TMI Blog2007 (5) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Tribunal was legally correct in deleting the addition of Rs. 2,99,287 towards cessation of liability which is clearly chargeable to tax under section 41(1) of the Income tax Act ? 2. Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was legally correct in deleting the addition of Rs. 1,77,953 made by the Assessing Officer under section 40A(5) of the Income-tax Act and holding that disallowance should be worked out in view of rule 3(c)(ii) of the Income-tax Rules, 1962? R.A. No. 982/Del/96 assessment year 1986-87: 1. Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was legally correct in deleting the addition of Rs. 1,80,075 made by the Assessing Officer under section 40A(5) of the Income-tax Act and holding that disallowance should be worked out in view of rule 3(c)(ii) of the Income-tax Rules? R. A. No. 981/Del/96 assessment year 1985-86: 1. Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was legally correct in deleting the addition of Rs. 1,39,658 made by the Assessing Officer under section 40A(5) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee would continue to be there so long as the limitation period is available to the creditors to recover those amounts. Therefore, in our opinion, disallowance of the amounts cannot have any legal consequence. It is not the case of the Assessing Officer that the debts due to the creditors were not true or genuine since all along they have been claimed in the accounts and they have been allowed in earlier years. In the absence of any evidence that the debts were not genuine and the creditors were bogus, the amounts should not be disallowed but should always be allowed as deduction while arriving at the real profit derived by the assessee in his business." 5. In respect of working out the amount of addition under section 40A(5) 5 of the Act, the facts are that the assessing authority had made an addition of Rs. 1,77,953, Rs. 1,39,658, Rs. 1,80,075 and Rs. 1,24,574 in respect of the assessment years 1984-85, 1985-86, 1986-87 and 1987-88 respectively, under section 40A(5) of the Act. In appeal, the Tribunal has directed the Assessing Officer to work out the disallowance in terms of rule 3(c) (ii) of the Income-tax Rules, 1962. 6. So far as the remaining question is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Verma, learned counsel, on the other hand, submitted that even though the respondent-assessee had written back the amount due to sundry creditors on the ground that it was lying unclaimed for the last three years, yet there is no cessation of liability. The provision of section 41(1) of the Act is not attracted. In support of his aforesaid plea, he has relied the decision of this court in the case of Bhagwat Prasad and Co. v. CIT [1975] 99 ITR 111 and CIT v. Iswari Khetan Sugar Mills Ltd. [1988] 172 ITR 430 (All) and of the apex court in the case of CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518 ; [1999] 2 SCC 355. He further submitted that the decision of the Calcutta High Court in the case of General Industrial Society Ltd. [1994] 207 ITR 169 has been considered by the apex court in the case of CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518 and has been distinguished. 12. In respect of disallowance worked out under section 40A(5) of the Act, he did not advance any serious argument. However, on the question of change of method of accounting, he submitted that the Tribunal has held that the change from cash system to mercantile system of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case 17 of General Industrial Society Ltd. [1994] 207 ITR 169 on the ground that it turns on the peculiar facts of the case. The apex court, in paragraphs 5 and 6 of the report, has held as follows (page 521 of 236 ITR) "Learned counsel for the appellant draws our attention to the judgment of the Calcutta High Court in CIT v. General Industrial Society Ltd. [1994] 207 ITR 169. The Division Bench of the Calcutta High Court has taken care to set out the two important factors in that case which weighed with them to come to the particular conclusion. The Bench said (page 172) 'It appears from the assessment order that there is one peculiar aspect in the present case. It is the practice of the assessee to write back such unclaimed and unspent liabilities from year to year on grounds of bar of limitation of the liability and to get away without paying tax on such amount written back to profit on the same plea. This has been happening since the assessment year 1977-78. This fact, to our mind, is very significant. One more notable feature is that the assessee never divulged to the Assessing Officer the details and particulars of the claims despite specific en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has recorded a categorical finding that the change of method from cash to mercantile system in respect of payment of bonus to the employee was bona tide. The law permits an assessee to change the method of accounting. In cases where change of method of accounting is adopted, there may appear some anomalies in order to arrive at the true profit and loss for the relevant assessment years and some adjustments have to be made. In the present case, we find that as the assessee was following the cash system of accounting in respect of payment of bonus to the employees in respect of the amount which had accrued as a liability in the preceding assessment years, but could not have been allowed as it was following the cash system of accounting, was liable to be allowed during the previous years relevant to the assessment years in question on actual payment basis even where there is a change of accounting system from cash to mercantile system. In this view of the matter, we do not find any illegality in the order of the Tribunal. The Tribunal was fully justified in deleting Rs. 3,67,872 in this behalf. 22. In view of the foregoing discussions, we answer this question referred to us in the ..... 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