TMI Blog1981 (11) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... preferred further appeals to the Income-tax Appellate Tribunal. In the appeals, the Tribunal considered its order passed in the earlier assessment year 1969-70. Both the assessee and the Revenue reiterated their respective contentions as urged in the said earlier appeal. The Tribunal followed its earlier order, and upheld, the addition in the assessment recording that no new issues were raised in the present appeal. On an application by the assessee under s. 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and referred the following questions stated to be arising out of its order in the said two assessment years : 1971-72: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not entitled to change its method of accounting from the mercantile system to the cash system in so far as credits in the interest account were concerned and thus in holding that the sum of Rs. 1,97,657, being interest accrued during the relevant year but not received, was liable to be included in the assessment year 1971-72 ? " 1972-73: " Whether, on the facts and in, the circumstances of the case, the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtors, R.N. Poddar Sons and G.B. Co. The loan of G.B. Co. was advanced for the first time in that year. The loan to R.N. Poddar Sons had been advanced in 1964. There was another debtor, Howrah Soap Co. Ltd., till the assessment year 1967-68. The assessee realised the entire principal and interest in the subsequent years from this debtor. The loan to G. B. Co. was advanced for the first time in the assessment year 1968-69. This shows that there was only one debtor, R. N. Poddar Sons, the interest from whom was not realisable according to the assessee and that the change was intended only so far as the interest receivable from the debtor is concerned. In the immediately preceding year the Tribunal was not satisfied about the bona fides of the assessee in claiming the change of system of accounting., The circumstances in the year under consideration on this point are the same as those were in the earlier year." It is a matter of record that the assessee sought to initiate a reference against the order of the Tribunal for the said assessment year 1969-70 but was unsuccessful. At the hearing, Mr. Poddar, learned advocate for the assessee, reiterated the contentions ur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest on account of a litigation between the partners and the interest received was much less than the interest accrued. In the circumstances, the assessee sought to change its method of accounting from mercantile to cash basis. This was not accepted by the Revenue. The Bombay, High Court, on facts, refused to state a case on a question of law. Beaumont C.J. observed in his judgment that an assessee was entitled to change his method of accounting from a definite point of time but the Revenue had to be satisfied on proper evidence that the regular method of accounting had been changed. Whether a regular method of accounting had been changed or not was purely a question of fact. Rangnekar J. observed that there was nothing in the Act to prevent an assessee from/changing his method of accounting provided he satisfied the Revenue authorities that be was doing so in good faith, and, if the Revenue was not likely to be defrauded, the ITO ought to accept the changed method. (b) Sundaram Co. Ltd. v. CIT [1959J 36 ITR 162 (Mad). In this case, an, amount of commission was not received by the assessee who claimed that it had adopted the cash system of accounting. There was no express f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likelihood of its being realised. It was found that the assessee had never included such rent on accrual but was, in fact, being assessed on the basis of accrual. The Tribunal held that the inclusion of such rent on accrual was justified. On a reference, the Allahabad High Court held, inter alia, that if an assessee chose to adopt the cash system of accounting he could not be assessed on accrual. The option was with the assessee and the Revenue could not compel an assessee to adopt the mercantile system of accounting. On the facts it was held that as the assessee had never offered its Tent to be assessed on accrual and had followed the cash system in respect of this income, the Revenue was not entitled to assess such rent on accrual basis. The fact that the rent was assessed on accrual in the previous years was immaterial. (e) CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Coil). In this cage the directors of the assessee, a limited company, passed resolution that from the relevant accounting year the method of accounting of the assessee would be changed from mercantile system to cash and that this new method should be followed thereafter. The resolution was conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted and it was held that s. 145 of the I.T. Act did not debar an assessee from changing his accounting method. It was observed that even if the altered method was not followed by the assessee regularly, the taxing authority could not fall back upon the earlier method but had to make an assessment under s. 144 of the Act. The matter was remanded to the Tribunal for being considered afresh. Mr. B. L. Pal, learned advocate for the Revenue, contended in reply that an assessee was entitled to change its method of accounting in respect of a particular head of account and not in respect of merely one item of his account and that such a change must be made bona fide. Mr. Pal submitted that the facts and circumstances which prevailed in the assessment year 1969-70, continued to prevail in the assessment years 1970-71 and 1971-72. There were no new facts before the Tribunal and no new issue was raised. The principles of res judicata were to be applied in such circumstances and the Tribunal was entitled to and rightly followed the earlier order passed in the assessment year 1969-70. Mr. Pal next submitted that in the assessment year 1969-70, it had been found as a fact that the change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s." (d) Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 (All). This decision was cited for the following observation of the Allahabad High Court (p. 130): "Once the assessee had adopted the mercantile system of accounting, there is no alternative for the Income-tax ; Officer but to compute the assessee's income on that system, i.e., on the accrual and not the receipt basis. The choice is entirely that of the assessee. He may even choose to adopt the mercantile system for certain transactions and the cash basis for other transactions, but once having chosen and regularly employed that system, it is not open to him unilaterally at any time during an accounting year to say that he will not now follow that system in respect of a particular transaction. It would be opens to the assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purposes of income-tax, to say that he will not debit the interest which may have accrued as a debit in its accounts for any reason whatsoever." (e) New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395, 397 (All). " It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1983] 141 ITR 847 ) on the sole ground that the material on record was not sufficient to establish that the change was introduced on a regular basis., It was not (sic) found by us that the change was not bona fide. In the assessment year 1969-70, the Tribunal appears to have re-examined whether the change in the method of accounting effected by the assessee in the assessment year 1968-69 was b on a fide, on further evidence, as noted earlier. The Tribunal came to the conclusion that the object of the assessee in effecting the change in its method of accounting was only in respect of interest receivable from one debtor and, therefore, the change was not bona fide. Even assuming that such a finding is correct and has become final, it still remains to be examined whether in continuing the changed method of the subsequent years 1970-71 and 1971-72, the assessee acted malafide. Particulars of the debtors of the assessee and their payments to the assessee in the said subsequent years were neither called for nor examined. In an event, there is no specific finding in the relevant assessment years that the assessee, in maintaining the change in its method of accounting, was not acting bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by introducing successive changes in his methods of accounting to exclude items of his income from being included in the computation of his total income. Therefore, when in assessee changes his regular method of accounting by another regular method the question of his bona fides have little relevance. Only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the Revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the expression of good faith " and bona fide " occur in the observations in the earlier judgment noted earlier. In our opinion, where it is found that an assessee has employed (changed ?) his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change. For the above reasons the assessee succeeds in this reference. The question referred to us are both answered in the negative and in favour of the assessee. -In the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
