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TMI Blog2001 (7) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... nds in the appeal for the assessment year 1992-93. Since the issues with regard to the grounds on lease equalisation charges and finance charges are common in both these appeals, we propose to decide these issues first. Lease Equalisation Charges (Ground No. 1) 4. The assessee has taken this ground before us stating that the CIT(Appeals) erred in up-holding the order of the Assessing Officer inasmuch as the lease equalisation charges have been accounted in accordance with the guidance issued by the Institute of Chartered Accountants of India, the Apex Accounting Body in India, in whose opinion the true profits can be determined only in this manner and further taken the ground that the CIT (Appeals) ought to have held that in these circumstances, the Assessing Officer has erred in treating this as a contingent reserve and ought to have held that the Lease Equalisation charge is not a contingency provision. 5. We have heard the learned counsel for the assessee and the learned Departmental Representative at length. But the arguments of the learned counsel for the assessee were mainly with regard to the second issue on finance charges on Hire Purchase agreement. The learned Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------------- Asst. yr. Finance charges Finance charges Difference in as per SOD computed on EMI Finance method method charges sought to be excluded ----------------------------------------------------------------------------- 1991-92 Rs. 17,15,47,000 Rs. 13,45,48,230 Rs. 3,69,98,770 1992-93 Rs. 27,69,55,197 Rs. 22,83,33,229 Rs. 4,86,21,968 ----------------------------------------------------------------------------- 9. The Assessing Officer, after considering all the facts and circumstances of the case has held against the assessee while placing reliance on the order of the Delhi Bench of the ITAT, in the case of Amarpali Mercantile (P.) Ltd v. Asstt. CIT[1993] 45 ITD 386 and maintained that the assessee is prohibited from adopting regularly one method of accounting for its own purpose and another method for income-tax purpose and was of the view that the method adopted by the assessee on SOD Method win be subjected to Income-tax Act. 10. The assessee, before the Assessing Officer filed its objections, justifying adoption of EMI Method of income recognition as only accrual method as per section 5 of the Income-tax Act and rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , method of accounting regularly employed by the assessee relates to the method of accounting regularly employed by the assessee for its own purpose and does not relate to a method of making up statutory return for assessment, The same principle was followed by the AUahabad High Court in the case of CIT v. Singari Bai (13 ITR 224). Therefore, with the help of the legal propositions, it could be safely said that the method of accounting regularly employed by the assessee is the one by which the company has worked out its profits and loss and it does not include the adjustment made in respect of finance charges in the income adjustment statement enclosed to the return of income. It is the duty of the Assessing Officer, therefore, to determine as to whether the profits and gain envisaged vide sections 28 to 44 of the Income-tax Act can be correctly detected from the profits and gains prepared by the assessee by employing the SOD Method is the real income for the purpose of the Income-tax Act. 12. At page 8 of the Assessment Order, the Assessing Officer has further observed that:- "Reference may be made to page 399 of 'Advanced Accounting Practice' edited by Emila Woolf, Suresh Tann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1991-92 and dated 9-8-1985 for assessment year 1992-93. Thus, the CIT (Appeals) confirmed the addition of differential finance charges in both the years as mentioned above. 15. The assessee being aggrieved against the orders of the CIT (Appeals), filed these appeals before this Tribunal, mainly on the following grounds which we firstly take from Appeal for the assessment year 1991-92:- (1) The CIT(A) ought to have followed the decision of Supreme Court in E.D. Sassoon & Co. Ltd v. CIT [1954] 26 ITR 27 wherein it was held that the finance charges accrue to an assessee only when the right to receive is acquired by the assessee. (2) The CIT(A) ought to have appreciated that in the case of a hire purchase contract incorporating EMI method of payment, the right to receive the income embedded in each instalment arises only on the due date and the quantum of income earned on each such instalment is the amount arrived at by dividing the total income earned on the contract by the total number of instalments. (3) The CIT (Appeals) ought to have followed the Circular No. 127 (12) IT/12 dated 13-5-1943 of the CBDT. The CIT (Appeals) is wrong in holding that the said circular cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee to the other. (3) The CIT(A) ought to have followed the decision of the Gujarat High Court in Rajan Ramkrishna v. CWT[1981] 127 ITR 11 and the decision of the Supreme