1982 (4) TMI 207 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of provision for stipends payable to articled clerks.
2. Method of accounting employed by the assessee.
3. Statutory liability and its recognition in accounts.
4. Consistency and regularity in the method of accounting.

Detailed Analysis:

1. Disallowance of Provision for Stipends Payable to Articled Clerks:
The Commissioner directed the Income Tax Officer (ITO) to disallow the provision of Rs. 23,587 made by the assessee for stipends payable to articled clerks. The assessee, a firm of chartered accountants, was under statutory obligation to pay stipends to articled clerks as per Regulation 32B of the Chartered Accountant Regulations, 1964. Despite contesting this obligation legally, the firm claimed the liability as a deduction in its adjusted profit and loss account. The Commissioner disallowed the claim on the grounds that the provision was not made in the accounts and the firm followed a cash system of accounting.

2. Method of Accounting Employed by the Assessee:
The firm had been consistently following a cash system of accounting. However, for the assessment year in question, the firm made a provision for the liability of stipends, thereby converting its method of accounting to a hybrid system. The Commissioner argued that the firm could not adopt different methods of accounting for different items and that the provision for stipends was not allowable under the cash system.

3. Statutory Liability and Its Recognition in Accounts:
The statutory liability to pay stipends was enforceable by law, and non-compliance could jeopardize the practice and profession of the chartered accountant. The Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT held that a statutory liability must be allowed as a deduction irrespective of whether it was provided for in the accounts, provided the mercantile system of accounting was followed. The assessee's method of accounting was scrutinized to determine if the statutory liability could be recognized under a hybrid system.

4. Consistency and Regularity in the Method of Accounting:
The Tribunal emphasized that a method of accounting must be regularly and consistently followed. The Madras High Court in CIT v. E.A.E.T. Sundararaj permitted different methods of accounting for different parts of a business, provided they were employed regularly and consistently. The Tribunal noted that the assessee had consistently followed the hybrid system of accounting after the change, thereby satisfying the requirement of regularity and consistency.

Conclusion:
The Tribunal concluded that the Commissioner erred in disallowing the provision for stipends. The change in the method of accounting to a hybrid system was genuine and consistently followed thereafter. The statutory liability to pay stipends was enforceable and should be allowed as a deduction. The ITO's allowance of the claim was not erroneous or prejudicial to the interests of the revenue. Therefore, the Tribunal vacated the Commissioner's order and allowed the appeal.