Income Tax Appellate Tribunal - Delhi
Amarpali Mercantile (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 11 March, 1993
Equivalent citations: [1993]45ITD386(DELHI)
ORDER
P.J. Goradia, Accountant Member
1. This appeal arises from the order dated 24-7-1991 passed by Miss S.K. Nigam, Commissioner of Income Tax (Appeals)-I, New Delhi and the only ground raised is as under :
The CIT (Appeals) erred on facts and in law in disregarding the cash basis of accounting consistently followed by the appellant and in holding that the appellant could not maintain its accounts on cash basis for purposes of income-tax while maintaining the same on accrual basis under the Companies Act consequent to the amendment of the Companies Act w.e.f. 15-6-1988.
2. The assessee is a limited company engaged in the business of financing and investment. The assessee was following cash system of accounting since inception as could be seen from the assessment order for assessment year 1986-87. The problem arose because during the financial year ended on 31-3-1989, Section 209 of the Companies Act was amended by the Companies (Amendment) Act, 1988, w.e.f. 15-6-1988 whereby it was made mandatory for all companies to maintain accounts on accrual basis i.e., mercantile system of accounting only. In compliance with this amendment, the assessee started maintaining accounts on mercantile system of accounting w.e.f. 1-4-1988. Accordingly the accounts for the previous year ended on 31-3-1989 were prepared on the basis of mercantile system of accounting. However, as far as the Income-tax Act was concerned the assessee prepared its return of income on cash system of accounting, as was hitherto being followed by the company and accepted in past. The Assessing Officer did not accept the income returned on the basis of cash system of accounting and made an addition of Rs. 2,68,870 being the interest amount accrued but not received, not taken into account while filing the return of income on cash basis. He was of the view that as per the provisions of Section 145(1) the income chargeable under the head profits and gains, had to be computed in accordance with method of accotinting regularly employed by the assessee and since the method followed by the company was mercantile, the income had to be computed accordingly. He, therefore, gave an opportunity to the assessee to explain. The assessee submitted its reply in writing stating that for the purpose of income tax, the assessee followed cash system of accounting. Not satisfied with the explanation, the Assessing Officer observed that the assessee could not be permitted to have two sets of accounts, one on the basis of the Companies Act and another for the purpose of income-tax. The Commissioner (Appeals) approved the reasoning of the Assessing Officer by confirming the addition.
3. The learned counsel Shri Vaish appearing for the assessee submitted that maintaining of two sets of accounts was still permissible. He drew support from the CBTD Circular appearing on 172 ITR 21 (Statute) in connection with uniform financial year for all taxpayers as per the amendment made by Direct Tax Laws (Amendment) Act, 1987 permitting the assessee to follow any counting year as previous year but for the purpose of new Section 3 of the Income-tax Act, the assessees were required to make up the accounts on 31st March. Earlier to 1-4-1976, when Section 44AA was introduced, there was no compulsory requirement of maintaining the books of accounts. Only from 1-4-1976 necessary amendment was made to make compulsory, the maintenance of books of accounts in certain cases and thereafter Section 44AB was also inserted covering some assessees within the purview of tax audit and when tax audit requirements were to be complied with, the Legislature had specifically excluded certain assessees which were compulsorily obliged to have the accounts audited under certain statutes and, therefore, the assessee being a company, since the accounts were required to be audited by statutory auditors under the Companies Act, the accounts were audited under that Act and necessary report was obtained. But, in case, the assessees were not to comply with maintenance of accounts on accrual basis as per the amended Section 209 of the Companies Act, at the most the auditors could have qualified the auditors' report and the assessees could have continued to maintain books of accounts on cash basis. Merely because the assessee changed over to mercantile system of accounting so as to fall in line with the amendment under the Companies Act, the assessees could not be said to have forfeited its right to be taxed only on the basis of cash system of accounting. Besides Revenue had no right to impose altered method of accounting. Moreover, if the basis of taxing the assessee on cash basis was continued not only Revenue's Interest was protected but at the same time the assessee could be saved of hardships and this had to be the approach of the court as was canvassed by their Lordships of Punjab and Haryana High Court in the case of Salig Ram KanhayaLal v. CIT [1982] 133 ITR 915 and the SLP against this decision was also dismissed vide 143 ITR 65 (Statute). Even under the Income-tax Act, there were provisions which converted the system of accounting to cash, for example, Section 43B. If the assessees were to be assessed on mercantile basis merely because of the amendment in the Companies Act then many financial companies and banks would be put to lot of hardships because by very nature of their business, there is bound to be sticky loans and advances apart from the deferred loans and advances on which no income is received even though accrued but not due because of terms of contract. He further placed reliance on the following decisions (0 in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), (ii) in the case of CIT v. McMillan & Co. [1958] 33 ITR 182 (SC), (iii) in the case of CTT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) and (iv) in the case of Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 (All.).