Court in KP. Varghese v. ITO [1981] 131 ITR 597 wherein it was held that benevolent circular is binding on ITOs and WTOs even if the circulars deviate from the legal position. (4) The CIT(A) ought to have appreciated that the CBDT in exercise of its powers conferred on it by section 119 of the Act has clearly distinguished the tax treatment for HP Contracts ignoring the underlying legal position. Hence, he ought to have appreciated that accounting of HP contracts should be done only as per the principles laid down by the circular. (5) The CIT(A) erred in interpretation of the appellant contentions that the assessee has sought to reject his own books of account. He ought to have appreciated that because of the CBDT Circular the assessee followed the Equated Monthly Instalment method for tax purposes. (6) The CIT (Appeals) ought to have appreciated that if the interpretation that the circular is not applicable to the Hire Purchase company but only to the person purchasing the assets under the contract, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lat rates. The learned counsel for the assessee also submitted that there is a difference between hire purchase agreement and loan agreement on the question of passing of the title and as such, hire purchase agreement cannot be treated as loan agreement. 20. The learned counsel for the assessee further relied upon certain Circulars of the CBDT, which he has filed in the Paper Book connected with this case. To show that no interest is chargeable in respect of section 194A of the Income-tax Act on hire purchase agreements. The learned counsel for the assessee further argued that section 2(28) of the Incometax Act is not applicable. He further argued that no interest tax was levied in this case as it was admitted that it was a genuine hire charges agreement. He further argued that hire charges agreement are not taken into account under sections 370 and 372 of the Companies Act. 21. The learned counsel for the assessee submitted that RBI guidelines also treat hire purchase agreements and loan agreements differently and separately. He further submitted that under sales-tax also, hire purchase is treated as sale and not loan and contended that under hire purchase agreement, no element ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SOD Method. The learned D.R., further argued that all the arguments of the learned counsel for the assessee are not applicable to this case and further argued that the hire purchase agreements are in the nature of loan agreement and the authorities below have correctly assessed for which no interference is called for. 25. The learned Departmental Representative further argued that the case reported in KP. Varghese as relied upon by the learned counsel for the assessee is not applicable to this case as the Hon'ble Supreme Court was concerned with the value of the stock in that case and the facts are different from the facts of the present case. He further argued that the case of British Paints was correctly applied in this case. The learned DR., further argued that the authorities below, in their orders have considered the entire facts and arguments as also the objections and argued that whether it is a hire purchase agreement or rental, it is income and as such, the assessee has been rightly assessed. He has further argued that all the CBDT Circulars have been considered by the Special Bench of the Tribunal and hence, no interference is called for in this case by this Tribunal. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate stage. Some of the points with regard to legal propositions/ principles have been settled by the Hon'ble Special Bench of the ITAT, in the case cited supra and these are specifically mentioned at para 26(c) of the said order, after carefully going through various Judgments of the Courts. For the sake of convenience, the same are reproduced below: "26(c) From a reading of the provisions of section 145 in conjunction with the charging provision contained in section 4, the scope of total income defined in section 5 and other relevant provisions in the light of principles of law laid down in the various judgments discussed hereinbefore, the following well-settled principles of law clearly emerge: (i) That the provisions of section 145 cannot override section 5 of the Act. If an income has neither accrued nor received within the meaning of section 5 of the Act, whatever section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognising such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year. Section 145 determines the mode of computing the taxable income. It does not af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer which is to determine the income, we would like to mention here that there is no dispute that the Assessing Officer has not only power under section 145 to compute the correct income but also is under legal compulsion to do so. The Assessing Officer in the assessment year 1991-92, has given some examples at para 3 of Page 6 as to how the income was to be assessed on SOD Method. But it is only an assumed fact and has no connection whatsoever with the facts of this case. Perhaps, the Assessing Officer was influenced by the Method having recognition of Institute of Chartered Accountants and other Text Books. 