Income Tax Appellate Tribunal - Madras
Ashok Leyland Finance Ltd. vs Assistant Commissioner Of Income-Tax on 27 July, 2001
Equivalent citations: [2001]80ITD560(CHENNAI)
ORDER
Bhavnesh Saini, Judicial Member
1. These appeals by the assessee are directed against the order of the CIT(Appeals) dated 20-9-1994 for the assessment year 1991-92 and dated 9-8-1995 for the assessment year 1992-93.
2. We have heard these two appeals alongwith I.T.A. No. 779 (Mds.)/1993 in respect of the same assessee and vide our separate order, we have disposed of this appeal independently. Since the major two grounds are common in these appeals and relate to the same parties, these appeals were heard together and are being disposed of by this common consolidated order for the sake of convenience.
3. The two common grounds in both these appeals are with regard to lease equalisation charges and finance charges on Hire Purchase agreement for both the assessment years 1991-92 and 1992-93. There is no other ground in the appeal for the assessment year 1991-92. However, there 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 agreement. The learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below and argued that there is no irregularity or illegality in the orders of the CIT(Appeals). It appears that the learned counsel for the assessee practically did not advance any argument on this issue and has argued only on the next common issue, ie., finance charges and during the course of argument itself, he has submitted that the assessee would not be pressing this ground.
6. In view of the above statement of the parties, there is no need for us to go into the detail. However, we have considered para 2.2 of the CIT(Appeals) for the assessment year 1991-92 and para 3.6 for the assessment year 1992-93 in which the CIT(Appeals) has held that the Assessing Officer was justified in concluding that it was in the nature of contingent liability. This ground was considered in detail by the authorities below. Since it is not pressed before us, we are inclined to dismiss this ground of appeal as not pressed without giving any of our findings on this issue.
Finance Charges (Ground No. 2):
7. The facts as taken from the orders of the authorities below on record are that the assessee is a Public Limited Company, engaged in the business of Hire Purchase and Leasing and adopted Mercantile system of accounting. It was also taken out from the records that the assessee has been adopting sum of digits (hereinafter mentioned as 'SOD') method/technique of income, recognition of receipts by way of finance charges in respect of Hire Purchase agreements. However, for the purpose of Income-tax, the assessee was adopting Equated Monthly Instalments Method (hereinafter called as EMI Method) for income recognition in respect of finance charges under Hire Purchase agreements.
8. The assessee was filing the returns of income in these years as well as in earlier years on the same basis. It was claimed by the assessee before the Income-tax authorities that what is chargeable to tax is only that income which has accrued and determining whether the income has accrued or not, the regard shall be had to the Hire Purchase Agreement entered into between the assessee and the hirer and not the SOD method adopted by the assessee in its books of account. Details of claim for exclusion/deduction of difference in finance charges made by the assessee in both the years are as under:--
Asst. yr. Finance charges Finance charges Difference in
as per SOD computed on EMI Finance
method Method charges sought
to be excluded
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1991-92 Rs. 17,15,47,000 Rs. 13,45,48,230 Rs. 3,69,98,770 1992-93 Rs. 27,69,55,197 Rs. 22,83,33,229 Rs. 4,86,21,968
9. The Assessing Officer, after considering all the facts and circumstances of the case has held against the assessee while placing reliance on the order of the Delhi Bench of the ITAT, in the case of Amarpali Mercantile (P.) Ltd. v. Asstt. CIT [1993] 45 ITD 386 and maintained that the assessee is prohibited from adopting regularly one method of accounting for its own purpose and another method for income-tax purpose and was of the view that the method adopted by the assessee on SOD Method will be subjected to Income-tax Act.
10. The assessee, before the Assessing Officer filed its objections, justifying adoption of EMI Method of income recognition as only accrual method as per Section 5 of the Income-tax Act and raised the following grounds, which are taken from para 3 of the Assessment Order for the assessment year 1991-92:--
(a) ALF neither followed cash system of accounting nor was there a conversion to accrual system consequent to Company Law amendment in 1988.
