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TMI Blog2017 (5) TMI 841X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances, the assessees were entitled to follow a different system of accounting in respect of their transactions under the new agreement although with the same party, namely, MAL. A switch over in the midst of an accounting year, especially in such cases, could lead to skewed results. An assessee could then avoid paying the correct advance tax by following the cash system at first and then justifying the non-payment or short payment by switching over to the mercantile system. Further, the assessee could do this, theoretically at least, more than once leaving the entire assessment in a state of uncertainty and confusion. This would considerably fragment an assessment year. Apart from placing a burden on the Assessing Officer and the other authorities under the Act in carrying out the assessment in terms of time and resources, it would pose considerable difficulties in carrying out the assessment. The authorities would understandably be far more reluctant to accept a switch over in the midst of the financial year. Their decision to refuse to accept the switch over in the midst of financial year ought not be interfered with lightly. A switch over in the midst of financial year oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1981. The assessee endorsed its acceptance at the footnote of the letter. MAL agreed to avail of the assessee's marketing services with effect from April 1, 1981 till December 31, 1982. The arrangement was to be reviewed thereafter. In consideration of a payment of ₹ 30,000 per month including expenses of TA, DA, postage, telephone, telegrams and other incidentals of the assessee's travelling agent and other staff members and executives, the assessees agreed to provide the services mentioned therein which included sending their representative to the dealers of MAL at various places throughout India. The assessee's representatives were required to forward to MAL daily reports of their visits to each dealer, inter alia, in respect of showroom condition, sale of any other brand by the dealer, stock position and any other matter felt necessary. The assessee had been showing the commission derived pursuant to this agreement on accrual basis. (B) MAL and the assessee thereafter entered into an agreement dated October 1, 1983. By clause-1, MAL appointed the assessee as sole selling agents for sale of all their products in India, Nepal and Bhutan. The agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of goods shall also be borne by them. (C) After entering into the agreement dated October 1, 1983, the assessee changed its system of accounting from the mercantile to the cash basis. The change was only in respect of the commission received from MAL. The assessee continued showing the commission received from the other concerns on the mercantile/accrual basis. 4. The accounting year of the assessee was the first day of April each year to the 31st day of March of the following year. As we mentioned earlier, during the assessment year in question i.e. 1984-85, the assessee followed the mercantile system for the period April 1, 1983 to September 30, 1983 and the cash system for the period October 1, 1983 to March 31, 1984. 5. The Assessing Officer did not accept the change on the ground that the source of income in respect of all four concerns was the same. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, as did the Tribunal. The Assessing Officer referred to the authorities relied upon by the parties some of which we will shortly deal with. He also referred to section 145(1), which at the relevant time, read as under : ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt basis. It is definitely not a proper method of keeping the books of account. There is no consistency in maintaining of the accounts of income because the expenses have been claimed on mercantile basis and the gross income has been shown on receipt basis. Keeping in view the above discussion and also the forceful argument of the Income-tax Officer I hold that all the case law quoted by the appellant are not relevant on the facts of this case and the arguments of the appellant's counsel also stand on no footing. I, therefore, further held that it is not a new source of income and keeping in view the dubious method of planning for evasion of tax, the Income-tax Officer has rightly come to the conclusion that the income from this source should have been taken on mercantile basis. In these circumstances the addition of ₹ 14,09,241 made by the Income-tax Officer under the head 'Commission income' is confirmed. 7. The Tribunal partly allowed the assessee's appeal on the questions referred by it. The Tribunal upheld the decision of the Assessing Officer and of the Commissioner of Income-tax (Appeals). The Tribunal held that the assessee had not adopted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, the computation is to be made upon such basis and in such manner as the Income-tax Officer may determine. The proviso, therefore, does not place a bar upon the assessee's switching over from one system to the other. Nor did it at the relevant time bar the assessee from adopting different systems of accounting in respect of different transactions even if they were similar in nature. Strictly, the proviso does not even prohibit the assessee from switching over from one system to the other in the middle of the accounting year. The assessee could do so subject to the Income-tax Officer's right to insist upon a particular basis of accounting in the event of his being of the opinion that income cannot properly be deduced on the basis of the system adopted by the assessee. 11. For the first accounting year, a party would, in any event, be entitled to follow any accounting system subject only to the Income-tax Officer's insisting upon a particular system in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the statute book. If the assessee could at any moment of time say that he will not debit the interest because of some reason or the other, then it would open the floodgates of evasion. There is also no hardship as the Legislature has expressly provided that, if the income on the accrual basis has been included in the assessee's total income and tax paid thereon but subsequently it is found that that income was not received or could not be received, then in the year when such debt was found to have become irrecoverable or bad, it could be claimed as a bad debt. This provision is to be found in section 10(2)(xi) of the Act. This provision also indicates that the Legislature never intended an assessee to be able to resile from the mercantile system of accounting and the accrual basis at his sweet will and pleasure. In this view of the matter, it is wholly unnecessary to consider whether the financial position of the debtor was good or not, and whether there was any justification for the assessee not to have made the debit of ₹ 20,400 in the account of this particular debtor. That will be a matter which falls to be considered if and when the assessee claims the amount as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntentionally suppress the income derived or derivable in the particular previous year. Even where an assessee has adopted a particular method for a period of years, there is no provision of law which prevents him from changing to any other method, provided the changeover is not made in the same assessment year. We agree with these observations except to the effect that the changeover is not permissible in the same assessment year. Section 145 does not prohibit the same. Our attention was not invited to any other provision of law that prohibits it either. As a matter of fact, a switch over in the same assessment year would be allowed far less readily for reasons we will furnish later. That, however, is an aspect that relates to the exercise of discretion in the facts of a case and not to an absolute legal bar. 15. The answer to the first question requires a consideration as to whether in the facts of this case, the Tribunal was right in holding that the assessees could not adopt a cash system of accounting in respect of the commission received from MAL. In our view, on facts, the question must be answered in favour of the Department and against the assessee but only so far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 30,000 per month, clause 11 of the agreement dated October 1, 1983 entitled the assessee to commission at 1.5 per cent. upon the invoice price. Equally important is the fact that under clause 13 the disputed bills were to be settled by the assessees at their expense and the loss on return of goods was also to be borne by them. Such stipulations were absent in the first agreement. 19. The two agreements were, therefore, entirely different in their scope and nature. The rights and liabilities of the parties thereunder were also entirely different. In respect of the first agreement the assessees knew exactly how much they were entitled to receive, namely, ₹ 30,000 per month. Under the second agreement, although the commission was fixed at 1.5 per cent. The receipt thereof may well have been the subject matter of controversy and uncertainty, inter alia, on account of clauses 11 and 13. The controversy and the disputes could lead to litigation which in turn would be resolved only after years. The assessees, therefore, would not at any given point of time know with any degree of certainty as to the amount that they would be entitled to during the financial year. The uncertaint ..... X X X X Extracts X X X X X X X X Extracts X X X X
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