TMI Blog2005 (2) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the hybrid method/system of accounting was permissible; if permissible, then could its consequences be avoided or ignored and the first proviso to section 145 of the Income-tax Act, 1961 ("the I.T. Act"), as it stood for the respective previous years 1986-87, 1987-88 and 1988-89, invoked for the purpose of holding that the income could not be deduced from such mixed accounting system. The admitted facts: In this case, the facts are more or less admitted. The assessee used to maintain mercantile system of accounting in respect of its outgoings, whereas it used to maintain cash system of accounting in respect of the receipt of interest against financing of vehicles, a part of its business. In the earlier years, this mixed system of accounting was permitted and accepted by the income-tax authorities and its income was accordingly assessed. But for the previous years 1986-87, 1987-88 and 1988-89, the Assessing Officer took a different view. The Assessing Officer held that the hybrid system of accounting could not be permitted. The Commissioner of Income-tax (Appeals) reversed the said orders holding, inter alia, that section 145 permitted maintaining of hybrid system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). He also distinguished the decision in CIT v. United Credit Ltd. [2002] 257 ITR 443 (Cal) and the unreported decision of this Court in Juggilal Kamlapat Udyog Ltd. v. CIT- since reported in [2005] 278 ITR 52 (Cal) I.T.A. No. 82 of 1999 disposed of on January 16, 2004, by the hon'ble Aloke Chakrabarti and the hon'ble S.K. Gupta, JJ. He also drew our attention to page 57 of the paper book and contended that the said system of accounting was subject to the satisfaction of the Assessing Officer and the authorities under the Income-tax Act in succession. In case the Assessing Officer or the learned Tribunal found that the income could not be deduced from the kind of the accounting method followed and it presented a distorted picture of the accounts, it was open to the authorities to determine the income in any of the manners of accounting system, as they might deem fit and proper. In the present case, Mr. Deb pointed out from para. 10 of the decision of the learned Tribunal, that such a finding was arrived at due to which the proviso to section 145 became applicable. Mr. Shom, learned counsel for the Department, in the other ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was not possible to deduce the income out of such accounting, the system of accounting could not be questioned. Once the system of accounting is accepted, then its consequences could not be avoided or ignored. In Investment Ltd. v. CIT [1970] 77 ITR 533 (SC); CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226 (Mad); CIT v. North Arcot District Co-operative Spinning Mills Ltd. [1984] 148 ITR 406 (Mad); G. Padmanabha Chettiar and Sons v. CIT [1990] 182 ITR 1 (Mad); Wood Craft Products Ltd. v. CIT [1993] 204 ITR 545 (Cal); CIT v. Woodcraft Products Ltd. 1996] 217 ITR 862 (Cal); CIT v. Citibank N.A. [1994] 208 ITR 930 (Bom) and CIT v. United Credit Ltd. [2002] 257 ITR 443 (Cal), the hybrid system of accounting was held to be acceptable. Relying on these decisions, the hon'ble Chakrabarti, J. speaking for the court, held that the hybrid system could not be ignored in the absence of any finding that the income could not be deduced from the accounts maintained by the assessee. The proposition is well-settled. The language employed in section 145 and the proviso, as it stood for the previous years concerned, permits acceptance of hybrid system of accounting provided the same was followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the power of the Assessing Officer to form an opinion whether or not the income can be properly deduced from the accounts maintained by the assessee, even though the accounts may be correct and complete to his satisfaction. This proposition is undisputed. It is well within the power of the Assessing Officer, even if he is satisfied with the correctness and completeness of the accounts, to form an opinion whether or not the income chargeable under the Act can be properly deduced from the accounts so maintained. What is or is not profit or gain is primarily a question of fact. Such fact is to be ascertained by the tests ordinarily applied in such kind of business. In this connection, reference may be made to the ratio decided in Sun Insurance Office v. Clark [1912] AC 443 (HL) and Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733, 737 (SC), dealing with section 13 of the Indian Income-tax Act, 1922, corresponding to section 145 of the 1961 Act, wherein it was held that it is not the question of correctness but it is a question whether there was material to support the findings of the learned Tribunal involving the applicability of the proviso to section 13 of the 1922 Act. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the true income of the assessee. This view was adopted as far back as in 1938 in the decision in CIT v. Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36 (PC) followed in CIT v. McMillan and Co. [1958] 33 ITR 182 (SC); S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579, 588 (SC) and CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, 128 (SC) since referred to in British Paints India Ltd. [1991] 188 ITR 44 (SC). However British Paints India Ltd. [1991] 188 ITR 44 (SC) would not be a decision which can be applied in the present facts and circumstances of the case in relation to the findings about the distorted picture of the income for the simple reason that in British Paints India Ltd. [1991] 188 ITR 44 (SC), the method of accounting was not the question involved. The question that was under consideration in the said decision related to the evaluation of the stock-in-trade, which was prepared on expert advice in the interest of efficient administration of the company. In arriving at the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products were excluded. This system of evaluation of the stock-in-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be adjusted against the receipt of interest of that previous year. In British Paints India Ltd. [1991] 188 ITR 44 (SC), the method of computing profits and gains was held to be incorrect by reason of the system adopted for evaluation of the stock-in-trade. In this case, it is not the method of evaluation which is in dispute. It is the system or method of accounting, which has since been questioned by the authorities under the Act, which it cannot do. It is not a case that one class of income was being maintained in a different system or method. Admittedly, all receipts of interest were maintained on cash basis, namely, a particular class and all outgoing interest payable was maintained in another system. When such a system was permissible, the assessing authority was not supposed to find fault with the same simply because there might be shifting of income by reason of such system. If we accept such a proposition, then an assessee would not be entitled to follow a mixed/hybrid method of accounting. Such an absolute proposition cannot be laid down which has since been recognized in law over such a long period of time and has been done away with by virtue of the amendment brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lock receipt of several years was received in a particular previous year or subsequently, then the assessee would be liable to pay the tax in that previous year when the cash was or would be received. The next contention raised by Mr. Deb is that in those days the rate of tax was very high and the rate was reduced for the subsequent years. Taxability is not dependent on the decrease and increase in the rate of taxes applicable to the subsequent previous years; it is dependent on the earning of the income in the particular previous year. The present case: The principle: How applicable: In the present case, the finding at para. 10 in the order of the learned Tribunal is that the system of accounting presented a distorted view of the income. But, the said finding cannot be construed to mean that the hybrid system of accounting maintained by the assessee was inaccurate or incomplete or that income was not possible to be deduced from such system of accounting. Whether such system of accounting would present a distorted figure of income is wholly immaterial; inasmuch as once the system is accepted, its consequences cannot be avoided or ignored. Conclusion: It may be noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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