9911796707
TMI Blog2001 (9) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... 61, for the last 18 years. It is engaged in running a pathology laboratory. Since its inception, the petitioner has been following the accrual system of accounting for all items of expenditure and it has been following the cash/receipt basis for all collections. The petitioner says that it has been assessed from the assessment year 1983-84 onwards; that right from inception, its accounts have been prepared on the above basis; that computation of income on the above basis has been submitted to the Income-tax Department for the last 18 years; that during the said period, its method of accounting has never been questioned by the Income-tax Department; that the income returned by it has been consistently accepted by the Department in the past. For the assessment year 1994-95, the petitioner filed its return of income. This was on October 31, 1994, showing a total income of Rs.1,53,174. This return was accompanied by duly audited accounts for the year ending March 31, 1994, and by a tax audit report under section 44AB of the Act. Respondent No. 1 is the joint Commissioner of Income-tax. He is the Assessing Officer. Initially, respondent No. I issued an intimation under section 143(1)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch received the assent of the President on May 26, 1995, section 145(1) of the Income-tax Act came to be amended. That, before the said amendment, income was computed by following one of the three methods of accounting, viz., (i) cash or receipt basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method, which has elements of both the aforestated two methods. That, by the said amendment, it was decided that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with either the cash or the mercantile system of accounting. In other words, by the said amendment, the hybrid system of accounting was done away with. Mr. Dastur, however, pointed out that the said amendment took effect only from the assessment year 1997-98. He, therefore, contended that, in the present case, the Assessing Officer erred in issuing notice under section 148 only on the ground that the petitioner has computed its income on the basis of a mixed or hybrid method of accounting. Mr. Dastur pointed out that during the assessment year 1994-95, it was open to the assessee to follow that method. That the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of failure on the part of the assessee to disclose fully and truly all the facts. Hence, it was submitted that there was no reason to reopen the assessment. That, there is no averment for failure to disclose all the facts in the order sheet. That, this was a cage of change of opinion. That, earlier the Department had accepted the hybrid system of accounting followed by the assessee and now the Department insists on the assessee not following the said system for the assessment year 1994-95 and, therefore, it was a case of change of opinion. In support of his arguments, Mr. Dastur relied upon various authorities. Findings: In the present case, it cannot be disputed that, at the relevant time, mixed/hybrid system of accounting did prevail. That, this system of accounting has been well recognised by the Institute of Chartered Accountants of India (see clause 6 of Monograph on Compulsory Maintenance of Accounts). However, in the present case, the first respondent has now found that through inadvertence he overlooked the entry of Rs.6,70,758 representing unpaid purchase in respect of which he had wrongly granted a deduction. That, such unpaid expenses should not have been allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng allowed for unpaid purchases. Secondly, in the judgment of the Kerala High Court, there is no escapement of income from assessment. In the circumstances, the judgment of the Kerala High Court has no application to the facts of the present case. Similarly, in the case of CIT v. Citibank N. A. [1994] 208 ITR 930, this court has taken the view that the hybrid system of accounting is a well known system of accounting and if the assessee follows such hybrid system of accounting in respect of certain transactions and if the assessee follows the mercantile system of accounting in respect of certain other transactions, then no fault can be found with the hybrid system followed by the assessee. In that matter, the assessee was Citibank. It has certain non-performing assets. Therefore, for problem loans, they followed one system of accounting and for other loan accounts which had no such problems, they followed a different system of accounting. As stated hereinabove by us, the cases cited on behalf of the assessee show that the peculiar problem was faced by the bank or by the construction company with regard to certain items of income or expenditure which led the bank or the construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem of accounting. As stated hereinabove, in none of the judgments cited on behalf of the assessee, the courts have found escapement of income. There fore, the judgments cited on behalf of the assessee have no application to the facts of this case. In the case of CIT v. E. A. E. T. Sundarara [1975] 99 ITR 226 (Mad), the assessee maintained a separate account in respect of the sales tax collections and payments. These collections were not brought into the trading account. The Income-tax Officer treated these collections as the assessee's income. This led to the dispute. Ultimately, the Madras High Court came to the conclusion that the collection of sales tax constituted trading receipts and since the assessee, in that case, was maintaining the cash system only in respect of his' sales tax account, the liability to sales tax can be deducted only when the same is paid to the Government. Therefore, the court held that it is only when the assessee paid the amount to discharge his sales tax liability, he can claim deduction. These facts clearly show that there was no case for escapement of income from assessment. The Madras High Court observed that the assessee was entitled to employ on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loitation of the film. A further amount of Rs.1,00,000 was also debited. This amount of Rs.1,00,000 was the price paid for exploitation. However, the assessee did not take credit for the value of the unexpired exploitation rights at the end of the accounting period. It was in this context that the Supreme Court held that in the case of a trading venture whichever method of book-keeping is adopted for computing the true profits of the year the stock-in-trade must be taken into account. It is in this context that the Supreme Court made an observation that there are different systems of book-keeping. The Supreme Court further laid down that under the Income-tax Act, the tax is levied on income, profits and gains and not on receipts. That taxable profits cannot be deduced only from cash receipts. That, if in the computation of profits only the cash receipts are taken into account then, in substance, the profits would be deferred thereby transforming what in truth are the profits of the business into capital by merely making book entries. Therefore, the principle settled by the judgment is that even if the assessee is entitled to keep his accounts under a mixed system of accounting, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily due to failure of the assessee to disclose fully or partially some material facts relevant for assessment. That, if any item has escaped from assessment which was otherwise includible within the assessment and the Assessing Officer notices it subsequently by his own investigation or by reason of some information received by him, one cannot say that it constitutes change of opinion: see Praful Chunilal Patel v. M. J. Makwana [1999] 236 ITR 832 (Guj). However, in the present case, the period of four years has since elapsed. Therefore, the proviso to section 147 comes into the picture. Under the said proviso, no action can be taken after four years unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Therefore, it was contended on behalf of the assessee that, in the present case, there is no allegation of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In the present matter, as stated above, the assessee has been following the mercantile system of accounting for all items of expenditure and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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