TMI Blog2008 (5) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... n the price of the asset. His past behaviour also indicates that he does not intend to deal in the assets. The invoice is usually made in the name of user. The financier by entering into hire-purchase agreement makes itself prone to the loss on account of bad debts and also of defective vehicles, which might become its property due to hire-purchase transactions. The assessee does not earn any profit on purchase and sale of vehicles. It earns income on hire-purchase transactions. Entries recorded in the books of account - It is settled law as held in the case of Kedarnath Jute Mfg. Co. Ltd.[ 1971 (8) TMI 10 - SUPREME COURT] , that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter some misapprehension or mistake fails to make an entry in the books of account and if under the law, a deduction must be allowed by the AO, the assessee will not lose the right of claiming or will not be debarred from being allowed that deduction. The word ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s-dismissed. 3. The only remaining issue for consideration relates to confirming the additions made under section 40A(3) of the Income-tax Act. The facts of the case stated in brief are that the assessee is engaged in the business of financing second hand motor vehicles on hire-purchase basis. The assessee in the profit and loss account had shown purchase price of second hand motor vehicles at Rs. 79,14,700 and on credit side by sale on hire-purchase in contra entry of Rs. 79,14,700. On a query raised by the Assessing Officer, a date-wise list of hire-purchase transactions containing names and addresses was filed. From this list, the Assessing Officer found that payments of Rs. 23,37,000 in cash exceeding Rs. 20,000 in respect of 32 parties (33 instances) were made. The Assessing Officer required the assessee to explain as to why 20 per cent of the total amount of Rs. 23,37,000 paid in excess of Rs. 20,000 should not be disallowed under section 40A(3) of the Act. It was explained that the transactions were not in the nature of expenditure. They were simply loan transactions. The reliance was placed on CBDT in Notification S.O. No. 624 of14-2-1969wherein it was clarified that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /renovation of the vehicle. For the security of the advance given the purchaser of the vehicle hypothecates the vehicle in favour of the assessee till the time full and final payment including financial charges for the assessee-company are settled and made. The purchaser of the vehicle makes periodical payments in the form of instalments to liquidate the amount of advance and finance charges. 5. In view of above, it was submitted that under hire-purchase agreement the assessee was the owner of the vehicles and the person, who had taken the loan was a hirer. The agreements entered into between the parties were not in respect of purchase and sale of any commodity. For the purpose of accountancy the assessee had shown the advances as purchases and credited the same amount to the sales account. The assessee was not engaged in any trading activity, which is carried on by the persons engaged in the business for earning the profits. He placed reliance on the decision of Hon'ble Gujarat High Court in the case of H. Mohmed Co. v. CIT [1977] 107 ITR 637. The assessee earned income by way of finance charges on advances given. He further submitted that the word 'any expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les were hit by the provisions of section 40A(3) of the Act. He, accordingly, upheld the stand taken by the Assessing Officer. 7. Before us, the ld. AR of the assessee submitted that the assessee is engaged in the finance business. The assessee is not a trader, but a financer. The vehicles are purchased by the purchasers directly from the sellers and for financing of the said vehicles, the parties approached the assessee. The assessee arranged funds and agreements were entered into to safeguard its interests. The entire amount was not paid by the assessee. Part of the amount was paid by the purchasers of the vehicle themselves. The hire-purchase is the name given to the loan transactions. In commercial sense, a commodity is traded and not an asset. The vehicles purchased by the purchaser and financed under hire-purchase agreement, are movable assets in the hands of assessee and not the commodities. The payment is not made directly by the assessee to the owner of the vehicle. He further submitted that the decision taken under the Interest-tax Act could not be made applicable to income-tax proceedings as converse may not always be true particularly when financial transactions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Interest-tax Act, the assessee had treated the transactions as hire-purchase transactions. Therefore, under the Income-tax Act, he cannot be permitted to change his stand by saying that the transactions were in the nature of loan. The assessee cannot change his stand according to his convenience. The assessee has shown the vehicles as stock-in-trade and once it is shown as stock-in-trade on hire, the payment made for purchase of such stocks will be hit by the provisions of section 40A(3). He, therefore, supported the order of the ld. CIT (Appeals). 9. We have heard both the parties and gone through the relevant records. There is no dispute that the assessee is engaged in the business of hire-purchase. Under hire-purchase transactions, the vehicles financed by the assessee are treated as owned by assessee till the principal amount together with finance charges is realized. The assessee finances the vehicles identified by the purchasers from the parties and enters into hire-purchase agreement. In the books of account the vehicles are shown as stock on hire under hire-purchase basis. The assessee has not earned income from sale of vehicles under hire-purchase agreement. The in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is usually made in the name of user. The financier by entering into hire-purchase agreement makes itself prone to the loss on account of bad debts and also of defective vehicles, which might become its property due to hire-purchase transactions. The assessee does not earn any profit on purchase and sale of vehicles. It earns income on hire-purchase transactions. These are some of the characteristics of hire-purchase business. Thus, except in the cases where the financier is also dealer in the assets he lets on hire purchase, the decision of Modern Plastic will be applicable in the most of the cases of hire-purchase. Respectfully following the decision of Hon'ble Kerala High Court it is held that the true nature of the transactions is only a financial agreement in favour of the purchasers of the vehicles. 11. As regards the entries recorded in the books of account it is settled law as held in the case of Kedarnath Jute Mfg. Co. Ltd., that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the book ..... X X X X Extracts X X X X X X X X Extracts X X X X
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