Hire purchase finance charges accrue over instalments under the real income principle and are taxable on an EMI basis.

Hire purchase finance charges were required to be recognised for income-tax purposes under the terms of the agreements and the real income principle, because the arrangements were genuine hire purchase contracts and not loan transactions. Section 145 governed only the method of computation and could not expand the charge to tax, while section 5 required accrual to be determined by the contractual structure. CBDT circulars on hire purchase were treated as binding on the tax authorities and supported the view that such hire charges were not interest. The finance charges therefore accrued evenly over the instalment period and were taxable on the equated monthly instalment basis, so the addition was deleted.

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Issues: Whether finance charges arising under the hire purchase agreements were to be recognised for income-tax purposes on the assessee's equated monthly instalment method or on the sum-of-digits method reflected in the books of account.

Analysis: The assessee followed the mercantile system, but the court examined the substance of the hire purchase contracts and held that the transactions were genuine hire purchase arrangements and not loan transactions. Accrual of income had to be determined under the terms of the agreements and in accordance with the principle of real income under section 5 of the Income-tax Act, 1961, while section 145 only governed the mode of computation and could not enlarge the field of taxable income. The circulars of the CBDT on hire purchase transactions were treated as binding on the tax authorities and supported the view that hire charges under such contracts were not interest. The earlier order in the assessee's own case and the distinction from cases treating similar arrangements as financing transactions were also relied upon.

Conclusion: The finance charges accrued evenly over the instalment period under the hire purchase agreements and were taxable on the equated monthly instalment basis. The addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was deleted, and the claim of the assessee was accepted.

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