ORDER
A. Kalyanasundharam, Accountant Member
1. In this reference sought for by the revenue, the following questions are said to arise out of the order of the Tribunal:
1. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not upholding the disallowance of interest payment of Rs. 94,465 claimed by the assesses under the head ‘Finance Commission’ which did not pertain to the accounting period relevant to the assessment year under reference ?
2. 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. 94,465 out of the total liability of Rs. 1,20,380 claimed by the asessee as having accrued during the year on account of hire purchase commission ?
3. 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. 1,20,380 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. On behalf of the department, Mr. C.R. Meena was of the view that these are pure questions of law and, therefore, need to be referred. On the other hand, the argument of the counsel was that the department has accepted that the assessee has been following the consistent system of accounting of such hire-purchase commission being charged in the year of payment. According to the counsel for the assessee it is not for the department to change the method of accounting followed consistently by the assessee as there are no powers provided under the statute to the department to do so. In these circumstances, the question of chargeability of the hire-purchase commission to the income of the assessee is pure question of a finding of fact as -it follows the earlier finding of fact of consistent system of accounting.
3. We have given careful consideration to the arguments of the parties. The Tribunal in paragraph 3 of its order have given a finding of fact to the effect that the assessee has been consistently following the system of charging the hire-purchase commission in ‘ the year of payment related to entering into of the agreement with the financiers. Section 115(1) provides for computation of income in. accordance with the method of accounting regularly employed by the assessee and it also provides that only in such cases where the accounts are correct and complete to the satisfaction of the ITO but the method employed is such that the income cannot be properly deduced there from then the ITO shall compute the income upon such basis as the ITO may determine. The Gujarat High Court in the case of Balapur, Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 91 was considering the identical issue relying on which the Tribunal came to the conclusion that the ITO cannot limit the expenditure to the extent of its applicability for the year as the assessee had been following the consistent system of accounting of charging the entire amount of hire-purchase commission as was agreed to with the financiers in the year itself. In the above-mentioned case, the Gujarat High Court was of the view that the department once has accepted a particular method followed by the assessee and if the assessee follows the same system for the subsequent year it should be accepted. To the extent of the method of accounting being followed by the assessee consistently over the years it is a pure question of a finding of fact but to the extent of whether the accounting followed by the assessee is proper or otherwise is definitely a question of law. Now the question that is to be determined is whether it is a referable question of law or not. The question of system of accounting especially mercantile system Was examined by Their Lordships of the Supreme Court in the cases of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134, CIT-v. A. Gajapathy Naidu [1964] 53 ITR 114, Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 and also in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. According to Their Lordships in the mercantile system it brings into credit What is due, immediately it becomes due and before it is actually received and it brings into account the expenditure the amount for which a legal liability ‘has been incurred before it is actually disbursed. In the present case before us, there is no dispute to the fact that the liability has accrued and what is being disputed is that since it could not be paid at a subsequent point of time it should not be allowed as an expenditure. As already observed by Their Lordships in a mercantile system once a liability is legally incurred it is rightly chargeable as an expenditure irrespective of the fact as to when it is payable or paid. Since the question is settled by Their Lordships of the Supreme Court no referable question of law can said to arise out of the present reference. The reference application is accordingly rejected.
H.S. Ahluwalia, Judicial Member
1. I have had the benefit of going through the order proposed by my learned brother and to my mind, it would be safer to submit rather than to withhold this reference. The incidents of hire-purchase agreement are well known to everybody. Instead of charging regular interest, the financier adds certain commission to the actual cost of the vehicle and the total thereof is made payable over a number of years. In other words the interest for a number of years is added to the total cost in the very first year of purchase. It is really not & commission but an accumulated amount of interest. It is correct that according to-the hire-purchase agreement, the liability is fastened on the assessee the moment the agreement is entered into, and in view of certain authorities which lay down that the accrual liability can be claimed as deduction, the assessee’s claim could be and has been allowed by us. But the point cannot be said to be free from doubt. It is all a question as to what is the real intent and purpose of the agreement and the answer to the question is also well knowp to everybody that I do not have to clarify it any further. The interest does not actually accrue in the very first year though the liability thereof may by virtue of the agreement arise straightaway. In fact my learned brother himself has referred to certain authorities supporting the assessee’s claim that in a mercantile system, an asses-see can bring in a credit what is due and to debit for what liability has incurred. May be that in ordinary cases the position of law can be said to have been settled. But obviously the circumstances of this case is rather peculiar. A liability which really accrues over several years has been accepted in the first year. Whether it can be claimed as a deduction merely because it has been accepted as such is a question the answer to which is not free from difficulty. I am, therefore, of the opinion, a reference in the matter should be submitted by framing an appropriate question.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
As there has been a difference of opinion between us, the following point of difference is referred to a Third Member Under Section 255(4) of the IT Act :
Whether any reference in the matter is called for.
G. Krishnamurthy, President
1. In this reference application filed by the Commissioner of Income-tax, Jaipur, he stated that the following questions, said to be questions of law, arise out of the order of the Tribunal in IT A No. 512 (Jp.) of 1984 :
1. Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified in not upholding the disallowance of interest payment of Rs. 94,465 claimed by the asses-see under the head ‘Finance Commission’ which did not pertain to the accounting period relevant to the assessment year under reference ?
2. 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. 94,465 out of the total liability of Rs. 1,20,380 claimed by the assessee as having accrued during the year on account of hire-purchase commission ?