4. The learned Sr. Departmental Representative apart from relying upon the orders passed by tax authorities submitted that judicial pronouncements pressed into service by Mr. Vaish were on law prior to the amendment made in the Companies Act and this was not bonafide but malafvde and this should not be permitted. Supporting his argument on the basis of Tribunal's decision in Prqjatantra Prachar Samity v. ITO [1991] 39 TTJ (Ctk.) 280 it was submitted1 that assessee could not be allowed to follow two systems of accounting.
5. On consideration of the material the claim made by the assessee is not acceptable for the reasons as follows:
5.1 For all practical purposes such as recording of the business transactions, compliance with requirements of the Companies Act, presentation of the accounts before the share-holders etc. and also for the purpose of filing returns under the Income-tax Act, the assessee followed cash system of accounting which was admittedly accepted in past. However, from the current year the assessee changed over to method of mercantile system of accounting for all practical purposes other than meeting its liability under the Income-tax Act. This is not permissible as the same is not in accordance with law while interpreting the words 'method of accounting regularly employed by the assessee' it was held in the case of Sarangpur Cotton Mfg. Co. Ltd. (supra) that section related to a method of accounting regularly employed by the assessee for his own purposes, that is to say, for the purposes of his business and did not relate to a method of making up the statutory return for assessment to income-tax. Similar principle was laid down in the case of CIT v. Smt. Singari Bal [1945) 13 ITR 224 (All.) (FB) where it was held that the assessee could not for the purpose of more conveniently carrying on his own business adopt the mercantile basis and then for the purpose of income-tax assessment adopt the cash system of accounting. See pages 1159/60 of Kanga and Palkhiwala's The Law and Practice of Income-tax, Eighth Edition and also pages 4231/32 of Sampath Iyengar's Law of Income-tax, Eighth Edition. In our opinion the principle laid down in these two cases still hold the field of assessments. Mr. Vaish contended that the change from cash system to mercantile system was effected only to comply with the amended provisions of the Companies Act. But the fact remains that the assessee did change over to mercantile system of accounting for all practical purposes except one for preparing the statutory return for Income Tax purpose. Mr. Vaish further contended that had the assessee continued to follow the cash system of accounting then at the most there could have been only a qualification in the statutory report to be obtained from the statutory auditors under the Companies Act and there were no other penal provisions. Even if it is accepted that there were no other compelling reasons or penalties not envisaged under the Companies Act for not switching over to mercantile system of accounting, yet the assessee did change over in spite of this aspect and that itself clarifies the intention of the assessee to change over to mercantile system of accounting for all practical purposes though in the Resolution passed by the Board of Directors it is stated that for the purpose of Income-tax Act only, the company shall follow the cash system of accounting.
5.2 It was further submitted that there would be hardships to the assessee in case the assssees were to be taxed on income on the basis of mercantile system of accounting because in that eventthe assessee would be paying tax on interest even on sticky or doubtful loans or even where interest received is deferred. Probably his submission was based on the decision of the Hon'ble Supreme Court in the case of State Bank of Travancorev. CIT [1986] 158 ITR 102 where, by majority decision, it was held that such accrual of interest would be taxed even when the loans are sticky since there would be an agreement between the parties with regard to the payment of interest. First of all there is no evidence brought to our notice in respect of any such amount of interest having been taken as accrued about which the assessee is not certain of recovery. No such position is found from the accounts filed before us. Besides there are sufficient guide-lines in respect of such matters where if the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim the Revenue recognition is advised to be postponed to the extent of un-certainty involved (See Compendium of Guidance Notes, Vol. II, 2nd Edition issued by the Institute of Chartered Accountants of India on pages 47-15, consequent to amendment to Section 209 of Companies Act) and, therefore, there should not be difficulty at least on the basis of the said decision which was resting upon the fact that the assessee itself had charged interest by debiting the debtor's account and had taken the credit to the suspense account. Besides the Central Board of Direct Taxes also issues from time to time appropriate Circulars in this regard so as to remove the hardships of the assessees.
