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2015 (8) TMI 430 - KERLA HIGH COURT

2015 (8) TMI 430 - KERLA HIGH COURT - [2015] 379 ITR 132 (Ker) - Adoption of mercantile system of accounting - according to the Revenue, in respect of all the activities of the assessee, the accounting of income and expenditure should be under the same system, i.e. the assessee having adopted mercantile system of accounting, it cannot adopt accounting on cash basis in respect of sales of newspaper and advertisement revenue alone - Held that:- Having regard to the provisions of section 145 of the .....

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RT] the entries in the books of accounts are not determinative or conclusive and any matter relevant are to be examined on the touchstone of provisions contained in the Act. Apart from arguing that for the sales of newspaper and advertisement charges, it was not permissible to adopt accounting on cash basis, it was not even contended by the Revenue that the taxable income could not be deduced from the accounts of the assessee.

In the light of the principles of law deducible from the s .....

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: SRI.GEORGE K. GEORGE, SC FOR IT JUDGMENT Antony Dominic, J. 1.The captioned appeals are filed by the Revenue, aggrieved by the orders of the Income Tax Appellate Tribunal, Cochin Bench in ITA.Nos.386/95, 387/95, 620/95 and 679/95 respectively, concerning the assessment years 1990-91, 1991-92, 1992-93 and 1993- 94 respectively. 2.The respondent assessee is a company which is publishing the newspaper 'Kerala Kaumudi'. The assessee is following mercantile system of accounting. However, as .....

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ppeals) were allowed partly. Further appeals filed by the assessee were allowed by the Tribunal and the assessing officer was directed to revise the assessments. It is in this background, the Revenue has filed these appeals. 3.The questions of law framed in these appeals being common, those framed in ITA.119/99, filed in relation to the order passed for the assessment year 1990-91, are extracted below: "1. Whether, on the facts and in the circumstances of the case and in the absence of a fi .....

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ash system result in difficulty for the assessing officer in ascertaining the correct income? 3. Whether, on the facts and in the peculiar circumstances of the case the assessee is entitled to have different system of accounting considering the incomes and the head under which the income is assessed? 4. Whether, on the facts and in the circumstances of the case the Tribunal is justified in finding in the present case that "in respect of the earlier years there was no difficulty in ascertain .....

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er years there was no difficulty in ascertaining the correct income" and is not the finding in the circumstances of the case wrong based on surmises and conjectures? 6. Whether, on the facts and in the circumstances of the case and in the light of the findings that the assessee had not maintained log books in respect of the vehicles and in the absence of evidence that the telephones were used exclusively for business purpose the Tribunal is right in law and fact in interfering with the disa .....

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tivities of the assessee, the accounting of income and expenditure should be under the same system. This contention was sought to be substantiated relying on the judgments of the Apex Court in Keshav Mills Ltd. v. Commissioner of Income Tax, Bombay [(1953) 23 ITR 230] and G.Padmanabha Chettiar & Sons v. Commissioner of Income Tax [(1990) 182 ITR 1]. 6.On the other hand, learned senior counsel appearing for the respondent assessee contended that having regard to the provisions of section 145 .....

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v. Commissioner of Income Tax [(1999) 237 ITR 889] and of the Gujarat High Court in Commissioner of Income Tax v. Ganga Charity Trust Fund [(1986) 162 ITR 612]. 7.We have considered the submissions made by both sides. Before we deal with the contentions raised by both sides on the merits of the controversy, at the outset, we may state that dispute regarding accounting of newspaper sales and advertisement charges on cash basis, which is the subject matter in these appeals, had been the subject m .....

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n respect of the earlier years. The Tribunal considered the issue for the first time in respect of the assessment years 1977-78 and 1978-79 in the order in ITA Nos.240 & 241 (Coch)/84 dated 29.8.1986. In that order the Tribunal observed- "On merits also the appeals have to be dismissed because we have examined the system of accounting followed by the assessee in respect of advertisement receipts and we are satisfied that the assessee is consistently following cash system of accounting f .....

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sh system of accounting. Reference application filed by the department for the assessment years 1977-78, 1978-79 and 1979- 80 were dismissed by the Tribunal by the order in RA Nos.362 to 364 (Coch)/86 dated 25.9.1987. The decision of the Tribunal was accepted by the department evident from the letter C.No.406 RA (1)/20/T/Jcd1/86-87 dated 17.8.1990 from the CIT, Trivandrum addressed to the assessee. It can also be seen from the letter C.No.403/242/J/91-92 dated 15.6.1992 from the CIT, Trivandrum .....

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of the Tribunal, therefore, confirms that the system of accounting adopted by the assessee, viz., accounting on cash basis, was confirmed by the Tribunal in the previous assessment years and the orders of the Tribunal were accepted by the Department. Accordingly, assessments were completed in the subsequent assessment years until the issue was again raised in the assessment years in question. 9.It is true, as contended for the Revenue, in the proceedings under the IT Act, principles of res judic .....

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ided by the Tribunal and which order has attained finality and was accepted by the Department also. In Radhasami Satsang v. Commissioner of Income Tax [193 ITR 321], the Supreme Court had occasion to consider the question of applicability of the principles of res judicata to income tax proceedings. This judgment has been followed by the Apex Court in its subsequent judgment in Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. [(2007) 8 SCC 688]. In Radhasami Satsang (supra), the Su .....

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propriate to allow the position to be changed in a subsequent year, (unless there was) any material change justifying the Revenue to take a different view of the matter." 10.Referring to this judgment and various other authorities and answering the very same contention, the Apex Court, in its judgment in Bharat Sanchar Nigam Limited v. Commissioner of Income Tax [282 ITR 273] summarised the legal position thus: "The decisions cited have uniformly held that res judicata does not apply i .....

