1982 (4) TMI 210 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of provision for stipends payable to Articled Clerks.
2. Method of accounting employed by the assessee (cash vs. hybrid system).
3. Statutory liability and its impact on deduction claims.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Stipends Payable to Articled Clerks:
The primary issue in this case revolves around the CIT's direction to the ITO to disallow the provision of Rs. 23,587 for stipends payable to Articled Clerks employed by the assessee, a firm of Chartered Accountants. The CIT's order was based on the assertion that the assessee, following a cash system of accounting, could not make such a provision in its accounts. The CIT emphasized that under a cash system, entries for liabilities not yet disbursed cannot be made, thus rendering the allowance of the claim erroneous and prejudicial to the interests of the Revenue.

2. Method of Accounting Employed by the Assessee (Cash vs. Hybrid System):
The assessee argued that it had converted its method of accounting to a hybrid system, allowing for the provision of stipends as a statutory liability. The Tribunal noted that the law permits an assessee to employ different methods of accounting for different parts of its business or different classes of income, provided these methods are regularly and consistently followed. The Tribunal referenced the Madras High Court's decision in CIT vs. E.A.E.T. Sundararaj, which supports the use of multiple accounting methods if they result in a proper determination of true profits and are consistently applied.

3. Statutory Liability and Its Impact on Deduction Claims:
The Tribunal acknowledged that the liability to pay stipends to Articled Clerks arose from statutory requirements under the Chartered Accountants Regulations, 1964. This statutory liability is enforceable by law, and non-compliance could jeopardize the practice and profession of the Chartered Accountant. The Tribunal emphasized that if an assessee follows the mercantile system of accounting, statutory liabilities must be allowed as deductions based on accrual, irrespective of whether a provision was made in the accounts. In this case, the assessee had consistently followed the cash system but made a provision for stipends, thereby converting to a hybrid system of accounting.

Conclusion:
The Tribunal concluded that the assessee's conversion to a hybrid system of accounting was genuine, bona fide, and consistently followed thereafter. This conversion was driven by the need to comply with statutory requirements and to ensure the correct determination of income. The Tribunal found that the ITO's acceptance of the assessee's claim was not erroneous or prejudicial to the interests of the Revenue. Consequently, the Tribunal vacated the CIT's order under s. 263 of the IT Act, 1961, and allowed the appeal, affirming the assessee's entitlement to the deduction for the provision of stipends payable to Articled Clerks.