TMI Blog2001 (6) TMI 824X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery called SCADA system on 30th March, 1993, to M/s Reliance Capital Finance Trust Limited (hereinafter called RCFTL) for a total consideration of ₹ 8,03,38,800. The assessee thereafter entered into a lease agreement with RCFTL and leased back the said SCADA system for a period of 60 months and the total lease rentals were ₹ 10,55,65,200. The said lease agreement is given at pages 1 to 31 of the paper-book. The schedule to the agreement mentions the date of commencement, period, rate of rental and lease management fees for the rental. The first lease agreement was entered into on 30th March, 1993, and as per this agreement each monthly lease rent instalment was for an amount of ₹ 17,59,420. The assessee entered into a supplemental agreement on 5th April, 1993, which provided for amending cl. (iv) relating to the period and schedule of lease rentals and cl. (ii) relating to variation in rentals. The period referred to in the schedule to the agreement dt. 30th March, 1993, was replaced by the supplemental agreement dt. 5th April, 1993. The supplemental agreement extended the period of lease into a 'primary' period of 60 months from the commenceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding on the IT authorities and it is not open to the assessee to adopt a different basis for income-tax purposes after having made entries in the books of accounts. As per the agreement referred to above in this paragraph, the assessee-company had paid ₹ 2,11,13,040 to M/s Reliance Capital Ltd. towards lease rentals, which is inclusive of lease tax. Clauses 2.2, 2.3, 4, 4.4, 4.9 and schedule of the agreement dt. 30th March, 1993 read as under : 2.2. The lessee is paying and shall pay to the Lessor, the lease Management Fee and rental as specified in the schedule. The lessee shall pay the instalments of rental regularly and punctually, without any deduction or abatement, irrespective of whether the said properties are in use by the lessee are or working for one or more shifts or not or are under repair or maintenance or replacement for any period whatsoever, without affecting the lessee's obligation to pay the rental for the fixed period and in addition to the right of the lessor specified in cl. 8 hereof, in the event of the lessee being in arrears or any such rentals, such arrears of rental shall carry interest @ 2 per cent per month on compounding basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Description Amount I. Microprocessor based control system for monitoring energy flow intended to result in saving of Energy surveillance center and data Acquisition system (SCADA). ₹ 803.388 lakhs. II. Equipment (said properties) to be used at at Patalganga and various CP stations on route to Patalganga from Chembur, Maharashtra. III. Commencement date for rentals 30th March, 1993. IV. Fixed period 60 months from the commencement date. V. Rate ₹ 21.90/1000/ month. VI. Lease management fees 1/2% of the agreement amount-front ended. The total lease rentals for the fixed period for the said properties i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80,338 5. 1-4-2002 80,338 6. 1-4-2003 80,338 7. 1-4-2004 80,338 8. 1-4-2005 80,338 9. 1-4-2006 80,338 10. 1-4-2007 80,338 8,03,380 (Rupees eight lakhs three thousand three hundred and eighty only). 2. (ii) Variation in rental's on account of change in capital allowance. (A) if for any reason whatsoever, the eligibility of the lessor to claim depreciation computed at the aforesaid rate is deceased or if for any reason the lessor is disallowed its claim for the same, whether wholly or partly in any year during the fixed period of the lease, instalments of rentals in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The agreement required the assessee-company to pay ₹ 2.11 crores and under the mercantile system of accounting these amounts of lease rentals were accrued. Absence of book entry not defeat the accrual of liability. 4. However, the AO was of the view that the assessee was bound to compute its total income on the basis of books of account and it was not open to it to claim any deduction which was not debited in the books of account. In this connection, he has relied on the decision of the Calcutta High Court in the case of CIT vs. Uco Bank, (1993) 114 CTR (Cal) 123 : (1993) 200 ITR 68 (Cal). He thereafter referred to the decision of Court of Appeal of UK in Gallagher vs. Jones and Threlflai Jhones (1993). He held that the accrual concept is made up of two principles, viz. recognition and matching and that the assessee could not make the claim in respect of the sum of ₹ 2,11,13,040 but only of ₹ 70,83,671 as that was the amount debited in the books of account on the basis of guidelines of ICAI. The AO restricted the claim to ₹ 79.28 lakhs and disallowed the balance lease rental amount of ₹ 140.29 lakhs on the ground that the assessee was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books of account. In this connection the AO has relied upon the decision of the Calcutta High Court in the case of CIT vs. Uco Bank (supra) for the proposition that the assessee in that case claimed a notional loss on account of stock valuation only in the computation of income without following the same method in its regular books while finalising the accounts. On the basis of this decision, the AO had concluded that : It is clear that assessee after