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CASE BASED ASSIGNMENT SPECIAL
ACCOUNTING
AREAS
NAME: SHUBHI SHARMA
CLASS: SYBAF
ROLL NO: A046
SAP ID: 40307210033
TOPIC: HIRE PURCHASE AND
CONSIGNMENT ACCOUNTS
SEM: SEMESTER III
ACADEMIC YEAR: 2022-23
1
Jay Bharat Credit and Investments V.
Commissioner of Sales-Tax and Anr.
(2000) 7 SCC 165
CASE OF HIRE PURCHASE AGREEMENT
The case explained below is based on hire purchase transaction.
So, firstly WHAT ARE HIRE PURCHASE TRANSACTIONS OR
AGREEMENTS?
 Hire purchase agreements are contracts in which the owner of commodities
permits a person (the hirer) to hire things from him for a set amount of time
in exchange for payment in instalments. If all of the instalments are paid on
time, the hirer has the opportunity to purchase the products at the end of the
contract.
 There is a conditional sales agreement involved between the two parties i.e.,
THE HIRER AND THE HIREE.
 FACTS OF THE CASE
 APPELLANT: Jay Bharat Credit and Investments
 RESPONDENT: Commissioner of Sales Tax Anr.
The appellants (A) ran a hire-purchase company. They bought cars and then
rented them out, with the hirer paying a deposit and the balance over time in
instalments, which included both the car's cost and the hire fees. I.e.; the price of
the vehicle includes hire charges, in instalments.
After the payment of the last instalments the hirer is given an option to transfer the
ownership of the vehicle in his/her name on the payment of a nominal charge or a
small fee.
2
The sales tax authorities who responded (R) argued and claimed that the sum paid
in instalments+ for the transaction was a part of the sale price and, as such, was
subject to taxes under the Sales tax according to the terms and provisions of the
Sales Tax Act, 1941, (As BENGAL FINANCE CASE; as it applied to Delhi's
Union territory.)
 ISSUE INVOLVED IN THE CASE:
Whether Respondent (R) were justified in holding that hire-purchase transactions
entered into by Appellant (A) were liable to the imposition of sales tax or not on
the consolidated proceeds?
 CONTENTION (A) [ means the arguments by the appellant]
1. The first argument raised by the appellant was that sales tax cannot be levied on
the full amount paid by the hirer which includes the hire charges, but the sale
consideration on which sales tax can be imposed will only be the price of the
vehicle at the time when the hirer exercises the option to purchase the same at
the time of the last instalment paid.
{as per the amendment made to the Bengal Finance (Sales Tax) Act, 1941.
The definition of sale under the Sale of Goods Act (SOGA) would not
include a hire-purchase agreement.}
2. Then the second argument or contention raised by the appellant party was that
there was a violation of Article 14 of the constitution as hire purchase
transactions had not been included under the ambit of taxation in the whole
country, but only in Delhi.
So, in a nutshell, because hire buy transactions were only taxed in Delhi and not
the entire country, there was a breach of Article 14 of the constitution.
 HELD:
THE JUDGEMENTS PASSED BY THE AUTHORITIES (HC & SC)
 High Court: favoured Respondent (R)
 Supreme Court: favoured Respondent (R)
3
1. With respect to first contention put forth by the appellant was
that sales tax could not be applied to the entire sum paid by the
hirer, which includes the hire fees; rather, the sale consideration
on which sales tax could be applied would only be the cost of the
vehicle at the time the hirer chose to exercise the option to
purchase it at the time of the final instalment paid.
Since the Amendment of the Act had not changed from its original state
before that date.
So, the situation had not actually changed. Both "transfer of property in
goods" and "transfer of goods on hire purchase" are included in the
definition of SALE under section 2(g) of the Sales of Goods Act.
As a result, the latter is subject to taxation and sales tax has to be levied on
the amount of the instalment.
2. With respect to the second contention raised by the appellant (A)
regarding breach of Article 14
So, this was rejected or dismissed by the court on the ground that the
definition of sale in the Central Sales Tax Act included and encompasses
hire purchase agreements which is as such applied to the whole of India.
