TMI Blog1995 (10) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... first year of the appellant's business. It commenced its business in October, 1984 and closed the accounts on 31-5-1985. The appellant adopted a peculiar method of accounting. It adopted the "mercantile system" of accounting for purchases and other expenses and 'cash system' for sales. It is a hybrid system whereunder the sales for which consideration was realised were shown as receipts while the credit sales were shown in the "suspense account". When the invoice is raised and goods are despatched to customers, the customer's account is debited, crediting the sales to suspense account. When the money is realised from the customers, the entry is reversed by crediting the sales account. At the end of the previous year when books are closed, the sales account is credited with the sales which were realised. The balance sales which were not realised by the end of the previous year, are kept in the sales suspense account. As and when they are realised during the subsequent year or years, they are credited to sales account in that year. The manufacturer M/s. Quinn India Ltd. allows 90 days' credit to the appellant. For payments beyond 90 days, it collects 18 per cent interest. The appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would always be less than the sale proceeds realisable (Sundry Debtors) and that by adopting this method, the appellant would never pay income-tax. Further, the Income-tax Officer observed in the assessment order that the appellant can so choose its affairs in such a way the Sundry Debtors are always more than the net profit in a particular year and thereby avoid or postpone the payment of tax and even if the unrealised sales of earlier years are realised in any subsequent year, they are offset by the brought forward losses of earlier years. Hence the Assessing Officer wanted to reject the book results as it is not possible to deduce true profits from the method of accounting adopted by the assessee, by invoking the provisions of section 145(1) of the Income-tax Act, for determining the income of the appellant. Hence, on 8-3-1989, he issued a letter to the assessee proposing to determine the income by computing the same on mercantile basis by including sales shown by the assessee as sales suspense account. The assessee-firm sent a reply, dated 18-3-1989, contending that it is free to follow any system of accounting as long as the same has been followed by it consistently, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------ Rs. 1,95,544 or Total Taxable income: Rs. 1,95,550 ------------------------------------------------------------------------------------- So far so good. Here the Assessing Officer purporting to consider the genuine hardship and difficulty of the assessee felt that the sale proceeds realised during the relevant previous year only should be considered. Having held earlier that it is not possible to deduce correct profits from the method of accounting adopted by the assessee and the same method or system of accounting should be adopted for both purchases as well as sales, the Assessing Officer had gone at a tangent and held as follows in the assessment order : " However, considering that the assessee has expressed genuine hardship and difficulty, the sale proceeds realised during the relevant previous year only are considered and the subsequent realisation is not taken into consideration. " The ratio between the sale proceeds realised during the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been employed regularly and consistently by a trader, cannot be discarded by the Department for no valid ground. 7. The learned Commissioner of Income-tax (Appeals) rejected the various contentions raised on behalf of the appellant and agreed with the view taken by the Assessing Officer that true profits cannot properly be deduced from the method of accounting employed by the appellant. He, further, held that it is not a case where the Assessing Officer changed the method of accounting employed by the assessee, but it is only a case where the Assessing Officer computed the income by treating the sales shown in the suspense account as regular sales and crediting in the trading account, since the system of accounting followed by the assessee did not reflect the true profits. In that connection he observed as follows : " The Assessing Officer has determined the gross profits on Mercantile System by treating the sales shown in the suspense account as regular sales and crediting in the trading account. This does not anyway indicate that he has changed the method of accounting, however, the department has a right to determine the true profits if it felt that the system of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for sound and valid reasons adopted bona fide, hybrid system of accounting viz., Mercantile System for purchase and other expenses and cash system for sales. The assessee had to make this conservative choice due to recovery problems and for its own survival in this highly competitive business. (5) It cannot be said that it is not possible to deduce true profits from the method of accounting adopted by the appellant. In the initial years this method may reflect losses, but in the long run it certainly reflects profits. It is not, as though, in every year the assessee's business should necessarily result in positive income for the Income-tax Officer to accept the method of accounting of the assessee. (6) " Postponement of tax liability" is no ground for rejecting the method of accounting regularly employed by an assessee. Department has no power to impose its own method of accounting on the assessee, even though the said method may be a better one than the one adopted by the assessee. ". Hence, the learned Authorised Representative of the appellant submits that the computation of income as made by the appellant should have been accepted by the Authorities below. Regarding pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, if any, is