Income Tax Appellate Tribunal - Mumbai
S.K. Somaiya vs 10Th Income-Tax Officer on 15 February, 1996
Equivalent citations: [1996]58ITD322(MUM)
ORDER
M.V.R. Prasad, Accountant Member
1. Appeal No. 4434/Bom/88 (assessee's appeal) and No. 4672/Bom/88(Revenue's appeal) are related to the assessment year 1983-84 and are directed against the order of the ld. CIT(A) dated 17-3-1988. Appeal Nos. 3854 to 3856/Bom/89 are assessee's appeals for the assessment years 1984-85 to 1986-87 and are directed against the orders of the ld. CIT(A) for these years dated 27-2-1989. As common points are involved, these appeals are heard together and are disposed of by this common order.
2. It is convenient to consider assessee's appeals for all the years together and to consider the Department's appeal only for 1983-84 separately.
ITA Nos. 4434/Bom/88 - 3854, 3855 & 3856/Bom/89 : (Assessee's appeal)3. The assessee sought to file some additional grounds vide his letter dated 22-4-1992 and vide letter dated 20-1-1996 for the assessment years 1983-84 to 1986-87. All the additional grounds are related to the grounds already filed. They are admitted.
4. The assessee is an individual deriving income from business by way of selling agency commission and income from other sources. He has also derived some capital gains.
5. One of the common grounds for all these years is regarding the taxability of the income by way of interest income derived by the appellant from one M/s. Somaiya Organo Chemicals Ltd., in which the appellant is one of the substantially interested persons. The amounts involved are as follows :
A.Y. 1983-84 interest income Rs. 2,37,633
A.Y. 1984-85 interest income Rs. 1,37,572
commission Rs. 60,000
A.Y. 1985-86 commission Rs. 1,80,000
interest Rs. 1,74,200
A.Y. 1986-87 interest Rs. 1,88,748
commission Rs. 1,45,500
6. The appellant had an A/c. in the Books of M/s. Somaiya Organic Ltd. and the commission and interest amounts are credited to this A/c. in the Books of this Company. The Assessing Officer brought these amounts credited in the books of the appellant in the books of the company to tax on the ground that the amounts accrued to the assessee and so they are includible in the total income. The assessee resisted the inclusion on the ground that in respect of this source of income he was following the cash basis and so they should not be included. This matter had been adjudicated by the Tribunal for the assessment year 1980-81, vide ITA No. 4019/Bom/84 dated August, 1987. The Tribunal upheld the order of the ld. CIT(A) for that year who accepted the contention of the appellant. The order of the Tribunal of assessment year 1980-81 was based on the logic that the appellant had the choice under the provisions of section 145 of the I.T. Act of choosing the method of accounting and cash basis is a recognised method of accounting.
7. For the assessment year 1983-84, the CIT(A) discussed the issue in great detail and did not choose to follow the decision of the Tribunal. For the assessment year 1984-85, a different CIT(A) decided the appeal and she also did not choose to follow the order of the Tribunal. Her comments are given in para 4 of her Order dated 27-2-1989 and she observed as follows :-
"The issue relating to the receipt of commission and interest from Somaiya Organic Chemicals Ltd. was agitated in the earlier years. The I.T.A.T. Bombay Bench 'D' in Appeal No. 4019 (Bom) of 1984 and in I.T.A. No. 3988 (Bom) of 1984 for assessment year 1980-81 have decided that the system of accounting adopted by the appellant is immaterial since the appellant had credited the interest every year during the current year. The I.T.A.T. has not interfered with the system of accounting. Hence the appellant's ground of appeal should be accepted. The Income-tax Officer has discussed the question of taxability of the commission income on cash basis in the earlier years orders and specifically for the reasons given by him in assessment year 1982-83 order assessed it on protective basis and similarly, the interest accrued on commission and deposit amount with M/s. Somaiya Organic Chemicals Ltd. for the reasons given in para 6 of his order rejected the appellant's claim for accepting the interest income on accrual basis. The facts are that the appellant has outstanding balance of Rs. 12,99,400 in assessment year 1982-83 out of which withdrawal of Rs. 6,00,000 was made during the year and hence the ITO assessed it on protective basis on the ground that the commission was taxable on the basis of accrual. Similarly, interest accrued on accumulated balance of commission and deposits also to be taxed on accrual basis.