 LAW POINTS INVOLVED
The term ‘hire and purchase’ is often used to describe the contracts which are in
reality agreements to purchase chattels by instalments subject to a condition that
the property in them is not to pass until all instalments have been paid.
There is distinction between the two sorts of agreements between -first where, as in
the case of a hire-purchase contract, the hirer is not obliged to buy the goods at the
end of the contract, whereas in the latter type of contract there is an obligation on
the hirer to buy.
It held that in cases where the property changes ownership, sales tax would be
imposed under the provisions of The Sales and Goods Act (SOGA) and there can
be no refraining or escaping from paying the same taxes.
4
So, the crux lies in the change of ownership of the asset/ commodity/chattel etc.
(inclusive definition and not an exclusive definition).
If the ownership changes, taxes in the ambit of The Sales Tax Act are levied and if
ownership does not change taxes are not imposed.
5
M/S. Ganeshlall Jay Kumar Nadia V.
J.C.I.T, Range -34, Nadia
CASE OF CONSIGNMENT ACCOUNTING
The below case is based on consignment accounting. So, WHAT IS BASICALLY
CONSIGNMENT ACCOUNTING?
 In accounting, the term “Consignment account” relates to accounts
dealing with a situation where one person (consignor) sends goods to
another person (consignee) on the basis that the goods will be sold on
behalf of and at the risk of the former.
Terms Used in Consignment Accounts: -
A. Consignor: It is the person that sends goods.
B. Consignee: The person who receives the goods.
C. Consignment: Consignment is a business arrangement through which the
consignor sends goods to the consignee for sale.
 FACTS OF THE CASE
 Appellant is the assessee i.e. M/S Ganeshlall Jay Kumar Nadia
 Respondent is J.C.I.T. i.e., Joint Commissioner of Income Tax Authority.
BACKGROUND:- The Assessee is a business partnership. It operates as a
wholesaler of spices and other commodities as well as a commercial agent.
During the assessment proceedings, the AO discovered that, according to
the VAT re-turn, the proforma value of the goods received on consignment
during the previous year was Rs.2,06,08,540/-.
However, according to the assessee's books of accounts, the value of the
goods received on consignment during the preceding year was
6
Rs.1,92,89,902/-. The assessee was summoned by the AO to explain the
disparity in the value of items received on consignment.
The assessee explained it before the A.O. that the goods received on
consignment sale as declared for the purpose of VAT return is only
realisable value and not the actual value.
The assessee (M/S Ganeshlall Jay Kumar Nadia) pointed out that the since
it was a consignment sale the assessee does not regard the purchases or sales
unless the sales of the consigned goods is completed to the third party.
Then assessee also pointed out that the actual sales to the third party was
only a sum of Rs. 1,92,89,902/- and this was recorded as purchases as well
as sales in the books of accounts of the assessee.
Also, the assessee received a commission for the consignment sale which
has been separately recorded in trading , profit and loss account.
 CONTENTIONS (A)
1) According to the facts and circumstances of the case, the Ld.
Commissioner of Income tax confirms the findings made by Joint
Commissioner of Income Tax about his undisclosed income due to
discrepancy of the sales figures in the books of accounts and the VAT
Return and the same was raised as argument by the assessee before
the tribunal.
 RESPONDENT
The AO however, did not accept the explanation of the Assessee. According
to the AO the assessee is sold the goods on discount and thereafter on sale
he is guaranteed commission and other reimbursements by the consignor.
The value of goods after inclusion of discount comes to Rs 1,95,96,462 ( Rs
19289902 + Rs 306560).The figure of Rs.3,06,560 has been taken by the
AO from the credit side of the Profit and loss account in which the various
components of income from consignment business are set out.
The AO believed that the assessee`s claim that the proforma value was used
for the VAT return was incorrect as a result.
He also noted that the assessee had the freedom to sell the items at a
premium i.e., at a higher value and make profits over and above the
commission.
Under the VAT Act, there is no idea of notional sales or value. VAT is
levied on actual cost and not on any estimated figure.
7
The AO further observed that assesses has been doing cash
sales as reflected in the books of account and therefore the possibility of
premium on sales is very high.
