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TMI Blog2012 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... correct. In the event the hire purchase or leasing agreement did not give the apportionment or bifurcation of the EMIs between the principal and interest components, the interest income in relation to such agreements, recognized on the basis of SOD system of accounting by the assessee in its books of account, represents the 'real income' accrued to the assessee. - Decided in favor of revenue. - I.T.T.A. NO.10 OF 2000 - - - Dated:- 7-2-2012 - SHRI MADAN B.LOKUR, SANJAY KUMAR, JJ. JUDGMENT (Per Sri Justice Sanjay Kumar) The issue for consideration in this assessee's appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter, 'the Act') is as to the methodology of computation of the assessee's income from finance charges. The assessee is a public limited company engaged in the business of leasing, hire purchase and finance. For the assessment year 1987-88, it admitted a loss of Rs.7,09,738/-. The Assistant Commissioner of Income Tax, Central Circle-III, Hyderabad, however assessed the income of the assessee at Rs.6,77,460/-. This assessment was based on disallowance of deductions and consequential additions in connection with finance charges, loss on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Rs.12,33,700/- towards finance charges in its books of account. This figure was arrived at by adopting the 'Indexing' or 'Sum of Digits' (SOD) system of accounting. However, while offering income under this head in its return of income, the assessee followed the mercantile system of accounting and reduced the income on this count to Rs.6,71,326/-. The orders of the authorities below reflect that the hire purchase agreements entered into by the assessee with its customers required finance charges to be paid at the rate of 15% per annum over a period of five years. The consolidated Equated Monthly Instalment (EMI) payable by the hirers was detailed in Schedule-II of the agreement and each composite instalment of the EMI contained two elements - part principal and part finance charges. The 'principal component' constituted capital receipt while the amount collected towards 'finance charges' was obviously a revenue receipt. In its books of account, the assessee used the SOD system of accounting and reflected more receipts on the revenue account and less on the capital account from out of the EMIs received during the assessment year. While submitting its return of income, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore of the opinion that whatever portion of the EMI was treated as interest/finance charges by the assessee should be held to have accrued to the assessee during the assessment year and chargeable to tax. The AO also pointed out the anomaly which would arise if deductions towards finance charges in the hands of the hirers were permitted on the basis of the indexing system of accounting while allowing the hiring company/financer to adopt the mercantile system of accounting in respect thereof. The AO opined that the assessee could not maintain one system of accounting for the purpose of carrying on its business and another system for tax purposes. As the assessee had itself maintained its books of accounts on the indexing system of accounting, the AO held that it was bound to adopt the same for the purpose of the assessment proceedings also. In appeal, the Commissioner of Income Tax (Appeals) observed that no hypothetical or theoretical income based on mere book entries could be brought to tax. Dealing with the differential income arising out of the finance charges in the present case, the Commissioner opined that the same was neither actually received by the assessee nor did it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be disclosed and for determining the real income, the entries in a balance sheet required to be maintained in the statutory form, may not be decisive or conclusive. In such a case, the Supreme Court held that it was open to the Income-tax Officer as well as the assessee to point out the true and proper income while submitting the return. Pertinent to note, the Supreme Court pointed out that the method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the departmental authorities on the view that the assessee should have adopted a different method of keeping accounts or of valuation. The Court also pointed out that whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. As pointed out by the Supreme Court in COMMISSIONER OF INCOME-TAX V/s. BRITISH PAINTS INDIA LIMITED (1991) 188 ITR 44, even if the assessee adopted a regular system of accounting, the Assessing Officer is under a duty under Section 145 of the Act to consider whether the correct profits and gains could be deduced from the accounts so maintained. If not, he is obliged to adopt such method of computation as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly and reasonably. Despite this Court granting time, both sides were unable to produce a copy of the hire purchase agreement entered into by the assessee with its customers. As the full particulars are not before this Court, the observations in this regard of the authorities below assume importance. While considering the issue as to what portion of the monthly instalment accrued as interest, the AO did not detail the bifurcation, if any, of the consolidated monthly equated instalment mentioned in Schedule II of the agreement. In appeal, the Commissioner also referred to this aspect but did not elucidate as to whether any apportionment of the instalment amount is detailed in the said Schedule towards the principal and interest components. However, the AO while dealing with this aspect observed that the most appropriate method of accounting in the case of hire purchase financing, which would give the correct picture of the components of principal and interest in the instalments paid by the hirer would be the index system of accounting. He further observed that this was followed by the assessee and all other hire purchase financiers. The inference that can be logically drawn from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to be applied towards the satisfaction of the interest and thereafter to the principal. The Tribunal found that the indexing method/SOD method takes into account the reducing principal amount in each EMI and give a realistic, constant and uniform rate of interest which is the real rate of interest implicit in the hire purchase agreement. The Tribunal therefore concluded that the finance charges income/interest income in relation to hire-purchase agreements recognized on the basis of SOD method by the assessee in its books of account represented the real income accrued to the assessee in the relevant previous year and which, having been apportioned from the amount of equated monthly instalment, also represented the income received/receivable in the relevant accounting year as per the terms of the respective hire-purchase agreements. Sri Krishna Kaundinya , learned counsel, sought to draw a distinction between the above decision and the case on hand by placing reliance on ASHOK LEYLAND FINANCE LIMITED V/s. ASSISTANT COMMISSIONER OF INCOME TAX (1979) 59 TTJ (Mad) 736. Therein, a Division Bench of the Madras High Court was dealing with a case which was somewhat similar on facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements. Further, as the assessee had itself employed this system of accounting in its books of account, applying the law laid down in SANJEEV WOOLEN MILLS (2005) 279 ITR 434 (SC), the Department was bound to accept the same for the assessment proceedings. Viewed thus, we are of the opinion that the law laid down by the Special Bench of the Income Tax Appellate Tribunal at Hyderabad in NAGARJUNA INVESTMENT TRUST LIMITED 1998(62) TTJ (HYD) (SB) 33 = 65 ITD 17 (SB) was correct. In the event the hire purchase or leasing agreement did not give the apportionment or bifurcation of the EMIs between the principal and interest components, the interest income in relation to such agreements, recognized on the basis of SOD system of accounting by the assessee in its books of account, represents the 'real income' accrued to the assessee. Reliance placed by the Tribunal on this judgment while allowing the Revenue's appeal in the present case was therefore justified. The substantial question of law is accordingly answered upholding the Revenue's computation of the assessee's income from finance charges and in favour of the Revenue and against the assessee. In consequence, the ITTA is dismissed, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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