Both The Learned Counsels Fairly Agreed That Thesaid Questions Are Covered By A Decision Of This Court Inthe Case Of Commissioner Of Income Tax v. Ashok Leylandfinance Ltd. [(2013) 213 Taxman 0204], Wherein It Was Hasheld As Under

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN M/s. Sundaram Finance Limited.,21, Patullos RoadChennai – 600 002.Appellant / Appellant The Assistant Commissioner of Income TaxCompany Circle VI(4)Chennai.Respondent/Respondent ----- Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, Madras 'C' Bench, Chennai, dated 17.04.2008 madein ITA No.1002/Mds/2006 against the order passed by thecommisioner of Income Tax (appeals)-V, Chennai. 34. dated31.01.2006 made in ITA.NO.232/2005-06 and against theorder passed by the Assistatant Commisioner of Income Taxcompany Circle VI(4), Chennai. Dated 28.03.2005 made in SV-048/AAACS4944A for the Assessment Year 2002-2003. The present Appeal was admitted by the Co-ordinateBench of this Court on 16.03.2009 with the followingquestions of law:- “(i) Whether, on the factsand in the circumstances of thecase, the Tribunal was right in law in holding that the InternalRate Return (IRR) method is theappropriate method of incomerecognition in hire purchasetransaction as against theEquatedSum(ESM)methodregularlyfollowedbytheAppellant?; (ii) Whether, on the factsand in the circumstances of thecase, the Tribunal was right inholding that the interest incomeon hire purchase transactionsaccrued only under the InternalRate Return (IRR) method and formpart of the mercantile system ofaccounting?; (iii) Whether, on the factsand in the circumstances of thecase, the Tribunal was right inholding that the appellant is notentitled to maintain its Book onthe Internal Rate Return (IRR)method while offering the incomeon Equated Sum (ESM) method fortax purpose.” 2.Both the learned counsels fairly agreed that thesaid questions are covered by a decision of this Court inthe case of Commissioner of Income Tax Vs. Ashok LeylandFinance Ltd. [(2013) 213 Taxman 0204], wherein it was hasheld as under: "18. In the light of the said finding offact, one has to look at the reasoning of theTribunal referring to the order of theSpecial Bench of the Hyderabad Tribunal andthe assessee's own case in respect of theprevious assessment year. Referring to theearlier orders of the Tribunal, which came onreference before this Court and which in turnwas also rejected by this Court underjudgment dated 12.3.1998, the Tribunal heldthat the consistency of returning the incomefor the purpose of income was only on EMImethod. This was so, ever since the assesseestarted its business in this field. TheTribunal further pointed out that in loantransaction, only money is really involved, but in a hire purchase transaction, hiring ofasset other than money is involved; the titleto the property will pass on to the hirer,when all the instalments are paid and whenthe hire purchaser exercises his option topurchase. Therefore, given the fact that thecharacter of the transaction was pure andsimple a hire purchase agreement and that thetransaction had not in any manner undergoneany change from the one which was the subjectmatter of consideration by the Tribunal forthe earlier years, in respect of which,reference application filed by the Revenuewas dismissed, the Tribunal came to theconclusion that the Assessing Officer hadcommitted a serious error in ignoring the EMImethod, to adopt SOD method. but in a hire purchase transaction, hiring ofasset other than money is involved; the titleto the property will pass on to the hirer,when all the instalments are paid and whenthe hire purchaser exercises his option topurchase. Therefore, given the fact that thecharacter of the transaction was pure andsimple a hire purchase agreement and that thetransaction had not in any manner undergoneany change from the one which was the subjectmatter of consideration by the Tribunal forthe earlier years, in respect of which,reference application filed by the Revenuewas dismissed, the Tribunal came to theconclusion that the Assessing Officer hadcommitted a serious error in ignoring the EMImethod, to adopt SOD method. 19. We are in agreement with the reasoning ofthe Tribunal in this regard that when oncethe Revenue had accepted the character of thetransaction as hire purchase transaction, theincome that flows from the transaction has tonecessarily follow the treatment that isgiven under the hire purchase agreement.Secondly, when the Revenue had not disputedthe fact that on all the earlier years, theRevenue had treated the income as per thehire purchase agreement on EMI basis, thereare no materials available as on record toshow that following such method had reallyresulted in suppression of income, in otherwords, there was no true reflection of theincome that has to be assessed under theAct." 