TMI Blog1995 (9) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... It was claimed that such type of expenditure was normal business expense and not covered by Explanation 2 to section 37(2A) of the Income-tax Act. 4. The aforesaid submissions did not find favour with the Commissioner of Income-tax (Appeals), who at the outset, set out the details of the expenditure in question as follows :- " Date Ch. No. To whom paid Particulars Amount Rs.12-9-1987607789 Chicken Inn Dinner for 500 persons 42,800.00 on3-9-198714-9-1987607793 Hotel Sofital Stay charges of Surya. stockists 39,942.751-9-1987194140 M/s. Bhagwan 30 Safari Suit case. 18,315.00 Das Sons. ----------- 1,01,057.75 " ----------- 5. By referring to Explanation 2 to section 37(2A) the Commissioner of Income-tax (Appeals) opined that entertainment expenditure included the amount spent on provision of hospitality of every kind by the assessee to any person whether by way of food or beverages or in any other manner. According to him it was immaterial whether such provision was made by reason of any express or implied contract or custom or usage of trade. He, therefore, concluded that the entire amount of Rs. 1,01,057 was covered by Explanation 2 to section 37(2A) and liable for disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said expenditure, viz., Rs. 10,700 be excluded from the purview of the disallowance being allocated to the employees of the assessee on an estimated basis. The Assessing Officer is now directed to recompute the disallowance in accordance with the aforesaid directions. 10. The second ground in the appeal pertains to the disallowance of a sum of Rs. 18,67,822 in respect of the depreciation on vehicles which were leased out by the assessee. The Assessing Officer in the course of the assessment proceedings noted that the following vehicles had been purchased and leased out on the last day of the accounting period : " Date Description of Vehicle Amount (Rs.) 30-3-1989 D. C. M. Toyota 23,75,920 31-3-1989 Truck TATA 1,60,000 30-3-1989 Maruti 1,39,412 31-3-1989 Premier Padmani 65,000 30-3-1989 Maruti Car 94,500 31-3-1989 Ambassador 1,16,000 --------- 29,50,832 " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificates and the insurance on the vehicles were not sufficient since surrounding facts and circumstances and " reality of the situation " had to be duly considered ; (ii) Section 42 of the Motor Vehicles Act, 1988 made it obligatory on the part of the owner of a transport vehicle to obtain a permit from the Transport Authority concerned authorising thereby the use of the vehicle for the purposes specified therein. That section 123 of the same Act made it an offence to use the vehicle without a permit and the obtaining of a temporary permit was not sufficient enough ; and (iii) Without obtaining a permanent and regular permit it was not possible to put the vehicle to commercial use. 14. We have considered the submissions of both the parties in support of their respective stands. The learned counsel in addition to reiterating the arguments advanced before the lower authorities raised for our consideration the following :--- (i) That proper lease agreements had been entered into between the assessee and the lessees before the end of the accounting period ; (ii) That the lessees had confirmed in writing that these vehicles had been put to commercial use before31-3-1989; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the view that there is substantial merit in the arguments advanced by the learned counsel for the assessee. It is not disputed before us by the Revenue that the lease agreements have been entered into and concluded prior to the end of the accounting period. Further there is no dispute on the score that the vehicles have been physically taken possession of by the lessees and the lease rentals duly paid over to the assessee and accounted for as income. The further fact which requires repetition on our part is that whereas the lessees furnished certificates to the effect that they had taken possession of the vehicles and put them to commercial use before the end of the accounting period there was no attempt on the part of the Revenue authorities to make enquiries or confront the lessees. The orders of the tax authorities have proceeded entirely on suspicion and without any reasonable or cogent basis. As rightly contended by the learned counsel, the transaction on its part stood completed as soon as the lease agreement was concluded and physical possession of the vehicles handed over. As the business to which the aforesaid transactions pertained was that of leasing the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings the Assessing Officer noted a change in the method of accounting earlier followed by the assessee inasmuch as no closing stock of tickets in respect of draws not held had been reflected and earlier system of reflecting as sales the value of the tickets despatched irrespective of the dates of draw had been departed from. On being asked to work out the effect of the aforesaid changed method the assessee filed a comparative statement and which reflected a difference of Rs. 97,22,290 which was termed by the Assessing Officer as a reduction in the profits. 