(b) Even prior to the Company Law amendment in 1988, ALF has been following accrual method of accounting only.
(c) There are no different sets of accounts maintained by ALF, one under cash system and another under mercantile system.
(d) Section 145 of the Income-tax Act contemplates ascertainment of true income and the Assessing Officer can disregard the method of accounting followed by the assessee if it does not result in ascertainment of true income. Determination of income under EMI method would definitely result in the ascertainment of true or real income and the said EMI Method is a popular method employed by leading Corporations like HDFC, LIC and several other assessees.
(e) Methods of income recognition need not be the same for both tax purposes and book purposes.
(f) It is the duty of the Assessing Officer to determine true income under the Income-tax Act in all cases including a case where the book profits are over-stated owing to employment of a different method.
(g) In the case of an assessee following mercantile 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 accounting regularly employed by the assessee for its own purpose and does not relate to a method of making up statutory return for assessment. The same principle was followed by the Allahabad High Court in the case of CIT v. Singari Bai (13 ITR 224). Therefore, with the help of the legal propositions, it could be safely said that the method of accounting regularly employed by the assessee is the one by which the company has worked out its profits and loss and it does not include the adjustment made in respect of finance charges in the income adjustment statement enclosed to the return of income.
It is the duty of the Assessing Officer, therefore, to determine as to whether the profits and gain envisaged vide Sections 28 to 44 of the Income-tax Act can be correctly detected from the profits and gains prepared by the assessee by employing the SOD Method is the real income for the purpose of the Income-tax Act.
12. At page 8 of the Assessment Order, the Assessing Officer has further observed that:--
Reference may be made to page 399 of 'Advanced Accounting Practice' edited by Emila Woolf, Suresh Tanna and Karam Singh wherein the recommendations of the Institute of C.As in England and Wales on hire purchase transactions is mentioned inter alia - i.e., the basis for apportioning interest should be appropriate to the business and applied consistently. The most suitable method is either the actuarial or the sum of the digits method. The straight-line method may be suitable where the business is not subject to sharp fluctuations. The basis used should be disclosed in a note to the accounts.
The income relating to Finance Charges in this case has been deducted by employing the SOD Method. This is also evident from para 3.6 of the 'Notes to Accounts' wherein it is stated under the head 'income recognition' that finance charges on hire purchase business are computed under the reducing balance method, i.e., SOD method. For the reasons enumerated in the preceding paragraphs, finance charges as worked out in the books of the assessee, by SOD/reducing balance method is income occurred within the meaning of Section 5 of the I.T. Act, 1961. Such income relating to an accounting year is either received or if not received, due to default of the hirer, can be enforced as a debt. This being the only test for accrual of income under Section 5 of the Act, the same is satisfied 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. {supra) 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 (Appeals) confirmed the addition of differential finance charges in both the years as mentioned above.
15. The assessee being aggrieved against the orders of the CIT (Appeals), filed these appeals before this Tribunal, mainly on the following grounds which we firstly take from Appeal for the assessment year 1991-92:--
(1) The CIT(A) ought to have followed the decision of Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 wherein it was held that the finance charges accrue to an assessee only when the right to receive is acquired by the assessee.
(2) The CIT(A) ought to have appreciated that in the case of a hire purchase contract incorporating EMI method of payment, the right to receive the income embedded in each instalment arises only on the due date and the quantum of income earned on each such instalment is the amount arrived at by dividing the total income earned on the contract by the total number of instalments.
(3) The CIT (Appeals) ought to have followed the Circular No. 127 (12) IT/ 12 dated 13-5-1943 of the CBDT. The CIT (Appeals) is wrong in holding that the said circular cannot be applied to the facts of our case on the ground that the additions to income was made for different reasons with reference to the method of accounting regularly followed by the appellant.
(4) The CIT(A) is wrong in his view of the CBDT Circular due to which the assessee has no choice but to adopt EMI basis of accounting for tax purposes even though it is not the same method followed in the books of account.