3. It was also observed in the aforesaid Judgementthat the Tribunal relied upon the Central Board of DirectTaxes Circular dated 13.01.1998 and allowed the computingof Interest component on the basis of EMI Method. Therelevant portion is extracted for ready reference:"11. It is a matter of relevance topoint out that the assessee placed relianceon the circular of the Central Board ofDirect Taxes, which, no doubt, was withreference to hire purchase cases. TheTribunal referred to the Central Board ofDirect Taxes' circular dated 13.01.1998, which specifically dealt with the hirepurchase transactions' taxability withreference to interest element, to ultimatelyhold that Section 194 A of the Income Tax Actwould not be attracted in case of payment ofperiodical instalment on the hire purchaseagreement . Thus in the context of thecircular of the Board No.127/(12)-I.T.42dated 13.05.1943 as well as subsequentCirculars, particularly Circular No.275/9/80-IT (B) dated 25.01.1981 and CircularF.No.160/1/96 dated 13.1.1998, the Tribunalagreed with the assessee's case. Aggrievedby this, the Revenue has filed the above TaxCase (Appeals) before this Court." 4. The Andhra Pradesh High Court in Sri ChakraFinancial Services Ltd. Vs. Commissioner of Income Tax[(2013) 350 ITR 398] , after discussing the Madras HighCourt's aforesaid view held that where there is noindication in the Hire Purchase Agreements reflecting thebifurcation of the EMIs into principal and interestcomponents, the common and accepted usage of the Indexingsystem of accounting in the Hire Purchase trade must beheld to be valid as otherwise the rate of interest underthe mercantile system in so far as the later EMIs areconcerned would be far higher and contrary to the rateprescribed in the assessee’s agreements. The differencebetween the EMI and SOD method was illustratively explainedby the Andhra Pradesh High Court in the following manner: "6. To illustrate the difference inaccounting of incomes as per the indexingmethod and the mercantile system, ahypothetical transaction involving hiring ofmachinery worth Rs.100/- is taken, on whichhire purchase finance charges recoverable in5 years is Rs.70/-. The following are theamounts of recovery shown in the books ofaccount and in the computation of income asper the return filed. "6. To illustrate the difference inaccounting of incomes as per the indexingmethod and the mercantile system, ahypothetical transaction involving hiring ofmachinery worth Rs.100/- is taken, on whichhire purchase finance charges recoverable in5 years is Rs.70/-. The following are theamounts of recovery shown in the books ofaccount and in the computation of income asper the return filed. Receipt of finance charges for the first andsecond years under the indexing system wouldthus be far higher than that reflected in themercantile system of accounting. That is whathas happened in the present case. The issuehowever is whether the income of the assesseeunder this head is to be assessed as per theentries in its own books of accounts or inaccordance with the mercantile system ofaccountancy which it chose to adopt in itsreturn of income." 5. The views of the Madras High Court was discussed bythe Andhra Pradesh High Court in the following manner:"Sri Krishna Kaundinya , learnedcounsel, sought to draw a distinction betweenthe above decision and the case on hand byplacing reliance on ASHOK LEYLAND FINANCELIMITED V/s. ASSISTANT COMMISSIONER OF INCOMETAX (1979) 59 TTJ (Mad) 736. Therein, aDivision Bench of the Madras High Court wasdealing with a case which was somewhat similar on facts to the present one. Theappellant company before the Madras HighCourt was also engaged in the business ofhire-purchase and lease financing. Its annualaccounts were maintained in so far as financecharges were concerned on the reducingbalance method (indexing method). However,the mercantile system of accounting wasemployed for the return of income as in thepresent case. Faced with a situation where two systems wereadopted for accounting for the income, theMadras High Court held that the right toreceive an amount under a contract accrues orarises depending upon the terms of theparticular contract. In other words, incomehas to be computed even under the accrualsystem of accounting only on the basis ofaccrual as provided for in the agreementsevidencing the transactions. In short, therecan be no accrual of income de hors the termsand conditions of the agreement. Viewed inthis light, the Madras High Court held thatthe technique of accounting followed by theassessee (Reducing balance method or the SODmethod) in its books of account for recordingthe transactions cannot determine the accrualof income. The Court held that accrual would depend onthe terms and conditions of the contractbetween the parties, but not at the whims ofeither party. Upon perusing sample copies ofthe agreements, the Madras High Court heldthat it was not open to the assessee to adoptthe SOD method or the reducing balance methodwhen the agreement was to the contrary. Examination of the above judgment reflectsthat the case before the Madras High Courtdiffered from the present one on crucialfactual aspects. The Madras High Court foundon facts that the terms of the agreement inthat case did not permit adoption of theIndexing System of accounting and therefore,use of the said system in the books ofaccounts was held to be contrary to the termsof the contract itself. In the present case, however, there is noindication of the assessee’s hire purchaseagreements reflecting bifurcation of the EMIsinto principal and interest components. In Examination of the above judgment reflectsthat the case before the Madras High Courtdiffered from the present one on crucialfactual aspects. The Madras High Court foundon facts that the terms of