Calcutta High Court
Commissioner Of Income-Tax vs Kesoram Industries And Cotton Mills ... on 19 December, 1990
Equivalent citations: [1993]204ITR154(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. This reference at the instance of the Revenue under Section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1978-79. The question which has been raised in this reference is as follows :
"Whether, on the fads and in the circumstances of the case, the Tribunal was justified in holding that the assessee was at liberty to change its method of accounting in respect of payment of bonus from cash system to mercantile system ?"
2. Shortly stated, the facts are that, in the past, the assessee was debiting to the profit and loss account of the year the bonus relating to the immediately preceding year that was actually paid during the year. In other words, the assessee was not making any provision for payment of bonus in the accounts of the year to which the bonus related. Instead, it used to debit the bonus actually paid during the year to the profit and loss account of the year even though the bonus related to the working of an earlier year. In short, the assessee was following the cash system of accounting so far as this item of expense was concerned. During the year under consideration, the assessee debited the amount actually paid during this year to the profit and loss account of this year in accordance with its past practice. This had been allowed by the Income-tax Officer and there was no dispute about the same. In addition to the above, the assessee also debited to the profit and loss account of this year the provision for bonus that accrued as payable for working of this year. The idea was that in the subsequent year the bonus relating to this year would be payable out of the provision made during this year, and not out of the profits of the subsequent year. In other words, the assessee changed its system of accounting in respect of this item of expense from "cash" to mercantile. Hence, it debited the aforesaid provision for bonus relating to this year in the profit and loss account of this year. The Income-tax Officer disallowed this provision made by the assessee on the ground that the change in the method of accounting, introduced was not acceptable. The reason given by the Income-tax Officer was that the change permits the assessee to deduct the bonus for two years in this year, one under the previous cash system and the other under the new mercantile system. According to the Income-tax Officer, such a change adopted by the assessee was not acceptable and so he disallowed the aforesaid provision for bonus.
3. The assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the action of the Income-tax Officer was not justified. The Commissioner of Income-tax (Appeals) agreed with the contention of the assessee and directed the Income-tax Officer to accept the method of accounting adopted by the assessee and allow the deduction claimed by the assessee in respect of the aforesaid provision for bonus relating to the year under consideration which has been made in the profit and loss account.
4. The Department appealed to the Tribunal and contended that the Commissioner of Income-tax (Appeals) erred in his decision. On the other hand, the assessee supported the order of the Commissioner of Income-tax (Appeals). The Tribunal considered the contentions of both the parties as well as the facts on record and held as follows :
We find force in the contentions raised for the assessee. We find that, in the printed accounts for the year under consideration, in item No. 8 of schedule 16 at page 29, a reference has been made to the changed system of accounting for this item of expense. In addition, we find from the copies of the assessment orders for the assessment years 1979-80 and 1980-81 that the assessee has been following the changed mercantile system of accounting for bonus in those two subsequent assessment years also. This has clearly been stated in paragraph 17 of the assessment order for the assessment year 1979-80 and paragraph 6 of the assessment order for the assessment year 1980-81. Hence, there is no doubt that the assessee has followed the changed method regularly after the change. The changed method is also one of the recognised methods of accounting and so it will also reflect the true profits of the business. It was explained before us that the assessee intended to change over to the mercantile system after the coming into force of the Payment of Bonus Act, 1965, under which the liability to pay bonus became statutory and certain. In other words, there was no escape from the payment of bonus in any year after the coming into force of the said Act. Hence, it cannot be said that the change has been made with any mala fide intention. It is but natural that, in the first year of change, two items had to be debited to the profit and loss account, one on the old basis and the other on the new basis. This would make no difference in the long run as in the subsequent years only the excess over the provision made, if any, would be claimed as deduction on payment basis. Besides, possible detriment to the Revenue is no ground for rejecting a bona fide change in the method of accounting followed consistently after the change. Hence, we uphold the decision of the Commissioner of Income-tax (Appeals) on this point and reject this ground.
5. At the hearing before us, the contentions raised before the Tribunal had been reiterated. We have already extracted the findings of the Tribunal. The method of accounting for bonus has been changed from cash to mercantile in consonance with uniformity and in conformity with the general method of accounting.
6. The assessee has been consistently following this system in respect of bonus liability in the subsequent assessment years. Neither principle nor the authority bars an assessee from substituting one method of accounting for another at his choice. The assessee is entitled to change his method of accounting provided it is bona fide and it is regularly employed and not merely for the year in question.
7. The finding of the Tribunal is that the assessee has changed the method of accounting bona fide and that method was being followed consistently in the subsequent years. This finding has not been challenged. The method adopted by the assessee has not been found to be prejudicial to the interests of the Revenue, having regard to the uniform rate of tax applicable to the company in all the years. There is no dispute that the method adopted by the assessee regarding the payment of bonus in the accounts is in conformity with acknowledged accountancy principles. We are of the view that, on the facts and in the circumstances of this case, the Tribunal came to a correct conclusion and no interference is called for. We, therefore, answer the question in this reference in the affirmative and in favour of the assessee.
8. There will be no order as to costs.
Bhagarati Prasad Banerjee, J.
9. I agree.