21. The Assessing Officer thereafter allowed the assessee an opportunity to justify the changed method and in response to which detailed submissions were made, but the sum and gist being that the changed method was a bona fide one and permissible under the law and that the same had been adopted with a view to correct the wrong presentation of accounts on the basis of the earlier method and further there was no attempt to postpone the tax liability from one year to the other. These submissions on the part of the assessee were rejected by the Assessing Officer on the following main grounds :---- (i) It was strange that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated that tickets despatched before the end of the year in respect of lotteries ; the draws of which had not taken place before the close of the year were not treated as sales, but shown as closing stock. As soon as the draws took place, these were reflected in the sales ; (ii) That the changed method was a recognised one as the same had been followed by other assessees in the lottery business and once the said method stood accepted in other cases it was not open to the Assessing Officer to take the view that the true profit could not be worked out and assessed in the assessee's case ; (iii) That the assessee's taxable income in the succeeding assessment year on the basis of the changed method was higher by Rs. 28 lakhs and odd and since the method was a recognised one it could not be rejected on the ground that it reduced the tax liability ; and (iv) That the assessee was entitled to adopt a different method as compared to preceding assessment years even though the interest of the Revenue was adversely effected by such a change. 24. In support of the view-point canvassed, reliance was placed on the judgments reported in Forest Industries Travancore Ltd. v. CIT [1964] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnised one and followed by other assessees in the same line of business ; (2) That material on record clearly revealed the closing stock of lottery tickets had been duly shown although by way of an adjustment in the prepaid expense account. That written submissions to the CIT (Appeals) in this respect had been completely ignored to record an erroneous finding that closing stock had not been shown ; (3) In effect there was no change in the method of accounting and what the assessee had done was to show in the closing stock the tickets which had been sent to the stockists on " consignment basis " and in respect of which the draws had not taken place ; (4) The change was bona fide and followed consistently in the subsequent assessment years. Further in the succeeding assessment year the returned income was more by a figure of Rs. 28,00,000 and odd as a result of the changed method; (5) That in the course of the appellate proceedings before the CIT (Appeals) for the assessment year 1990-91 the Assessing Officer had accepted that closing stock of tickets had been duly reflected in the various assessment years including assessment year 1989- 90 at a figure of Rs. 57,87,163 and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing decisions were relied upon :- (i) Snow White Food Products Co. Ltd.'s case ; (ii) CIT v. Carborandum Universal Ltd. [1984]149 ITR 759 (Mad.) ; (iii) CIT v. Mopeds India Ltd. [1988]173 ITR 347 (AP) ; (iv) Forest Industries Travancore Ltd.'s case ; (v) Triveni Engg. Works Ltd's case ; (vi) CIT v. S. Sen [1949]17 ITR 355 (Ori.) ; (vii) CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi) ; (viii) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) ; (ix) Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.) ; and (x) CIT v. Guranditta Mal Shanti Parkash Zira [1987] 164 ITR 774 (Punj. Har.). 29. The learned Departmental Representative, on the other hand, vehemently supported the order passed by the Commissioner of Income-tax (Appeals) placing reliance on the judgment of the Hon'ble Supreme Court in the case of British Paints (India) Ltd. The subsequent arguments advanced by him were a reiteration of the reasons recorded by the tax authorities in rejecting the viewpoint canvassed on behalf of the assessee. He, however, did not dispute before us that closing stock in respect of the tickets had been shown by the assessee by adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new method. The assessment order for assessment year 1990-91 takes due note of this. 32. We further find that in the said remand report the Assessing Officer has categorically stated that some other assessees doing " similar business " " are following almost the same method of accounting ". In the present assessment year, however, the assessee's case has been rejected on the ground that whatever is the " regularly followed method " adopted by other assessees and accepted by the Department in their cases cannot be implanted into the assessee's case as it is following a different method which has been accepted by the Department as its consistent method. In our opinion, this is not a valid reason for rejecting the " new method " without a further finding to the effect that the changed method is faulty and erroneous in law, outside the principles of