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TMI Blog1981 (11) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... erest or the principal amounts. Accounting on receivable basis would give a false impression of its profits. It was contended further that this change in the method of accounting was bona fide. The AAC held that such departure from the previously employed system was not permissible as the accounts would then cease to reflect the true profit and loss. The assessment by the ITO was upheld. The assessee went up on further appeal before the Income-tax Appellate Tribunal. Before the Tribunal it was reiterated on behalf of the assessee that for some years past it had not been receiving interest from its debtors whose position was such that there was little chance of realisation of the debts. Therefore, the method of accounting in respect of the assessee's interest income had been changed and unless such change was made the accounts would give a false impression of income from interest. The assessee contended that it was open to it to make change in its regular method and employ a different method of accounting even in respect of different parts of its business or different classes of its customers. It was contended on behalf of the Revenue, on the other hand, that in Pt. IV of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court : " Whether, on the facts and in the circumstances of, the case, the Tribunal was right in holding that the assessee-company was not entitled to change its method of accounting from the mercantile to the cash system in so far as the credits in the interest account were concerned and thus in holding that the sum of rupees one lakh fifty eight thousand three hundred and thirty-six only being interest accrued during the relevant year but not received was liable to be included in the assessment year 1968-69 ?" At the hearing, Mr. Poddar, learned advocate for the assessee, submitted that the following had been found as facts and stood undisputed. The assessee had in fact changed its system of accounting from mercantile to cash basis in respect of its income from interest in the relevant assessment year. This was accepted by the revenue authorities and also the Tribunal. It was also found that interest from a joint venture of the assessee was being accounted for on cash basis and that for several years past the assessee had not been receiving payment of interest from its debtors. Mr. Poddar submitted further that it was also a fact that the changed method of accounting in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in the relevant period. He submitted that under s. 145 of the I.T. Act the assessee had the option of choosing his own method of accounting and to change the same unilaterally. The assessee was not required to enter into any contract with his customers nor to obtain the permission of the I.T. authorities for this purpose. The fact whether the debtors of the assessee were unable to pay interest or not was in the strict sense wholly irrelevant to the issue. Mr. Poddar next submitted that the Tribunal was in error in following and applying the decision of the Allahabad High Court in Shiv Prasad Ram Sahai [1966] 61 ITR 124 (All), as the said decision has been expressly dissented from by this court in Reform Flour Mills P. Ltd. v. CIT [1978] 114 ITR 227. Mr. Poddar next submitted that none of the authorities below, viz , the ITO, the AAC and the Tribunal, found clearly or recorded that the assessee did not follow the changed method of accounting regularly. The point was not even raised before the Tribunal and as such it must be presumed that the changed method was followed regularly by the assessee in subsequent years. It was also submitted that, in any event, it was the dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aram Co. Ltd. v. CIT (1959] 36 ITR 162 (Mad). In this case, the dispute, inter alia, was whether an amount of commission not received by the assessee could be brought to tax though the assessee claimed that it had adopted cash system of accounting. There was no express finding by the Tribunal that the said system of accounting had been regularly employed by the assessee. On a reference, the High Court of Madras held that as the same system of accounting had been adopted by the assessee in subsequent years the test that the method had been de regularly employed " must be held to be satisfied. It was, however, held on other facts that this system failed to disclose the true income of the assessee who thus came under the mischief of the proviso to s. 13 of the Indian I.T. Act, 1922. (c) Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad). The assessee in this case carried on business of banking and held securities and shares as its stock-in-trade or circulating capital, which were valued usually at cost at the commencement and also at the close of the year of account. The assessee valued the securities at cost at the commencement of 1951 and at market value at the end of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that as the assessee had never offered its rent to be assessed on accrual and had followed the cash system in respect of this income, the Revenue was not entitled to assess such rent on accrual basis. The fact that the rent was assessed on accrual in previous years was immaterial. (e) CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal). The assessee here was a company and derived income