The AO also held that since commission amount is exempt from VAT it is
not included in the calculation of the undisclosed sales. The assessee's
unreported revenue which means his undisclosed income was treated as the
difference between actual sales and what was recorded in the books at a total
of Rs. 13,18,638 was added to that total income amount of the assessee (Rs.
2,06,08,540/- minus Rs. 1,92,89,902/-).
Commissioner of Income Tax however confirmed the order of AO. The CIT
observed that it was mandatory that there should be matching between the
sales disclosed before VAT authority and the sales disclosed before the
Income tax department.
That means the sales figures of the VAT return and the books of accounts
should match. As the actual sale values are required for VAT and income
tax is levied on figures of books of accounts.
So, these both figures should not contravene each other.
He also held that sale of any type being normal sale or consignment sale
cannot have a different treatment for the purpose of VAT and a different
treatment for the purpose of income tax.
So, the aggrieved assessee from the decisions of the CIT preferred the
appeal before the tribunal.
 HELD
JUDGEMENT BY THE TRIBUNAL WAS IN THE FAVOUR OF
ASSESSEE.
The tribunal took into account the opposing arguments.
8
The balance sheet which breaks down the closing stock, makes it clear that
and demonstrates it well that an amount of Rs. 1,92,89,902/- is discovered
recorded in the stock in trade received on consignment sale.
When determining the closing stock, the identical amount of stock that was
sold was properly taken into account. The quantitative information included
in sub-schedule VII of Form No. 3CD auditors report provides the
quantitative information on the products that the assessee traded.
The same is attached to this order as an annexure.
It was shown whatever the quantity of goods received on consignment in the
form of purchases during the previous year + opening stock after reducing
the sales have been shown as closing stock.
The dispute is only with regard to the value assigned for the purpose of
VAT returns.
From the submissions made by the assessee it is clear that in a consignment
sale the assessee does not become the owner of the property.
In a consignment sale goods sent on consignment are accompanied by pro-
forma invoice.
This pro-forma invoice contains only a notional value of the goods send on
consignment.
The actual value of these goods are recorded in the books of the consignee
only when the goods are sold by the consignee to the third party.
Ganeshlall Jay Kumar-(A.Y.2011-12) shown income from consignment
business in the profit and loss account.
Thus, the stand taken by the assessee that the realisable value is only
reflected in the books of account and the commission for carrying out the
consignment is correctly accounted in the books of accounts of the assessee.
In the given facts and circumstances tribunal is of the view that
the addition made by Assessing Officer (AO) and sustained by
Commissioner of Income Tax (CIT) is without any basis.
9
CASES SUMMARISED
CASE I
JAY BHARAT CREDIT AND INVESTMENT V. COMMISIONER OF
SALES TAX
The only question which arises for consideration in cases is : Whether the
respondents were justified in holding that hire purchase transactions entered into
by the appellants were liable to imposition of sales tax on the consolidated
proceeds or not?
It has been contented with the amendment that in the case of hire purchase
agreements sales tax cannot be levied on the full amount paid by the hirer which
would include the hire charges.
But the sale consideration will be payable on the amount and on which tax can be
imposed will only be the price of the assets/commodities/chattels etc. at the time
when the hirer exercises the option to purchase the same at the time of the last
instalment.
CASE II
M/S GANESHLALL JAY KUMAR NADIA V. JOINT COMMISIONER OF
INCOME TAX
The question led in this case was that whether VAT is applicable on difference
between proforma value of goods and value of goods as per books of accounts
when there is a significant difference in their values i.e. Will VAT be levied on the
undisclosed income or not ?
In the result the appeal was allowed in the favour of assessee i.e. M/S Ganeshlall
Jay Kumar.
Judgement by tribunal; a consignment sale goods sent on consignment are
accompanied by pro-forma invoice. This pro-forma invoice contains only a
notional value of the goods send on consignment. The actual value of these goods
are recorded in the books of the consignee only when the goods are sold by the
consignee to a third party. So, VAT will not be imposed on the difference of the
values which results in undisclosed income of the assessee as stated by the J.C.I.T
and confirmed by C.I.T.
