1995 (10) TMI 79 - AT - Income Tax

Summary

Issues Involved:

1. Method of Accounting
2. Determination of Total Income
3. Disallowances of Expenses
4. Status of the Appellant (registered-firm vs. unregistered-firm)

Issue-wise Detailed Analysis:

1. Method of Accounting:

The appellant adopted a hybrid method of accounting, using the mercantile system for purchases and expenses, and the cash system for sales. The Assessing Officer rejected this method, arguing it made it impossible to deduce correct profits and allowed for indefinite postponement of tax liability. The Assessing Officer invoked Section 145(1) of the Income-tax Act to determine the income on a mercantile basis, including sales shown in the sales suspense account.

The appellant contended that it is free to choose its method of accounting as long as it is consistently followed, arguing that the hybrid method was adopted due to recovery problems and business expediency. The appellant cited various judicial precedents to support the validity of its chosen method.

The Tribunal upheld the Assessing Officer's rejection of the hybrid method, emphasizing that even if the method is legally valid, it must enable the proper deduction of profits. The Tribunal referenced the Madras High Court's decision in G. Padmanabha Chettiar & Sons v. CIT, which held that the same basis must be adopted for receipts and payments. The Tribunal concluded that the hybrid method did not reflect true profits and inherently postponed tax liability, thus justifying the Assessing Officer's actions.

2. Determination of Total Income:

The Assessing Officer determined the total taxable income by including sales from the sales suspense account, initially apportioning the total income into realized and unrealized sales. The Commissioner of Income-tax (Appeals) disagreed with this bifurcation, holding that the total assessable income should be Rs. 1,95,550, not Rs. 1,18,237.

The Tribunal concurred with the Commissioner, stating that the Assessing Officer's bifurcation was incorrect. The Tribunal emphasized that once the hybrid method was rejected, the total income should be computed on a mercantile basis without bifurcation. The Tribunal found no flaw in the Commissioner's enhancement of the assessment.

3. Disallowances of Expenses:

The Assessing Officer made several disallowances, including traveling expenses, commission payments, and carriage outwards expenditure. The Commissioner of Income-tax (Appeals) upheld these disallowances.

The appellant argued that these expenses were fully vouched and verifiable, thus should not have been disallowed. However, the Tribunal upheld the disallowances, agreeing with the lower authorities that the expenses were not justified.

4. Status of the Appellant (registered-firm vs. unregistered-firm):

The appellant initially raised the issue that its status should have been taken as a registered firm instead of an unregistered firm. However, the appellant did not press this ground during the proceedings, leading to its rejection.

Conclusion:

The Tribunal upheld the Assessing Officer's rejection of the hybrid method of accounting and the determination of total income on a mercantile basis, including sales from the sales suspense account. The Tribunal also upheld the disallowances of various expenses and rejected the appellant's contention regarding its status as a registered firm. The Tribunal found no merit in the appellant's arguments and confirmed the Commissioner of Income-tax (Appeals)'s enhancement of the assessment.