(5) The CIT (Appeals) ought to have appreciated that in view of the Circular the decisions in CITv. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6ITR 36 (PC) and CIT v. Smt. Singari Bai [1945] 13 ITR 224 (All.) have no application in our case.
(6) The CIT(A) ought to have appreciated that the decision of British Paints supports the appellant's case namely that the duty of the assessing authority is to arrive at the true income notwithstanding the regular method adopted if it does not reflect the true profits and hence in the instant case it is the duty of the officer to have adopted the EMI method.
(7) The CIT(A) ought to have appreciated that the hire purchase agreement which forms the basis of the contract shows that the principal and finance charges for the entire period of the contract (as shown in the second schedule to the agreement) is 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 to have followed the decision of the Gujarat High Court in Rajan Ramkrishna v. CWT [1981] 127 ITR I and the decision of the Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 5972 wherein it was held that benevolent circular is binding on ITOs and WTOs even if the circulars deviate from the legal position.
(4) The CIT(A) ought to have appreciated that the CBDT in exereise of its powers conferred on it by Section 119 of the Act has clearly distinguished the tax treatment for HP Contracts ignoring the underlying legal position. Hence, he ought to have appreciated that accounting of HP contracts should be done only as per the principles laid down by the circular.
(5) The CIT(A) erred in interpretation of the appellant contentions that the assessee has sought to reject his own books of account. He ought to have appreciated that because of the CBDT Circular the assessee followed the Equated Monthly Instalment method for tax purposes.
(6) The CIT (Appeals) ought to have appreciated that if the interpretation that the circular is not applicable to the Hire Purchase company but only to the person purchasing the assets under the contract, then based on the legal position created by the Hire Purchase Contract, the appellant is the legal owner of the asset until the last instalment is paid and as such fulfils all the conditions laid down under Section 32 of the Income-tax Act and would be entitled to claim depreciation on the assets under hire purchase.
17. We have heard the learned counsel for the assessee and the learned Departmental Representative and carefully gone through the material on record and also considered the rival submissions of the parties. The learned counsel for the assessee also filed a Paper Book, containing written submissions, copies of various orders of different Benches of the ITAT, and High Courts and Supreme Court and also filed copies of various CBDT Circulars connected with this case. The learned Departmental Representative also filed a Written Submission containing all the details which we have taken on record.
18. The learned counsel for the assessee besides relying upon the grounds of appeal, argued that the assessee has correctly adopted the EMI Method for the purpose of Income-tax and argued that SOD Method was adopted in maintaining the books of account under legal compulsion. The learned counsel for the assessee further 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 the assessee also submitted that there is a difference between hire purchase agreement and loan agreement on the question of passing of the title and as such, hire purchase agreement cannot be treated as loan agreement.
20. The learned counsel for the assessee further relied upon certain Circulars of the CBDT, which he has filed in the Paper Book connected with this case. To show that no interest is chargeable in respect of Section 194A of the Income-tax Act on hire purchase agreements. The learned counsel for the assessee further argued that Section 2(28) of the Income-tax Act is not applicable. He further argued that no interest tax was levied in this case as it was admitted that it was a genuine hire charges agreement. He further argued that hire charges agreement are not taken into account under Sections 370 and 372 of the Companies Act.
21. The learned counsel for the assessee submitted that RBI guidelines also treat hire purchase agreements and loan agreements differently and separately. He further submitted that under sales-tax also, hire purchase is treated as sale and not loan and contended that under hire purchase agreement, no element of loan arises. He has also relied upon certain portions on Hire Purchase Act to show that hire purchase and loan agreements are different terms under law. The learned counsel for the assessee also relied upon the order dated 21-5-1996 in ITA Nos. 1226 & 1227/Mds/94 for the assessment years 1989-90 and 1990-91 in the case of the same assessee, decided by the Madras Bench of the ITAT in favour of the assessee and also relied upon the recent Judgment of the Supreme Court in the case of UCO Bank v. CIT [1999] 240 ITR 3551 and submitted that the case of the assessee is squarely covered by the aforesaid order of the ITAT and the decision of the Hon'ble Supreme Court.