having made entries in the books on account consistent with the method of accounting followed by him cannot be permitted to adopt a different base for income-tax purpose, just because that base may be permissible under the method of accounting following by the assessee, i.e. mercantile system. It is submitted that the reliance placed by the AO is misplaced. Firstly, that decision has been reversed by the Hon'ble Supreme Court in the case of Uco Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). In fact, the Supreme Court while reversing the decision had observed that for the purpose of income-tax what is to be taxed is the real income, which is deduced on the basis of accounting syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in a statutory form, may not be decisive or conclusive in determining real income of the assessee. It may sometime disentitle a deduction simply because under some misapprehension or mistake assessee fails to make an entry in the books of account, although under the law a deduction must be allowed by AO. The claim made by the assessee is in line with the method of accounting followed by the assessee, which is mercantile system of accounting. Coincidentally, the assessee had also paid the amount claimed as deductible during the year under consideration. The mercantile system of accounting 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 incurred before it is actually disbursed. The learned counsel further submitted that the word 'accrue' had been understood by the Supreme Court in E.D. Sassoon Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) at p. 51 as under : If the assessee acquires a right to receive the income, the income cannot be said to have accrued to him though it may be received later on its being ascertained. The basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or Courts which failed. The appeal is consequently allowed and the judgment of the High Court is set aside. The question which was referred is answered in favour of the assessee and against the Revenue. Our attention was also invited to the ratio laid down by the Gujarat High Court in the case of CIT vs. Gujarat Mineral Development Corporation (supra) and Bombay High Court in the case of Addl. CIT vs. Buckau Wolf New India Engineering Works Ltd. (supra) for the proposition that whether the assessee is entitled to a particular deduction or not will depend upon the provisions of law relating thereto and not on the view which the assessee might take of its rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The Court must have regard to the system of accounting followed by the assessee. It is pointed out that in the present case the facts are even stronger than in those cases inasmuch as the agreement provides for the liability of ₹ 219.57 lakhs and the entry in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not militate against the view of Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). In both these cases emphasis is laid on the principle that when one follows the mercantile system of accounting the liability which accrues must be allowed or upheld. The issue which arose in Kedarnath Jute Mfg. Co. Ltd. and State Bank of India (supra) was whether the deductibility of an amount in the mercantile system of accounting is a prisoner of entries being made or not being made in the books of account. It was held by the Hon'ble Supreme Court that taxability and deductibility is not however defeated by making entry or not making entry in the books of account. It is explained that in the case of Addl. CIT vs. Buckau Wolf New India Engg. Works Ltd. (supra) the Hon'ble Bombay High Court considered whether the observations of the Hon'ble Supreme Court in the case of Kedarnath Jute were limited to the case of a statutory liability and could not be applied to a case of contractual liability. The Hon'ble Bombay High Court observed as under : It was submitted further that the assessee had not made an entry in his books for the full amount in the year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount which is claimed deductible by the assessee. Thus, the consequence of finding is that the amount of lease rent is allowable. The other possibility is that even though no explanation is offered as to why the second agreement was signed, the two agreements must be read together. The conclusion which would follow from the proposition that the two agreements must be read together are that everything in the second agreement is valid and subsisting and must be given effect to. The second agreement modifies the first agreement in four different ways given below : (i) It extends the period of lease from 60 months to 120 months. (ii) It provides for a further lease rent for the increased period. (iii) It provides that the further lease rental is payable yearly instead of monthly. (iv) It makes a provision for variation in rentals on account of change in capital allowances. If the finding of the CIT(A) is interpreted, it will amount that the lease period is extended to 20 years. It is submitted that the learned CIT(A) has failed to read and comprehend the agreement in its totality. It is not open to the CIT(A) to pic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Supreme Court decision, what is the legal liability of the assessee on 31st March, 1993. Is it open to the assessee to tell and submit before the Court in a suit filed by the lessor that