9911796707
TMI Blog1987 (3) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... o the appeal by the assessee that the CIT(A) erred in confirming the assessment made on the basis of the original return disregarding the revised return and that the revised return should not have been declared as invalid within the meaning of section 139(5). The assessee has also taken a ground that the change over of the system of accounting from mercantile to cash has been rejected by the authorities below on arbitrary and flimsy grounds. 3. Briefly speaking, the assessee is a State Industrial & Investment Corporation of U.P. Its objects are stated to be for accelerating industrialisation through various assistance to entrepreneurs and other agencies. In that process, it gave advances and loans on which interest was earned. It also paid interest on its own borrowings and deposits etc. It has been stated before us that the assessee right from the inception, has been following mercantile system of accounting and the accounting period followed was the financial year i.e. March ending. For the assessment year 1981-82, the previous year ended on 31-3-1981. The assessee filed a return for the assessment year 1981-82 on 15-10-1981 with an income of Rs. 56,56,910. The assessee also fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by copies of balance-sheet and other accounts ended on 31-3-1981. The said return was verified and signed by the Managing Director on 6-10-1981. He also indicated that the assessee filed an estimate of his income for the purpose of advance tax on 12-9-1980 at Rs. 5,54,150 on which Rs. 33 lakhs was worked out as advance tax payable, that estimate of advance tax was revised on 13-3-1981 and the income was reduced to Rs, 46,89,000. The ITO pointed out that even at the time of filing of those papers, the assessee-Corporation was very clear in its view that it has to return the income on the basis of the mercantile system of accounting, which has been followed since the past many years and that there was no indication of switching over from mercantile system of accounting to cash system for the accounting period 1980-81 relevant to the assessment year 1981-82. 4. He pointed out that only on 12-2-1981, the Board of Directors decided to change over to cash system with effect from 1-4-1981. He reproduced the resolution to that effect in the assessment order itself. He also pointed out that it was only after the return was originally filed on 15-10-1981 that a decision was taken in the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn can be filed and that the said revised return cannot be acted upon. 6. The Assessing Officer also considered the provisions of section 4 and section 145 in dealing with the point of accrual. He was of the view that the Income-tax Act permits the assessee to adopt any method of accounting and once such a method was adopted, the same method would have to be followed consistently and cannot be changed at the will of the assessee. He referred to the decision of the Hon'ble Allahabad High Court in the case of Balraj Virmani v. CIT [1974] 97 ITR 69 to emphasise that under the mercantile system of accounting an income became assessable when it accrued even if it was not received. According to him, the assessee cannot be permitted to change the system of accounting just to avoid incidence of taxation. Reference was made to the decision in the case as reported in CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal.). According to the ITO, the retrospective change of accounting method in the case of the assessee cannot be said to have been made in good faith because the purpose behind the change was to avoid proper assessment of tax on the income, which had already accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end of the accounting period concerned, the assessee has been following the mercantile system of accounting and during that period, the assessee had no intention of following the cash system, as indicated in the assessment order. He, therefore, held that the ITO was justified in rejecting the claim of the assessee for the change of the accounting method and consequently the revised return filed by the assessee. In other words, the CIT(A) sustained also the decision of the ITO to disregard the revised return. The CIT(A) also referred to section 211 of the Companies Act, 1956, which required a company to prepare balance-sheet which gives a true and fair picture at the end of the financial year and that the profit and loss account should also give the same picture. According to him, the cash system followed by the assessee would not give a true and fair picture of the affairs of the company. He also remarked that even the auditors had objected to the change of the accounting system and under ground also, the change of the accounting was not accepted. 