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r to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, t .....

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passed for one assessment year does not operate as res judicata in the succeeding assessment years. However, the issue resolved by the Tribunal and which was accepted by the Department on the basis of which assessments were also finalised in the succeeding assessment years as well, is attempted now to be re-opened. That departure is possible only if the exemptions pointed out in the aforesaid judgments are in existence. For that purpose, the Assessing Officer has mainly relied on the judgment o .....

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ommissioner of Income Tax [(1999) 237 ITR 889]. Therefore, these later judgments of the Apex Court render the very basis on which the Assessing Officer has proceeded non existent. 12.As we have already stated, the method of accounting on cash basis which is now objected by the Revenue has been upheld by the Tribunal in its orders and these orders of the Tribunal have become final and were accepted and acted upon by the Revenue. This, therefore, shows that the fundamental aspect permeating though .....

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not open to the Income Tax Officer or the Commissioner of Income Tax (Appeals) to have ignored the binding orders of the Tribunal and to complete the assessments in the manner it has been done. Further, the Revenue has no case that the accounting disabled it from quantifying the taxable income or that the Tribunal's orders in the previous years are vitiated for any illegality. Therefore, we are in complete agreement with the senior counsel for the assessee that the view taken by the Tribuna .....

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ubstitution by Finance Act, 1997, section 145 (1) provided that "income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, section 145 of the IT Act gave liberty to the assessee to compute income chargeable under the heads mentioned in the section in accordance with the method of accounting regularly employed by .....

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ntile system of accounting or what is otherwise known as the double entry system is opposite to cash system of book keeping under which a record is kept for actual receipts and actual cash payments, entries being made only when money is actually collected and disbursed. It is also stated that mercantile system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been i .....

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accounting for one part of his business or one class of customers and a different method for another part of his business or another class of customers. It is also held that if he employs such different methods regularly and consistently, the profits would have to be computed in accordance with the respective methods. 17.Having thus seen the difference between the mercantile system and cash system and also the liberty that an assessee has in opting for the system of accounting he regularly adop .....

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[200 ITR 68]. This judgment, as rightly pointed out by the learned counsel for the assessee, has since been overruled by the Apex Court in its judgment in United Commercial Bank v. Commissioner of Income Tax [(1999) 240 ITR 355]. In that judgment, referring to the judgment in Investment Ltd. v. Commissioner of Income Tax [(1970) 77 ITR 533], the Apex Court held that a method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the .....

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permissible to adopt for income tax purposes a method different from the one on the basis of which the final accounts were prepared. This contention was sought to be substantiated by relying on the judgment in State Bank of Travancore v. Commissioner of Income Tax [(1986) 158 ITR 102]. The Apex Court has specifically held that the contention does not have any substance and has finally concluded thus: "Hence for the purpose of income tax whichever method is adopted by the assessee a true pi .....

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1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; (2) In the balance-sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts and for that purpose, to value stock-in-trade either at cost or market price. (3) A method of accounting adopted by the taxpayer consistently and regularly ca .....

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a case where accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine." 21.Again at page 367, the Apex Court held thus: "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in- trade at cost for the purpose of statutory balance sheet, and fo .....

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e assessee invited our attention to the Division Bench judgment of this Court in Commissioner of Income Tax v. Geo Tech Construction Corporation [(1996) 221 ITR 164]. That was the case of a contractor whose system of accounting showed that the receipts were accounted on cash basis and expenses on mercantile basis. In this judgment, upholding the system of accounting of the assessee and recognising the liberty available to an assessee to maintain the hybrid system of accounting, the Division Benc .....

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the ancillary field have sought to introduce and stamp labours in regard thereto and, as is common, a ready phrase from the field of horticulture gets introduced to describe such system as a hybrid system of accounting, really leading to one fundamental fact of life that account consciousness gets reflected in the process of system of keeping accounts which have to be understood and appreciated in the context of the person or assessee concerned." 23.Reading of this judgment also shows that .....

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55], which contained the undisputed principle that no one gets a vested right in an erroneous order. 24.The other judgment of the Apex Court relied on by the counsel for the assessee is UCO Bank v. Commissioner of Income Tax [(1999) 237 ITR 889]. Reading of this judgment shows that the Apex Court declined to follow the judgment in State Bank of Travancore (supra), which again was relied on by the assessing officer. This was a case where the appellant, which had adopted mercantile system of accou .....

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ed by the assessee was considered by the Apex court and the judgment shows that a mixed method of accounting was followed in as much as the assessee had made credit to the suspense account as mentioned above. In this judgment, approving the mixed system of accounting adopted by the assessee, the Apex Court held that the very fact that the assessee, although generally adopted the mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to .....

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switched over to accounting on cash basis. Approving this, the Gujarat High Court held thus: "On the second question regarding the change of system of accounting, we find that when the assessee-trust experienced difficulty in the assessment year 1971-72, because of non- receipt of income from interest from two parties with which it had placed its funds by way of deposits, it decided to switch over to cash system of accounting, so that it may not be required to pay income-tax on notional in .....

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situation, we fail to understand, why a bona fide assessee should be precluded from switching over to another system of accounting which he finds convenient and which would reflect his real income. In CIT v. Rajasthan Investment Co. (P) Ltd. [1978] 113 ITR 294, the Calcutta High Court held that on the Tribunal's finding that the change in the method of accounting of the assessee was bona fide and in keeping with the real state of affairs of its business, the change in the method of accountin .....

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ccounting unilaterally. In Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861, the Calcutta High Court reiterated that an assessee is entitled to change his regular method of accounting by another regular method and such a change can be effected even in respect of a part of the assessee's income. According to their Lordships, a recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular me .....

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