10
BIBLIOGRAPHY
1. LAWYERSEVICES.IN
2. INDIANKANOON
3. CASEMINE
4. WIKIPEDIA
5. CASELAW.IN

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Special Accounting Areas - Hire purchase agreement

  • 1. CASE BASED ASSIGNMENT SPECIAL ACCOUNTING AREAS NAME: SHUBHI SHARMA CLASS: SYBAF ROLL NO: A046 SAP ID: 40307210033 TOPIC: HIRE PURCHASE AND CONSIGNMENT ACCOUNTS SEM: SEMESTER III ACADEMIC YEAR: 2022-23
  • 2. 1 Jay Bharat Credit and Investments V. Commissioner of Sales-Tax and Anr. (2000) 7 SCC 165 CASE OF HIRE PURCHASE AGREEMENT The case explained below is based on hire purchase transaction. So, firstly WHAT ARE HIRE PURCHASE TRANSACTIONS OR AGREEMENTS?  Hire purchase agreements are contracts in which the owner of commodities permits a person (the hirer) to hire things from him for a set amount of time in exchange for payment in instalments. If all of the instalments are paid on time, the hirer has the opportunity to purchase the products at the end of the contract.  There is a conditional sales agreement involved between the two parties i.e., THE HIRER AND THE HIREE.  FACTS OF THE CASE  APPELLANT: Jay Bharat Credit and Investments  RESPONDENT: Commissioner of Sales Tax Anr. The appellants (A) ran a hire-purchase company. They bought cars and then rented them out, with the hirer paying a deposit and the balance over time in instalments, which included both the car's cost and the hire fees. I.e.; the price of the vehicle includes hire charges, in instalments. After the payment of the last instalments the hirer is given an option to transfer the ownership of the vehicle in his/her name on the payment of a nominal charge or a small fee.
  • 3. 2 The sales tax authorities who responded (R) argued and claimed that the sum paid in instalments+ for the transaction was a part of the sale price and, as such, was subject to taxes under the Sales tax according to the terms and provisions of the Sales Tax Act, 1941, (As BENGAL FINANCE CASE; as it applied to Delhi's Union territory.)  ISSUE INVOLVED IN THE CASE: Whether Respondent (R) were justified in holding that hire-purchase transactions entered into by Appellant (A) were liable to the imposition of sales tax or not on the consolidated proceeds?  CONTENTION (A) [ means the arguments by the appellant] 1. The first argument raised by the appellant was that sales tax cannot be levied on the full amount paid by the hirer which includes the hire charges, but the sale consideration on which sales tax can be imposed will only be the price of the vehicle at the time when the hirer exercises the option to purchase the same at the time of the last instalment paid. {as per the amendment made to the Bengal Finance (Sales Tax) Act, 1941. The definition of sale under the Sale of Goods Act (SOGA) would not include a hire-purchase agreement.} 2. Then the second argument or contention raised by the appellant party was that there was a violation of Article 14 of the constitution as hire purchase transactions had not been included under the ambit of taxation in the whole country, but only in Delhi. So, in a nutshell, because hire buy transactions were only taxed in Delhi and not the entire country, there was a breach of Article 14 of the constitution.  HELD: THE JUDGEMENTS PASSED BY THE AUTHORITIES (HC & SC)  High Court: favoured Respondent (R)  Supreme Court: favoured Respondent (R)
  • 4. 3 1. With respect to first contention put forth by the appellant was that sales tax could not be applied to the entire sum paid by the hirer, which includes the hire fees; rather, the sale consideration on which sales tax could be applied would only be the cost of the vehicle at the time the hirer chose to exercise the option to purchase it at the time of the final instalment paid. Since the Amendment of the Act had not changed from its original state before that date. So, the situation had not actually changed. Both "transfer of property in goods" and "transfer of goods on hire purchase" are included in the definition of SALE under section 2(g) of the Sales of Goods Act. As a result, the latter is subject to taxation and sales tax has to be levied on the amount of the instalment. 2. With respect to the second contention raised by the appellant (A) regarding breach of Article 14 So, this was rejected or dismissed by the court on the ground that the definition of sale in the Central Sales Tax Act included and encompasses hire purchase agreements which is as such applied to the whole of India.  LAW POINTS INVOLVED The term ‘hire and purchase’ is often used to describe the contracts which are in reality agreements to purchase chattels by instalments subject to a condition that the property in them is not to pass until all instalments have been paid. There is distinction between the two sorts of agreements between -first where, as in the case of a hire-purchase contract, the hirer is not obliged to buy the goods at the end of the contract, whereas in the latter type of contract there is an obligation on the hirer to buy. It held that in cases where the property changes ownership, sales tax would be imposed under the provisions of The Sales and Goods Act (SOGA) and there can be no refraining or escaping from paying the same taxes.
