TaxTMI 
TaxTMI 
2001 (7) TMI 295
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....re are two more grounds 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 agree....
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....e as under: ----------------------------------------------------------------------------- Asst. yr. Finance charges Finance charges Difference in as per SOD computed on EMI Finance method method charges sought to be excluded ----------------------------------------------------------------------------- 1991-92 &n....
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....tile system of accounting it is the accrued income and accrued income only that should be charged to tax and not any hypothetical income in whatever manner determined. (h) The duty of the Assessing Officer to arrive at true income should not be confined to cases favourable to the Revenue only. 11. The Assessing Officer, after considering these objections raised on behalf of the assessee, concluded this issue against the assessee as is observed from paras 6 to 9 of the Assessment Order for the assessment year 1991-92 "The assessee is free to adopt any method of accounting. Income has to be computed on the basis of method of accounting maintained by the assessee. Section 145 has no application to the case. The correct income for the purpose of Income-tax can be detected from the books of the assessee. It is the duty of the Assessing Officer to examine whether the income can be correctly derived from the accounts maintained by any method regularly employed by the assessee. In CIT v. Sarangpur Cotton Manufacturing Co. Ltd. (6 ITR 36), it has been held that for the purpose of section 145, method of accounting regularly employed by the assessee relates to the method of accountin....
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.... in the present case. It is the duty of the Assessing Officer to consider whether the books of account maintained by the assessee show the true state of accounts and whether correct income can be deduced therefrom. Once the correct income can be deduced from the books of the assessee, the Assessing Officer is bound to go by the book results. He has no scope for taking any other view. Once the income has accrued, inasmuch as such income can be enforced as a debt the payment by the hirer by any other method including by EMI will not make the accrual a non accrual. The payment by the hirer by EMI is only a mode of recovery." 13. Thus, the Assessing Officer relied upon the case of Amarpali Mercantile (P.) Ltd and held that the finance charges as received by the assessee for hire purchase business is assessed as per books of account maintained by the assessee, i.e., SOD Method. 14. The assessee being aggrieved with the order of the Assessing Officer, filed appeal before the CIT (Appeals) for both the years and the same on this issue was dismissed vide impugned order dated 20-9-1994 for the assessment year 1991-92 and dated 9-8-1985 for assessment year 1992-93. Thus, the CIT (Ap....
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....s divided equally by the number of instalments specified in the contract and hence the method employed for arriving at the monthly instalment is the equated monthly instalment (EMI) method. (8) The CIT (Appeals) ought to have appreciated that in our hire purchase contract, the hire charges (finance charges) are always computed at a fixed flat percentage p.a, which clearly shows that legally the contract contemplates EMI not only as a mode of recovery but also as the method of recognition of income. (9) The CIT (Appeals) ought to have appreciated that the IT Department has always adopted the EMI Method instead of the method adopted by the appellant for domestic purposes and hence cannot take a different stand subsequently. 16. The main grounds taken, from the Appeal for the assessment year 1992-93 are: (1) The CIT (Appeals) erred in holding that the Circular No. 127(12)/IT/12 dated 13-5-1943 issued by the, CBDT has limited application and that the same does not apply to the HP vendor (assessee). (2) The CIT(A) ought to have appreciated that there cannot be any discrimination in applying the CBDT Circular from one kind of assessee to the other. (3) The CIT(A) ought ....
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.... argued that earlier the same EMI Method was adopted on hire purchase agreement and the assessee was regularly claiming the same in earlier years also which was accepted by the Department. He further argued that the authorities below should have gone into the character of the receipt where the amount, in question, represents income. The learned counsel for the assessee further argued that the assessee followed the accounting method based on SOD Method because of compulsion of the Institute of Chartered Accountants. He also argued that for Income-tax purposes, actual and real income was shown in the returns filed with the Department and the record furnished alongwith income of return and the Department did not dispute it which was regularly employed on the basis of terms contained in hire purchase agreement. 19. The learned counsel for the assessee further argued that the contract for hire purchase agreement was there on the same terms upon which the income was calculated for the purpose of Income-tax on EMI Method. He further argued that the element of loan is not involved in the transaction, in question, as finance charges had to be paid on flat rates. The learned counsel for t....
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....the same is not applicable as relied upon by the learned Departmental Representative. 23. The learned counsel for the assessee has taken us minutely through this order of the Special Bench of the ITAT, particularly, paras 25, 26, 27, 29 and 32 of the order. The learned counsel for the assessee further argued that in this order of the Special Bench the real issue was not discussed as to what is the real character of the hire purchase agreement. He further argued that Special Bench, ignoring all the CBDT Circulars passed the order and has not discussed any CBDT Circular which are binding upon the Revenue authorities. The other arguments are not repeated as they are already there in the written submissions. 24. The learned Departmental Representative, on the other hand, argued that the case of the Revenue is squarely covered by the decision of the Special Bench of the ITAT. The learned Departmental Representative mainly stressed upon this Special Bench order and argued that the assessee itself has adopted SOD Method and, therefore, the assessee is bound by the SOD Method and hence the authorities below have correctly assessed the income on the basis of SOD Method. The learned D.....
