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2009 DIGILAW 615 (RAJ)

Commissioner of Income v. Heeralal Kataria

2009-02-26

M.N.BHANDARI, R.C.GANDHI

body2009
JUDGMENT 1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (in short, "the Tribunal"), has made reference for our answer to the following questions in D. B. Income-tax Reference No. 49 of 1989 : "(i) Whether on the facts and in the circumstances of the case, the Tribunal was justified in not upholding the disallowance of interest payment of Rs. 21,600 claimed by the assessee under the head 'Finance commission' which did not pertain to the accounting period relevant to the assessment year under reference ? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding the disallowance of Rs. 21,600 out of the total liability of Rs. 43,200 claimed by the asses see as having accrued during the year on account of hire purchase commission ? (iii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding that the liability of Rs. 43,200 claimed by way of accrued hire purchase commission was in reality the amount of interest projected over the period of hire purchase agreements and that, therefore only the interest relatable to the relevant account year was admissible as deduction ? 2. And the following questions have been referred in D. B. Income-tax Reference No. 22 of 1990 : (i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding the disallowance of Rs. 41,866 claimed by the assessee under the head 'Finance commission' which did not pertain to the accounting period relevant to the assessment year under reference ? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding the liability of Rs. 1,12,000 claimed by way of accrued hire purchase commission was in reality the amount of interest projected over the period of hire purchase agreements and, therefore, only the interest relatable to the relevant accounting year was admissible as deduction ?" 3. The aforesaid questions have been referred for the same assessee on the same set of facts. Thus, both the cases are taken up together for hearing and decided by this common order. 4. The aforesaid questions have been referred for the same assessee on the same set of facts. Thus, both the cases are taken up together for hearing and decided by this common order. 4. The brief facts relevant to the issue are that the assessee has claimed deduction of finance commission which was charged as expenditure in the profit and loss account of the assessee. The aforesaid deduction was claimed in the same year in which the hire purchase agreement was entered into by the assessee irrespective of the fact that actual payment was made even in the following years. The assessee had purchased trucks, trolleys, etc., under an agreement with the finance companies and, as per the agreement for hire purchase, the assessee was to make payment of the hire purchase amount and finance commission in instalments. As per the accounting system adopted by the assessee, the entire amount payable towards finance commission as per the hire purchase agreement was claimed in the assessment year in which such hire purchase agreement was entered into irrespective of the fact that the actual payment was even made in the following years. The issue raised by the Revenue is as to whether the entire amount towards finance commission can be deducted or can be claimed in the assessment year in which hire purchase agreement was entered into or the part of finance commission has to be shown for subsequent years in which actual payment was made. 5. Learned counsel for the Revenue submits that it being hire purchase agreement, title of the vehicle was not passed on to the assessee and thereby the amount of finance commission, which was actually paid in the subsequent years cannot be claimed as the expenditure in the year when the hire purchase agreement was entered, thus, the deduction towards finance commission cannot be taken entirely in the year of the hire purchase agreement rather the same has to spread in the years in which the aforesaid commission was actually paid by the assessee in instalments. 6. 6. According to the learned counsel for the assessee, they had entered into the hire purchase agreement in many previous years and as per the mercantile accounting system, they had claimed the benefit of the entire finance commission in the first year of hire purchase agreement itself and the Department was permitting such a system for past many years, and it is only for the assessment year 1981-82 that such benefits have been denied. Referring to the judgment of the hon'ble apex court rendered in the case of CIT v. Bilahari Investment P. Ltd. reported in (2008) 299 ITR 1 , he submits that if the Department has allowed a particular method of accounting for several years, then for a subsequent decision taken by the Department to change the method of accounting, reasons are required to be given. It is stated that though certain reasons have been given, but they are not germane to any legal proposition and now looking to the amount involved in these cases and the principle laid down by the hon'ble apex court in the case of Bilahari Investment P. Ltd. (2008) 299 ITR 1 the reference can be answered. The relevant paragraph 20 of the judgment in the case of Bilahari Investment P. Ltd. (2008) 299 ITR 1 (SC) is quoted hereunder (page 8) : "As stated above, we are concerned with the assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. There fore, we do not wish to interfere with the impugned judgment of the High Court." 7. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. There fore, we do not wish to interfere with the impugned judgment of the High Court." 7. On the other hand, learned counsel for the Revenue submits that the assessing authority has given specific reasons for deviating from the method of accounting adopted by the assessee and looking to the reasons given, the judgment of the hon'ble apex court in the case of Bilahari Investment P. Ltd. (2008) 299 ITR 1 does not apply. 8. We have considered the rival submissions of the parties and perused the record carefully. 9. It is not in dispute that the mercantile accounting system was adopted by the assessee and was permitted by the Revenue for several years. By virtue of the said accounting system, the assessee was claiming the benefit of finance commission in the year of hire purchase agreement itself irrespective of the fact that the amount of instalments as per the hire purchase agreement was actually paid in the subsequent years. The answer to the question whether such an accounting system was permissible or not, is not before us. Further the Department itself was permitting the said accounting system according to which, the assessee was accounting the entire finance commission in the year of hire purchase itself irrespective of the fact that the instalment pursuant to the hire purchase agreement was actually paid in the subsequent years. Assessment on the aforesaid basis was continued for years together and it is only for the assessment year 1981-82 that the said system was not accepted by the Department. Thus, looking to the aforesaid facts and circumstances and also the judgment of the hon'ble apex court in the case of Bilahari Investment P. Ltd. (2008) 299 ITR 1 , we are of the view that the Department having permitted the assessee to claim the benefit of finance commission in the year in which the hire purchase agreement was entered, the same system is required to be continued for the assessment year 1981-82 and this arrangement is allowed looking to the peculiar facts and circumstances of the case and the amount so claimed is not quire higher. It is also to be noticed that the hon'ble apex court in the case of Bilahari Investment P. Ltd. (2008) 299 ITR 1 held that the Department has to record the finding for changing the method of accounting. In these cases though the reasons have been recorded, but looking to the other facts of these cases, we cannot accept those reasons, and in view of the analogy laid down by the hon'ble apex court, we are deciding these references in favour of the assessee and against the Revenue. 10. These Income-tax references are accordingly disposed of. *******