TMI Blog1985 (10) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, but the Tribunal did not permit it. Since that alternative contention is not raised in the question referred for our opinion, we need not state it. However, on the substantive ground, the Tribunal held that the payment of income-tax was a charge on income or outgoing which ought to be taken into consideration before determining the net income for the purpose of application or setting apart, as the case may be, under section 1l(1)(a) of the Act. In the view of the Tribunal, the deduction of income-tax is a necessary outgoing which has to be considered before the net income capable of application for the purposes of the trust could be ascertained. The Tribunal, therefore, upheld the assessee's contention and allowed the deduction. On the above facts, so far as the assessment year 1971-72 is concerned, two questions have been referred for this court's opinion. They read as under : " (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that income-tax liability for an amount of Rs. 76,972 should be allowed as deduction under section 11(1)(a) of the Income-tax Act, 1961 ? and (2) Whether the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal reiterated its view in regard to the deduction permitted for the assessment year 1971-72 and stated that income had to be computed on general commercial principles and not on notional basis for the purpose of application under section 11 (1)(a) of the Act. Applying the general commercial principles, it held that the assessee had not received any income which could be applied or set apart for the purposes of the trust. The Tribunal, accordingly, dismissed the Revenue's appeal. On these facts' so far as the assessment year 1972-73 is concerned, the following questions have been referred to us for opinion : " (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the assessee was justified in changing its method of accounting from 'mercantile ' to 'cash system', as the companies where the assessee had deposited the monies had not paid any interest during the past years including the previous year relevant to the assessment year in question on account of financial difficulties ? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, clear that the income derived from property must be such as can be applied for the purposes of the trust or accumulated or set apart for such application at a future date not exceeding 25 % of the income from such property. The word " applied " was construed by the Supreme Court in H. E. H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 and the Supreme Court stated that it envisaged actual application of the income for the purposes of the trust. Similarly, the word " accumulated " meant the income so set apart during the year for future spending on such purposes. There can be no actual application or setting apart or accumulation of income derived from the trust property unless it is actually available for application or accumulation in the hands of the trustees. Where an assessee is following the mercantile system of accounting, income on accrual basis may be reflected in the account books, but such notional income is incapable of actual application or accumulation under section 11 (1)(a) of the Act and if the assessee-trust is called upon to pay income-tax for want of such application or accumulation, it would result in rendering the benevolent provision fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted. It is only from the surplus income that remains in the hands of the trustees that actual application or accumulation for the purposes of the trust can be expected. If there is no income which could be actually applied or accumulated by the trustees for the purposes of the trust, the trustees would be incapable of actually applying or accumulating the income for taking the benefit of section 1l(1)(a) of the Act. Therefore, even in the case of an assessee following the mercantile system of accounting, there can be no doubt that for the purposes of actual application or accumulation or setting apart of income from trust property for the purposes of the trust, the trustees must have on hand income which could be so utilised and what are outgoings towards payment of income-tax must be deducted for working out such surplus income. If a notional income calculated on the basis of accrual under the mercantile system of accounting is conceived as income for the purposes under section 1l(1)(a) of the Act, it must be conceded that such notional income can never be actually applied or accumulated or set apart for the purposes of the trust and the assessee-trust, while being liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to adjust his own affairs in such a way that his tax liability may be reduced, provided the means employed are lawful. It further held that section 145(1) of the Act does not place any embargo on the assessee's right to alter the method of accounting. In other words, according to their Lordships, the assessee was entitled to change his method of accounting 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 method of accounting is substituted by another regular method, the same result will follow. It is only in a case where the assessee changes his regular method of accounting by another method and does not follow the changed method regularly hereafter that it may be possible to say that by introducing successive changes in his method of accounting, he propose ..... X X X X Extracts X X X X X X X X Extracts X X X X
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