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

R. Sudhakar, J.

These two tax case appeals at the instance of the assessee, challenging the order of the Income Tax Appellate Tribunal, Chennai ''A'' Bench dated 14.7.2006 in respect of the assessment years 1995-96 and 1996-97 respectively, have been admitted on the following substantial questions of law:-

''''(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 Installments basis regularly followed by the appellant?

(2) 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?

(3) 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 Installment basis?''''

The appellant-assessee is engaged in the business of hire purchase and leasing. They have maintained the books of accounts in respect of hire purchase finance charges on Sum of Digits (SOD) technique and has offered the sum on Equated Monthly Instalment (EMI) technique while computing the income for the purpose of tax in respect of the two assessment years in question. This was rejected by the assessing officer, who added the differential amount of hire purchase finance charges between the Sum of Digits technique and Equated Monthly Instalment technique and determined the tax liability thereon. Aggrieved by that, the assessee went on appeal to the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) also held against them. Thereafter, when an appeal was brought before the Tribunal, the Tribunal also, upholding the order of the Commissioner of Income Tax (Appeals), held as follows:-

''''14. The hirers are paying interest on reducing capital balance basis. The assessee has not maintained books of accounts on EMI basis and therefore the same cannot be considered as income earned as per the books of accounts 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 accounts 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 ITAT all over the country, we have to follow the decision of Special Bench and not by the Divisional Bench in the case of Ashok Leyland Finance Ltd., dated 28th February 2006. Respectfully following the order of Special Bench, we hold that ld. CIT(A) was justified in confirming the stand taken by the Assessing Officer.''''

Hence, the appellant-assessee is before us with these appeals.

The learned counsel for the appellant-assessee primarily relied on the decision of this Court in CIT Vs. Ashok Leyland Finance Ltd., to contend that the issue has been answered in favour of the assessee.

On the other hand, the learned standing counsel for the respondent-Revenue has relied upon the Circular Text (1995) 215 ITR (Stat) 0070 with regard to the methods of accounting and accounting standards for computing income vide the Finance Act, 1995 to say that when the income shall be computed only in accordance with either the cash or the mercantile system of accounting regularly employed by an assessee with effect from the assessment year 1997-98 and subsequent years, these two appeals pertaining to the assessment years 1995-96 and 1996-97 may be allowed in favour of the assessee, as prior to deletion of the first proviso to sub-section (1) of Section 145 by the amendment, the assessee could adopt the hybrid method for the purpose of computation of income.

We have heard the learned counsel for the parties and also perused the aforesaid circular text as well as the decision of this Court in Ashok Leyland Finance Limited case. Admittedly, the circular text reads as follows:-

''''44.1. Section 145(1) of the Income Tax Act prior to its amendment by the Finance Act, 1995 provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipt basis; (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assessees are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995 has amended section 145 of the Income Tax Act to provide that income chargeable under the head ''''Profits and gains of business or profession'''' or ''''Income from other sources'''' shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted.

44.2. The Finance Act, 1995 has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head ''''Profits and gains of business or profession'''' or ''''Income from other sources''''. These accounting standards will be laid down in consultation with expert bodies like the Institute of Chartered Accountants.

44.3. The amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years.''''

On perusal of the aforesaid circular, for the purpose of deciding these two appeals in respect of the assessment years 1995-96 and 1996-97 are concerned, we are of the firm view that prior to this amendment, the first proviso to sub-section (1) of section 145 gave an option to the assessee to determine the income by adopting any one of the methods. In such view of the matter, we find that the appeals of the assessee are justified insofar as following one system of accounting for the purpose of books of accounts and another for the purpose of determination of tax. We are not going into the finer aspects of the agreement to come to a conclusion either way, as the provision of law prior to the amendment stood in favour of the assessee. Accordingly, both the tax case appeals are allowed and the substantial questions of law are answered in favour of the assessee and against the Revenue in respect of the assessment years 1995-96 and 1996-97 are concerned. No Costs.