9. For the assessment year 1981-82, the grievance of the assessee as mentioned earlier was against the confirmation of the CIT(A) in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny be authorised to take necessary steps in taking follow up action. It is argued at length by the assessee's learned counsel that the original return was filed provisionally along with those copies of accounts which have not been audited at all and, therefore, the first return should not have been acted upon particularly when the assessee filed a revised return in the instant case, which in fact was a correct and valid return in the eye of law and the first return has become non est. It is also argued that the assessee has right to file a revised return and, therefore, the authorities below went wrong on facts and in law in making the assessment for the year 1980-81 on the basis of original return as mentioned earlier. 11. Reference is made to various case laws in respect of the assessee's contention. It is also urged that the assessee has got a right to choose a particular method of accounting and the Income-tax Department could not compel the assessee to adopt a particular method of accounting at any time. It is also urged that there is no need for obtaining prior approval from the department at their change over of system was to be effected. Reference is made to the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when there was any omission or mistake in the original return and that in the instant case, the assessee has not shown any omission or mistake which had crept in the original return. Reference is also made to the decision as reported in [1985] 22 Taxman, page 222, in which it is stated that the decision as reported in Eastern Bengal Jute Trading Co. Ltd.'s case had not been considered. 13. At this juncture it was pointed out by the learned Departmental Representative that for the next year i.e. 1981-82, the assessee filed a Writ Petition before the Hon'ble Allahabad High Court. But the claim of the change over was rejected, which fact would support the fact that the filing of the revised return was not proper for the year 1980-81. Reference is made to a decision as reported in CIT v. Bharat Refineries Ltd. [1986] 162 ITR 652 (Cal.). It is, therefore, submitted that when the first return in the instant case was valid there was no question of filing a second return. Reference is made in Kma Ltd. v. ITO [1986] 15 ITD 307 (Bom.), Sandvik Asia Ltd. v. ITO [1986] 17 ITD 78 (Pune), Shiv Prasad Ram Sahai's case and (sic) 143 ITR 116 at page 728, Alld., Eastern Bengal Jute Trading Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee fails. 15. Another important aspect of the assessee's contention is regarding the change of the system of accounting. As indicated earlier, return was filed on 15-10-81 on the basis of the accounts and other records maintained by the assessee on mercantile basis as has been done in the past years. In fact the return was filed on that basis, but the second return was filed much after the resolution which was made after a long gap from the end of the accounting period. This change after the accounts have been finalised, and after the return has been filed after proper verification, cannot said to be admissible and permissible. In fact, in the resolution passed on 19-10-81 for the assessment year 1981-82, the wordings were that ' resolved that the accounts for the year 1980-81 be prepared on Cash System of Accounting and the profit and Loss Account and Balance Sheet be modified accordingly. Further resolved that the Managing Director/General Manager/Secretary of the Corporation be and are hereby authorised to take all necessary steps in pursuance of the foregoing resolution." 16. From this resolution, it is seen that the change over of accounting was resolved to give retros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides. Since complete details and relevant facts are not readily available, we would restore these few points to the Assessing Officer for fresh disposal keeping in view our decisions in the earlier grounds of appeals dealt with by us in the preceding paragraphs. 20. Thus, as far as the assessment year 1981-82 is concerned, the appeal by the assessee is rejected. 21. For the assessment year 1982-83 the appeal by the assessee is that the order of the CIT(A) was not a speaking order relating to the first three grounds of appeal raised before him to the effect that the Assessing Officer acted beyond jurisdiction disregarding the facts of the case in recommending audit of accounts of the assessee under section 142(2A) to the Commissioner of Income-tax, and that the persons named as auditors could not be nominated or hold office as auditors under section 142(2A) and that the direction given by the Assessing Officer under section 142(2A) transgressed the lawful and reasonable limits. Briefly speaking, the facts of the case are as under. 22. For the assessment year 1982-83, the Assessing Officer observed that the return was filed on the basis of cash system of accounting which was ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case on merits. Additions and disallowances were made in the computation of the income which was computed at Rs. 4,53,43,564 before depreciation. 