TaxTMI 
TaxTMI 
TaxTMI 
2019 (3) TMI 1068
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....rn (IRR) method is the appropriate method of income recognition in hire purchase transaction as against the Equated Sum (ESM) method regularly followed by the Appellant?; (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest income on hire purchase transactions accrued only under the Internal Rate Return (IRR) method and form part of the mercantile system of accounting?; (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the appellant is not entitled to maintain its Book on the Internal Rate Return (IRR) method while offering the income on Equated Sum (ESM) method for tax purpose." 2. Both the learned counsels fairly agr....
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....to the conclusion that the Assessing Officer had committed a serious error in ignoring the EMI method, to adopt SOD method. 19. We are in agreement with the reasoning of the Tribunal in this regard that when once the Revenue had accepted the character of the transaction as hire purchase transaction, the income that flows from the transaction has to necessarily follow the treatment that is given under the hire purchase agreement. Secondly, when the Revenue had not disputed the fact that on all the earlier years, the Revenue had treated the income as per the hire purchase agreement on EMI basis, there are no materials available as on record to show that following such method had really resulted in suppression of income, in other words, ther....
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....the Hire Purchase Agreements reflecting the bifurcation of the EMIs into principal and interest components, the common and accepted usage of the Indexing system of accounting in the Hire Purchase trade must be held to be valid as otherwise the rate of interest under the mercantile system in so far as the later EMIs are concerned would be far higher and contrary to the rate prescribed in the assessee's agreements. The difference between the EMI and SOD method was illustratively explained by the Andhra Pradesh High Court in the following manner: "6. To illustrate the difference in accounting of incomes as per the indexing method and the mercantile system, a hypothetical transaction involving hiring of machinery worth Rs. 100/- is taken, on ....
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.... with a case which was somewhat similar on facts to the present one. The appellant company before the Madras High Court was also engaged in the business of hire-purchase and lease financing. Its annual accounts were maintained in so far as finance charges were concerned on the reducing balance method (indexing method). However, the mercantile system of accounting was employed for the return of income as in the present case. Faced with a situation where two systems were adopted for accounting for the income, the Madras High Court held that the right to receive an amount under a contract accrues or arises depending upon the terms of the particular contract. In other words, income has to be computed even under the accrual system of accountin....
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.... held to be valid as otherwise the rate of interest under the mercantile system in so far as the later EMIs are concerned would be far higher and contrary to the rate prescribed in the assessee's agreements. 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 (supra), 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 (supra) was correct. In the event the hire purchase or leasing agreement did not give the apportionment or bifurcation of the EMIs between th....
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....ial charges for the first year would be 10/55, for the second year 9/55, for third year 8/55 and so forth which would clearly give higher financial charges for interest taxable in the first year. This SOD method even though adopted by the Assessee in its Book of Accounts on the basis of Guidelines issued by the Institute of Chartered Accountants of India was not adopted in the Returns of Income filed by it which consistently adopted EMI method for taxability of interest income all these years. Since, for the previous assessment years, this Court has already approved such bifurcation of income and has held that interest income (Finance charges) on consistently adopted basis of E.M.I. would be taxable in the hands of the Assessee, the mere ch....