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CIT v. M/s Motor Sales - INCOME TAX REFERENCE No. 108 of 1985  RD-AH 771 (14 September 2004)
I.T.R. No.108 of 1985
Commissioner of Income Tax (Central) Kanpur v. M/s. Motor Sales Ltd. Lucknow.
Hon'ble R.K.Agrawal, J.
Hon'ble K.N.Ojha, J.
The Income Tax Appellate Tribunal, Allahabad has referred the following two questions of law under Section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.
"1. Whether on the facts and circumstances of the case, the Tribunal was legally correct in holding that the sale of vehicles under the hire purchase agreement is concluded only when the terms of the agreement are fully complied with by the hirer or option to purchase is exercised?
"2. Whether on the facts and in the circumstances of the case, the I.T.A.T. was correct in law in holding that the entire dealer's margin or profit under the hire purchase agreement did not accrue to the assessee on the execution of agreement by the hirer?"
Briefly stated the facts giving rise to the present Reference are as follows :-
The present reference relates to Assessment Year 1976-77. The respondent-assessee deals in sales of motor vehicles. In the annual return for the accounting year 1975-76 filed in the course of the assessment it had mentioned vide Note No.6 that the assessee had changed the method of accounting which resulted in the profit for the year being lower by Rs.500181.00 as under:-
i) "Dealer's margin of Rs.5,49,192/- on 22 old vehicles sold on hire purchase basis (as reduced by Rs.89,496/- the amount already included in The petitioner &L account) 5,49,192 - 89,496 = 4,59,696.
ii) Dealer's margin of Rs.10,711/- on repossessed vehicles sold again on hire purchase basis reduced by Rs.1136/- already included in the total income 10,711-1136 = 9575.
iii) Dealer's margin of Rs.51,805/- on new vehicles sold on hire purchase basis reduced by Rs.20,895/- already included in the total income 51,805-20,895 =30,910 Total (i +ii+iii) = 5,00,181/-."
The Income Tax Officer accepted the change in the method of accounting vide assessment order dated 30th January, 1979. The Commissioner of Income Tax, Kanpur, however, initiated proceedings under Section 263 of the Act and vide order dated 24th January, 1981 modified the assessment order. Feeling aggrieved the respondent preferred an appeal before the Tribunal. The Tribunal has allowed the appeal. It has held that the sale of vehicles to the hirer under the hire-purchase agreement is concluded only when the terms of the agreement were complied with by the hirer or option to purchase was earlier exercised by such hirer. Till that time the sums paid periodically by the hirer under the hire-purchase agreement is "hire" in accordance with Section 2(b) of the Hire Purchase Act and the hirer is at liberty to terminate the hire-purchase agreement thereby avoiding the liability to pay the "hire" and the respondent had no claim to the future hire in such case of termination of the agreement by the hirer and, therefore, it cannot be said that the entire amount under the hire-purchase agreement accrued to the assessee on the execution of the agreement by the hirer. The Tribunal came to the conclusion that the old method followed by the respondent-assessee was incorrect and it was entitled to adopt the correct method.
We have heard Sri A.N. Mahajan, learned Standing Counsel appearing for the Revenue. Nobody has put in appearance on behalf of the respondent-assessee.
It has fairly been stated by Sri Mahajan that the question as to whether on the execution of the hire-purchase agreement by the respondent-assessee property in goods passes or not has been settled by this court in the case of the respondent-assessee itself in I.T.R. No.92 of 1983, C.I.T. v. M/s Motor Sales Limited, decided on 18th November,2003 and this Court after considering the various decisions of the Hon'ble Supreme Court and the agreement of hire-purchase which is a standard agreement had come to the conclusion that ''the property in the goods' had not passed on the execution of agreement of hire-purchase. The aforesaid decision is reported in (2004) 266 ITR 261.
Respectfully following the aforesaid decision, we answer both the questions referred to us in the affirmative i.e. in favour of the assessee and against the Revenue. However, there shall be no order as to costs.
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