AI Drafter 
TaxTMI 
TaxTMI 
1996 (1) TMI 444
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....assessments were completed under s. 143(3) r/w s. 115J but accepting the mode of computation of income as done by the assessee. It is pertinent to point out that the book profits in terms of s. 115J was much larger than the profit computed under the provisions of IT Act on the basis of EMI "method" and after discussions with the assessee's representative, the amount of book profit which was larger than the amount computed under EMI "method" was adopted in the assessment for both the years. The learned CIT was of the view that when the finance charges received by the assessee were accounted for by it in its books of account on the reducing balance basis, the assessments should have proceeded only on that basis and not on the basis of equated monthly instalments (EMI) as has been done in the assessment. According to him, the computation of income for purposes of income-tax was at variance with the method regularly followed by the assessee in its books of account, thus leading to computation of an incorrect amount of income under the head 'Profits and gains of business'. According to him, this has caused serious prejudice to the interests of the Revenue. In this view of th....
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....ly over the period for which the instalments are to run. Therefore, for the purpose of income-tax in its anxiety to disclose the correct amount of income, which accrued to it on mercantile basis, the assessee had offered the income on EMI basis. The assessments were not simply completed under s. 143(1) but were completed only under s. 143(3) r/w the provisions of s. 115J after scrutiny and discussion. Therefore, there was no error in the completed assessments which was prejudicial to the interests of the Revenue. The learned CIT has simply invoked s. 263 on a pretence that there was variation between the mode of accounting of the receipts in the books of account (SOD) and the mode by which it admitted the income (EMI basis) for assessment purposes. The learned CIT has not come out with the reason as to which one of the methods is the correct method to be followed in the background of the agreement between the parties. But still merely because there was variation he had concluded that the assessment order suffered from error. In this connection he referred to the agreements entered into between the assessee and the hirers in support of his contention that EMI method (on the basis of....
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.... had not computed the income in accordance with the provisions of s. 145(1) of the IT Act and, therefore, his orders suffered from an error which was prejudicial to the interests of the Revenue. If regard is had to these facts and consequences flowing from adopting different standards, one for purposes of accounting in the books and another for purposes of income-tax, one cannot find fault with the order of the CIT under s. 263. 4. Shri Vinay Mohan relied on the decision of the Hyderabad Bench of the Tribunal in ITA No. 2777/Hyd/1988 in ITA No. 2967/Hyd/1988 in relating to the asst. yr. 1985-86 in the case of Nagarjuna Finance Ltd. In that case the assessee adopted the sum of the digits method (for short, SOD method) for recognising its income in its accounts as it was an accepted practice in accounting. However, for the purpose of income-tax the assessee contended that it had adopted mercantile system of accounting, namely, recognition of income on the basis of instalments, whether received or not. The difference between the income computed as per the SOD method and the income computed as per accrual method as termed as differential income and the assessee sought to deduct the ....
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....hat action under s. 263 would be barred by limitation by 31st March, 1994. There is force in the contention of Shri Ramamani, the learned counsel for the assessee, that the CIT has reached a conclusion in his own view of the matter without affording an effective opportunity to the assessee to state its case in all its dimensions. On this score alone the order of the CIT for asst. yr. 1989-90 is liable to be set aside. 6. For the asst. yr. 1990-91, the CIT set aside the assessment order stating : "For the asst. yr. 1989-90 in the case of the assessee, I have set aside the assessment with a direction to the AO to complete the assessment afresh on an issue similar to the issue mentioned at (i) in para. 2 above after affording an opportunity to the assessee to furnish its submissions. The assessment for the asst. yr. 1990-91 is also set aside for the sake of uniformity in treatment and also because I am satisfied that interest of Revenue were seriously prejudiced since these issues were not duly considered in the assessment." It may be incidentally mentioned that in respect of asst. yr. 1990-91, the time-limit for passing an order under s. 263 did not expire by 31st March, 199....
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....w should the finance charges be apportioned ? The finance charge is '126. From actuarial tables, the rate of interest is 1-3/4 per cent per month. . Outstanding hire purchase Simple interest for 1 month added Instalment paid deducted Balance c/f 30th November GBP GBP GBP GBP . 1,274 . . . Less : Depositss 200 . . 31st December 1,074x1-3/4% 19 100 993 Interest for December . . . . quarter . 19 . . 31st January 993x1-3/4% 17 100 910 28th February 910x1-3/4% 16 100 826 31st March 826x1-3/4% 15 100 741 Interest for March . . . . quarter . 48 . . 30th April 741x1-3/4% 13 100 654 31st May 654x1-3/4% 11 100 565 30th June 565x1-3/4% 10 100 475 Interest for June . . . . quarter . 34 . . 31st July 475x1-3/4% 8 100 383 31st August 383x1-3/4% 7 100 290 30th September 290x1-3/4% 5 100 195 Interest for September . . . . quarter . 20 . . 31st October 19....