although the contract provides for an obligation in the payment of disputed sum of ₹ 2.19 crores because of supplemental agreement and the entries in the books of account, it is legally liable only to the extent of ₹ 70 lakhs. The learned counsel submitted that it is preposterous to suggest that a legal liability can be changed unilaterally in the case of contractual obligation by a simple entry debiting in its books of account a sum far lesser than its contractual obligation. It is further submitted that a legal liability must be determined in accordance with the contract entered into between parties irrespective of the amount debited in the books of account. It cannot stand scrutiny for even a moment that the legal liability and a contractual obligation can be whisked away on the ground that a certain accounting standards have been followed to maintain the books of account. In this connection it must be borne in mind, as point out by the AO, that the accrual system of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the original agreement. The supplemental agreement is silent in this respect. (B) No justification has been brought on record for introduction of the concept of 'primary period' and 'secondary period'. This is apparently an artificial device for enlarging the period of lease to 15 years. (C) The original lease agreement and the supplementary lease agreement are in reality only one agreement with the prime objective of taking the asset on lease for the period of 15 years to that higher deduction could be claimed in the initial 5 years period. (D) The so-called two agreements are in spirit only one agreement. Accordingly, lease rentals should be payable over lease terms of 15 years spread over equally as one in the original agreement. This is in accordance with the Guidance Note issued by the ICAI. It was submitted that the Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (supra) has laid down the proposition that where the law has not defined a concept known to accounting practice, that concept must draw on accounting practice to derive its meaning. ICAI taking into account of fact that leasing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in regard to commission in that case has to be read as one integrated whole. It is submitted that similarly in the present case the lease period has been increased by a supplemental agreement from five years to 15 years and, therefore, both the agreements should be treated as one. 10. It is further submitted that the assessee is following mercantile system of accounting, according to which the profits earned and credited to the accounts will be taken as the basis of computation of total income. Our attention was invited to the mercantile system of accounting as explained by the Supreme Court in the case of Keshav Mills Ltd. (supra) and it was pointed out that the Supreme Court held that the mercantile system of accounting treats profit or gains as arising or accruing at the date of transaction notwithstanding the fact that they are not received or deemed to be received and under that system book profits are taxed. The Court further observed that profit earned and credited in the books of account became the basis of computation. In view of this decision, the AO adopted the book profit reflected in the P L a/c for the year ending 31st March, 1996. It was further pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamples : (1) An assessee has taken machinery on lease for 4 years on 1st April, 1995 and the contract stimulates that the total rent for the entire lease period is ₹ 4,00,000 and the entire rent of ₹ 4 lakhs requires to be paid at the beginning of the contract. While preparing the P L a/c for the year ending 31st March, 1996, how much is the accrued liability for the previous year 1995-96? I humbly submit that in the mercantile system of accounting, the accrued liability of rent is ₹ 1,00,000 and this amount requires to be debited to the P L a/c. For the year ending 31st March, 1996. In the balance-sheet for the year ended 31st March, 1996, lease rent advance of ₹ 3,00,000 will appear on the asset side of the balance sheet as Rent in advance . 2(1) An assessee has taken machinery on lease for 15 years on 1st April, 1995 from a sister concern on a total rent of ₹ 15 lakhs payable as under : Asst. yr. Lease rent 1995-96 ₹ 10 Lakhs 1996-97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) wherein the lease rental calculation has been given. The learned Departmental Representative quoted the portion relating to lease tax paid from the order of the CIT(A) as under : Lease rent for one year 70,83,671.33 Add : Lease tax paid 8,44,524.00 79,28,195.33 11. It is submitted that under the Lease Tax Act, assessee has to pay tax not exceeding 15 per cent on the turnover of sales in respect of the transfer of right to use goods specified in the Schedule. The tax paid by the assessee works out to 11.92 per cent or 12 per cent of the lease rent. The assessee added the lease tax to the lease rental recorded in the books of account. The basis on which lease tax has been paid has not been discussed by the CIT(A) in his order but a finding has been given that lease rental includes lease tax. Therefore, the assessee paid the lease tax on the accrued lease rent of ₹ 70.83 lakhs and not on the lease rent paid in advance of ₹ 1,40,29,364. Therefore, accrued lease rent requires to be restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome to tax. The assessee's method of accounting of lease rentals will result in reduction of profit in first five years. Consequently, it gives a completely misleading picture of financial result. In this connection, our attention was invited to the Supreme Court decision of the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC). Reliance was also placed on the decision of the Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC) wherein it was held that income has to be computed on the basis of regularly employed method of accounting. 