25. It may be mentioned that against the order of the Hon'ble High Court dismissing the Writ Petition filed by the assessee, the assessee went in appeal before the Hon'ble Supreme Court of India. It is stated that the Hon'ble Supreme Court has passed an order, a copy of which has been placed in our file. It has been observed by the Hon'ble Supreme Court that the petitioners having opted in favour of preferring appeals before the appellate authority against the assessment orders, the Hon'ble Supreme Court did not propose to interfere at that stage and, therefore, the Special Leave Petitions were accordingly dismissed. In respectful compliance with the above directions of the Hon'ble Supreme Court and keeping in view of the ratio enunciated by the Hon'ble Allahabad High Court in the case of Hindustan Construction Co., as reported in 1987 UPTC, Vol. 1, page 68, we proceed to deal with the matter. 26. Amongst other things, the assessee took up the matter before the CIT(A) contending that the Assessing Officer was not justified in makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 142(2A). It is vehemently urged on behalf of the assessee that such direction cannot lawfully be given by the Assessing Officer and on that fact alone the whole procedure was void ab initio. It is pointed out that as the Assessing Officer has not given a copy of his report to the Commissioner of Income-tax, the reasons are obviously not spelt out, but as far as the approval of the Commissioner of Income-tax is concerned, the Commissioner has simply agreed to the proposal of the Assessing Officer, copy of which has been placed in our file. It is argued at length that in the entirety of the facts and circumstances of the case, both the authorities below went wrong in rejecting the bona fide claims of the assesses. It is also emphasised that the change over as urged earlier, was not for any motive or mala fide intention. It is also pointed out that the revenue have not shown any material or fact to show that the change over was not bona fide and was not intended to be followed hence thereafter. As mentioned earlier, the assessee's learned counsel refers to various decisions of different High Courts to reinforce his arguments. It is also pointed out that the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular transaction or particular account. The case of the assessee is that the change over was for the entire system of accounting except some minor items which would not in any way materially affect the claim of the assessee. The assessee relied on the decision of Ganga Charity Trust Fund in which the various decisions of the Hon'ble Calcutta and other High Courts have been taken into account before holding that since there was no finding of fact that the switch over to the cash system was not bona fide, the assessee was entitled to switch over and the revenue have not shown that the change lacks durability or regularity and was merely a stop gap arrangement to avoid payment of tax. The case of the ITO in the instant case is that the change over of the system by the assessee was to defer the taxability of the returned income. This appears to be not correct as the return for the year under consideration made was not on mercantile system of accounting but on the basis of the cash system followed by the assessee right from the beginning of the accounting year itself. In matters of taxation each year is independent and subsequent development may not have a direct bearing on the issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of Dr. Ishwari Prasad it was held by the Hon'ble Allahabad High Court that there was no bar to the change of the system and bona fide of the assessee is prerequisite for the change. According to the ITO, the assessee's intention in the change was only to defer the taxability of the income which had already been accrued. This contention of the Assessing Officer cannot be supported as the assessee had been maintaining the system on cash basis for the entire year right from the beginning of the accounting period and there was, therefore, no question of delaying taxability or for avoidance of tax. We, therefore, do not find any mala fide on the part of the assessee in the method of accounting followed by the assessee for the year under consideration i.e. 1982-83. That apart, if the accounts of the assessee are defective from which income cannot be deduced, then the provisions of section 145(1) etc., may be attracted. As far as the direction of the Assessing Officer to the assessee to recast the accounts, is concerned, we are of the opinion that the Assessing Officer in exercise of the powers under section 142(2A) cannot so direct the assessee particularly when the CIT hims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may also mention that in the case as reported in Shiv Prasad Ram Sahai's case cited before us supports the stand taken by the assessee. So is the decision in the case as reported in CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572, (Mad.) in which taxation of illusory interest was not upheld. 35. In view of what we have discussed and in view of the ratio of the decisions enunciated by different High Courts and Hon'ble Supreme Court, we are of the opinion that the Assessing Officer erred in making the assessment under section 144 in the circumstances of the case, and in our view the CIT(A) was not justified in not correctly appreciating the facts and the background of the case involved for the year under consideration. 