2015 (8) TMI 430 - HC - Income Tax

Adoption of mercantile system of accounting - according to the Revenue, in respect of all the activities of the assessee, the accounting of income and expenditure should be under the same system, i.e. the assessee having adopted mercantile system of accounting, it cannot adopt accounting on cash basis in respect of sales of newspaper and advertisement revenue alone - Held that - Having regard to the provisions of section 145 of the IT Act, the Apex Court in United Commercial Bank v. Commissioner of Income Tax 1999 (9) TMI 4 - SUPREME Court , Geo Tech Construction Corporation case 1996 (2) TMI 81 - KERALA High Court and Ganga Charity Trust Fund 1985 (10) TMI 67 - GUJARAT High Court have approved the liberty available to the assessee to follow either of the two systems of accounting or the hybrid system. As reiterated by the Apex Court in Taparia Tools Ltd. v. Commissioner of Income Tax 2015 (3) TMI 853 - SUPREME COURT the entries in the books of accounts are not determinative or conclusive and any matter relevant are to be examined on the touchstone of provisions contained in the Act. Apart from arguing that for the sales of newspaper and advertisement charges, it was not permissible to adopt accounting on cash basis, it was not even contended by the Revenue that the taxable income could not be deduced from the accounts of the assessee. In the light of the principles of law deducible from the statutory provisions and the judgments that we have referred to, we are of the view that no illegality can be attributed to the decision of the Tribunal. In such circumstances, answering the question of law in favour of the assessee and against the Revenue

Issues Involved:

1. Adoption of different accounting systems by the assessee.
2. Difficulty in ascertaining correct income due to mixed accounting systems.
3. Entitlement to different accounting systems based on income heads.
4. Tribunal's jurisdiction and findings in the context of earlier years.
5. Disallowance of expenses due to lack of evidence for business use.

Issue-wise Detailed Analysis:

1. Adoption of Different Accounting Systems by the Assessee:
The primary contention raised by the Revenue was that the assessee, having adopted the mercantile system of accounting, could not adopt the cash system for sales of newspapers and advertisement revenue alone. The Revenue argued that all activities should be accounted for under the same system. The Tribunal, however, upheld the assessee's system of accounting on cash basis for these revenues, consistent with its previous years' practices. The Tribunal's decision was based on the precedent that an assessee may employ different methods of accounting for different sources of income, provided these methods are followed consistently and regularly.

2. Difficulty in Ascertaining Correct Income Due to Mixed Accounting Systems:
The Revenue argued that the mixed accounting system would result in difficulty for the assessing officer in ascertaining the correct income. However, the Tribunal found that the system of accounting adopted by the assessee did not prevent the correct quantification of taxable income. The Tribunal noted that the Revenue had accepted this accounting method in previous years and had not provided evidence that the method hindered the accurate determination of income.

3. Entitlement to Different Accounting Systems Based on Income Heads:
The Tribunal referenced several judgments, including United Commercial Bank v. Commissioner of Income Tax and Commissioner of Income Tax v. Geo Tech Construction Corporation, which supported the assessee's right to adopt different accounting systems for different sources of income. The Tribunal emphasized that section 145 of the Income Tax Act allowed the assessee to compute income under the heads mentioned in the section in accordance with the method of accounting regularly employed by the assessee.

4. Tribunal's Jurisdiction and Findings in the Context of Earlier Years:
The Tribunal highlighted that the issue of accounting on a cash basis for newspaper sales and advertisement charges had been adjudicated in earlier years, and the system had been upheld. The Tribunal cited the principle of consistency, stating that the Income Tax Department should maintain consistency in its approach, especially when previous decisions had attained finality and were accepted by the Department. The Tribunal referred to the Supreme Court's judgment in Radhasami Satsang v. Commissioner of Income Tax, which held that a fundamental aspect found as a fact in one assessment year should not be changed in subsequent years unless there is a material change justifying a different view.

5. Disallowance of Expenses Due to Lack of Evidence for Business Use:
The Tribunal addressed the disallowance made by the assessing officer due to the lack of evidence that vehicles and telephones were used exclusively for business purposes. The Tribunal found that the Revenue had not established that the accounting method disabled it from quantifying the taxable income or that the Tribunal's orders in previous years were vitiated by any illegality. The Tribunal upheld the assessee's accounting method, finding no justification for the disallowance of expenses.

Conclusion:
The Tribunal concluded that the assessee's method of accounting on a cash basis for newspaper sales and advertisement charges was consistent with previous years and legally permissible. The Tribunal dismissed the Revenue's appeals, affirming the assessee's right to adopt different accounting systems for different sources of income, provided these methods are followed consistently and regularly. The Tribunal emphasized the importance of consistency and the principle that an assessee's method of accounting should not be discarded if it accurately reflects the income.

← Previous Next →