13. The learned Departmental Representative submitted that the arguments advanced by the learned counsel for the assessee have no substance and that the decisions cited by him are not applicable to the facts of the present case. 14. In reply, the learned counsel for the assessee submitted that the decision in the case of Madras Industrial Investment Corporation Ltd. (supra) was a decision rendered by two Judges of the Supreme Court for the proposition that the accounting standards must override the statute. That was the case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in Tuticorin Alkali (supra) must prevail because it was rendered by three Judges, whereas the decision in Madras Industrial (supra) was rendered by two Judges. 15. The learned counsel for the assessee submitted that the reference to the decision of Hyderabad Bench of the Tribunal made by the learned Departmental Representative is of no consequence as inasmuch as the decision has not been accepted by the Special Bench in (1998) 62 TTJ (Hyd) (SB) 33 : (1998) 65 ITD 17 (Hyd) (SB) (supra) and it is contrary to several decisions of the Supreme Court. 16. As regards the argument of learned Departmental Representative with regard to lease tax paid is concerned, it is pointed out that the assessee has paid lease tax of ₹ 8,44,524. According to him, the tax paid is on the lease rent of ₹ 70,83,671 and in the circumstances the accrued lease rent is only ₹ 79.28 lakhs because if the entire lease rent of ₹ 2.19 crores is allowed as a deduction without corresponding payment of lease tax, it will violate the Lease Tax Act and, therefore, not deductible under s. 37 of the IT Act. It is pointed out that the learned Departmental Representative had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative that lease tax has been paid on the sum of ₹ 70,83,671 is factually incorrect. On the other hand, the argument of learned Departmental Representative that the amount which is allowable is that amount on which lease tax is paid supports the assessee that the amount of lease rent which is allowable is ₹ 2,11,13,040 and not ₹ 70,83,671. It is pointed out at this stage that the assessment order under the abovementioned Act for the period 1st April, 1993, to 31st March, 1994 (Annexure-I to this order), indicates that the taxable turnover is ₹ 12,88,56,022, which includes ₹ 2,11,13,040 (Annexure-II) in respect of RCFTL. 17. Concluding his arguments, the learned counsel for the assessee submitted that the amount claimed by the assessee is allowable in all these years. Thus, the disallowance of balance lease rental of ₹ 140.29 lakhs is uncalled for. 18. We have considered the rival submissions and have gone through the material available on record. This is a case of sale and lease back of plant and machinery called SCADA. The assessee-company entered into lease agreement with RCFTL and leased back the said SCADA s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Under this agreement, the amount of lease rental payable is ₹ 2.19 crores, i.e. the amount which is claimed deductible by the assessee. The other possibility is that even though no explanation is offered as to why the second agreement was executed, the two agreements should be read together. The conclusion flows from the proposition that the two agreements must be read together or everything in the second agreement is valid and subsisting and must be given effect to. The second agreement modifies the first agreement in four ways : (1) It extends the period of lease from 60 months to 120 months. (2) It provides for a further lease rent for the increased period. (3) It further provides that the lease rental is payable yearly instead of monthly. (4) It makes a provision for variation in rental on account of change in capital allowances. The CIT(A) while coming to the conclusion that these two agreements should in spirit be read as one agreement, had ignored the three other aspects mentioned above. It is not open to truncate the agreement and read it in part and ignore the other parts. If we go through the two ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Keshav Mills (supra), the question has to be asked what is the liability of the assessee on 31st March? Is it open to the assessee to tell and submit before the Court in a suit filed by the lessor that although the contract provides for an obligation in the payment of ₹ 2.19 crores because of the supplemental agreement and the entries in the books of account, it is legally liable only to the extent of ₹ 70.83 lakhs. It was contended that it is preposterous to suggest that a legal liability can be changed unilaterally in the case of contractual obligation by a simple entry debiting in its books of account a sum far lesser than its contractual obligation. The legal liability must be determined in accordance with the contract