22. The learned counsel for the assessee further argued that in this case of Supreme Court, it was held that because of compulsion if the assessee had adopted two different methods of accounting, then the method adopted by the assessee for showing real income should be accepted by the Revenue authorities. The learned counsel for the assessee further argued that the Order of the Special Bench of the ITAT, Hyderabad dated 21-4-1997 reported in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 is distinguishable on facts and as such, 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 (supra). 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.R., further argued that all the arguments of the learned counsel for the assessee are not applicable to this case and further argued that the hire purchase agreements are in the nature of loan agreement and the authorities below have correctly assessed for which no interference is called for.
25. The learned Departmental Representative further argued that the case reported in K.P. Varghese (supra) as relied upon by the learned counsel for the assessee is not applicable to this case as the Hon'ble Supreme Court was concerned with the value of the stock in that case and the facts are different from the facts of the present case. He further argued that the case of British Paints was correctly applied in this case. The learned DR., further argued that the authorities below, in their orders have considered the entire facts and arguments as also the objections and argued that whether it is a hire purchase agreement or rental, it is income and as such, the assessee has been rightly assessed. He has further argued that all the CBDT Circulars have been considered by the Special Bench of the Tribunal and hence, no interference is called for in this case by this Tribunal.
26. The learned Departmental representative also filed a written submission which we have taken on record and lastly, the learned DR mentioned in the written submission that for judicial discipline and judicial decorum, this Bench should follow the decision of the Special Bench order and decide the issue in accordance with the same.
27. Therefore, during the entire course of argument of the learned counsel for the assessee, he was stressing upon the method of accounting only. He had contended that EMI Method is also one of the accepted methods and argued that the provisions of Section 145 of the Act cannot override the provision of Section 5 and therefore, the income shown in the books in excess of what is offered for tax did not accrue and, therefore, cannot be taxed. It was also argued that the income shown in the books of account need not necessarily be taken as income accrued under Income-tax Act. He had taken us to para 23 of the order of the Special Bench (supra) in which it was clearly stated that the income by way of finance charge is nothing but interest as submitted by learned D.R., of intermediate terms of financing and the interest income under SOD Method is the real accrued income in the previous 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 (supra) 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 stage. Some of the points with regard to legal propositions/ principles have been settled by the Hon'ble Special Bench of the ITAT, in the case cited supra and these are specifically mentioned at para 26(c) of the said order, after carefully going through various Judgments of the Courts. For the sake of convenience, the same are reproduced below:--
26(c) From a reading of the provisions of Section 145 in conjunction with the charging provision contained in Section 4, the scope of total income defined in Section 5 and other relevant provisions in the light of principles of law laid down in the various judgments discussed hereinbefore, the following well-settled principles of law clearly emerge:
(i) That the provisions of Section 145 cannot override Section 5 of the Act. If an income has neither accrued nor received within the meaning of Section 5 of the Act, whatever Section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognising such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year. Section 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or the ambit of taxation. The computation provisions cannot enlarge or restrict the content of taxable income. The range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions;
(ii) The proviso to Section 145(1) does not merely confer a discretionary power upon the Assessing Officer but also imposes a statutory duty on the Assessing Officer to examine in every case whether income, profits and gains chargeable to tax in the relevant year, could properly be deducted from the method of accounting followed by the assessee;
(iii) The term 'accrual' of income used in the Companies Act, as explained in the various Accounting Standards and as understood for the purposes of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per Section 5 of the Act on the basis of a careful scrutiny of the terms 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 Assessing Officer which is to determine the income, we would like to mention here that there is no dispute that the Assessing Officer has not only power under Section 145 to compute the correct income but also is under legal compulsion to do so. The Assessing Officer in the assessment year 1991-92, has given some examples at para 3 of Page 6 as to how the income was to be assessed on SOD Method. But it is only an assumed fact and has no connection whatsoever with the facts of this case. Perhaps, the Assessing Officer was influenced by the Method having recognition of Institute of Chartered Accountants and other Text Books.
