2001 (10) TMI 264 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under section 263 of the Income-tax Act.
2. Maintenance of books of account on cash basis versus accrual basis.
3. Compliance with section 209(3) of the Companies Act.
4. Consistency of method of accounting as per section 145 of the Income-tax Act.
5. Prejudice to the interests of Revenue.
6. Applicability of prior judgments and legal precedents.

Detailed Analysis:

1. 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, 1961, and in setting aside the assessments made under section 143(3) for the assessment years 1991-92 and 1992-93. The CIT noticed that the assessee maintained its books of account on a cash basis, which was inconsistent with section 209(3) of the Companies Act, amended by the Companies (Amendment) Act, 1988. Consequently, the CIT issued a notice under section 263, proposing to modify, cancel, or annul the assessment orders.

2. Maintenance of books of account on cash basis versus accrual basis:
The assessee, a finance company, consistently maintained its books of account on a cash basis and filed its returns accordingly. The CIT argued that the assessee should have maintained its books on an accrual basis as mandated by section 209(3) of the Companies Act, leading to the non-consideration of accrued interest on loans amounting to Rs. 28,493 for the assessment year 1991-92 and Rs. 1,07,884 for the assessment year 1992-93. The assessee contended that the method of accounting followed was consistent and did not prejudice the interests of Revenue.

3. Compliance with section 209(3) of the Companies Act:
Section 209(3) of the Companies Act requires companies to maintain books of account on an accrual basis and according to the double-entry system of accounting. The CIT argued that the assessee's failure to comply with this provision resulted in the non-recognition of accrued interest income. The assessee countered that section 209(3) pertains to the preparation and presentation of accounts to shareholders and does not automatically mandate the method of accounting for income-tax purposes.

4. Consistency of method of accounting as per section 145 of the Income-tax Act:
The assessee argued that section 145 of the Income-tax Act allows a choice of method of accounting, including cash basis, and this choice is not overridden by section 209(3) of the Companies Act. The assessee maintained that the method of accounting consistently followed should be respected, and any violation of the Companies Act should be addressed under that Act, not by altering the method of accounting for income-tax purposes.

5. Prejudice to the interests of Revenue:
The CIT concluded that the non-recognition of accrued interest income was prejudicial to the interests of Revenue. However, the assessee argued that the same income was offered to tax in subsequent years on a cash basis, and there was no differential tax impact. The assessee also highlighted the hardship of being liable to interest under section 234B due to the change in the method of accounting.

6. Applicability of prior judgments and legal precedents:
The Tribunal referred to several legal precedents, including the decisions of the Supreme Court in Investment Ltd. v. CIT and CIT v. A. Krishnaswami Mudaliar, which affirm the principle that the choice of method of accounting lies with the assessee. The Tribunal also distinguished the decision in Nagarjuna Finance Ltd. v. Dy. CIT, noting that it involved a different factual situation. Furthermore, the Tribunal cited the Supreme Court's ruling in Malabar Industrial Co. Ltd. v. CIT, which held that when two views are possible, the provisions of section 263 are not attracted.

Conclusion:
The Tribunal concluded that the provisions of section 209(3) of the Companies Act do not override section 145 of the Income-tax Act. The choice of method of accounting lies with the assessee, and the CIT's action under section 263 was not justified. The Tribunal set aside the CIT's order and restored the assessments made by the Assessing Officer for both years. The appeals of the assessee were allowed.