the agreement inthat case did not permit adoption of theIndexing System of accounting and therefore,use of the said system in the books ofaccounts was held to be contrary to the termsof the contract itself. In the present case, however, there is noindication of the assessee’s hire purchaseagreements reflecting bifurcation of the EMIsinto principal and interest components. In the absence thereof, the common and acceptedusage of the Indexing system of accounting inthe hire purchase trade must be held to bevalid as otherwise the rate of interest underthe mercantile system in so far as the laterEMIs are concerned would be far higher andcontrary to the rate prescribed in theassessee’s agreements. Further, as theassessee had itself employed this system ofaccounting in its books of account, applyingthe law laid down in SANJEEV WOOLEN MILLS(supra), the Department was bound to acceptthe same for the assessment proceedings. Viewed thus, we are of the opinion that thelaw laid down by the Special Bench of theIncome Tax Appellate Tribunal at Hyderabad inNAGARJUNA INVESTMENT TRUST LIMITED (supra)was correct. In the event the hire purchaseor leasing agreement did not give theapportionment or bifurcation of the EMIsbetweentheprincipalandinterestcomponents, the interest income in relationto such agreements, recognized on the basisof SOD system of accounting by the assesseein its books of account, represents the ‘realincome’ accrued to the assessee. Relianceplaced by the Tribunal on this judgment whileallowing the Revenue’s appeal in the presentcase was therefore justified. The substantialquestion of law is accordingly answeredupholding the Revenue’s computation of theassessee’s income from finance charges and infavour of the Revenue and against theassessee. In consequence, the ITTA isdismissed, but in the circumstances, withoutany order as to costs." 6. Having perused the aforesaid Judgements, we are ofthe clear opinion that the later decision of Andhra PradeshHigh Court relied on by the learned counsel for the Revenuedoes not help the case of the Revenue and Andhra PradeshHigh Court itself distinguished the facts before it fromthe Madras High Court decision in the case of Ashok Leyland(Supra). Admittedly, the Assessee has been following thesame method of E.M.I for bifurcation of its income intoPrincipal and interest component for all these years inquestion. The S.O.D method gives higher finance charges(interest) for the initial years and lower finance charges(interest) for the later years, i.e, the Sum of Digits issum total of the number of years e.g. If the Hire PurchaseAgreement is for 10 years, the SOD is 55 6. Having perused the aforesaid Judgements, we are ofthe clear opinion that the later decision of Andhra PradeshHigh Court relied on by the learned counsel for the Revenuedoes not help the case of the Revenue and Andhra PradeshHigh Court itself distinguished the facts before it fromthe Madras High Court decision in the case of Ashok Leyland(Supra). Admittedly, the Assessee has been following thesame method of E.M.I for bifurcation of its income intoPrincipal and interest component for all these years inquestion. The S.O.D method gives higher finance charges(interest) for the initial years and lower finance charges(interest) for the later years, i.e, the Sum of Digits issum total of the number of years e.g. If the Hire PurchaseAgreement is for 10 years, the SOD is 55 (1+2+3+4+5+6+7+8+9+10 = 55). Therefore, total financialcharges for the first year would be 10/55, for the secondyear 9/55, for third year 8/55 and so forth which wouldclearly give higher financial charges for interest taxablein the first year. This SOD method even though adopted bythe Assessee in its Book of Accounts on the basis ofGuidelines issued by the Institute of Chartered Accountantsof India was not adopted in the Returns of Income filed byit which consistently adopted EMI method for taxability ofinterest income all these years. Since, for the previousassessment years, this Court has already approved suchbifurcation 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 merechange of Accounting method in its Book of Accounts on thebasis of S.O.D. does not alter the position in the tax inthe hands of the assessee. Therefore, the Judgement ofAndhra Pradesh High Court in the case of Sri ChakraFinancial Services Ltd. Vs. Commissioner of Income Tax[(2013) 350 ITR 398] is distinguishable. 7. On the other hand, since in the case of AshokLeyland Finance Ltd., (supra) the Coordinate Bench of thisCourt has upheld the taxability with regard to interestincome on EMI method, which has been consistently followed,there is no reason to take a different view in the matterfor the present Assessment years, in this case. 8. Accordingly, the present Appeal of Assessee isallowed and the questions of law are answered in favour ofthe Assessee and as against the Revenue. No order as tocosts. Sd/- Assistant Registrar(CS iv) //True Copy// Sub Assistant Registrar vsgTo, 1.THE ASSISTATANT COMMISIONER OF INCOME TAX COMPANY CIRCLEVI(4), CHENNAI.2.THE INCOME TAX APPELLATE TRIBUNAL, MADRAS 'C' BENCH,CHENNAI.3.THE COMMISIONER OF INCOME TAX (APPEALS)-V, CHENNAI. 34. +1cc to Mr. Subbrayan Aiyar,Advocate SR.No. 21342+1cc to Mr.T.R.Ravikumar , Advocate SR.No. 20665Tax Case Appeal No. 158 of 2009 A.SK(04/04/2019)