5.3 It was further submitted that such approach should be adopted, which shall protect the interest of Revenue and also not cause any undue hardships to the assessee. On this aspect, in our opinion, the approach adopted by the tax authorities is quite correct because apart from that being in consonance with the law, if the assessment is based on the books maintained for all purposes except for tax purpose then the assessee will not be required to maintain another set of books of accounts, nor will it be necessary for the assessee to have audit under Section 44AB as otherwise, in our opinion, it would be necessary, besides detailed time consuming enquiries will not be resorted to by the Assessing Officer to find out what exactly are the amounts received by the assessee and what is the element of interest/principal paid by the assessee and re-conciling the same with books of accounts maintained on mercantile system of accounting. All these undue hardships will be removed by the course adopted by the Assessing Officer. Immediate advantage that will accrue from our this decision would be there will not be need of any modification of the assessment and if the Tribunal's Order is accepted then litigation will come to an end not only for this year but for all subsequent years. To our mind this too is a great advantage to the assessee.
5.4 While ending we would like to refer to one more aspect, the intention behind the amendment made to Section 209 of the Companies Act. Sachar Committee, formed for reforms in the Companies Act. had found that certain Corporate Bodies maintained all or certain accounts on cash basis in which event a true and fair picture of the state of affairs of the Company might not always be reflected and, therefore, it was desired by the Committee to make it obligatory on all Companies to maintain accounts only on mercantile system of accounting (Para 8.6 of the Report) and based on this recommendation Sub-section (3) to Section 209 of the Companies Act had been amended. The newly inserted Sub-section (3) reads as under :
(3) For the purposes of Sub-sections (1) and (2) proper books of account shall not be deemed to be kept with respect to the matters specified therein:-
(a) if there are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be and to explain its transactions; and
(b) if such books are not kept on accrual basis and according to the double entry system of accounting.
Because of the amendment now it is obligatory on the part of all the Companies to record its business transactions only on the basis of accrual, that is to say, method of mercantile system of accounting and that is why as we have stated earlier the judicial principle laid down by the Privy Council and Allahabad High Court is directly applicable. We further find on reading Section 209 of the Companies Act that Sub-section (5) prescribes for compulsory compliance by the Company with the requirements of amended section and in case of wilfull default by the Company the officials mentioned in Sub-section (6) are punishable with imprisonment and/or fine. Therefore, the submission of Mr. Vaish that the company could invite only qualification in the report of the statutory auditors if it had not changed over to mercantile system of accounting, is incorrect.
5.5 The decision in the case of McMillan & Co. (supra) in fact supports the case of the Revenue because it was held that Section 13 which is in para materia with Section 145 does not confer a mere discretionary power but in the context it imposed a statutory duty on the Assessing Officer to examine in every case the method of accounting employed by the assessee. In this case we have already stated that the Assessing Officer examined the method of accounting employed by the assessee on the basis of decision of the Privy Council and Allahabad High Court referred to earlier and the Assessing Officer also found that the changed method had been regularly employed and he further agreed that profits and gains could appropriately be deduced therefrom. Similarly the decision in the case of A. Krishnaswami Mudaliar (supra) it was held that Section 13 of the Old Act did not compel the Assessing Officer to accept a balance-sheet of cash receipts and out-going prepared from the books of accounts but he had to compute the income in accordance with the method of accounting regularly employed by the assessee. Similarly the decision in the case of Shiv Prasad Ram Sahai (supra) also supports the case of Revenue. It was held therein that if the assessee had once chosen the mercantile system and had regularly employed that system it was not open to him unilaterally at any time during subsequent accounting year to change that system because the variation could only be by mutual consent. In this case as we have stated earlier except for Income-tax purposes, the assessee changed the system of accounting and to which consent is accorded by the Assessing Officer. The learned Departmental Representative had placed reliance on the decision of Cuttack Bench of the Tribunal in the case of Prajatantra Prachar Samiti (supra) where it was held that the assessee was prohibited from adopting regularly one method of accounting for his own purpose and yet another method of accounting for Income-tax purposes. Mr. Vaish did not controvert this principle by showing how the decision of Cuttack Bench was not applicable to the facts of the case. Decision of Punjab and Haryana High Court in case of Salig Ram Kanhaya Lal (supra) pressed into service was totally on different point. In that case the assessee who maintained books on accrual method had received decretal amount, but the decree passed by Lower Court was subject matter of further appeal and it was held that the amount could not be said to have accrued to the assessee. But such is not the case here. The controversy is entirely different.
6. In the result the appeal is dismissed.