1983 (12) TMI 85 - AT - Income Tax

Cash Basis, Cash System, Foreign Company, Mercantile System, Revised Returns, Right To Receive

Summary

Issues Involved:
1. Change of method of accounting from mercantile to cash basis.
2. Computation of profit and estimation of commission income.

Detailed Analysis:

Change of Method of Accounting:
The primary issue revolves around the assessee's change of method of accounting from the mercantile system to the cash system. The assessee, a firm, initially filed a return based on the mercantile system but later submitted a revised return under the cash system, citing difficulties in receiving commission from a foreign party, Khyber Enterprises Inc., Chicago. The Income Tax Officer (ITO) rejected this change, arguing that the revised return was unnecessary and that the assessee acted on an after-thought. The Appellate Assistant Commissioner (AAC) upheld the ITO's rejection of the cash system but did not agree with the ITO's estimates of commission income.

The Tribunal, however, disagreed with the authorities, stating that an assessee is entitled to change its method of accounting if it is bona fide and necessary for its business. The Tribunal cited several precedents, including Sarupchand v. CIT [1936] 4 ITR 420 (Bom.) and CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal.), to support the assessee's right to choose its method of accounting. The Tribunal emphasized that the ITO should consider the revised return based on the new method of accounting, especially since no assessment had been made on the original return.

Computation of Profit and Estimation of Commission Income:
The second issue concerns the computation of profit and the estimation of commission income. The assessee argued that due to the foreign party's failure to remit the commission regularly, it was prudent to adopt the cash system. The Tribunal noted that while the cash method could be acceptable, substantial constraints existed that prevented the acceptance of the assessee's claim in this instance.

The Tribunal examined several cases, including Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 (SC) and Indermani Jatia v. CIT [1959] 35 ITR 298 (SC), to understand the implications of the cash and mercantile systems. It concluded that the method of accounting should not distort the chargeability of income. The Tribunal observed that the assessee maintained a current account with the foreign party, involving several transactions. The absence of specific allocation of amounts as commission made it difficult to ascertain whether the commission was received. The Tribunal held that the ITO was correct in rejecting the cash method for computing the year's profits.

However, the Tribunal found fault with the ITO's arbitrary estimation of commission income. It directed the ITO to compute the actual commission based on the agreement and the receipts from the foreign party. If precise computation was impossible, a reasonable estimate should be made.

Conclusion:
The Tribunal dismissed the appeals, upholding the AAC's decision to reject the cash system but remanding the case to the ITO for a proper computation of commission income based on actual receipts and the agreement terms. The ITO was instructed to avoid arbitrary estimations and base the assessment on concrete details provided by the assessee.