N.R. Uthandam Transports (P.) Ltd. vs Commissioner of Income Tax

The assessee is a private limited company carrying on bus transport business at Sankarankoil. The assessment year is 1968-69, the accounting

year ending on 31-3-1968. The assessee purchased the bus bearing registration number MDT 8364 from Pandian Automobiles Pvt. Ltd.,

Madurai for Rs. 48,901. In order to raise funds for this purchase, the assessee borrowed Rs. 50,000 from M.M. Finance Corporation, Madras

(''Finance Corporation'') by entering into a hire purchase agreement with it on 13-12-1967. It was agreed thereunder that besides Rs. 50,000

advanced by the Finance Corporation the assessee should pay Rs. 15,000 towards what is called ''hire purchase charges'' and Rs. 105 for stamps.

It was further agreed that the assessee should repay the Finance Corporation the aforesaid amount in 29 monthly instalments of Rs. 2,245 each,

the first instalment being payable on the date of the agreement and the remaining instalments being payable on the 13th of the succeeding month

commencing from 13-3-1968 and ending with 13-6-1970. In pursuance of this agreement, the Finance Corporation paid Rs. 48,901 to Pandian

Automobiles (P.) Ltd., directly by cheque drawn on the Bank of Baroda and Rs. 1,099 to the assessee in cash. The assessee also executed a

promissory note on the same date in favour of Finance Corporation agreeing to pay the sum of Rs. 65,105 on demand, obviously as a collateral

security. Only two instalments were payable by the assessee in the assessment year-one on 13-2-1968 and the other on 13-3-1968. The assessee

purchased another bus bearing registration number MDT 6652 in March 1968. To raise funds for above purchase, it borrowed Rs. 18,000 from

the aforesaid Finance Corporation by entering into a hire purchase agreement with it on 4-3-1968. It was agreed thereunder that the assessee

should pay to the abovesaid Finance Corporation, Rs. 4,200. In addition to the principal amount of Rs. 18,000 by way of hire purchase charges

and Rs. 100 for stamps and the entire amount was repayable in twenty equal monthly instalments of Rs. 1,150, the first instalment being payable on

the date of the agreement and the rest being payable on the 4th day of succeeding months commencing from 4-5-1968 and ending with 5-11-

1969. In this case also, the assessee executed a promissory note dated 4-3-1968 in favour of Finance Corporation agreeing to pay Rs. 22,300 on

demand as a collateral security. With regard to this transaction, no instalment was payable during the accounting year relevant to the assessment

year. However, the assessee-company debited its interest account with Rs. 19,200 on 31-3-1968 and credited the account of Finance

Corporation in its books with the aforesaid sum comprising of Rs. 15,000 payable under the hire purchase agreement dated 13-12-1967 and Rs.

42,000 being the amount payable under the hire purchase agreement dated 4-3-1968. Though the documents themselves called these amounts as

hire purchase charges, the assessee as well as all the authorities proceeded on the basis that it represented the interest payable on the amount

borrowed. The assessee in view of the fact that it was maintaining account on mercantile basis and also debited the interest account with the entire

sum of Rs. 19,200 on 31-3-1968 and credited the account of M.M. Finance Corporation in its books with the aforesaid amount claimed a

deduction of the entire amount for the computation of its profits and gains in the business for the relevant year. The ITO held that the entire interest

of Rs. 19,200 was not allowable and only the interest referable to the two instalments payable during the year of account under the first hire

purchase agreement was allowable. With the result, he disallowed a sum of Rs. 18,166 out of the claim for deduction of Rs. 19,200. However,

when the assessee preferred an appeal, the AAC accepted the contention of the assessee and held that the entire sum of Rs. 19,200 was

allowable as interest. The department preferred an appeal to the Tribunal, and the Cochin Bench of the Tribunal, camping at Madras, held that the

entire amount was not allowable because the liability to pay the interest of Rs. 19,200 cannot be said to have accrued during the year of account

and it is only the interest referable to the instalments payable during the accounting year relevant to the assessment year which could be said to

have accrued in the year of account and the said interest can be allowed. It is this conclusion of the Tribunal that is challenged in the present

reference.

We are of the opinion that the conclusion of the Tribunal is correct. Simply because on the basis of the total number of instalments the interest

payable for the entire period had been calculated in advance and had been taken into account for fixing the amount of instalment, it cannot be

contended that the entire interest accrued on the date of borrowing itself. The learned counsel for the assessee very strongly stressed the fact that

the assessee was maintaining its accounts on mercantile basis and since the assessee has debited the interest account with the entire amount and

credited the Finance Corporation account in books with the said amount, the entire interest amount should be allowed. In our opinion this

contention lacks substance. As we pointed out already, the liability to pay the entire interest did not accrue on the day when the amount was

borrowed and the interest was referable to each one of the instalments and the liability to pay that interest accrued only when the liability to pay

instalment accrued. The Tribunal in paragraph 8 of its order has pointed out:

The question for consideration, therefore, is whether the interest amount of Rs. 15,000 and Rs. 4,200 payable by the assessee to the Finance

Corporation under the hire purchase agreements dated 13-12-1967 and 4-3-1968, had accrued during the relevant accounting year ending with

31-3-1968. In other words, can it be said that the Finance Corporation legally entitled to recover the aforesaid amounts of interest from the

assessee within the accounting year and whether the assessee was liable to pay the same? If it can be said that aforesaid corporation was entitled

to recover the same and the assessee was liable to pay the entire interest amount of Rs. 19,200 within the year of accounting the assessee''s claim

for deduction thereon will have to be allowed because the liability for interest would have accrued within the year of accounting.

Having posed the problem in this matter, the Tribunal examined the terms of the hire purchase agreement entered into between the parties and held

that there was no liability on the part of the assessee to pay the entire amount of Rs. 19,200 during the year of account itself and correspondingly

the creditor namely the Finance Corporation did not have the right to demand the payment of that interest. Having regard to the facts stated above,

it is clear that the conclusion of the Tribunal is correct. With the result, we answer the question referred to this Court in the affirmative and against

the assessee. The Commissioner is entitled to his costs of this reference. Counsel''s fee is fixed at Rs. 500.