1990 (1) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Change in the method of accounting.
2. Validity of the hybrid system of accounting.
3. Deduction of true profits and gains.
4. Application of Section 11(4A) of the IT Act.
5. Bona fides of the change in accounting method.
6. Provisions of Section 145 of the IT Act.

Detailed Analysis:

1. Change in the Method of Accounting:
The assessee, a registered society under Section 12A of the IT Act, switched from the mercantile system to a hybrid system of accounting from April 1, 1984. This change was due to delays in realizing money from advertisements, circulation, printing, and processing, which affected the statutory requirement of applying income to charitable objectives.

2. Validity of the Hybrid System of Accounting:
The Income Tax Officer (ITO) and Commissioner of Income Tax (Appeals) [CIT(A)] rejected the switch to the hybrid system. The ITO computed the taxable income on a mercantile basis, considering Rs. 30,91,093 as receivables not accounted for by the assessee. The CIT(A) upheld this, noting that expenses were booked on an accrual basis while receipts were on a cash basis, which did not match the income and expenses.

3. Deduction of True Profits and Gains:
The ITO and CIT(A) concluded that the hybrid system did not allow for the proper deduction of true profits and gains. The CIT(A) cited cases such as CIT vs. Sarangpur Cotton Manufacturing Co. and CIT vs. Krishnaswamy Mudaliar to support this view. The assessee's method was deemed inconsistent and not a valid method of accounting.

4. Application of Section 11(4A) of the IT Act:
The provisions of Section 11(4A) were applicable, which meant that the assessee's publication business profits were not exempt from taxation. The CIT(A) noted that the assessee's business was not carried out by the beneficiaries of the trust but on commercial lines, thus denying exemption under Sections 11(1), 11(2), and the connected provisions of Sections 11(3) and 11(3A).

5. Bona Fides of the Change in Accounting Method:
The assessee claimed the change was to reflect the true state of affairs and to meet statutory requirements. However, the CIT(A) found no substantiated evidence of collection problems that justified the switch. The assessee failed to provide comparative data on collection issues, leading to the conclusion that the change was not bona fide.

6. Provisions of Section 145 of the IT Act:
Section 145 mandates that income must be computed according to the method of accounting regularly employed by the assessee. The proviso allows the ITO to determine income if the method does not enable proper deduction of taxable income. The assessee's hybrid system was found to be arbitrary and not a recognized method, thus activating Section 145(2) for a best judgment assessment.

Conclusion:
The appeal by the assessee was dismissed. The lower authorities were justified in rejecting the switch to the hybrid system of accounting and in determining the income on a mercantile basis. The assessee's method did not allow for the proper deduction of true profits and gains, and the change was not substantiated as bona fide. The provisions of Section 145(2) were applicable, enabling the ITO to make a best judgment assessment.