mainly from interest. It also had some dividend income. In the relevant assessment year the directors of the assessee passed a resolution that from the relevant accounting year the method of accounting of the company would be changed from mercantile system to cash and that this new method should be followed thereafter. This resolution was confirmed at a general meeting of the shareholders of the assessee. The Tribunal held that the assessee could elect to be assessed on cash basis and directed the ITO to make assessment on that basis. On a reference this court held that under s. 291 of the Companies Act, the directors were empowered to change the method of accounting. The Tribunal had proceeded on the evidence on record and had found that the change in the method of accounting w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unilaterally was not accepted and it was held that s. 145 of the I.T. Act did not debar an assessee from changing his accounting method. Even if the altered method was not followed by the assessee regularly the taxing authority could not fall back upon the earlier method but had to make an assessment under s. 144 of the Act. The matter was remanded to the Tribunal for being considered afresh. On the questions of review of facts on a reference and of remand, Mr. Poddar also cited the following decisions : (a) Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC), (b) Mahesh Anantrai Pattani v. CIT [1961] 41 ITR 481 (SC), (c) CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC), (d) Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC), (e) CIT v. Webbing Belting Factory Ltd. [1968] 68 ITR 186 (SC), (f) Oriental Investment Co. P. Ltd. v. CIT [1969] 72 ITR 408 (SC), (g) CIT v. Rajasthan Mines Ltd. [1970] 78 ITR 45 (SC), (h) Smt. Chandravati Atmaram Patel v. CIT [1978] 114 ITR 302 (Guj), (i) Phulchand Ratanlal v. CIT [1976] 103 ITR 174 (Gauhati), (j) CIT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133 (SC), and (k) An unreported decision of this court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue profit and loss. This finding was not challenged in the appeal before the Tribunal which upheld the order appealed from. It was submitted that as such the finding of the AAC had been accepted by the Tribunal. It was next submitted that the Tribunal had indirectly held that the change in the method of accounting of the assessee was not bona fide as no evidence was produced in support of the change nor any reason given for the necessity for the change. Mr. Sengupta lastly submitted that the assessee was not entitled to change the method of his accounting without the approval or satisfaction of the I.T. authorities. In support of his contentions Mr. Sengupta cited the following decisions : (a) Ramkumar Kedarnath v. CIT [1937] 5 ITR 261 (Bom). In this case the assessee had adopted the mercantile system of accounting. In the year ending on the 31st December, 1933, the assessee did not include in its income, commission accrued from the 1st July till the 3lst December, 1933, on the ground that the party concerned was in financial difficulty and there was a possibility that such commission might not be paid at all. The revenue authorities included such commission in computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax, to say that he will not debit the interest which may have accrued as a debt in its accounts for any reason whatsoever." Mr. Sengupta also cited on the decisions in Sarupchand [1936] 4 ITR 420 (Bom), Indo-Commercial Bank Ltd. [1962] 44 ITR 22 (Mad), Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal) and Rajasthan Investment Co. (P.) Ltd.[1978] 113 ITR 294 (Cal), which were cited on behalf of the assessee and have been considered earlier. Before dealing with the points at issue it may be convenient to refer to the relevant portions of s. 145 of the I.T. Act which reads as follows : " 145. (1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee... (2) Where the Income-tax Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in section 144. " The said section and the corresponding s. 13 of the earlier Act have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the amount of interest in Part IV of its return is, in our view, not of much relevance to the points in controversy. The finding of the AAC that the changed system of accounting does not reflect the true profit and loss of the assessee was neither agitated nor adverted to before the Tribunal. If the method of accounting did not reflect the true profit or loss it was for the ITO to proceed on the basis of best judgment. The ITO proceeded merely by rejecting the change claimed by the assessee. We are unable to appreciate the contention of the Revenue that the Tribunal has held indirectly that the change claimed by the assessee was not bona fide. Fides of an act have to be found as a fact and such a finding of fact must be specific. The Tribunal has, however, held specifically that on the evidence on record it cannot be said the assessee had decided to change its existing regular method of accounting by another regular method. This conclusion of the Tribunal appears to be correct. The statement in the annual report of the assessee only records that the management had decided to account for the interest receivable during the year on cash basis and this indicates that the chang ..... X X X X Extracts X X X X X X X X Extracts X X X X
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