INCOME TAX ACT, 1961

Sedction 145(1)

Accounting method - Assessee consistently adopted ESM method for taxability of interest income but adopted IRR method in its Book of Accounts on the basis of Guidelines issued by ICAI - -

Assessee NBFC engaged in hire purchase financing, equipment leasing and allied activities had been following mercantile system of accounting. Since inception, Even Spread Method (ESM) as basis for apportionment of hire instalment into principal and finance income, had been adopted by assessee consistently over the years. The hire purchase agreement entered into with clients provided for recognizing the income expenses, as the case might be, on ESM basis. So, assessee recognised hire purchase income on ESM basis both for book and income-tax purposes upto previous year ended 31-3-2000 relevant to assessment year 2000-01. From previous year 2000-01 onwards, it followed IRR method for apportionment of hire instalment into principal and finance charges component as prescribed by AS on leases (AS-19 issued by ICAI. Though it switched over to IRR method for books to comply with AS, however, it continued to follow ESM for recognizing the hire purchase income for income-tax purposes as section 145(1) required assessee's to compute profits and gains of business or profession or income from other sources in accordance with either on cash or mercantile system of accounting regularly employed by them. However, AO while making the assessments for assessment years 2004-05 and 2005-06, concluded that entire hire purchase transactions were loan and interest rate implicit in the transaction, i.e., Internal Rate of Return (IRR) method adopted in the books determined real income and assessed accordingly. Held: IRR method even though adopted by assessee in its Book of Accounts on the basis of Guidelines issued by ICAI was not adopted in returns of income filed by it which consistently adopted ESM method for taxability of interest income all the years and taxability with regard to interest income on ESM method, which had been consistenly followed, there was no reason to take a different view in the matter for concerned assessment years and AO was, therefore, directed to tax interest income on EMI method or ESM, which has been consistently followed by assessee and allow consequential relief in accordance with law.

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