1985 (9) TMI 29 - HC - Income Tax

Summary

Issues:
1. Interpretation of method of accounting for tax purposes.
2. Taxability of lease amount received in instalments.
3. Justification of excluding future lease amount from income.

Analysis:
The High Court of Rajasthan addressed the reference application moved by the Revenue under section 256(2) of the Income-tax Act, 1961. The issue at hand was whether the Tribunal was correct in holding that a lease amount of Rs. 2,50,000, receivable in ten yearly instalments, was not taxable in the assessment year 1976-77 based on the method of accounting followed by the assessee. The assessee, a charitable trust, was engaged in cinematograph film distribution and had leased out distribution rights to a company. The agreement specified the consideration and payment schedule, including the Rs. 2,50,000 amount to be paid in ten instalments. The Income-tax Officer included this amount in the assessee's income for the year, considering it as an outstanding debt. The Commissioner of Income-tax (A) upheld this decision, but the Tribunal overturned it, stating that as the assessee maintained accounts on a cash basis, only actual receipts should be considered as income for the year.

The Tribunal emphasized that under the cash system of accounting, income should be recognized based on actual receipts during the year. It noted that the assessee had correctly excluded the future lease amount from income as it had not been received yet. The Tribunal found no valid reason provided by the Income-tax Officer to deviate from this principle. The Tribunal distinguished between the mercantile system and the cash system of accounting, stating that under the cash system, only actual receipts should be considered as income. The Tribunal's decision was based on the well-established legal position regarding accounting methods and income recognition.

The Revenue's application for reference to the High Court was dismissed by the Tribunal, which maintained that when the cash system is followed for accounting, only income received during the year should be disclosed. The High Court concurred with the Tribunal's decision, noting that since the assessee followed the cash system for maintaining accounts, only received income should be disclosed. As no question of law arose from the Tribunal's order, the High Court dismissed the Revenue's application, emphasizing that the Tribunal's decision was justified based on the accounting method followed by the assessee.