36. As mentioned earlier, the Hon'ble High Court found no error in the direction given by the Commissioner of Income-tax. Copy of the direction of the Commissioner has been placed in the Paper Book. But as mentioned in the preceding paragraphs, the Income-tax Officer instead of complying with the direction of the Commissioner, did ask the assessee to get the accounts audited after recasting the accounts on mercantile basis as was being done by the assessee til ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire accounting year 1981-82 by the assesses. From whatever facts and materials available, we do not find any complexity in the accounts, or any necessity for the Assessing Officer to direct the assessee to get the accounts audited compulsorily under section 142(2A) after recasting the accounts. Thus, this action of the Assessing Officer under section 142(2A) cannot be supported. In the circumstances, we would direct the Assessing Officer to recommence the proceedings afresh in accordance with law and after giving the assessee an opportunity of being heard. 38. For the assessment year 1982-83, the assessee has taken a ground that the Commissioner of Income-tax (Appeals) failed to decide the matter arising out of the ground No. 5 raised before him to the effect : " 5. That it was unjustified on the part of the learned IAC to turn down the application of the appellant made under section 129 which impinges on the validity of the assessment made." The grievance of the assessee is that the Officer who passed the assessment order was a different incumbent from the Officer who had been dealing with the case of the assessee for the year under consideration and that was why the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incompetent to interfere with the system of accounting regularly employed by the assessee. For this year also, the Assessing Officer dealt with the similar facts of the case that the assessee filed return on the basis of the accounts maintained on cash basis. In a similar situation as in earlier year, he directed the assessee to get the accounts audited after recasting the same on mercantile system as it was done till the assessment year 1981-82. The same facts were prevailing during the assessment year 1983-84 also. In view of what we have stated for the assessment year 1982-83, we find force in the contentions made on behalf of the assessee. For this assessment year also following our direction given for the earlier year, we set aside the orders of the authorities below for fresh disposal by the Inspecting Assistant Commissioner in the light indicated above. 42. The assessee has also taken grounds of appeal relating to merits regarding disallowances of expenses and other points, which according to the assessee was excessive and uncalled for. Again, in what we have discussed for the assessment year 1982-83, the grounds relating to the merits of the case are to be restored to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT (Appeals) considered the facts of the case and the various aspects of the matter and found that the rebates and interests arose for the first time during the year under consideration and was a proper charge on the profits of the current year. He, therefore, felt that the Assessing Officer was not justified in disallowing the claim and, therefore, the assessee was entitled to the relief of Rs. 3,35,337. 45. We have heard both the sides and we have gone through the orders of the authorities below for our consideration. We have also gone through the other papers in the Paper Book for our perusal. Having regard to the fact that the resolution was passed during the year under consideration as per finding of the CIT (Appeals) we are of the opinion that the claim of the assessee was rightly sustained by the CIT (Appeals). No interference is called for. 46. The next ground of appeal by the revenue is that the CIT (Appeals) erred in allowing the claim of Rs. 1,133 being gratuity which was rightly disallowed by the Assessing Officer. The Assessing Officer disallowed the claim. The assessee took the matter before the CIT (Appeals) and argued that the assessee had applied for recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the original return had been made the basis of assessment, then the claim for deduction has to be considered and determined as such. He found that the appellant had transferred the sum in question to the special reserve under section 36(1)(viii). The claim was, therefore, allowable subject to 40%, of the income finally determined. 49. We have gone through the orders and findings of the authorities below along with the other papers for our consideration. We have heard both the parties. The year in question is assessment year 1981-82 and in the assessee's appeal we have given our opinion that the assessee was not entitled to change the method of accounting after the end of the previous year and after finalising of accounts and after filing of the fresh return. For the assessment year 1981-82 in the assessee's appeal, we have rejected the contention of the assessee that the assessment should be made on the accounts maintained on cash basis. In view of that decision, the claim of the assessee in respect of Rs. 38,99,410 would be allowable on mercantile basis. The allowance allowed by the CIT (Appeals) was on sound basis. No interference is called for. 50. There is no other gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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