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....year. He argued that it was only the contention of the learned DR. But he stressed upon the fact that in the case of the assessee, all the transactions are only hire purchase transactions and payments are towards purchase price and hire charges for use of the asset. He lastly argued that as submitted earlier that the decision of the Special Bench is not applicable to this case as the facts and legal propositions in both the cases are different. 28. In the written submission filed by him it was also stated that once hire charges are accepted as not interest, then the SOD Method will have to be correct method. The learned D.R., lastly submitted that the decision of the Special Bench of the ITAT is squarely applicable as submitted in the written argument. According to the learned D.R., the facts are identical in each respect and as such, the same has to be followed by this Tribunal also. 29. We have bestowed our careful consideration and we have carefully considered various decisions referred to by the authorised representatives both orally as well as in their written statements and also various CBDT Circulars filed on record, which we will refer to in detail at appropriate stag....
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....of contract for Hire Purchase and Lease Agreements regardless of the method of accounting followed by the assessee for recognition of such income in its books of account." 30. On the basis of these principles, it is appropriate to find out whether the income by way of finance charges under hire purchase agreement entered into by the assessee with its various hirers has accrued under SOD Method as per books or under EMI Method as per agreement as shown by the assessee in its return of income filed with the Tax Authorities. 31. It is the submission of the assessee that invariably, in all hire purchase agreements, hire/finance charges are payable over the entire term of contract which is equally divided by the number of instalments agreed and as such the finance charges are usually expressed as a fixed percentage per annum on flat rate. But the Department has taken a stand that even assuming that these are hire charges, the quantum of income as shown in the books of account should be charged to tax. Accrual of income depends upon the right to receive which is governed by the terms of Hire Purchase agreement entered into between the parties. 32. As regards the duty of the Asse....
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....e parties that all other HP Agreements are almost identical or similar. Therefore, we have taken one of such Agreements, copy of which is filed as Annexure 12 (H.P. Agreement No. T-520 dated 10-12-1991) entered into between the assessee i.e., the owner - M/s Ashok Leyland Finance Ltd. and Mrs. A.M. Kalaivaniammal, w/o Mr. A.M. Munirathnam Mudaliar (called the hirer), for the purpose of scrutiny to see the terms and conditions of Hire Purchase Agreement. The terms and conditions of the said Hire Purchase Agreement are reproduced below:- AGREEMENT "This agreement made this TENTH day of DECEMBER 1991 between Messers Ashok Leyland Finance Limited, a company incorporated under the Companies Act, 1956, and carrying on business at 86, Chamiers Road, Madras-600 018 and having its registered office at No. 86, Chamiers Road, Madras-600 018 (hereinafter called 'the owner' of the first part Mrs. A.M. KALAIVANIAMMAL, w/o Mr. A.M. Munirathnam Mudaliar, Bharathi Bus Services, Sholinghur (hereinafter called 'the Hirer') of the second part and Mr. A.M. Munirathnam Mudaliar, M/s. Bharathi Bus Service, Sholinghur, N.A. Dt. 631 102 (hereinafter called 'the Guarantor') of the Third Part, witnesse....
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....owner hereunder. CLAUSE IV : If the Hirer shall duly perform and observe all the terms and conditions contained in this agreement and the covenants on his part to be performed and observed, and shall in the manner aforesaid pay to the Owner monthly sums by way of hire amounting (together with the said sum of Rs.18,126 so paid on the execution of the agreement as aforesaid) to the sum of Rs.7,67,393 and shall also pay to the Owner all other sums of money which may become payable to them by the Hirer under this Agreement, the hiring shall come to an end and the Chassis shall at the option of the Hirer to be exercised by him in writing, then become his property and the Owner will assign and make over all their right, title and interest in the same to the Hirer but until such payments as aforesaid have been made, the Chassis together with any accession, improvements and additions made thereto the Hirer shall remain the absolute property of the Owner. CLAUSE V: The Guarantor in consideration of the owner's agreeing to let the said Chassis to the Hirer, hereby guarantees the due performance by the Hirer of all the clauses and covenants of this Agreement and agrees to pay on demand ....