3. 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. 1,20,380 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 ?
When the reference application came up for hearing before the Jaipur Bench, the learned Accountant Member, who wrote the leading order held that no questions of law arose out of the order of the Tribunal and rejected the reference application. The learned Judicial Member held that the questions of law do arise out of the order of the Tribunal and desired that a reference in the matter should be submitted to the High Court by framing an appropriate question. Hence there is thus a difference of opinion between the learned Brothers, who heard this reference application. The matter was referred to the Third Member for his opinion.
2. Now let me state the facts that gave rise to the appeal before the Tribunal and the reference application filed by the Commissioner of Income-tax. The assessee is a registered firm carrying on the business of transport at Jaipur. For the assessment year 1980-81 under reference, it claimed inter alia, deduction of a sum of Rs. 1,20,380 as finance commission by debiting it to profit and loss account. The assessee borrowed moneys from five finance companies on the security of trucks it proposed to purchase. The following figures will show the amounts borrowed and the finance commission agreed to be paid :
Name of the company Amount Finance Period
advanced commission
Rs. Rs.
New Ganesh Finance Co. 1,75,000 52,500 18 months
Jaipur Bharat Credit 1,79,000 29,370 Not given
Automatic Manufacturing
Finance Company 1,50,000 28,560 -do-
Auto Enterprises 50,000 8,500 -do-
Motor Finance Company 1,00,000 18,000 -do-
1,36,930
It is not clear from the assessment order as to how the Income-tax Officer mentioned that Rs. 1,20,380 was debited to the profit and loss account under the head ‘Finance commission’ and another sum of Rs. 26,500 in Ahmedabad Branch books. Be that as it may, as against the claim of the assessee to allow the entire sum as finance commission in the year under appeal, the Income-tax Officer held that although this was described as finance commission, it was in fact interest paid on the money borrowed under hypothecating system and that the interest that related to the accounting year only could be allowed as a deduction in computing the income of the year and not the interest related to the future period without the accounting year. On this view, he calculated that Rs. 94,465 would be disallowed.
3. Aggrieved by this disallowance the assessee preferred appeal before the Commissioner (A). It was contended before him that what was agreed to be paid was only finance commission and that the liability to pay the finance commission accrued under the terms of the agreement as soon as the agreement was entered into with the concerned parties and what would happen in the event of assessee failing to pay instalments would be totally irrelevant to consider whether what was paid was finance commission or interest. It was further pointed out that in the earlier years commencing from 1973-74 huge amounts were claimed as finance commission and were allowed as a deduction and a departure from that system of accounting should not have been adopted by the Income-tax Officer. The system of accounting being mercantile, the liability to pay interest arose as soon as the agreement was entered into with the parties. The Commissioner (A) agreed with this view and directed the entire amount of Es. 94,465 to be deleted.
4. The department then preferred a further appeal before the Tribunal contending for the restoration of the disallowance. After hearing both the sides, the Bench came to the view that the Commissioner (A) was justified in deleting the entire interest. Here I may mention that in the order of the Tribunal the amount of Us. 1,20,380 was mentioned as disallowed whereas the amount actually disallowed was only Rs. 94,465. By filing the copies of the agreements of hire purchase entered into by the assessee firm with the financiers, the argument taken up before the Tribunal was that the moment the agreement was entered into, the liability to pay the finance charges accrued and as a consequence the entire finance commission should have been allowed as a deduction and support for this view was drawn from the way in which the assessments were completed in all the previous assessment years. The Tribunal agreeing with the view of the learned Commissioner (A) held as under :
The review of the copy of the agreement filed shows that the financier provides finances for part of the amount of the truck. To the finances so provided he adds the second year insurance premium, hire purchase charges, service charges or insurance and aggregates the same as total hire payable, this total amount is then divided over a period of time i.e. in months. Thus, it clearly establishes the fact that the hirer makes the assessee liable to pay the hire purchase charges, the moment the agreement is entered into. What he. further allows is, the time for payment of the principal and the hire purchase charges.
Elsewhere also the Tribunal clearly found that the liability to pay the hire charges became fastened on the assessee the moment the agreement was entered into. The Tribunal also considered that the subsequent event of the failure of the assessee to pay the instalments would be 01 no consequence and that could not be considered as a basis for disallowing the liability. It also placed reliance upon a decision of the Gujarat High Court in Balapur Vibhag Jungle Kamdar Mandali Ltd. ‘s case (supra) for the view that where an assessee follows consistently a particular system of accounting, the department in subsequent year would not be justified in rejecting the system of account maintained by the assessee in the same manner.
5. It will be seen from what was quoted above that the Tribunal in coming to the conclusion that the amount claimed by the assessee was allowable as a deduction interpreted the document apart from relying upon the past practice of assessment made in the assessee’s own case. It is now settled law that if the point raised on reference relates to the construction of a document or to the interpretation of the relevant provisions of the statute, it is a pure question of law-See Oriental Investment Co. (P.) Ltd. v. CIT [1969] 72 ITR 408 (SC), G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC), and a host of other decisions of the Supreme Court. I am therefore of the opinion that the order passed by the Tribunal gives rise to a question of law notwithstanding the fact that identical amounts were allowed as a deduction in the earlier assessment years, which fact is relevant for the purpose of allowing it as a deduction more than for deciding whether such a would give vise to a question of law or not.
6. I therefore agree with the view expressed by the learned Judicial Member. The matter will now go before the regular Bench for the disposal of the reference application according to the majority view.