? - Held that - We are in agreement with the reasoning of the Tribunal in this regard that when once the Revenue had accepted the character of the transaction as hire purchase transaction, the income that flows from the transaction has to necessarily follow the treatment that is given under the hire purchase agreement. Secondly, when the Revenue had not disputed the fact that on all the earlier years, the Revenue had treated the income as per the hire purchase agreement on EMI basis, there are no materials available as on record to show that following such method had really resulted in suppression of income, in other words, there was no true reflection of the income that has to be assessed under the Act. This Court in Commissioner of Income Tax v. Ashok Leyland Finance Ltd 2012 (7) TMI 590 - Madras High Court came to the conclusion that the EMI method followed by the assessee for the purpose of tax did not show any suppression of income. This decision of this Court has not been challenged by the Revenue. On the contrary, the same has been followed by this Court in respect of the very same assessee for the subsequent assessment years, which we have already extracted supra. Thus no hesitation to hold that in the absence of anything to the contrary, the assessee s plea that tax should be determined on the basis of EMI method has to be accepted. The finding of the Tribunal on this score, therefore, deserves to be reversed. - Decided in favour of the assessee.

Summary

Issues involved:
1. Assessment of Hire Purchase Finance charges for tax purposes.
2. Method of accounting for interest income.
3. Permissibility of maintaining books on one method and offering income on another method.

Detailed Analysis:
Issue 1: The case involved the assessment of Hire Purchase Finance charges for tax purposes. The appellant followed the Equated Monthly Instalment (EMI) method in its day-to-day accounts but maintained books of accounts on the Sum of Digits (SOD) Method. The Assessing Officer disallowed the claim and brought the differential amount under the SOD Method for tax computation.

Issue 2: The Tribunal upheld the assessment, stating that the income accrued to the assessee as per the contracts entered into, and should be assessable to tax on the SOD basis. The Tribunal emphasized that the hirers paid interest on a reducing capital balance basis, and since the assessee maintained books on the SOD method, the income should be assessed accordingly.

Issue 3: The appellant contended that the case was similar to a previous judgment where the Court allowed appeals in favor of the assessee. The Revenue argued against the appellant's method of accounting, stating that using different methods for maintaining books and filing returns was impermissible. The Court considered past judgments and the nature of the hire purchase transaction, concluding that the EMI method used by the appellant did not result in income suppression.

The Court referenced a previous case involving a hire purchase agreement and highlighted the importance of following the treatment specified in such agreements for income assessment. The Court noted that the EMI method did not suppress income and ruled in favor of the appellant, reversing the Tribunal's decision. The judgment emphasized that tax determination should align with the method specified in the hire purchase agreement.

Additionally, the Court referred to a decision in another case to emphasize that tax laws do not strictly follow accountancy practices. Ultimately, the Court allowed the Tax Case (Appeal) in favor of the appellant, with no costs incurred.