33. The Hon'ble Special Bench of the ITAT, in the case cited supra, has settled the legal principle for tax purposes with regard to accrual or receipt of income in the relevant previous year which will have to be determined in accordance with Section 5 of the I.T. Act, on the basis of careful scrutiny of terms of contract of HP Agreement, regardless the method of accounting followed by the assessee for recognition of such income in its books of account. Therefore, it is the duty of the Assessing Officer to assess the income in accordance with law. Hence, the question arises whether in this case, the Assessing Officer has determined the accrual or receipt of income as per the provision of Section 5 of the Act, after careful scrutiny of the terms of the HP Agreement. The Assessing Officer perhaps, by charging to tax income computed under SOD Method, as shown by the assessee in the books of account, a company obliged to follow accrual system of accounting, he presumed that the assessee has accounted for the accrual of income as per the provisions of Section 5 of the Act, not realising that the accrual used in different sense as understood for the purpose of tax law in certain circumstances may be having different meaning, depending upon the purpose of law.
34. We, therefore, feel it appropriate to go into the details of the HP Agreement entered into by the assessee and the hirer in this case for the purpose of determining income, to do justice between the parties. As observed above, there was no dispute that the assessee had followed Mercantile system of accounting which is also confirmed by the CIT(Appeals).
35. The assessee has filed certain sample copies of Hire Purchase agreements in the Paper Book and it is the contention of both the 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 ie., 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, witnesseth that:
WHEREAS the Hirer has, in terms of the proposal form signed by him, requested for finance for the purchase of a new vehicle, and the said proposal form is to be regarded as the basis of this contract:
WHEREAS the Owner has considered the proposal and agreed to finance the said purchase on the following terms and conditions:
NOW IT IS HEREBY AGREED AS FOLLOWS CLAUSE I: The Owner, being the owner of the Chassis with fittings, tools, accessories and additions more particularly described in the First Schedule hereto and hereinafter referred to as "the Chassis" agrees to let and the Hirer agrees to take on hire the Chassis from the date hereof subject to the terms and conditions herein contained which shall be taken and read as part of this agreement.
CLAUSE II: On the execution of this agreement, the Hirer shall pay to the Owner a sum of Re 1 in consideration of the option to purchase given to the hirer by Clause IV hereof and to be exercised 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. 7,626 as initial payment by way of hire and a sum of Rs. 10,500 as service charges both of which shall become the absolute property of the Owner and will punctually pay to the Owner at their address for the time being the sums mentioned in the Second Schedule hereto on the dates 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 Limited (ALF) formerly Ashok Leasing and Hire Purchase Limited (ALHP) has availed of Term Loan from Industrial Development Bank of India (IDBI) under Loan Agreement dated 20-6-1988 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 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 authorises the Hirer to pay the monthly instalments to IDBI on receipt of a notice to the effect from IDBI. The receipt(s) issued by IDBI to the Hirer for such payments shall discharge the Hirer from his/its obligation to the 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 any money due or which may become payable to the Owner under this Agreement (and not paid by the Hirer) either by way of hire, expenses or damages, repairs, replacement or other supplies.
CLAUSE VI: The Guarantor further agrees that any time or indulgence granted to the Hirer by the Owner shall not prejudice the Owner's rights against him or relieve him from his guarantee which will be a continuing guarantee till such time that the Owner may have any claim against the Hirer in respect of this Agreement.
36. Alongwith this Annexure 12, details of repayment are mentioned in the Second Schedule attached with it, according to which, the following figures are mentioned here:
Value of Vehicle, i.e., Value of Chassis and Value of body Rs. 5,32,525 (-) Initial payment (-) Rs. 5,25,000 (+) Finance charges Rs. 2,42,393 Total amount Rs. 7,67,393 The payment period is 36 months and schedule for payment is given from 1/92 to 12/94 at a flat rate of Rs. 21,315 per month, except minor portion in one instalment for total purchase ie., Rs. 21,368.