33. The Hon'ble Special Bench of the ITAT, in the case cited supra, has settled the legal principle for tax purposes with regard to accrual or receipt of income in the relevant previous year which will have to be determined in accordance with section 5 of the I.T. Act, on the basis of careful scrutiny of terms of contract of HP Agreement, regardless the method of accounting followed by the assessee for recognition of such income in its books of account. Therefore, it is the duty of the Assessing Officer to assess the income in accordance with law. Hence, the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WHEREAS the Hirer has, in terms of the proposal form signed by him, requested for finance for the purchase of a new vehicle, and the said proposal form is to be regarded as the basis of this contract: WHEREAS the Owner has considered the proposal and agreed to finance the said purchase on the following terms and conditions: NOW IT IS HEREBY AGREED AS FOLLOWS CLAUSE I: The Owner, being the owner of the Chassis with fittings, tools, accessories and additions more particularly described in the First Schedule hereto and hereinafter refer-red to as 'the Chassis' agrees to let and the Hirer agrees to take on hire the Chassis from the date hereof subject to the terms and conditions herein contained which shall be taken and read as part of this agreement. CLAUSE II: On the execution of this agreement, the Hirer shall pay to the Owner a sum of Re. 1 in consideration of the option to purchase given to the hirer by clause IV hereof and to be exercised by him, if he so chooses, later on. CLAUSE III: (1) The hirer shall pay to the owner on the execution of this agreement the sum of Rs.7,626 as initial payment by way of hire and a sum of Rs.10,500 as service charges both of which shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become payable to the Owner under this Agreement (and not paid by the Hirer) either by way of hire, expenses or damages, repairs, replacement or other supplies. CLAUSE VI : The Guarantor further agrees that any time or indul gence granted to the Hirer by the Owner shall not prejudice the Owner's rights against him or relieve him from his guarantee which will be a continuing guarantee till such time that the Owner may have any claim against the Hirer in respect of this Agreement.' 36. Alongwith this Annexure 12, details of repayment are mentioned in the Second Schedule attached with it, according to which, the following figures are mentioned here: ----------------------------------------------------------------------------- Value of Vehicle, ie., Value of Chassis and Value of body Rs. 5,32,525 (-)Initial payment Rs. 5,25,000 (+) Finance charges Rs. 2,42,393 Total amount Rs. 7,67,393 ----------------------------------------------------------------------------- The payment period is 36 months and schedule for payment is given from 1/92 to 12/94 at a flat rate of Rs.21,315 per month, except minor portion in one instalment for total purchase i.e., Rs.21,368. 37. On careful co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement was executed between them. The Special Bench of the Tribunal has come to conclusion that the hirer of the machinery in this case is the hirer who had only requested the assessee (Nagarjuna Investment Trust Ltd.) to provide finance for the import of the machinery, effecting the Hire Purchase Agreement as a security to seize the machinery in the event of any default of repayment of loan by way of Equated Monthly Instalments (EMI) and accordingly constitute the entire transaction as loan transaction. It was so confirmed in para 32 of the order of the Special Bench, which is reproduced hereunder: "It is an undisputed fact that the assessee-company is entitled to recover an EMI of Rs.24,375 p.m. in accordance with the said H.P. Agreement. The EMI of Rs.24,375 undoubtedly consists of interest component as well as principal component. The agreement as aforesaid does not give the apportionment or bifurcation of each equated monthly instalment of Rs.24,375 between the principal and interest components. The Hirer in the present case has agreed to repay the entire amount of loan alongwith interest by way of EMI of Rs.24,375 p.m. for 48 months without specifying as to what extent, each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of the Revenue. It also held that the accounting entries are not determinative of legal character of income. Whatever be the nature of accounting entries, in accrual basis of accounting, income cannot be brought to tax before it is accrued whether received or not. It was further held that in the instant case, the Assessing Officer has rightly computed the income under EMI Method which is in accordance with the contract between the parties. 44. We may add here that in this case, the Assessing Officer has accepted EMI Method of the assessee as being adopted for the last many years, but the CIT, under section 263 of the Act, reversed the order of the Assessing Officer under section 263 of the I.T. Act, which was a subject matter before the ITAT, Madras Bench and the ITAT Madras Bench has reversed the order of the CIT and restored the order of the Assessing Officer and directed to assess the income of the assessee on EMI Method in accordance with contract between the parties. 