entered into between the parties, irrespective of entries in the books of account. Otherwise it will not stand scrutiny for even a moment that a legal liability and contractual obligation can be whisked away on the ground that a certain accounting standard has been followed to maintain books of account. It is pointed that the IT Act does not recognize the matching principle of accounting of income. In this connection, distinction betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial was rendered by two Judges. In the case of Tuticorin (supra), the Hon'ble Supreme Court was directly concerned with an issue whether a well settled accounting principle must be given effect to in preference to Income-tax law and the Hon'ble Supreme Court has observed as under : Next it has been argued that according to well-established accountancy practice the interest earned by the company even before the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justified by any provisions of the statute or is contrary to it. In view of the above discussion, we are of the opinion that the two agreements are separate agreements and cannot be treated as one agreement because the supplemental agreement modifies the first agreement in four different ways cited above, and the accounting standard cannot be indiscriminately applied to determine the income under the Income-tax law because accrual of liability is the crux of the matter under the IT Act where the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 70,83,671, the accrued lease rental is only ₹ 79.28 lakhs. Therefore, there is no reason to allow deduction of ₹ 2.19 crores without corresponding payment of lease tax under the Lease Tax Act as it would be violative of Lease Tax Act as per the ratio laid down by Supreme Court in the case of Muddi Venkataratnam (supra). It was contended that if the assessee followed one method of accounting for preparation of P L a/c and balance sheet, he cannot be allowed to follow another method of accounting for tax purpose. For this proposition he has relied on the decision of Hyderabad Bench of the Tribunal in the case of Nagarjuna Finance Ltd. (supra) and decisions of the Supreme Court in the cases of Madras Industrial Investment Corporation Ltd. (supra) and Challapalli Sugars Ltd. (supra). 22. We find that the AO while disallowing the claim of the assessee has followed the decision of the Calcutta High Court in the case of CIT vs. UCO Bank (supra) for the proposition that where the assessee had made entries in the books of account consistent with the method of accounting followed by him, he cannot be permitted to adopt different basis for income-tax purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the total income of the assessment year. 24. Now the question arises whether deduction can be claimed even though no entry was made in the books of account. In the case of Kedarnath Jute Mfg. Co. Ltd. (supra), the Hon'ble Supreme Court has observed that if an assessee under a misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the ITO, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of its rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The learned Departmental Representative has referred to the decision of Gujarat High Court in the case of Gujarat Mineral Development Corporation (supra). In this case the facts were that the assessee has claimed entire expenditure in one year, whereas the expenditure was written off in the books of account over a period of seven years. Under these circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down the principle that merely because the assessee has been following the mercantile system of accounting and merely because it did not provide for the expenditure in the accounts of that year, the claim of the assessee on the basis of bill could not have been denied. It was also mentioned that the way in which entries are made in the books of account is not determinative of the question whether assessee has earned any profit or suffered a loss. The assessee might be making entries which are not in conformity with the principles of accountancy. Therefore, the taxability could not be decided on the basis of entries which the assessee might choose to make in its account but had to be decided in accordance with the provision of law. What would determine the taxability is not whether the assessee has shown a particular item as profit or loss in the accounting year but whether the said item could be regarded either as profit or loss under the provisions of the Act. In view of the above decisions, it is clear that whether the deductibility of an amount in the mercantile system of accounting is dependent upon the entries being made or not being made in the books of account is not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso referred to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and it was observed by the Bombay High Court that it is true that in the decision in Kedarnath Jute Mfg. the Supreme Court was considering the statutory liability for payment of sales-tax but the observations to be found at page 367 would seem to apply to all types of liability and not only to tax liability. It has been observed by the Supreme Court that whether the assessee is entitled to a particular deduction or not will depend on provisions of law relating thereto and not on the view which the assessee might take of his rights nor can existence or absence of entries in books of account be decisive or conclusive in the matter. In view of this, we do not find any substance in the arguments of the learned Departmental Representative. 