37. On careful consideration of these terms and conditions of Hire Purchase Agreement, it transpires that the assessee is the owner of the vehicle, in question, with accessories etc., as mentioned in Schedule I, which the assessee having purchased the same directly from the manufacturer of the Chassis on the request made by the hirer in the proposal form containing her willingness to hire the chassis from the assessee which was the basis of 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 (supra) and, therefore, the appeals do not merit consideration. Therefore, we feel it necessary to examine as to whether the aforesaid decision is applicable to the facts and circumstances of these appeals.
40. We have carefully noticed the terms and conditions and other relevant considerations of the Hire Purchase Agreement of the assessee in the case of Smt. A.M. Kalaivaniammal(supra) and the facts of the case decided by the Special Bench of Hyderabad Tribunal in the case of Nagarjuna Investment Trust Ltd. (supra). In para 29 of the order of the Special Bench (supra) it is observed by the Special Bench that the hirer, Sri Kanakadurga Press, in terms of the proposal form signed by the said hirer requested the assessee-company (Nagarjuna Investment Trust Ltd.), for financing all the machinery being imported from England and for that purpose, Hire Purchase Agreement was executed between them. The Special Bench of the Tribunal has come to conclusion that the hirer of the machinery in this case is the hirer who had only requested the assessee (Nagarjuna Investment Trust Ltd.) to provide finance for the import of the machinery, effecting the Hire Purchase Agreement as a security to seize the machinery in the event of any default of repayment of loan by way of Equated Monthly Instalments (EMI) and accordingly constitute the entire transaction as loan transaction. It was so confirmed in para 32 of the order of the Special Bench, which is reproduced hereunder:--
It is an undisputed fact that the assessee-company is entitled to recover an EMI of Rs. 24,375 p.m. in accordance with the said H.P. Agreement. The EMI of Rs. 24,375 undoubtedly consists of interest component as well as principal component. The agreement as aforesaid does not give the apportionment or bifurcation of each equated monthly instalment of Rs. 24,375 between the principal and interest components. The Hirer in the present case has agreed to repay the entire amount of loan alongwith interest by way of EMI of Rs. 24,375 p.m. for 48 months without specifying as to what extent, each monthly instalment is towards interest and principal. Where the debtor/Hirer pays an instalment without specifying or ear marking any amounts towards the principal or interest, the creditor (the respondent-company) is entitled to appropriate the amount of instalment first towards the payment of interest and the balance amount towards the principal. That is what has been precisely done by the respondent-company while recognising 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 (supra) 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 & 1227/Mds./1994 for the asst. years 1989-90 and 1990-91 in the case of the same assessee (M/s. Ashok Leyland Finance Ltd.,), has passed the order for the earlier years vide order dated 21-5-1996, copy of which is placed on record and relied upon by the learned counsel for the assessee.
43. We have considered the aforesaid order, in which the Tribunal, on similar facts and circumstances, has gone through a sample case of Hire Purchase Agreement of the same assessee in detail and held that the finance charges and the number of instalments will be recovered in Equated Monthly Instalments as given in the schedule to the Agreement and hence the income has to be computed in conformity with the agreement. The Assessment Order cannot be called for Question as it was prejudice to the interest of the Revenue. It also held that the accounting entries are not determinative of legal character of 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. It was further held that in the instant case, the Assessing Officer has rightly computed the income under EMI Method which is in accordance with the contract between the parties.
44. We may add here that in this case, the Assessing Officer has accepted EMI Method of the assessee as being adopted for the last many years, but the CIT, under Section 263 of the Act, reversed the order of the Assessing Officer under Section 263 of the I.T. Act, which was a subject matter before the ITAT, Madras Bench and the ITAT Madras Bench has reversed the order of the CIT and restored the order of the Assessing Officer and directed to assess the income of the assessee on EMI Method in accordance with contract between the parties.
