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TMI Blog1989 (3) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1979-80, no entries regarding interest on such loans, as have been considered to be sticky, were made either in the suspense account or otherwise. It adopted a, practice whereby the company treated the interest as its income by crediting to the profit & loss account only when the interest is actually received. On the basis of some proforma records kept by the assessee, a statement of interest deemed to have accrued for the previous year was submitted before the assessing authority, wherein the amount of interest was calculated at Rs. 15,49,97,781. This amount of interest was claimed to be not taxable in the hands of the assessee on the plea that it was following cash system of accounting insofar as the interest on sticky loans was concerned. An alternate claim was also made before the assessing authority that at least a sum of Rs. 14.54,47,904 should not be assessed to tax in view of the Circular F.No. 201/21/84, dated September, 1984. Reliance was also placed on the later Circular of the CBDT in No. 491 dated 30th June, 1987, wherein the Board has instructed the department to accept the cash system of accounting of interest and not to try to tax the amount of interest accruing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod ; that the assessee is, however, entitled to change this regular method of accounting by another regular method and that an assessee is also entitled to follow one method of accounting in respect of one income from one source and another method in respect of other source. 3. The learned Departmental Representative, on the other hand, submitted that when a partial item is isolated from the regular method of accounting, it cannot be treated a change in the method of accounting and for this proposition he referred to the decision of the Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. v. CIT [1981] 132 ITR 184 and that of the Allahabad High Court in the case of CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 728 and certain observations in the decisions of various High Courts reported in--- 1. J.K Bankers v. CIT [1974] 94 ITR 107 at 111 (All.) ; 2. Sarupchand v. CIT [1936] 4 ITR 420 (Bom.) ; 3. James Finlay & Co. v. CIT [1982] 137 ITR 698 at 705 (Cal.) ; 4. Snow White Food Products Co. Ltd.'s case at 857 and 860 ; 5. Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861 at 862 (Cal.) ; 6. CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.) and the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms, there are in numerable other systems of accounting which may be called hybrid or heterogenous -- in which certain elements and incidents of cash and mercantile systems are combined or they are prevalent side by side. 7. It is well settled that it is open to an assessee to adopt any system of accounting and even one system for one source and another system for a different source Calcutta High Court decision in the case of Snow White Food Products Co. Ltd. Having adopted a particular system of accounting, the assessee is free to switch over to another system of accounting provided the aforesaid four conditions are satisfied, namely, that it is a recognised method of accounting, that the system was regularly followed by the assessee, that the accounts maintained are complete and correct and that the income therefrom could be properly deduced. The change however, is not automatic. The ITO should be satisfied whose power is being not absolute but quasi judicial. The change is, however, normally not permissible for a particular year or a part of the year or in respect of a particular transaction. 8. In this case in regard to interest on sticky loan account, the assessee who was hit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir Lordships of the High Court at page 189 that they were not concerned in that reference with the question whether it was permissible to maintain or keep what had been called a hybrid system of accounting though it was clarified that what the expression " hybrid " indicated. According to their Lordships, the expression " hybrid " indicated the birth of a system born out of inter-mixture of the two. When the assessee simultaneously in respect of certain transactions followed mercantile system of accounting, in respect of other followed cash system of accounting, and then the proper expression should, perhaps, in the opinion of Their Lordships, be that the assessee maintained a dual system of accounting in respect of different transactions because the expression " hybrid " would be the result of inter-mixture of the two system and something of a third system emerges. This case, in our opinion, does not advance the case of the revenue. 10. In the case of Cosmopolitan Trading Co., the Allahabad High Court held that the change of the method of accounting was not justified as the same was in respect of a particular debt on the ground that interest was not being paid. There was no ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal had found that on the evidence on record, it could not be said that the assessee had decided to change its existing regular method of accounting by another regular method. The statement in the annual report only recorded that the management had decided to account for the interest receivable during the relevant year on cash basis, which indicated that the change was suggested only for the year. It was not a regular change as in the present case. There was nothing on record to indicate in that case that the change was intended to be followed regularly in future by the assessee. In the other case, the matter was re-examined for the subsequent year by the Tribunal and on further evidence, it came to the conclusion that the object of the assessee in effecting the change in its method of accounting was only in respect of interest receivable from one debtor and, therefore, the change was not bona fide. It was also doubted whether the changed method was followed in the subsequent years. In these circumstances, these two decisions of the Calcutta High Court are also not helpful to the revenue. 