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Issues involved:
The judgment involves the assessability of accrued dividends on vacant chits and arrears in the income-tax assessment years 1970-71, 1972-73, and 1973-74. The main controversy revolves around the method of accounting for declaring income in respect of defaulting subscribers' chits. Assessment Years 1970-71 and 1972-73: The assessee, a private limited company conducting chits among members, faced the question of whether accrued dividends on vacant chits and arrears are assessable in the year of their occurrence. The company's system involved crediting dividends to an "Accrued Dividends Account" until a new subscriber is found, and then paying over the dividends to the new subscriber. The Income Tax Officer (ITO) contended that the dividends should be accounted for as income when received, rather than at the chit's expiry. However, the Appellate Assistant Commissioner (AAC) and the Tribunal upheld the company's consistent accounting method, emphasizing that the ITO lacked grounds to reject it. The court ruled in favor of the assessee, stating that the ITO must demonstrate a defect in the accounting system to intervene. Assessment Year 1973-74: In this assessment year, a similar issue arose regarding the assessability of accrued dividends on vacant chits. The ITO argued that the company's method of deferring income recognition until the chit's expiry was improper. However, the AAC and the Tribunal supported the company's longstanding accounting practice, noting the absence of evidence of accounting defects. The court upheld the Tribunal's decision, emphasizing that the ITO's power to substitute accounting methods is limited to cases where correct profits cannot be deduced from the existing system. Key Legal Principles: The court cited precedents emphasizing that the Department must respect the assessee's chosen accounting method unless it fails to reflect true income. The judgment highlighted that the ITO's authority to alter accounting practices is contingent on demonstrating defects in the existing system. The court concluded that the Tribunal's decision was correct, rejecting the Department's attempt to tax the assessee based on a different accounting approach. Conclusion: The High Court of Andhra Pradesh ruled in favor of the assessee, holding that the accrued dividends on vacant chits and arrears were not assessable in the years of their occurrence. The court emphasized the importance of respecting the assessee's consistent accounting practices unless the ITO can prove inherent defects leading to incorrect profit calculation. The judgment favored maintaining the company's established method of accounting for dividend income.
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