  • 5. 4 So, the crux lies in the change of ownership of the asset/ commodity/chattel etc. (inclusive definition and not an exclusive definition). If the ownership changes, taxes in the ambit of The Sales Tax Act are levied and if ownership does not change taxes are not imposed.
  • 6. 5 M/S. Ganeshlall Jay Kumar Nadia V. J.C.I.T, Range -34, Nadia CASE OF CONSIGNMENT ACCOUNTING The below case is based on consignment accounting. So, WHAT IS BASICALLY CONSIGNMENT ACCOUNTING?  In accounting, the term “Consignment account” relates to accounts dealing with a situation where one person (consignor) sends goods to another person (consignee) on the basis that the goods will be sold on behalf of and at the risk of the former. Terms Used in Consignment Accounts: - A. Consignor: It is the person that sends goods. B. Consignee: The person who receives the goods. C. Consignment: Consignment is a business arrangement through which the consignor sends goods to the consignee for sale.  FACTS OF THE CASE  Appellant is the assessee i.e. M/S Ganeshlall Jay Kumar Nadia  Respondent is J.C.I.T. i.e., Joint Commissioner of Income Tax Authority. BACKGROUND:- The Assessee is a business partnership. It operates as a wholesaler of spices and other commodities as well as a commercial agent. During the assessment proceedings, the AO discovered that, according to the VAT re-turn, the proforma value of the goods received on consignment during the previous year was Rs.2,06,08,540/-. However, according to the assessee's books of accounts, the value of the goods received on consignment during the preceding year was
  • 7. 6 Rs.1,92,89,902/-. The assessee was summoned by the AO to explain the disparity in the value of items received on consignment. The assessee explained it before the A.O. that the goods received on consignment sale as declared for the purpose of VAT return is only realisable value and not the actual value. The assessee (M/S Ganeshlall Jay Kumar Nadia) pointed out that the since it was a consignment sale the assessee does not regard the purchases or sales unless the sales of the consigned goods is completed to the third party. Then assessee also pointed out that the actual sales to the third party was only a sum of Rs. 1,92,89,902/- and this was recorded as purchases as well as sales in the books of accounts of the assessee. Also, the assessee received a commission for the consignment sale which has been separately recorded in trading , profit and loss account.  CONTENTIONS (A) 1) According to the facts and circumstances of the case, the Ld. Commissioner of Income tax confirms the findings made by Joint Commissioner of Income Tax about his undisclosed income due to discrepancy of the sales figures in the books of accounts and the VAT Return and the same was raised as argument by the assessee before the tribunal.  RESPONDENT The AO however, did not accept the explanation of the Assessee. According to the AO the assessee is sold the goods on discount and thereafter on sale he is guaranteed commission and other reimbursements by the consignor. The value of goods after inclusion of discount comes to Rs 1,95,96,462 ( Rs 19289902 + Rs 306560).The figure of Rs.3,06,560 has been taken by the AO from the credit side of the Profit and loss account in which the various components of income from consignment business are set out. The AO believed that the assessee`s claim that the proforma value was used for the VAT return was incorrect as a result. He also noted that the assessee had the freedom to sell the items at a premium i.e., at a higher value and make profits over and above the commission. Under the VAT Act, there is no idea of notional sales or value. VAT is levied on actual cost and not on any estimated figure.