45. During the course of argument we were informed that Reference Application of the Revenue against the said order has been rejected by this Tribunal, against which the Department had gone on Writ Peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Special Bench of the Hyderabad Tribunal which is distinguishable on facts is not applicable to the facts of the present case. 49. As pointed out earlier, the income has to be determined in accordance with sections 4 and 5 of the I.T. Act. The learned counsel for the assessee argued that'in accordance with RBI clarification and also Sales-tax authorities, the agreement, in question, is only Hire Purchase Agreement and not a loan agreement is also not disputed before us. The assessee has treated the HP transaction as transaction on SOD Method in its books of account in the light of the requirement of various other statutes having a bearing on the business operation and the Department has been accepting the same EMI Method for assessment purposes in earlier year also. Therefore, the Department should have accepted the same position in relation to the subsequent year on similar transaction. 50. The recent Judgment of the Supreme Court in the case of UCO Bank holds that:- "Reversing the decision of the. High Court, that the appellant was a nationalised bank and therefore was governed by the Banking Regulation Act, 1949. The appellant followed the mercantile system of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as interest subject to interest tax. 3. As to what constitutes a transaction in the nature of hire purchase, the Assessing Officer should consider the issue on merits taking into account inter alia, the following facts and circumstances: (1) The Terms of the agreements: (2) The nature of the arrangement between the supplier of the asset, the hire purchase company and the end-user of the assets. (3) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire purchase, price etc. When a hirer is the real purchaser of the assets but does not pay the full purchase price and the hire purchase company pays the price or substantial part thereof on behalf of such hirer and a hire purchase agreement is entered into merely as an agreement then such agreement is a security for repayment of the loan and is essentially a loan transaction. 4. ** 5. Accordingly, instead of routinely treating all Hire-Purchase transactions as mere financing transactions, the Assessing Officers may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of any instalment or instalments under a hire purchase agreement can be said to be by way of interest in respect of any moneys borrowed or debt incurred. In this context, it has to be borne in mind that a hire purchase agreement is a composite transaction made up of two elements bailment and sale. In such an agreement, the hirer may not be bound to purchase the thing hired. It is a contract whereby the owner delivers goods to another person upon terms on which the hirer is to hire them at a fixed periodical rental. The hirer has also the option purchasing the goods by paying the total amount of the agreed hire at any time or of returning before the total amount is paid. What is involved in the present reference is the real nature of the fixed periodical rental payable under a hire purchase agreement. 5. It may be pointed out that part of the amount of the hire purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical instalments cannot be characterised as interest payable in any manner within the meaning of section 2(28A) of the Income-tax Act. It is in the nature of a fixed periodical rental under which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench of the ITAT, reported in Nagarjuna Investment Trust Ltd.'s case is distinguishable on facts and is not applicable to these appeals. Similarly, the case Amarpali Mercantile (P.) Ltd. as relied upon by the lower authorities is also not applicable to the case under consideration. In our view, all these orders on facts, are over-ruled by recent Judgment of the Hon'ble Supreme Court; (5) The earlier order of the ITAT Chennai Bench dated 21-5-1996 in ITA Nos. 1226 & 1227/Mds./1994, in the case of the same asses see, on the same facts and circumstances has to be followed alongwith the judgment of the Hon'ble Supreme Court in the case of UCO Bank. 55. In view of the above discussions, we are of the considered view that the Finance Charges accrued on the Hire Purchase agreement, recognised under E.M.I. Method and shown in the statement filed with the return of income is the real income that accrued to the assessee during the relevant previous year and as such, we are unable to up-hold the views of the authorities below. Accordingly, we set aside both the orders of the Commissioner (Appeals) on this issue and accordingly, the assessee's claim for exclusion of income amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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