45. During the course of argument we were informed that Reference Application of the Revenue against the said order has been rejected by this Tribunal, against which the Department had gone on Writ Petition before the Hon'ble Madras High Court. The Hon'ble Madras High Court has directed the Department to delete certain portions of unnecessary statements and ultimately the Writ Petition was dismissed with severe strictures against the Department. A copy of the Judgment dated 12-12-1998 of the Hon'ble Madras High Court is filed on record. Therefore, even as on date, the findings of the Madras Bench of the Tribunal 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 (supra). 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 payment of hire charges. In loan transaction, the money is really involved but in a Hire Purchase transaction, hiring of asset other than money is involved. In Hire Purchase agreement hirer has the option to buy the goods by paying all the instalments. But in the case of loan it is otherwise. In Hire Purchase Agreement, the title will pass on to the hirer when all instalments are paid but in loan, the title passes on to other party at the time of loan agreement itself. Therefore, the Agreement, in question, before us for consideration, on facts is only a Hire Purchase Agreement.
48. It is, therefore, established beyond doubt from the above discussions, that the earlier order of this Tribunal dated 21-5-1996 in the case of the same assessee is applicable to these appeals and the order of the Hon'ble Special Bench of the Hyderabad Tribunal which is distinguishable on facts is not applicable to the facts of the present case.
49. As pointed out earlier, the income has to be determined in accordance with Sections 4 and 5 of the I.T. Act. The learned counsel for the assessee argued that in accordance with RBI clarification and also Sales-tax authorities, the agreement, in question, is only Hire Purchase Agreement and not a loan agreement is also not disputed before us. The assessee has treated the HP transaction as transaction on SOD Method in its books of account in the light of the requirement of various other statutes having a bearing on the business operation and the Department has been accepting the same EMI Method for assessment purposes in earlier year also. Therefore, the Department should have accepted the same position in relation to the subsequent year on similar transaction.
50. The recent Judgment of the Supreme Court in the case of UCO Bank (supra) holds that:--
Reversing the decision of the High Court, that the appellant was a nationalised bank and therefore was governed by the Banking Regulation Act, 1949. The appellant followed the mercantile system of accounting both the book keeping purpose as well as for tax purposes. The appellant consistently and for over 30 years prior to the assessment year in dispute (1982-83) had been valuing its stock-in-trade (investments) "at cost" in the balance-sheet whereas for the same period of time the appellant had been valuing the very same investment "at cost or market value whichever is lower" for income-tax 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 accounting system regularly maintained by the assessee and that was done by the assessee in the present case.
Thus, the Hon'ble Supreme Court has decided the issue in favour of the assessee.
51. We reproduce below certain CBDT Circulars, giving clarifications with regard to the issue, in question:--
I. F. No. 160/1 /96-ITA-I dt. 13-1-1988 Sub: Interest tax Act, 1974 - Hire Purchase Transactions - Taxability of Hire charges as interest - Instructions Regarding.
1. ** ** **
2. The Board have since considered the issue and are advised that in the case of transactions which are in substance, in the nature of Hire Purchase, the receipt of hire charges would not be in the nature of interest. On the other hand if the transactions are in substance in the nature of financing transactions the hire charges should be treated as interest subject to interest tax.
3. As to what constitutes a transaction in the nature of hire purchase, the Assessing Officer should consider the issue on merits taking into account inter alia, the following facts and circumstances:
(1) The Terms of the agreements:
(2) The nature of the arrangement between the supplier of the asset, the hire purchase company and the end-user of the assets.
(3) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire purchase, price etc. When a hirer is the real purchaser of the assets but does not pay the full purchase price and the hire purchase company pays the price or substantial part; thereof on behalf of such hirer and a hire purchase agreement is entered into merely as an agreement then such agreement is a security for repayment of the loan and is essentially a loan transaction.
1. ** ** **
5. Accordingly, instead of routinely treating all Hire-Purchase transactions as mere financing transactions, the Assessing Officers may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire-purchases.
II. CBDT Instruction No. 1425inF. No. 275/9/80-IT(B) dated 16-11-1981 on the subject of T.D.S. - Section 194A of the Income-tax Act - Hire-Purchase Transactions - Applicability of - Clarification regarding.
