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TMI Blog2006 (10) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing cash system of accounting, such interest income from firm is offered for taxation in the year of receipt and not in the year of credit to their accounts. The Assessing Officer found that since the firm is crediting accounts of partners to the extent of amount due which is accumulated over years and again interest is paid on such capital account including interest of earlier years credited, it amounts to payment and hence the partners should have offered the income by way of interest credited to their account. He accordingly issued notice under section 148 dated 30-5-2002 to reassess the income of partners. The assessee objected to proceedings under section 148. The Assessing Officer after considering the objection by assessee held that when the liability to pay tax is evaded by one method or the other, there is escapement of assessment. The term 'escaped assessment', includes non-assessment as well as under-assessment. Since the income was not correctly disclosed, it can be said that there was no full and true disclosure and hence reopening of assessment is justified. 3. In the reassessment proceedings, the Assessing Officer held that the assessee followed mercantile sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partner. Such sum was accordingly brought to tax. 4. Learned CIT(Appeals) held that there is no bar to an individual to choose his method of accounting and the method of accounting followed by the firm is not binding on the partners. In a case where a company owned by Directors follows mercantile system of accounting and claimed expenditure on such basis but the Directors offering such income on cash basis, such method has to be accepted as held in the case of Dr. N.K. Brahmachari v. CIT [1992] 104 CTR (Cal.) 209. The assessee is allowed to choose and follow cash system of accounting and income should be determined on the basis of method regularly followed. The ratio of Hon'ble Supreme Court in McDowell Co. Ltd. will not apply in view of the subsequent decision of the Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. The ground relating to reopening of assessment was not adjudicated as the same was held to be of academic interest. Interest charged under sections 234A and 234B is held consequential in nature. 5. Whereas the revenue challenges deletion of addition in respect of interest income, in the cross objections the assessee challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves do alone in such cases best declare the intent of the law giver.' It is a cardinal principle of construction of statute that when language of the statute is plain and unambiguous, then the court must give effect to the words used in the statute and it would not be open to the courts to adopt a hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. In Kirkness v. John Hudson Co. Ltd. [1955] (2) All ER 345, Lord Reid pointed out as to what is the meaning of "ambiguous" and held that "a provision is not ambiguous merely because it contains a word which in different context is capable of different meanings and it would be hard to find-anywhere a sentence of any length which does not contain such a word. A provision is, in my judgment, ambiguous only if it contains a word or phrase which in that particular context is capable of having more than one meaning". It is no doubt true that if on going through the plain meaning of the language of status, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l cases that one must have regard to the strict letter of the law and if the revenue satisfies the Court that the case falls strictly in the provisions of law, the subject can be taxed." Referring to the provision of Indian Partnership Act, 1932, Shri Jaiswal submitted that the partnership is the relation between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all. As per section 2(23) of the Income-tax Act, 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932. The assessees who are partners, are related to each other and have total control over the affairs of the firm. There is no prohibition in the partnership deed for withdrawing any sum standing to the credit of such partner's account. The assessee is merely required to withdraw and such withdrawal cannot be considered as received but the moment the amount is credited to their account, it is as good as receipt by the partner. The assessees have conveniently allowed to swell their accounts from year to year and there is no material to show that such funds are not available to the individual partners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received". In the matter of payments, there are two aspects, viz., (1) payments due, and (2) payments received. The mercantile system of accountancy takes note of "payments due" whereas the cash system of accountancy recognizes only payments received. Mercantile system of accountancy, a double entry system, is maintained on the basis of accrual of rights to receive or liability to pay a certain sum of money, unlike in the case of cash system of accountancy which merely takes note of actual receipts or disbursements." As per section 145 as amended with effect from 1-4-1997 the assessee can follow either the mercantile system or cash system of accounting. The assessee was following mercantile system of accounting till assessment year 1997-98. The assessee changed the system of accounting in respect of interest and remuneration from firm by switching over to cash system. Such change is allowable provided the change is bona fide and followed consistently thereafter. As per sub-section (3) of section 145 if the Assessing Officer is not satisfied about the method of accounting followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile system of accounting regularly employed by the assessee. Such choice of method is at the discretion of assessee and not Assessing Officer. As per section 2(23) the words 'firm', 'partner' and 'partnership' shall have meanings respectively assigned to them in the Indian Partnership Act, 1932. As per the Indian Partnership Act, 1932, the persons constituting the partnership are individually called partners and collectively called firm. Thus though under the Income-tax Act, 1961, the firm and partners are separate assessable entities, the firm is not a separate juristic entity independent to its partner. 8.1 It is now settled law that the mercantile system of accountancy takes note of "payment due" whereas cash system of accounting recognizes only payment received. Under the cash system of accounting, only the actual receipts or disbursement are accounted for. The question, therefore, to be decided is whether the amount credited by the firm to the individual account of the partners in their capital account with firm can be said to have been received by the partners or not. It is agreed fact that in the partnership deed there is no prohibition for the partner withdrawing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year itself. Similarly the decision of ITAT, Bangalore in the case of Bajaj Ashok Chunnilal will also do not apply to the present set of facts. At this juncture it is relevant to consider the decision of Hon'ble Bombay High Court in the case of Motichand Devidas, In re [1946] 14 ITR 534. Following questions were referred for the opinion of Hon'ble High Court: (1) Whether, in the circumstances of the case, there was a discontinuance of the business or profession carried on by M/s. Motichand and Devidas on 8-7-1940, when Mr. Devidas died, so as to entitle the assessee to the relief provided by sub-section (3) of section 25 of the Indian Income-tax Act, 1939? (2) Whether, in the circumstances of the case, the applicants were properly assessed on the "receipts" or "cash" basis? Hon'ble High Court answering the second question held as under: "Dealing with the second question first, it appears to us clear that the Income-tax Officer was entitled to adopt the method of receipts or cash basis, for assessing the income of the assessee firm. The fact that they had been assessed in the previous years on the footing of their withdrawals in each year, cannot make it "a method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is following cash system of accounting in respect of interest and remuneration from the firm was also specifically mentioned by way of note. In absence of any fresh material coming to the knowledge of Assessing Officer, the Assessing Officer is not justified in reopening the completed assessment. 10. Learned Special Counsel for revenue, on the other hand, relied upon assessment order. He submitted that the objection raised by the assessee during assessment proceedings was discussed and dismissed. Thus the action of the Assessing Officer has to be upheld. Alternatively it was submitted by both the counsels that if the main issue in appeal by revenue is held in favour of assessee, this ground need not be adjudicated upon. However, if the same is decided otherwise, since the issue has not been decided by learned CIT(Appeals), the same may be decided by the Tribunal. 11. We have considered the rival submissions. In the present case original assessment was completed under section 143(1)(a). While computing the income under section 143(1)(a) the Assessing Officer has no power to vary the income declared in the return. In fact he formed no opinion on such return. However, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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