25. The learned Departmental Representative raised a valid point that the assessee had paid lease tax of ₹ 8,44,524. This tax is paid on the lease rent of ₹ 70.83 lakhs and in the circumstances the accrued lease rent is only ₹ 79.28 lakhs and if the entire lease rent of ₹ 2.19 crores is allowed as a ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 50 lakhs treating the expenditure as capital in nature. 28. The assessee incurred an expenditure of ₹ 50 lakhs towards stamp duty and registration fee for increasing its authorised capital from ₹ 100 crores to ₹ 200 crores. As the expenditure was in connection with the increase in authorised share capital of the company, the assessee was requested to show cause why the claim should not be disallowed. The claim of the assessee was that the expenditure incurred is in the nature of revenue and in the alternative it was claimed that the amount is allowable under s. 35D of the IT Act. The assessee has made the following submissions : We have paid ₹ 50 lacs to Registrar of Companies. The above payment was made in connection with increasing the authorised capital from ₹ 100 Crores to ₹ 200 Crores of equity shares of ₹ 10 each. We further submit that above expenses of ₹ 50 lac is fully allowable under s. 37(1) of the IT Act, 1961 as the expenditure is of revenue in nature and same has been laid out wholly and exclusively for the purpose of business or profession. The assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) and Brooke Bond (India) Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC). The learned counsel for the assessee submitted that the expenditure does not result in the creation of any capital asset and, therefore, it is allowable as a revenue expenditure. It is further submitted that as regards the claim under s. 35 of the IT Act, the assessee has claimed in the alternative that if the amount is not allowable under s. 37, it should be allowed under s. 35D. Since the expenditure in question falls within the purview of s. 35D(2)(c)(iii) and (iv), the expenditure is allowable under s. 35D in 10 instalments as prescribed in s. 35D(1) provided it does not exceed an amount calculated at 2-1/2 per cent of the cost of the project or the capital employed at the option of the assessee. 29. The learned Departmental Representative relied on the orders of the Revenue authorities. 30. We have considered the rival submissions and have gone through the material available on record. The Hon'ble Supreme Court in the above noted two cases has clearly held that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) remains in the womb of future . The measurement of periodic income is, to that extent, a matter of estimation and it is for the accuracy and reasonableness of such an estimation that principles of accounting inevitably come into picture. There should have perhaps no difficulty if there was one and only one correct principle or method of accounting or, in the alternative, if by force of law any single method of accounting had been adopted for the purpose of computation of total income. We are concerned in these appeals with asst. y₹ 1994-95 to 1996-97. For these assessment years, provisions of s. 145(1) conferred a choice upon the taxpayers in the following words : 145. Method of accounting.'(1) 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 : Provided that in any case where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that, in the opinion of the AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. Smt. Singaribai (1945) 13 ITR 224 (All) and Madras High Court in the case of Bangalore Woollen and Silk Mills Co. Ltd. vs. CIT (1950) 18 ITR 423 (Mad) that an assessee cannot ask for different system of accounting for the purpose of his income-tax assessment. 33. In Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 (SC), the Hon'ble Supreme Court held that the provisions of s. 13 of 1922 Act (corresponding to s. 145 of 1961 Act) was compulsory on the IT authorities and imposed upon them an obligation to accept the method of accounting regularly adopted by the assessee except in cases when the proviso to that section come into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income (p. 240). In CIT vs. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC), the Supreme Court reiterated that the ITO is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed : The only departure made by s. 13 of the Indian IT Act from the legislation in England is that whereas under the English legislation, the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch method was equally binding on the assessee inasmuch as he could not follow one method or system of accounting for writing his books of accounts and yet another method or system of accounting for the return of income filed by him. The provisions of s. 13 of 1922 Act and s. 145 of 1961 Act and various judgments of the Courts in India give clear legal recognition to the fact that unlike laws of physics, there could be more than one correct answer in the fields of accounting. Even the accounting practices under the overall umbrella of the mercantile system to admit of considerable amount of diversity. In such a situation the question of choice arises and that choice is exercised by an assessee while writing his books of accounts. In other words, it is not the legal position that on identical facts, the same amount of income could be assessable in the cases of all the assessees. The provisions of s. 145(1) and the choice conferred upon the assessee would make no sense at all otherwise. 