Hire purchase income recognition: consistently accepted EMI method prevailed over Sum of Digits taxation basis.

In a genuine hire purchase arrangement, hire purchase finance charges are to be assessed for tax on the Equated Monthly Instalment method where that method has been consistently accepted for tax purposes. The court held that the revenue's acceptance of the contractual character of the transaction and the absence of any material showing suppression of income or a failure to reflect true income justified continuation of the EMI basis. The fact that the books of account reflected a different method did not, by itself, require a different tax treatment when the agreement and past practice supported EMI recognition. The Sum of Digits basis was therefore rejected and the assessee's method upheld.

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Issues: Whether hire purchase finance charges were assessable to tax on the Sum of Digits basis as against the Equated Monthly Instalment basis regularly followed for tax purposes, and whether the assessee was bound to adopt the same method for books of account and return of income.

Analysis: The transaction was accepted as a hire purchase arrangement and not a loan transaction. The Court followed its earlier decision on identical facts and held that, where the revenue had accepted the character of the transaction and the assessee had consistently followed the EMI method for tax computation, the income flowing from the agreement had to be assessed in accordance with that method. The Court found no material to show suppression of income or any true reflection problem by following EMI for tax purposes, and held that the method adopted in the books did not compel a different tax treatment where the agreement and past treatment supported EMI recognition.

Conclusion: The questions were answered in favour of the assessee. Hire purchase finance charges were to be assessed on the EMI basis, and the Tribunal's view adopting the Sum of Digits basis was reversed.

Final Conclusion: The assessee's method of income recognition for hire purchase finance charges was upheld and the appeal succeeded.

Ratio Decidendi: In a genuine hire purchase transaction, the income for tax purposes must follow the contractual and consistently accepted EMI method unless the revenue shows suppression of real income or a legally sustainable basis to depart from that method.

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