TMI Blog2007 (1) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Revenue s appeal are as follows : "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 3,90,670 made by the Assessing Officer ignoring the fact that the transaction was finance transaction, since the assets claimed to have been leased were non-existent. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the method of accounting followed by the assessee was correct, thereby rejecting the method of diminishing balance applied by the Assessing Officer. The ld. CIT(A) ignored the fact that in finance transaction the rate of return remains constant throughout the transaction period and gives a fixed Equated Monthly Inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, reflected in Ground Nos. 1 and 2 extracted above, the material facts are like this. The assessee is an individual. He has entered into lease transaction with two concerns M/s. Shreeji Mineral Water and M/s. Vasudha Enterprises. The lease transaction involved 100% depreciable assets. In the original return of income the assessee has shown the transaction as lease transaction and had credited lease rental to its Profit Loss Account. The assessee had also claimed 100% depreciation on these equipments as per the admissible rules. Subsequently, however, the assessee revised its return of income, wherein lease transaction was admitted to be finance transaction in nature. The claim of depreciation @ 100% was accordingly withdrawn. However, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal of interest and it is aggregate of interest component so received during the relevant previous year, which is to be taxed as income of the assessee. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) noted that the method followed by the appellant is one of the methods prescribed by the Institution of Chartered Accountants of India and, therefore, the same cannot be rejected on the ground that some other method was also available. The learned CIT(A) further observed that amount to be taxed on conclusion of the transaction at the end of the agreement shall be the same and Revenue shall not be a looser. It was in this backdrop the Assessing Officer s action was reversed and the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant previous year and not the entire bill discounting income. The Revenue is aggrieved of this stand of the learned CIT(A) as well and is in appeal before us. 6. We have heard the rival contentions, perused material on record and duly considered factual matrix of the case as also applicable the legal position. 7. So far as the first issue is concerned, i.e., taxability of interest or finance charges which is raised in Ground Nos. 1 and 2, we find that the short issue requiring readjudication is whether or not the straight line method of accounting for interest income, which necessarily involves allocation of entire interest income uniformly over the entire lease period, is correct or not. Whether it is called interest or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of principal, therefore increases. In effect, with each passing periodical interval, interest component comes down and the principal component goes up. Under the assessee s method of accounting, however, while the quantum of money, for the time value of which interest of finance charges are paid, reduces at each periodical interval, the interest or finance income is spread over entire period of financing on pro rata basis as this income is spread over the entire period of financing. The only merit of the method adopted by the assessee is perhaps its simplicity, but then this method does not taken into account the very consideration for which interest or finance charges are paid. This results in distorted results that tax on income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are therefore, allowed. 9. As regards the second grievance raised by the Revenue, i.e., set out in Ground Nos. 3 and 4, it pertains to the question as to whether the entire bill discounting income is to be taxed in this previous year or only such income can be taxed in this previous year which pertains to the period within the previous year. In other words, we are required to adjudicate whether or not interest received from the period falling outside this previous year could be taxed in this previous year itself. While dealing with the Ground Nos. 1 and 2 in preceding paras, we have dealt at length with the concept of interest income and the basis on which it is to be allocated over the different accounting period. A bill discounting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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