2001 (10) TMI 1197 - AT - Income Tax

Summary

Issues Involved
1. Jurisdiction under Section 263 of the Income-tax Act.
2. Consistency in maintaining books of account on a cash basis.
3. Compliance with Section 209(3) of the Companies Act.
4. Accrued interest on Hundies and Debentures.
5. Assessment orders being erroneous and prejudicial to the interests of Revenue.
6. Harmonious interpretation of Section 145 of the Income-tax Act and Section 209(3) of the Companies Act.

Issue-wise Detailed Analysis

Jurisdiction under Section 263 of the Income-tax Act
The primary grievance of the assessee was that the Commissioner of Income-tax (CIT) erred in assuming jurisdiction under Section 263 of the Income-tax Act. The CIT had set aside the assessments made under Section 143(3) for the assessment years 1991-92 and 1992-93, claiming that the assessee's method of accounting was inconsistent with the Companies Act.

Consistency in Maintaining Books of Account on a Cash Basis
The assessee, a finance company, had consistently maintained its books of account on a cash basis and had filed its returns accordingly. The Assessing Officer completed the assessments under Section 143(3) without making any major additions. The CIT, however, noticed that this practice was not in line with Section 209(3) of the Companies Act, as amended by the Companies (Amendment) Act, 1988.

Compliance with Section 209(3) of the Companies Act
Section 209(3) mandates that companies maintain their books of account on an accrual basis and according to the double-entry system of accounting. The CIT issued a notice under Section 263 for both years, stating that the assessee's method of accounting was not in compliance with this provision, leading to the non-consideration of accrued interest on loans.

Accrued Interest on Hundies and Debentures
The CIT noticed that the interest received on hundi loans and debentures was accounted for on a cash basis, resulting in the non-inclusion of accrued interest of Rs. 28,493 for the assessment year 1991-92 and Rs. 1,07,884 for the assessment year 1992-93. The assessee argued that this accrued interest was offered to tax on a cash basis in subsequent years, and hence there was no prejudice to the Revenue.

Assessment Orders Being Erroneous and Prejudicial to the Interests of Revenue
The CIT concluded that the assessments were erroneous and prejudicial to the interests of Revenue because the accrued interest was not considered. The CIT relied on the Tribunal's decision in Nagarjuna Finance Ltd. v. Dy. CIT, which stated that it is not permissible for the assessee to ignore its own method of accounting and recompute its income for income-tax purposes.

Harmonious Interpretation of Section 145 of the Income-tax Act and Section 209(3) of the Companies Act
The assessee argued that Section 145 of the Income-tax Act allows the choice of accounting method and that this choice is not overridden by Section 209(3) of the Companies Act. The Tribunal agreed, stating that the provisions of the Income-tax Act should not be fettered by those of the Companies Act. The Tribunal also noted that the issue was debatable, and since two views were possible, the provisions of Section 263 were not attracted.

Conclusion
The Tribunal set aside the CIT's order passed under Section 263 and restored the assessments made by the Assessing Officer for both years. The appeals of the assessee were allowed, establishing that the choice of accounting method under Section 145 of the Income-tax Act remains with the assessee, notwithstanding the provisions of Section 209(3) of the Companies Act.