4. I have considered the submissions of the appellant. The appellant is adopting cash system on the basis of withdrawals and for the accrual income on accrued basis in the books. The appellant has easy access to the books of account. I have considered the points raised before the I.T.A.T. with regard to these disputed matters. I beg to differ with the conclusion arrived at by the I.T.A.T., as in my view, the scheme of the Income-tax Act for taxing income has been overruled by the choice of method of accounting adopted by the appellant."
It appears there is some misunderstanding about the order of the Tribunal for the assessment year 1980-81. The Tribunal obviously did not hold that system of the appellant is immaterial as observed by the CIT(A). However, one thing is clear that the CIT(A) did not choose to follow the order of the Tribunal for the assessment year 1980-81. She followed her order for the assessment year 1984-85 for the subsequent assessment years involved herein.
8. Various grounds are raised by the appellant in support of his contention that the commission income and interest income derived from M/s. Somaiya Organic Chemicals Ltd. should be brought to tax in the year in which they are accounted in its books on the basis of the method of accounting asked for by it. The gist of these grounds is only that they should be taxed on cash basis.
9. The CIT(A) has mentioned in para 6 of his order for the assessment year 1983-84 that the cash system of accounting cannot be equated with withdrawal of money from the A/cs. by the recipient as, otherwise, the taxability of the income would be postponed indefinitely. He also observed that the assessee under the provisions of section 145, has the choice of the method of accounting but the method chosen should enable the I.T.O. to determine the correct income. He has also considered the issue in the context of the provisions of section 198 of the I.T. Act relating to the deduction of tax at source and held that once the tax is deducted at source on an item of income, the corresponding income should necessarily be offered for tax by the recipient of that income. He has also drawn support from the decision of the Hon'ble Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122. It may, however, be observed that the Tribunal also drew support in its order from the same decision of the Apex Court in support of its view that the income in question could be taxed on cash basis adopted by the appellant. The CIT(A) also cited a number of cases in para 13 of his order in support of his contention that the method of accounting cannot affect the ambit of taxation. It is not necessary to cite all these cases because this proposition is not questioned. The CIT(A) has also given the example of some interest being credited to the account of an account holder in the bank pass book and, if such interest is to be taxed in the year of crediting, he wondered why a different criterion should be adopted in the case of similar amounts credited in the books of a third party.
10. We have given our careful consideration to the issue at hand. We find that there is no sufficient material to deviate from the decision of the Tribunal for the assessment year 1980-81. It is not the case of the Department that the appellant has not uniformly followed the accounting on cash basis as claimed by it in respect of the sources of income. We also find that the decision of the Apex Court in A. Krishnaswami Mudaliar's case (supra) is an authority for the proposition that the Assessing Officer has to compute the income in accordance with the method of accounting regularly employed by the assessee. We also find that the analogy of the credit entry in the Pass Book given by the CIT(A) may not be really comparable because the right to withdraw monies from a checkable account is with the account holder and this is not the position with the credit balance in the books of a third party. There is, of course, a decision of the Madras High Court in the case of Sundaram & Co. Ltd. v. CIT [1959] 36 ITR 162 which apparently is in favour of the Department. In this case, it is held that there should not be an unconscionable gap or interval between the time of credit by the third party and the taking into account as income in the books of the recipient. However, we are of the view that this decision proceeded on the peculiar facts of that case where the Department went into those details and built up a case of unconscionable delay. In the present case, the Department has only analysed the provisions of the I.T. Act such as section 4, section 5, section 45 and section 198 and have concluded that the cash basis method of accounting does not permit the assessee to claim to be taxed on the basis of receipt and not in terms of the credit entries in the third party account. We find that under provisions of section 145, the choice of the method of accounting is clearly with the assessee and he cannot be deprived of this right, unless a case is made out that he has abused it. In support of this proposition, we need not look beyond the decision of the Apex Court in CIT v. Chunnilal V. Mehta & Sons. P. Ltd. [1935] 82 ITR 54. In this case the Court laid down the general principles as follows :
"We have earlier come to the conclusion that the compensation with which we are concerned in this case became due to the assessee in April 1951, though it was actually received by the assessee in December 1955. Now arises the question to what circumstance the expression "due to" in section 10(5A) applies and to what circumstance the expression "received" therein is applicable? They do not mean the same thing. Our income-tax law is familiar with these two expressions. That law permits an assessee to adopt his own system of accountancy subject to certain conditions and his tax liability is determined on the basis of the system of accountancy adopted by him. In other words, the Act permits the assessee to adopt either the mercantile system of accountancy or the cash system of accountancy and the system adopted by him would be the basis on which he should be assessed. It is not necessary in this case to deal with the exceptions to that rule. We have to read section 10(5A) along with the other provisions in the Act. If so read, it is clear that the expression "due to" in that section refers to those assessees who maintain their accounts according to the mercantile system of accountancy and the expression "received by" applies to those assessees who adopt the cash system of accountancy. As observed by this Court in Commissioner of Income-tax v. A. Gajapally Naidu."