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....Illustration (5): Twelve monthly instalment of '100 are to be paid; the net cash purchase price is '1,074. "From actuarial tables, the present value of 12 instalments of '1 is 10.74 at 1-3/4%. At this rate of interest, the present value of twelve instalments of '100 is '1,074. The monthly rate of interest is 1-3/4 per cent; the annual rate is therefore, 21 per cent." There is a third method. It is known as straightline method or EMI method. Under this method interest is deemed to accrue evenly over the life of the hire-purchase agreement. The interest to be apportioned to an accounting period is computed from the following formula : .Number of instalments payable during the period . . ---------------------------------- x Finance charge = Interest for period . Total number of instalments payable over the whole agreement. . Illustration (10): Facts as in Illustration (7) : .Quarter Number of instalments payable during quarter Fraction Interest apportioned to quarter . . . GBP December 1 1/12 11 March 3 3/12 31 June 3 3/12 32 September 3 3....
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....before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed'. The book profits are taken for the purpose of assessment of tax, though the credit amount is not realised or the debit amount is not actually disbursed. If an income accrues within a particular year, it is liable to be assessed in the succeeding year. When does the right to receive an amount under a contract accrue or arise to the assessee, i.e., come into existence ? That depends upon the terms of a particular contract. No other relevant provision of the Act has been brought to our notice ' for there is none which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with the contract, though not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year." In other words, income has to be computed even under the accrual system of accounting only on the basis....
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....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. 51,274 as initial payment by way of hire and a sum of Rs. 500 as service charges both of which shall become the absolute property of the owner and punctually pay to the owner at their address for the time being the sums mentioned in the Second Schedule hereto on the date therein mentioned, whether previously demanded or not, by way of rent for the hire of the chassis. Clause III(2) : The hirer is aware that the owner, Ashok Leyland Finance Ltd. (ALF), formerly Ashok Leasing and Hire Purchase Ltd. (ALHP), has availed of 'Term Loan from Industrial Development Bank of India (IDBI) under loan agreement dt. 20th June, 1988 entered into between ALF and IDBI in terms of which IDBI has a right to collect monthly instalments directly from the hirer in certain events as provided for in the said loan agreement. In the event of IDBI exercising such right, I/we the hirer(s) agree and undertake to pay the monthly instalments directly to IDBI instead of to the owner (ALF), in the manner indicated in Second Schedule. Accordingly the owner (ALF) hereby aut....
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.... 9,950 Finance charges 13.03% . . 5 29-05-90 9.950 3 Yrs. : Rs. 98,175 6 29-06-90 9.950 Service charges : Rs. 500 7 29-07-90 9,950 Total : Rs. 3,48,675 8 29-08-90 9,950 Less: . . 9 29-09-90 9.950 Service charges Recd. Rs. 500 10 29-10-90 9,950 Balance Rs. 3,48,175 11 29-11-90 9,950 Add: . . 12 29-12-90 9,950 Insurance premium . . 13 29-01-91 9,950 For Rs. . . 14 29-02-91 9,950 2nd Year Rs. . 15 29-03-91 9,950 3rd Year Rs. . 16 29-04-91 9,950 4th Year . . 17 29-05-91 9,950 . . . 18 29-06-91 9,950 Grand total : Rs. 3,48,175 19 29-07-91 9,950 Repayable in . . 20 29-08-91 9,950 35 monthly instalments . . 21 29-09-91 9,950 . . . 22 29-10-91 9,950 . . . 23 29-11-91 9,950 . . . 24 29-12-91 9,950 . . . 25 29-01-92 9,950 . . . 26 29-02-92 9,950 . . . 27 29-03-92 9,950 . . .....
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....t only different techniques of accounting and to describe them as "methods of accounting" would be a misnomer in the context of the meaning assigned by the Courts to the expression "method of accounting" found in s. 145. The Hyderabad Bench did not advert to the terms and conditions of the agreement between the parties. With very great respects, we are unable to be persuaded by the decision of the Hyderabad Bench of the Tribunal that the accounting techniques or practices such as the "reducing balance method", or "SOD method" or the "EMI method" are synonymous with the expression "method of Accounting" as understood in income-tax law. It is settled law that accounting entries are not determinative of the legal character of the 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. In (1964) 53 ITR 114(SC) (supra) it was observed : "It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a particular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction....
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....Principal amount of loan 1,00,000.00 (ii) Interest at 15 per cent for 2 years 30,000.00 (iii) Total amount 1,30,000.00 (iv) To be recovered in 24 monthly instalments. . (v) Principal portion of the instalment . . item (1) divided by item (4) 4,166.67 (vi) Interest portion of the instalment . . item (2) divided by item (4) 1,250.00 (vii) Monthly instalment of both principal and interest . . item (3) divided by item (4) 5,416.67 . Item (7) is equal to item (5) plus (6) above . 13. A more careful reading of the relevant passages mentioned in para 9 from the text-book cited supra would show that different accounting treatments were illustrated but all such illustrations were without reference to the terms and conditions of the agreement. Sec. 145 is as follows : "145(1) income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case where the accounts are correct and complete to the satisfacti....