2004 (1) TMI 19 - HC - Income Tax

Whether the hybrid system of accounting followed by the assessee is permissible or not - export handling commission - assessee argued that in respect of the export handling business of the assessee, the expenditures are maintained in mercantile system and receipts are all maintained in cash system in view of uncertainty for recovery from concerned party - contention of the appellant is that the assessee all through is following the said practice of maintaining accounts in respect of export handling business on the mercantile system in respect of the expenditure and on the cash system in respect of its receipts and the law recognises such maintenance of accounts in hybrid system under section 145 of the Income-tax Act, 1961, as it was prevailing at the relevant point of time - We find that such hybrid system is fully permissible in law and the only requirement is that the income should be deducible from such accounting system and in the absence of that the authorities of the Revenue can interfere with. But as there is admittedly no finding that the income cannot be deduced from the accounts maintained by the assessee in the present case, we do not find the interference by the Assessment Officer is permissible.

Summary

Issues:
Appeal against judgment and order of Income-tax Appellate Tribunal regarding export handling commission deduction.

Analysis:
The judgment involved an appeal under section 260A of the Income-tax Act, 1961, against the decision of the Income-tax Appellate Tribunal. The assessee-company had multiple sources of income, including export handling commission. The dispute arose when the Assessing Officer treated the accrued export handling commission as income, contrary to the assessee's accounting practice of maintaining accounts on a hybrid system. The authorities rejected the assessee's explanation, leading to successive appeals. The main contention was whether the hybrid accounting system followed by the assessee was permissible under section 145 of the Income-tax Act, 1961.

The appellant argued that the hybrid system was permissible under the law prevailing at the relevant time, despite subsequent amendments disapproving it. The authorities contended that the new law prohibited such accounting practices. The judgment extensively discussed various legal precedents supporting the validity of a hybrid accounting system. The court referenced cases like Investment Ltd., E.A.E.T. Sundararaj, North Arcot District Co-operative Spinning Mills Ltd., and Citibank N.A., which upheld the legitimacy of a hybrid accounting system if it accurately reflected the true profits of the assessee.

The court emphasized that the Income-tax Officer could only interfere with an assessee's accounting method if it failed to deduce the income properly. Since there was no finding that the income could not be deduced from the accounts maintained by the assessee, the court held that the interference by the Assessment Officer was impermissible. Consequently, the appeal was allowed, and the findings of the lower authorities regarding the deduction claimed for export handling commission were quashed. The judgment was delivered by Judge ALOKE CHAKRABARTI, with agreement from Judge S.K. GUPTA.