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TMI Blog1984 (2) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee's learned counsel, Dr. D. Pal, at the outset pointed out that he had instructions not to press, the grounds relating to the Commissioner's order pertaining to the amalgamation expenses which, according to the Commissioner, were of the capital nature. He accordingly, confined his arguments only in respect of the Commissioner's order relating to the treatment to be made in the assessments in regard to the interest receivable by the assessee to the extent of Rs. 1,38,011 and Rs. 1,76,000, respectively, from Bihar Alloy Steels Ltd., in the assessment years 1976-77 and 1977-78. It has been pointed out that the Commissioner in arriving at his conclusion that the ITO's orders of assessments were erroneous insofar as they were prejudicial to the interests of the revenue, based his judgment on two premises, namely, that the interest receivable by the assessee from Bihar Alloy Steels Ltd. amounting to Rs. 1,38,011 in the assessment year 1976-77 and Rs. 1,76,000 in the assessment year 1977-78 were includible in the hands of the assessee-company on mercantile basis inasmuch as the amounts in question were debited in the profit and loss account of Bihar Alloy Steels Ltd. for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cases, the ITO did not include the interest receivable by the lender-companies from Bihar Alloy Steels Ltd. on accrual basis. In other words, according to the learned counsel, there was an understanding between the various companies belonging to the Birla group of cases and the department in terms of which the ITO did not assess the interest on advances made by the lender-companies on accrual basis and the debtor-company also did not claim the interest payments as deduction admissible under the mercantile system of accounting and it was claimed only in the year in which companies actual payments were made by way of interest to the lender-companies. In this connection, our attention was drawn to the letter dated 2-2-1981 of Birla Jute Manufacturing Company Ltd., addressed to the Commissioner (Central), Calcutta, requesting the Commissioner to intervene in the proposed action of the ITO in assessing the interest receivable from Bihar Alloy Steels Ltd., on mercantile basis, in disregard of the understanding reached between the department and the various companies under the Birla group for consideration of interest amount in the hands of the lender-companies on receipt basis. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on receipt basis, the Commissioner could not object to the method of accounting followed by the assessee, though the debtor-company might have followed a different method of accounting in respect of interest that it had to pay to the parties from whom it borrowed money on interest. It has been stated that the assessee was at liberty to follow different methods of accounting in respect of different sources of income and for this proposition he relied on three High Court decisions in CIT v. F.A.E.T. Sundararaj [1975] 99 ITR 226 (Mad.), CIT v. Rajasthan Investment Co. (P.) Ltd. [1978] 113 ITR 294 (Cal.) and Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.). It has been argued that the Commissioner's reliance on the Calcutta High Court decision in Reform Flour Mills (P.) Ltd.'s case was completely misplaced as in that case the real issue before the High Court was different, namely, whether the interest which was included in the assessment being the interest receivable on loans advanced to Associated Industries (Assam) Ltd. was the real income of the assessee. In this connection, the learned counsel drew our attention to the observation of the Hon'ble Calcutta High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, urged that the ITO's orders both in respect of the assessee-company and the debtor-company, could not be considered as erroneous and in that way, the Commissioner did not have proper jurisdiction in exercising his powers in terms of section 263. It has been stated that apart from interest on loans advanced to Bihar Alloy Steels Ltd., the two other receipts on account of guarantee commission and advisor's remuneration credited in the profit and loss account on cash basis for the two assessment years under appeal have been accepted by the ITO in spite of the Commissioner's observation that the accounts of the assessee-company were maintained on mercantile basis. 4. In reply, the departmental representative argued that it was wrong to say that the assessments in the case of both the assessee-company and the debtor-company at Patna were made on the basis of an understanding reached by the department as has been mentioned in the letter of Birla Jute Manufacturing Co. Ltd., dated 2-2-1981, addressed to the Commissioner (Central), Calcutta. It has been stated that in the returns filed by the assessee-company the only accounting system disclosed in respect of its different sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. We have also gone carefully through the records of the case. Both the assessee-company and the debtor-company are assessed by the same ITO, namely ITO Ward B, Special Investigation Circle, Patna. In the case of Bihar Alloy Steels Ltd. the ITO in completing the assessments for 1976-77 and 1977-78 disallowed interest payable on mercantile basis to different companies of Birla group amounting to Rs. 53,49,781 and Rs. 63,71,674, respectively, by observing, inter alia, as follows : " Since these companies follow receipt basis in their books of account, the claim has been rejected as the assessee has not paid anything and has made provision for payment. Deduction will be given on cash basis." In respect of the assessment year 1976-77, the ITO mentioned the names of seven Birla companies and in respect of the assessment year 1977-78 the amount disallowed to the extent of Rs. 63,71,674 comprised interest payable to nine Birla companies. In both the years, interest payable to Rameshwara Jute Mills Ltd.---the assessee-company has been considered while disallowing the interest amount of Rs. 53,49,781 for the assessment year 1976-77 and Rs. 63,71,674 for the assessment year 1977-78. Bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to the case of Reform Flour Mills (P.) Ltd. In the two decisions relating to the case of Snow White Food Products Co. Ltd. relied on by the assessee's learned counsel---the Calcutta High Court observed that a change in the method of accounting need not have the approval of the income-tax authorities and the change need not be supported by cogent reasons showing the bona fides of the assessee. It has been observed that if the method of accounting followed by the assessee does not reflect the correct income, the ITO can always compute the income on a different basis under section 144 of the Act. In respect of the first decision in Snow White Food Products Co. Ltd.'s case the High Court upheld the revenue's stand that the assessee-company was not entitled to change its method of accounting from the mercantile to the cash system in respect of its interest income as the Tribunal found that for the assessment year 1968-69, no evidence could be produced by the assessee that a change effected in the method of accounting was only for the year and there was nothing on record to indicate that the change was intended to follow regularly in future by the assessee. In the subsequent deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding interest receivable from Associated Industries (Assam) Ltd. on accrual basis as the system of accounting followed by the assessee in the past was the mercantile system. The assessee appealed and submitted that it had changed the method of accounting from mercantile to cash system and, moreover, the interest not having been received for a number of years, in the past, and there being no chance of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing the interest income in the account. The AAC rejected these contentions on the ground that the assessee-company had been following the mercantile system of accounting and it could not be permitted to follow the cash system with reference to interest receivable from a particular debtor. On further appeal, the Tribunal sustained the addition of the interest income. It was held by the High Court that there was no question of a change of method, as was mentioned by the assessee in the statement of the case, but only treatment of a particular transaction differently or separately from the method followed by the assessee. This, according to the High Court, was not permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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