Integrated Finance Co. Ltd. vs Joint Commissioner of Income Tax

R. Sudhakar, J.—This tax case (appeal) is filed by the assessee as against the order dated July 14, 2006, made in I.T.A. No. 1927 of 2002 on the file of the Income-tax Appellate Tribunal, Madras "A" Bench for the assessment year 1997-98. The assessment in this case relates to the assessment year 1997-98. In respect of the assessment years 1995-96 and 1996-97, Tax Case (Appeals) Nos. 1534 and 1535 of 2008 have been filed before this court and the same were allowed by this court on an interpretation of sub-section (1) of section 145 of the Income-tax Act, 1961. For the subsequent assessment years, viz., 1999-2000 to 2002-03, 2003-2004 and 2004-05, a batch of tax case appeals have been filed before this court in T.C.(A.) Nos. 237 of 2010 batch and this court following the decision of this court in the case of CIT v. Ashok Leyland Finance Ltd. reported in [2012] 82 CCH 287, allowed the appeals answering the following substantial questions of law in favour of the assessee:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the hire purchase finance charges should be assessable to tax on sum of digits basis as against equated monthly instalments basis regularly followed by the Appellant?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest income accrued only in the sum of digits method and form part of the mercantile system of accounting?

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 sum of digits method and offer the income on equated monthly instalment basis?"

In the present case, the questions that were framed by this court are as follows:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the hire purchase finance charges should be assessable to tax on sum of digits basis as against equated monthly instalments basis regularly followed by the appellant?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest income accrued only in the sum of digits method and form part of the mercantile system of accounting?

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 books on the sum of digits method and offer the income on equated monthly instalment basis?"

The facts in this case are not in dispute. The whole case revolves around the hire purchase agreement entered into between the appellant and the purchasers in respect of purchase of vehicle on hire purchase basis and to make payment in equated monthly instalments (EMI method). While computing income for the purpose of computation of tax, the appellant-asses-see followed the equated monthly instalment method whereas the assessee maintained the books of account on sum of digits method. While completing the assessment, the Assessing Officer was of the view that it was not permissible for the assessee to compute its income using one method in its day-to-day accounts and to use another method for computing income chargeable to tax. In so holding, the Assessing Officer disallowed the claim of the assessee and brought to tax the differential amount under the sum of digits method.

Aggrieved by the said order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who by following the decision of the Income-tax Appellate Tribunal, Hyderabad in the case of Deputy Commissioner Of Income Tax vs. Nagarjuna(1998) 65 ITD 17 dismissed the appeal, thereby upheld the assessment.

As against the said order of the Commissioner of Income-tax (Appeals), the assessee once again pursued the matter before the Tribunal, which dismissed the appeal filed by the assessee holding as follows:

"14. The hirers are paying interest on reducing capital balance basis. The assessee has not maintained the books of account on EMI basis and, therefore, the same cannot be considered as income earned as per the books of account of the assessee. As discussed earlier in the case before us the Assessing Officer has given a clear cut finding that assessee has maintained books of account under sum of digits method. Therefore, the facts of the case are identical to the facts of the case in the case of Nagarjuna Investments Trust Ltd. Income has accrued to the assessee as per the contracts entered into between the parties. Therefore, the income will be assessable to tax on sum of digits basis. Since the decision of Special Bench is binding on all Divisional Benches of the Income-tax Appellate Tribunal all over the country, we have to follow the decision of the Special Bench and not by the Divisional Bench in the case of Ashok Leyland Finance Ltd., dated February 28, 2006. Respectfully following the order of the Special Bench, we hold that learned Commissioner of Income-tax (Appeals) was justified in confirming the stand taken by the Assessing Officer."

Aggrieved by the said order of the Tribunal, the assessee is before this court.

Learned counsel appearing for the assessee submitted that the issue involved in this case is covered by a decision of this court in the case of CIT v. Ashok Leyland Finance Ltd. [2012] 210 Taxman 95 (Mad), wherein in an identical facts of the case, the issue was answered in favour of the assessee. He also pointed out that in respect of the very same assessee for the assessment years 1995-96, 1996-97, 1999-2000 to 2002-03, 2003-2004 and 2004-05, this court allowed the appeals.

Learned standing counsel appearing for the Revenue vehemently contended by placing heavy reliance on the view of the Assessing Officer and pointed out that for the purpose of maintaining books of account, the assessee is following the SOD method, whereas only for the purpose of filing return, the assessee had followed the EMI method, for which no explanation has been given by the assessee. She further submitted that the assessee could not adopt different methods of accounting one for the purpose of maintaining the books of account and the other for the purpose of filing return of income. Once the assessee is following one system of accounting, it is not permissible for the assessee to follow another system of accounting for the purpose of filing return of income. She further submitted that by virtue of the EMI method, the actual income on the interest component did not suffer tax and, therefore, such method should not be allowed to be adopted.

Heard learned counsel appearing for the appellant-assessee and the learned standing counsel appearing for the Revenue and perused the materials placed before this court.