1. ** ** **
2. In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them at 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 interest other than income chargeable under the head interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash, or by issue of a cheque or draft or by any other mode, deduct income-tax thereon at the rates in force. The obligation to make deduction under Section 194 would arise in the case of payment of any income by way of interest.
3. The expression 'interest' has been defined in Section 2(28A) to mean interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit claim or other similar right or obligation) and includes any service, fee or other charge in respect of the moneys borrowed or debt incurred in respect of any credit facility which has not been utilised.
4. It has to be considered whether the payment of any instalment or instalments under a hire purchase agreement can be said to be by way of interest in respect of any moneys borrowed or debt incurred. In this context, it has to be borne in mind that a hire purchase agreement is a composite transaction made up of two elements bailment and sale. In such an agreement, the hirer may not be bound to purchase the thing hired. It is a contract whereby the owner delivers goods to another person upon terms on which the hirer is to hire them at a fixed periodical rental. The hirer has also the option purchasing the goods by paying the total amount of the agreed hire at any time or of returning before the total amount is paid. What is involved in the present reference is the real nature of the fixed periodical rental payable under a hire purchase agreement.
5. 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 be characterised as interest payable in any manner within the meaning of Section 2(28A) of the Income-tax Act. It is in the nature of a fixed periodical rental under which the hire purchase takes place.
6. It is true that the definition of the hire purchase price in Section 2(d) of the Hire Purchase Act, 1972, also refers to any sum payable by the hirer under the hire purchase agreement by way of deposit or other initial payment or credit or amounts to be credited to him under such agreement on account of any such deposit 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 cannot be treated as interest on loan under Section 2(7) of the Interest-tax Act. The Income-tax Authorities have relied upon the some portion of the text book which will have no relevance in the present case as the law declared by the Supreme Court is binding and is in favour of the assessee.
54. Keeping in view the above discussions, we are of the considered view that--
(1) The hire purchase transactions of the assessee are only hire purchase transactions and not loan transactions;
(2) The nature of income stated in each EMI is only hire charges and not interest;
(3) The said Hire Charges accrued evenly over the terms or instalmental period as per Hire purchase agreement and EMI method as adopted by the assessee should be followed for the purpose of Income-tax in place of SOD Method as regularly adopted by the assessee;
(4) The order of the Special Bench of the ITAT, reported in Nagarjuna Investment Trust Ltd's case (supra) is distinguishable on facts and is not applicable to these appeals. Similarly, the case Amarpali Mercantile (P.) Ltd. (supra) as relied upon by the lower authorities is also not applicable to the case under consideration. In our view, all these orders on facts, are over-ruled by recent Judgment of the Hon'ble Supreme Court;
(5) The earlier order of the ITAT Chennai Bench dated 21-5-1996 in ITA Nos. 1226 & 1227/Mds./1994, in the case of the same assessee, on the same facts and circumstances has to be followed alongwith the judgment of the Hon'ble Supreme Court in the case of UCO Bank (supra).
55. In view of the above discussions, we are of the considered view that the Finance Charges accrued on the Hire Purchase agreement, recognised under E.M.I. Method and shown in the statement filed with the return of income is the real income that accrued to the assessee during the relevant previous year and as such, we are unable to up-hold the views of the authorities below. Accordingly, we set aside both the orders of the Commissioner (Appeals) on this issue and accordingly, the assessee's claim for exclusion of income amounting to Rs. 3,69,98,770 for the assessment year 1991-92; and Rs. 4,86,21,968 for the assessment year 1992-93 is up-held in favour of the assessee. Therefore, the additions made by the Assessing Officer and confirmed by the Commissioner (Appeals) on this account are deleted. No other ground for the assessment year 1991-92 is left to be dealt with.
56. The appeals on this issue, for both the assessment years are accordingly allowed in favour of the assessee.
57-62. [ These paras are not reproduced here as they involve minor issues.]