Madras High Court
The Commissioner Of Income Tax vs The Tamil Nadu Industrial Investment ... on 11 September, 2012
Bench: Chitra Venkataraman, K.Ravichandrabaabu
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 11.09.2012 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice K.RAVICHANDRABAABU Tax Case (Appeal) No.1168 of 2006 The Commissioner of Income Tax Tamil Nadu-I Madras . ... Appellant -Vs- The Tamil Nadu Industrial Investment Corporation Limited No.473, Anna Salai, Nandanam Chennai 35. ... Respondent Prayer: Appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal "B" Bench, dated 10.8.2005 in ITA No.2387/Mds/1992 for the assessment year 1989-90. For appellant : Mr.T.Ravikumar Standing Counsel for Income Tax For respondent : Mr.C.V.Rajan JUDGMENT
(Judgment of the Court was made by CHITRA VENKATARAMAN,J.) The Revenue is on appeal as against the order of the Tribunal relating to the assessment year 1989-90, raising the following substantial questions of law:-
1. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in deleting the additions of interest of Rs.35.57 crores and Rs.34.58 crores for the assessment years 1989-90 and 1990-91 respectively on account of accrued interest on cash basis and payment of interest is allowable on mercantile basis is valid ?
2. Whether on the facts and circumstances of the case, the Appellate Tribunal was deleting the additions made by the assessing officer of Rs.7,48,41,979/- related to the assessment year 1989-90 the interest expenditure on cash basis even though the assessee is following mercantile system of accounting is valid in law ?
2. It is seen from the facts narrated herein that the assessee was following the cash system of accounting from the financial year 1980-81 and it had switched over to the mercantile system of accounting during the financial year 1988-89 for all items of receipts and expenditure except interest on loans and advances. The assessee pointed out that the assessee had to switch over to the mercantile system of accounting by reason of amendment made to Section 209(3) of the Companies Act requiring all companies to maintain accounts according to the mercantile system. However, the Company Law Board permitted interest on loans and advances to be accounted for on cash basis. Thus, what was followed by the assessee was hybrid system during the transition period. The Assessing Officer disallowed the expenditure amounting to Rs.7,48,41,979/- holding that since the assessee had adopted mercantile system of accounting being an hybrid system, the correct income could not be deducted for the purpose of assessment. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax.
3. The Commissioner pointed out that the assessee had to change from cash system to the mercantile system of accounting by reason of amendment brought forth in the Companies Act and therefore the expenditure accrued but not paid during that year could not be debited in the assessment year 1988-89. As a result of this change, the payments made in June 1988 could only be debited in the accounts for the assessment year 1989-90 and the same had to be necessarily considered for deduction in the assessment year 1989-90. Considering the difficult situation on account of switching over of the system of accounting certain items of expenditure and income for two years would find place in the year of change. The Commissioner pointed out that if the assessee's contention were to be rejected then the expenditure incurred in the year 1989-90 would not be deducted at all either from the income of assessment year 1989-90 or 1989-90. Following the decision of the Bombay High Court reported in 193 ITR 349 (C.I.T. Vs. West Coast Paper Mills Ltd.,) the Commissioner allowed the appeals. Aggrieved by this, the Revenue went on appeal before the Tribunal which confirmed the view of the Commissioner of Income Tax. Hence the present appeal by the Revenue.
4. Heard the learned Standing Counsel appearing for the Revenue and the learned counsel for the respondent and perused the materials on record.
5. It is a matter of record that due to statutory compulsion the assessee had to switch over from the cash system of accounting to the mercantile system of accounting. In the process, while the receipts and expenditure for the year were maintained under mercantile system of accounting, in respect of interest paid on loans and advances, cash system of accounting was maintained. Hence, the said cash payment had to necessarily find place in the assessment for the year 1989-90, lest the assessee would have no deduction at all in respect of an expenditure incurred on cash basis. Realising the peculiar situation in the decision reported in 149 ITR 759 ( Commissioner of Income Tax Vs. Carborandum Universal Ltd.,) this Court observed in the context of valuation of stock that even though the change of method had resulted in a detriment in the year in question, since the method was to be followed consistently year after year in future, this apparent detriment to the Revenue will get adjusted and disappear. Thus, the new method adopted by the assessee, even though was detrimental to the Revenue, that alone could never be the basis for denying the benefit of deduction.
6. Similar view was adopted in the decision of the Bombay High Court reported in 193 ITR 349 (Commissioner of Income Tax Vs. West Coast Paper Mills Ltd.,) and also in the decisions reported in 286 ITR 207 (Guj) Commissioner of Income Tax Vs. Standard Radiators P.Ltd.,) and 302 ITR 221 (All) (Commissioner of Income Tax Vs. Willard India Ltd.,). Going by the reasonings given in the above decisions, on the fact that the switching over from cash system of accounting to mercantile system was on account of statutory compulsion, we have no hesitation in agreeing with the assessee's contention that the interregnum period in the process of switching over would certainly have a mixed system, where there is a cash system of accounting in respect of certain expenditure while the receipts and other expenditure would be maintained under mercantile system of accounting. The revenue has not disputed the fact that the assessee had to follow the mercantile system and during the transition period alone the hybrid system had arisen.
7. Guided by the decision of this court reported in 149 ITR 759 ( Commissioner of Income Tax Vs. Carborandum Universal Ltd.,) and decision of the Bombay High Court reported in 193 ITR 349 (Commissioner of Income Tax Vs. West Coast Paper Mills Ltd.,) and also the decisions reported in 286 ITR 207 (Guj) (Commissioner of Income Tax Vs. Standard Radiators P.Ltd.,) and 302 ITR 221 (All) (Commissioner of Income Tax Vs. Willard India Ltd.,), we have no hesitation in rejecting the Revenue's contention and confirming the order of the Tribunal. Accordingly, the tax case appeal is dismissed. No costs.
krr/ To
1. The Income Tax Appellate Tribunal 'B' Bench, Madras
2. The Commissioner of Income -Tax (Appeals)-III Chennai
3. The Deputy Commissioner of Income Tax, Special Range III, Chennai