  • 8. 7 The AO further observed that assesses has been doing cash sales as reflected in the books of account and therefore the possibility of premium on sales is very high. The AO also held that since commission amount is exempt from VAT it is not included in the calculation of the undisclosed sales. The assessee's unreported revenue which means his undisclosed income was treated as the difference between actual sales and what was recorded in the books at a total of Rs. 13,18,638 was added to that total income amount of the assessee (Rs. 2,06,08,540/- minus Rs. 1,92,89,902/-). Commissioner of Income Tax however confirmed the order of AO. The CIT observed that it was mandatory that there should be matching between the sales disclosed before VAT authority and the sales disclosed before the Income tax department. That means the sales figures of the VAT return and the books of accounts should match. As the actual sale values are required for VAT and income tax is levied on figures of books of accounts. So, these both figures should not contravene each other. He also held that sale of any type being normal sale or consignment sale cannot have a different treatment for the purpose of VAT and a different treatment for the purpose of income tax. So, the aggrieved assessee from the decisions of the CIT preferred the appeal before the tribunal.  HELD JUDGEMENT BY THE TRIBUNAL WAS IN THE FAVOUR OF ASSESSEE. The tribunal took into account the opposing arguments.
  • 9. 8 The balance sheet which breaks down the closing stock, makes it clear that and demonstrates it well that an amount of Rs. 1,92,89,902/- is discovered recorded in the stock in trade received on consignment sale. When determining the closing stock, the identical amount of stock that was sold was properly taken into account. The quantitative information included in sub-schedule VII of Form No. 3CD auditors report provides the quantitative information on the products that the assessee traded. The same is attached to this order as an annexure. It was shown whatever the quantity of goods received on consignment in the form of purchases during the previous year + opening stock after reducing the sales have been shown as closing stock. The dispute is only with regard to the value assigned for the purpose of VAT returns. From the submissions made by the assessee it is clear that in a consignment sale the assessee does not become the owner of the property. In a consignment sale goods sent on consignment are accompanied by pro- forma invoice. This pro-forma invoice contains only a notional value of the goods send on consignment. The actual value of these goods are recorded in the books of the consignee only when the goods are sold by the consignee to the third party. Ganeshlall Jay Kumar-(A.Y.2011-12) shown income from consignment business in the profit and loss account. Thus, the stand taken by the assessee that the realisable value is only reflected in the books of account and the commission for carrying out the consignment is correctly accounted in the books of accounts of the assessee. In the given facts and circumstances tribunal is of the view that the addition made by Assessing Officer (AO) and sustained by Commissioner of Income Tax (CIT) is without any basis.
  • 10. 9 CASES SUMMARISED CASE I JAY BHARAT CREDIT AND INVESTMENT V. COMMISIONER OF SALES TAX The only question which arises for consideration in cases is : Whether the respondents were justified in holding that hire purchase transactions entered into by the appellants were liable to imposition of sales tax on the consolidated proceeds or not? It has been contented with the amendment that in the case of hire purchase agreements sales tax cannot be levied on the full amount paid by the hirer which would include the hire charges. But the sale consideration will be payable on the amount and on which tax can be imposed will only be the price of the assets/commodities/chattels etc. at the time when the hirer exercises the option to purchase the same at the time of the last instalment. CASE II M/S GANESHLALL JAY KUMAR NADIA V. JOINT COMMISIONER OF INCOME TAX The question led in this case was that whether VAT is applicable on difference between proforma value of goods and value of goods as per books of accounts when there is a significant difference in their values i.e. Will VAT be levied on the undisclosed income or not ? In the result the appeal was allowed in the favour of assessee i.e. M/S Ganeshlall Jay Kumar. Judgement by tribunal; a consignment sale goods sent on consignment are accompanied by pro-forma invoice. This pro-forma invoice contains only a notional value of the goods send on consignment. The actual value of these goods are recorded in the books of the consignee only when the goods are sold by the consignee to a third party. So, VAT will not be imposed on the difference of the values which results in undisclosed income of the assessee as stated by the J.C.I.T and confirmed by C.I.T.
  • 11. 10 BIBLIOGRAPHY 1. LAWYERSEVICES.IN 2. INDIANKANOON 3. CASEMINE 4. WIKIPEDIA 5. CASELAW.IN