"When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting years, he should include the said income in the assessment of the succeeding assessment year."
The Court has also made the following interesting observation :
"Method of maintaining accounts is one thing and the actual entries in the accounts maintained is a different thing. What is relevant is the method of accountancy and not the actual entries."
The principle laid down by the Hon'ble Supreme Court in the above decision is that the method of accounting has to be respected unless there are weighty reasons for deviating from it. We find no such weighty reasons have been made out in this case. Respectfully following the decision of the Tribunal in the year 1980-81 and of the Apex Court cited supra we hold that the above amounts of interest and commission should be taxed in respective years on cash basis as claimed by the assessee.
10A. Two additional grounds raised by letter dated 20th January, 1996 for the assessment year 1983-84 read as follows :
"The CIT(A) ought to have held that the amount of Rs. 1,25,766 being commission received from Somaiya Organo Chemicals Ltd. should not have been taxed on a protective basis, since the commission was taxed in the assessment year 1982-83 on accrual basis."
"The ld. Commissioner of Income-tax (A) failed to appreciate that Rs. 1,25,766 represented the receipt of commission and not interest accrued/received on commission outstanding from M/s. Somaiya Organo Chemicals Ltd. and therefore the figure of Rs. 2,37,633 which represents interest depending on the result in appeal.
Similar grounds about not taxing the commission or not including the commission income on cash basis as the amounts in question had already been taxed on accrual basis are raised for the assessment years 1984-85, 1985-86 and 1986-87. The amounts of commission involved in these years are as follows :
A.Y. 1983-84 Rs. 1,25,766 A.Y. 1985-86 Rs. 1,00,000 A.Y. 1986-87 Rs. 1,45,500
We find we have to reject these grounds for all the years. The appeal for the assessment year 1983-84 is now before us. The assessee contends that the above amounts should not be taxed this year on cash basis because they were already taxed for the assessment year 1982-83 on accrual basis. Assessment year 1982-83 is not now before us and we cannot give any finding in respect of that assessment year. So far as the assessments under consideration are concerned, it is not denied that even in respect of commission income, the appellant has been following cash basis. Actually, both the commission income and the interest income are credited to one account in the books of M/s. Somaiya Organo Chemicals, and in the Tribunal's Order for the year 1980-81, the appellant claimed that it had followed cash basis both for commission income and interest income and similar position is evident even from the grounds of appeal raised and the order of the CIT(A) for the assessment year 1984-85. Commission amounts in question are correctly included in the years under consideration on the ground of cash basis of method of accounting. As such, we have to reject the grounds on this issue for all the years.
11. However, the Assessing Officer may verify the amounts that are includible on cash basis and include only those amounts. Subject to these remarks the additional grounds are rejected.
12. The next ground is that the CIT(A) erred in not directing the ITO to give credit to tax deducted at source for various years. This is common ground for all the years and the amounts involved are as follows :
A.Y. 1983-84 Rs. 37,702 A.Y. 1984-85 Rs. 13,753 A.Y. 1985-86 Rs. 17,492 A.Y. 1986-87 Rs. 18,869
The CIT(A) denied the credit for these amounts on the ground that the relevant incomes are not included in the total income of the concerned years. This view cannot be upheld because of the language of the section 199 as it stood at the relevant time. During the relevant period, tax deducted at source has to be given credit, in the assessment made for the immediately following assessment year. The question of giving credit is not determined on the basis of the inclusion of the relevant income in the assessment. The provision as it stands now is different. In view of the provision that obtained during the relevant period, we have to hold that the appellant is entitled for getting credit for the tax deducted at source. Accordingly, the above may be given credit.