accountancy and an attempt to evade the legitimate revenues of the Government. We find no such finding on the part of either the Assessing Officer or the CIT (Appeals). An assessee is entitled in law to improve upon an existing system within the parameters of law and accountancy and as long as the change allows the Assessing Officer to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to follow the same method year after year, the change would have to be accepted notwithstanding the fact that during the assessment year in question ; which was the first year when the change of method was brought about, a prejudice or detriment might be caused to be Revenue. As the method of valuation adopted by the assessee had obtained recognition from practising accountants and the commercial world for valuation of stock-in-trade, the adoption of that method could not be questioned by the Revenue unless the adoption of that method was found to be not bona fide or restricted to a particular year. " (iii) Forest Industries Travancore Ltd's case : " Held, that the assessee was entitled to change his method of valuation of stock in this manner even though the Revenue may be affected adversely by such change. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, when the latter is less than the cost price, provided the change in bona fide and the new system is continued in subsequent years. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o appreciate the arguments, it would be necessary on our part to set out certain relevant clauses of the agreement as follows :--- " 2. That the Organising Agent shall despatch tickets for the various Draws so as to reach the stockist at their place of destination mutually agreed upon. In case of loss of tickets in transit, to the place of destination of the tickets, despatched by the Organising Agent then the Organising Agent shall be responsible for such loss. " " 4. That the Organising Agent shall pay service charges at the rate of 3 per cent on the basis of the total value of the tickets sold. The stockist may deduct the service charges while making the payment. " " 5. That the Organising Agent may fix quota of lottery tickets to be supplied to the stockist based on his actual demand and sales in the past or as may be agreed. The Organising Agent, however, reserves the right to reduce the quota of tickets for a particular draw or draws without assigning any reason whatsoever. The tickets will be supplied to the stockist on F. O. B. basis on a proper challan form (despatch slip). The stockist would be under an obligation to tally tickets received with the challan forms. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o charge of interest at the rate of 18 per cent on the unpaid amount in case the same continues to be withheld beyond 15 days of the " date of draw ". There is also a stipulation in the agreement that " tickets issued for a draw and anticipated to remain unsold should be so returned that they are physically received by the organising agent at least one day before the actual date of the draw ". Further tickets not received by such time would not be accepted and " treated as sold by the stockist and the stockist shall remain liable for its payment in the same manner as if the tickets have actually been sold ". Another clause which requires a mention is the one pertaining to the deposit of interest-free security by the stockists with the assessee and which is refundable in the event of termination of the agreement by any of the parties and the right to do so being made available to both of them. The balance sheet for the year under appeal discloses the figure of such security deposit at Rs. 2.58 crores. 38. By adverting to the relevant clauses, we note a system of working between the parties whereby the assessee in its capacity as organising agent can curtail the quota of tickets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gents. 42. In the final analysis, we accept the " changed method " adopted by the assessee in the year under appeal not only on the basis of the merits of the said system, but also on an appreciation of the agreement between the assessee and its stockists. We would, however, direct the Assessing Officer to recompute the taxable income strictly in accordance with the method followed by some of the " other assessees in the same line of business " and which has been accepted in their respective cases and these facts having been accepted by the Assessing Officer himself during the appeal proceedings before the Commissioner of Income-tax (Appeals) for assessment year 1990-91 and echoed by the CIT (Appeals) in his orders for assessment years 1990-91 and 1991-92. Further if any change is warranted in the taxable incomes for the subsequent assessment years then this may also be carried out while deciding the issue for such assessment years. As already stated, the point at issue has been set aside to the file of the Assessing Officer by the CIT(A) for assessment years 1990-91 and 1991-92 directing that the same be decided in the light of the ITAT order for assessment year 1989-90. 43. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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