only a temporary affair in the initial years and there would be positive income in the long run and that it is not, as though, every business should necessarily yield positive income from the very first year onwards for accepting the method of accounting followed by a businessman and that even assuming for a moment that from the method adopted by the appellant, profits cannot be deduced properly, at the most the Assessing Officer can make some permissible adjustments, but cannot change the method of accounting itself wholesale. He, further, submits that cash basis for certain payments or receipts is not alien to the concept of mercantile system, that section 43(B) gives statutory recognition to it whereunder certain liabilities are allowed on actual payment basis only, even when the assessee is following the mercantile method of accounting and that on the same analogy there is nothing wrong if cash system is adopted for sales while adopting mercantile system for purchases. 12. We have duly considered the rival submissions. Section 145(1) of the Income-tax Act mandates that income chargeable under the head "Profits and gains of business or profession" shall be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be discarded, only, if in the opinion of the Taxing Authorities, income of the trade cannot be properly deduced therefrom. In the case of Sundaram Co. Ltd. v. CIT [1959] 36 ITR 162, the Madras High Court held that the assessee is entitled to adopt his own system of accounting, but in the circumstances of a given case, if that system, failed to disclose the assessee's true income, it is open to the Department to ignore the results of that system and to deduce the true income of the assessee. In the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), the High Court observed that the expression, "in the opinion of the Income-tax Officer" appearing in the proviso to section 143(1) imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income from the profits and gains of business of the assessee could properly be deduced therefrom. In Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861, the Calcutta High Court held that a recognised method of accounting followed regularly would normally result in a proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the Assessing Officer was justified in rejecting the method of accounting adopted by the assessee and determining the total income. There can be no doubt that both the methods viz. mercantile and cash adopted by the assessee are legally valid methods. However, the question to be answered would be whether different methods of accounting could be adopted for one and the same source. In the case on hand, we are now concerned with the very first previous year of business and assessment. No doubt, it is true, that the appellant followed the same method in the subsequent assessment years also as is evident from the facts and figures mentioned in the assessment order itself. When an assessee followed a particular method in the first year and continued to follow the same method consistently in the subsequent years also, it can be said that the method of accounting employed by him in the very first year itself is the "regularly employed method of accounting". Thus, in our opinion, though it is the first year of assessment, the appellant satisfied the requirement of "regularly employing the method of accounting", in question. 16. Crucial question that has to be decided is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, is always offset by the sales credited to the suspense account. The assessment order clearly reveals that the method is so devised to postpone the tax liability for a long time or even indefinitely. Postponement of tax liability is inherent and inbuilt in this system adopted by the assessee. Such a system can never be encouraged much less accepted. 17. At this stage it would be relevant to refer to the decision of the Madras High Court in the case of G. Padmanabha Chettiar Sons v. CIT [1990] 182 ITR 1. The question that arose for decision in that case was whether an assessee can adopt mercantile system to claim deduction of amounts payable by it and cash system in respect of the amounts due to it. The Madras High Court held that the same basis has to be adopted for receipt and payment and that when the assessee adopts cash system for receipts, it cannot be permitted to adopt mercantile basis for payments. 18. The ITAT, Ahmedabad "C" Bench in the case of ITO v. Saurashtra Investments (P.) Ltd [1994] 50 TTJ (Ahd.) 319, following the ratio of the decision of the Madras High Court in the case of G. Padmanabha Chettiar Sons held that same system is to be adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... splaced the method of accountancy adopted by the assessee, by applying the proviso to section 145(1) when the Assessing Officer made the computation upon the basis and in a manner determined by the Assessing Officer. Having rejected the method adopted by the assessee, the only other best possible manner by which the Assessing Officer could have determined the income is by bringing to tax the sales suspense account. Exactly, he has so done. In our opinion, the computation was done on correct basis. But the Assessing Officer erred in bifurcating the total income for two years and the same was subsequently set right by the First Appellate Authority, very rightly. On a thorough consideration of the material available on record and the position of law on the subject, we have no hesitation to hold that it is not possible to deduce correct profits from the Hybrid method of accounting adopted by the assessee for one and the same source and that the Assessing Officer very rightly rejected the said method and brought to tax the sales suspense account i.e. the unrealised sales outstanding at the end of the year. If there is any difficulty in realising the sales, then they can be written off a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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