15. The next case on which the revenue placed reliance is that of the Bombay High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, hold that the sum of Rs.20,29,825 was rightly added to the income of the assessee. The next item, namely, L/C Commission and other charges written off in past years amounting to Rs. 57,767 has been allowed by the IAC himself in the assessment year 1984-85. In view of this position, there could be no grievance for the assessee on this score as well. The third item, namely, write back for provision for bad and doubtful debts amounting to Rs. 13,10,030, consists of two parts. Out of the said sum, an amount of Rs. 9,91,000 was allowed by the Tribunal in the assessment year 1978-79 and the remaining amount of Rs. 3,19,040 was allowed by the CIT(A). In view of this position, the assessee cannot be said to have any grievance on this point also. The last item is write back of interest suspense account amounting to Rs.49,34,815. This has been allowed in the assessment years 1975-76 to 1978-79. The assessee's contention that this amount cannot be taxed in the current year because it does not fall under any provisions of the income-tax Act nor even under section 41 on the ground that the amount has not actually been received or credited back to the revenue account has no force. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeds one, hundred thousand rupees. Neither of these two provisions are subject to the other. In these circumstances, in our opinion, as held by the Tribunal in the case of American Bureau of Shipping, we hold that the provision beneficial to the assessee must be followed. We therefore hold that the entire expenses on repair and insurance of the motor cars are allowable under sec. 31 and the same would not be subjected to disallowance under section 37(3A) of the Act. We may also state here that in similar circumstances, the Bombay High Court has in the case of CIT v. Chase Bright Steel Ltd. [1989] 42 Taxman 142 held as under--- " Since section 37(1) does not contemplate expenditure of the nature described in sections 31 to 36, the abovementioned expenditure allowable under sections 30 and 31 could not again fall for consideration under section 37(1). Again sub-sec. (3) of section 37 starts with non-obstante clause 'notwithstanding, anything contained in sub-section(1)...' which of necessity must relate to expenditure allowable under sub-section (1) of section 37 and no other provisions. This being so and the assessee's case, as stated above, not falling to be considered under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the irrecoverability of the amount is concerned. Simply because they were debited under the head " provision for bad and doubtful debt " would not make any difference. The amounts were actually written off in the accounts of the assessee. He further submitted that a similar matter came up before the Tribunal in the assessment year 1977-78 and vide order dated 20-4-1982 in ITA No. 68/Bom./81, the Tribunal allowed the claim of the following still earlier orders in the appeals for assessment year 1975-76 and 1976-77 in ITA Nos. 1446, 1447 and 1448/Bom/1980, dated 9-4-1981. From the details placed before us, we find that the write off pertained to specific debtors and, therefore, could not be termed as a provision on ad hoc basis. There is no dispute that the debts were not bad debts as the same had become bad and irrecoverable as per the system of evaluation and the regular method of accounting followed by the assessee. The only objection taken by the authorities below for disallowing the claim is that it was a provision for bad debt. As we have stated earlier, the amount written off by the assessee pertained to specific debts and it was not mere provision made for anticipated de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75,931 is not pressed. This ground is accordingly rejected. 23. The next ground is against the disallowance of Rs.1,56,17,975 out of interest-tax under sec. 43B. The disallowance was made by the IAC (Asst.) on the ground that the liabilities in question were not discharged during the accounting period and allowance for deduction on account of liabilities were required to be made only on the basis of actual payment. Before the CIT(A), it was submitted that the due date for payment of the liabilities had not expired during the previous year and that the liabilities were required to be paid on or before 31st March, 1985 on financial year basis, whereas the accounts of the assessee were closed on December, 1984. It was further submitted that the liabilities were in fact discharged by actual payment before the due dates. The CIT(A), on principle, agreed with the contention of the assessee and held that the liabilities for payment of tax or duty or any other statutory liability cannot be disallowed under the provisions of section 43B of the Act, if the liability in question was paid within the due date under the relevant statute, even if the actual date of payment falls in the next acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se allowable under the Act in respect of any sum payable by the assessee by way of tax or duty etc. under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund, superannuation fund or gratuity fund or any other fund for the welfare of the employees shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him in computing the income referred to in sec. 28 of that previous year in which such sum is actually paid by him. Emphasis is laid on the amount payable by the assessee. If the amount of tax, duty or contribution etc. is not payable during the previous year under consideration, in our opinion, no disallowance could be made, in view of the decision of the Andhra Pradesh High Court in Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708. In the circumstances, we modify the directions issued by the CIT(A) by observing that the IAC (Asst.) should reconsider the claim of the assessee in the light of the aforesaid decision. 25. The next ground is against the disallowance of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A(1) on the assessee for its failure to deduct tax at source and to pay the same to the Government Treasury. On this issue, the CIT(A) had remitted the matter back to the file of the IAC (Asst.) for verifying the claim of the assessee and to re-determine the assessee's liability to pay interest under s. 209(1A) in accordance with law. Since the CIT(A) himself has sent back the matter to the IAC (Asst.) for verification with reasonable directions, no further relief could be given by us in these proceedings. This ground is, therefore, rejected. 28. The last ground is against disallowance of additional depreciation in respect of duplicating machines, micro processors and copying machines amounting to Rs.82,682. the IAC (Asst.) observed that the equipment in question were office equipments on which additional depreciation was not allowable. He also held that the assessee was not a manufacturing concern but only a financial institution and therefore, these equipments would partake the character of office equipments. Following the first appellate order for the assessment year 1984-85 in the assessee's own case, the CIT(A) rejected the claim of the assessee for additional depreciation. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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