36. As pointed out earlier, income-tax is an annual levy. For the purpose of income-tax, each year is a separate self-contained period of time. As early as in the case of CIT vs. PLSM Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee pointed out to the difference between Accounting Standard-1 issued by ICAI and Accounting Standard-1 issued by CBDT and argued that CBDT does not recognise matching principle. In my humble opinion, any such difference between the Accounting Standards of ICAI and those of CBDT is not of much relevance upto asst. yr. 1996-97 because it is only with effect from asst. yr. 1997-98 that the new provisions of s. 145(2) substituted by the Finance Act, 1995, have come into operation which alone have empowered the Central Government to notify Accounting Standards to be followed by any class of assessees or in respect of any class of income. Until then, as pointed out, the method of accounting followed by the assessee in the books of accounts maintained by him has to be given effect to if the method of accounting is such that the income can properly be deduced therefrom. 37. During the course of hearing before us, it has been emphasised at considerable length that actual income is to be determined from the method of accounting and not from the entries made or not made in the books of account. It was pointed out that accrual of the legal liability cannot be thwarted or postpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58 ITR 102 (SC), the assessee charged interest even in the cases of sticky loans by debiting the concerned parties, yet it credited the said amounts to a separate account styled as the Interest suspense account . Hon'ble Bombay High Court in the case of Citibank N.A. (supra) noted that the treatment given in the books of accounts made the difference and observed in the following words : The above decision of the High Court was upheld by the Supreme Court in State Bank of Travancore vs. CIT (1985) 49 CTR (SC) 290 : (1986) 158 ITR 102 (SC). It was observed by Sabyasachi Mukharji J. (at p. 136) : that the assessee indubitably maintained its accounts on the mercantile basis and had regularly adopted it. The assessee claimed that the three sums represented interest on what is called 'sticky' loans in its books of account but having regard to the deteriorating financial position of the concerned debtors and the history of these accounts, the assessee was of the view that in the relevant years, the advances had become so 'sticky' that even the recovery of the principal amounts had become highly improbable and extremely doubtful. Therefore, though the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From these two judgments in the case of State Bank of Travancore (supra) and in the case of Citibank N.A. (supra), the position is reinforced that in most situations method of accounting and entries made in the books of account thereunder may be decisive of income chargeable to tax. On facts, there was not much difference'both cases related to interest chargeable on sticky loans'but the entries in the books of account were significantly different which made all the difference in assessment of income. It is also established from the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra) that ordinarily an assessee cannot be permitted to follow one yardstick for writing his books of accounts and yet another yardstick for the return of income or assessment. This position has remained unaffected even in the judgment of Hon'ble Supreme Court in the case of United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). The Hon'ble apex Court reversed the decision of the High Court on the ground that valuing stock-in-trade investments at cost in the form of the balance sheet prescribed under the Banking Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime gap between these two agreements according to the authorities below was very small. In the assessment order the AO mainly stressed the treatment given by the assessee himself in his published accounts. The assessee raised before him the issue of the useful life of the assets but the learned AO held that if the useful life of the assets was only five years, the assessee could not have taken the assets on lease for a period of 15 years. In any event, the contractual period of lease amounted to 15 years and, therefore, total amount of lease rent had to be equally written off over the period of 15 years. The learned CIT(A) has emphasised that the assessee did not offer any explanation as to why the supplemental agreement was signed within a week of signing of the original agreement. The distinction between 'primary period' and 'secondary period' was only an artificial device for enlarging the period of 15 years and the original lease agreement and the supplemental lease agreement are, in spirit, only one agreement. The learned counsel for the assessee stressed during the course of hearing before us that the material changes brought about by the supplemental agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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