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....entering into the hire purchase agreement. The vehicle was purchased at the request of the hirer. Otherwise, the assessee would not have purchased the vehicle, in question. Therefore, it is clear in this case that the assessee has not given any loan or granted money for purchase of vehicle, in question. Therefore, it is clearly established that it is not a loan transaction but is only a hire purchase agreement. 38. Our view is strengthened by contention No. 13 appearing at page 4 of the agreement in which it is mentioned that 'the hirer acknowledges that he holds the vehicle as a mere bailee of the Owner and shall not have any proprietary right, title or interest as purchaser therein until he having exercised in writing his option to purchase as herein before provided by payment of the whole amount due under this Agreement or under any term thereof, the owner makes over to him all their right, title and interest in the vehicle. 39. The learned Departmental Representative mainly argued that the case is covered by the decision of the Special Bench of the Hyderabad Tribunal in Nagarjuna Investment Trust Ltd's case and, therefore, the appeals do not merit consideration. Therefore....
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....ecognising the finance income in relation to H.P. Agreement on the basis of SOD Method in its books of account." 41. Therefore, the Special Bench of the Tribunal has held that it was that HP Agreement which was only a loan transaction. The specific finding of the Special Bench for import transaction under reference was a loan transaction. But the assessee's contention in the present case is that the hire purchase transaction are hire purchase only. The fact of Nagarjuna Investment Trust Ltd's case would, therefore, be that the hirer itself has made arrangement for import of the machinery and thus became the owner of the property which was subsequently subjected to finance on the basis of HP Agreement made available by the company i.e., Nagarjuna Investment Trust. But the facts of these appeals are that that the assessee-company purchased the vehicle and made available to the hirer for use on the strength of HP Agreement and thus become owner till the agreement was concluded or options were exercised by the parties. Therefore, in our view the facts of this case and the case decided by the Special Bench are altogether different. 42. The ITAT, Madras Bench in ITA Nos. 1226 & 122....
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....ibunal are maintained and are not reversed by any higher legal forum. 46. We may also add here that ITAT Madras Bench had an occasion to deal with the case of Nagarjuna Finance (P.) Ltd. [IT Appeal Nos. 2777 and 2969 (Hyd.) of 1988] for the Asst. year 1985-86 and after carefully considering the same has held that the Hyderabad Bench of the Tribunal has not gone into the details of the terms of agreement. It appears that the earlier order dated 25-1-1996 in the case of the assessee of the Madras Bench of the Tribunal was not brought to the notice of the Special Bench, while deciding the matter reported in Nagarjuna Investment Trust Ltd's case. Therefore, the Hon'ble Special Bench at Hyderabad had no occasion to refer to or compare the facts of the case of the assessee with that of the one decided by it. 47. We may add here that the Income-tax authorities have failed to note the difference between the Hire Purchase transaction and the loan transaction. A loan transaction involves lending of money and the consideration in a loan transaction is payment of interest by the borrower on the due dates as per agreement, whereas in the Hire Purchase Agreement, the consideration is payme....
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....purposes. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. From the form of the prescribed balance sheet under the Banking Regulation Act it was evident that scheduled nationalised banks were directed to put the value of shares and securities at cost and if the market value was lower, it was to be shown separately in brackets. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting income-tax return on the real taxable income in accordance with a method of accounting adopted by the assessee consistently and regularly. That could not be discarded by the Departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there was no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax what is to be taxed is the real income which is to be deducted on the basis of the accounti....
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.... a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. 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, therefore, be characterised as interest payable in any manner within the meaning of section 2(28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter it is clarified that the provisions of section 194A of the Income-tax Act are not attracted in such transactions. III. O.P. No. 275/9/80-IT(B) dt. 25-1-1981 1. The question of consideration is whether a part of the hire purchase instalment paid by a hirer to the owner under a hire purchase contract can be deemed to constitute payment of interest thereby attracting the provisions of section 194A of the Income tax Act. 2. Section 194A provides that any person, not being an individual or a Hindu Undivided Family who is responsible for paying to a resident any income by way of....
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.... or payment. But such deposit or payment is not in respect of any money borrowed or debt incurred within the meaning of section 2(28A) of the Income-tax Act. 7. In view of the above, it would appear that the provisions of section 194A will not be attracted in the case of payment of periodical instalments under a hire purchase agreement. 52. We observe here that the Revenue has not treated the income money in each Hire Purchase Agreement as interest for the purpose of section 194A of the IT Act. It is a settled law that all the Circulars of the CBDT, are binding upon the Income-tax Authorities. As such, on the basis of these circulars, the issue, in question, has to be decided in favour of the assessee and against the revenue. 53. We may also mention here that Chennai 'A' Bench of the Tribunal in [IT Appeal No. 27 (Mad.) of 1997] for the assessment year 1994-95 in the case of Mahavir Finance v. Asstt. CIT vide order dated 3-1-2001, in which the author of this order is one of the Members, has passed the order in favour of the assessee by placing reliance on CBDT Circular bearing No. 760, dated 13-1-1998, which is reproduced above at page 43, and held that the hire purchase c....