In the case of CIT v. Ashok Leyland Finance Ltd. [2012] 210 Taxman 95 (Mad), identical questions have been raised, which are as follows:

"1. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is justified in following the equated monthly instalment method to account the finance charges for the income-tax purposes only?

Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is justified in following sum of digits method to account the finance charges to arrive at balance sheet and profit and loss statements only?"

In that case also, hire purchase agreement was entered into in respect of purchase of vehicles on hire purchase basis. While returning the income, the assessee followed equated monthly instalment method as against the sum of digits method for the purpose of arriving at the balance-sheet and the profit and loss statement. The assessee laid emphasis on the hire purchase agreement. In that case, the Tribunal considering the nature of transaction held that it was not a loan transaction but a hire purchase agreement and also taking note of the consistent method adopted for the purpose of tax, namely, EMI method, accepted the assessee''s plea, which is set out in paragraphs 8 and 9 of the order, which the Revenue did not challenge. The said portion reads as follows:

"8. Before the Tribunal, the assessee took a definite plea that the nature of transaction entered into by the assessee was pure and simple, a hire purchase and leasing. The assessee admitted that in the books of account, it adopted the SOD method, however, for the purpose of income-tax, the assessee adopted the EMI method for income recognition in respect of the finance charges and hire purchase agreement. The Tribunal considered the contention of the assessee in terms of the hire purchase agreement and ultimately came to the conclusion that the question, as to whether the income by way of finance charges under hire purchase agreement entered into by the assessee with its hirers had accrued under the SOD method as per the books or under the EMI method as per the agreement, has to be seen in the background of the nature of transaction conducted by the assessee. Thus, referring to the various clauses in the agreement, ultimately, the Tribunal came to the conclusion that the assessee had not given any loan or money for purchase of vehicle in question. Thus, the transaction was not a loan transaction but only a hire purchase agreement.

It is an admitted fact that the Revenue did not challenge this finding of fact before this court for the purpose of considering as to which method should be taken in a correct method for the purpose of arriving at the real income of the assessee."

In the present case also, we find that factually there is no dispute that the entire transaction is hire purchase transaction and not a loan transaction and the same methodology is adopted. In the case of CIT v. Ashok Leyland Finance Ltd. [2012] 210 Taxman 95 (Mad), on fact, finding has been arrived at paragraph 17 which may be relevant for the purpose of deciding this case, which reads as follows:

"17. A perusal of the order of the Tribunal clearly showed that the nature of the business transaction conducted by the assessee was one of a hire purchase giving vehicles on hire purchase and the assessee had not given any finance or loan for the purchase of vehicle. The terms of the agreement thus clearly point out that the hire purchaser shall not have any proprietary right or title until he exercised, in writing, his option to purchase, as provided in the agreement by payment of the whole amount due under the agreement or in term thereof. A reading of the agreement shows that the principal and finance charges for the entire period of contract had been shown separately in the schedule attached to the agreement. The total amount of hire purchase charges, namely, principal and finance charges, were divided equally by number of instalments specified in the contract. Thus the method employed for arriving the monthly instalment is an EMI method and the right of the assessee to receive the hire purchase charges on various due dates are as per the schedule mentioned in the agreement.

... Therefore, given the fact that the character of the transaction was pure and simple a hire purchase agreement and that the transaction had not in any manner undergone any change from the one which was the subject matter of consideration by the Tribunal for the earlier years, in respect of which, reference application filed by the Revenue was dismissed, the Tribunal came to the conclusion that the Assessing Officer had committed a serious error in ignoring the EMI method, to adopt SOD method.

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, there was no true reflection of the income that has to be assessed under the Act."

This court came to the conclusion that the EMI method followed by the assessee for the purpose of tax did not show any suppression of income. This decision of this court has not been challenged by the Revenue. On the contrary, the same has been followed by this court in respect of the very same assessee for the subsequent assessment years, which we have already extracted supra.

Since the fact in these decided cases, which we quoted above, are squarely applicable to the facts of the present case and the question of law has been answered in favour of the assessee in the batch of the cases in respect of the very same assessee, we have no hesitation to hold that in the absence of anything to the contrary, the assessee''s plea that tax should be determined on the basis of EMI method has to be accepted. The finding of the Tribunal on this score, therefore, deserves to be reversed. Accordingly, we answer the questions of law in favour of the assessee and against the Revenue. It will be relevant to refer to the decision of the Court of Appeal in the case of B. S. C. FOOTWEAR LTD. Vs. RIDGWAY (INSPECTOR OF TAXES)., (1970) 77 ITR 857 , 860 wherein it has been propounded as follows ( page 181 of 227 ITR):

"Russell L.J., while rejecting an argument based on well-settled accountancy practice, pointed out that the income-tax law does not march step by step in the divergent footprints of the accountancy profession. ... (See Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, (1997) 227 ITR 172 : (1997) 6 JT 129 : (1997) 4 SCALE 447 : (1997) 6 SCC 117 : (1997) 1 SCR 528 Supp : (1997) 93 TAXMAN 502 ."

In the result, this tax case (appeal) stands allowed. No costs.