Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Skypak Couriers (P.) Ltd. on 24 February, 2000
Equivalent citations: [2001]78ITD141(MUM)
ORDER
Shri Pradeep Parikh, Accountant Member.
1. This is an appeal by the Department against the order of the ld. CIT(A) dated 17-1-1994 arising out of order passed under section 154 of the Income-tax Act, 1961 (the Act) dated 1-3-1993. The only ground raised in the appeal reads as follows :
"On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing to compute profit under section 115J by adopting Hybrid system of accounting overlooking the fact that the provisions of section 115J are special in nature and the income under this provision is to be computed under sub-section I-A of 115J of the Companies Act" (sic).
The ground, as is evident, is not properly worded. To put it simply, the controversy is whether can the assessee adopt a method of accounting different than the one followed by it on the basis of which the books are actually maintained to determine profits under section 115J of the Act. The assessment year with which we are concerned is a transitional year, the previous year comprising of 21 months from 1-7-1987 to 31-3-1989. So far as proceedings under the Act are concerned, the year under consideration has a tempestuous history and hence, a graphic description of the events and facts is necessary to unfold as to how the controversy arose. The chronology of events and the facts as they emerged on each occasion now follow.
2. A.(i) Upto assessment year 1988-89, assessee was following hybrid system of accounting, i.e., receipt on cash basis and expenditure on mercantile basis.
(ii) On account of amendment in section 209 of the Companies Act, 1956 with effect from 15-6-1988, assessee had kept its books of account on mercantile system of accounting for assessment year 1989-90.
(iii) However, for income-tax purposes, it had also prepared its annual accounts (profit and loss account and Balance sheet) as per hybrid system of accounting. Thus, two sets of annual accounts were prepared, one on mercantile basis and the other on hybrid basis. The return of income was filed as per hybrid system of accounts.
(iv) Assessing Officer, invoking provisions of section 145(1), was of the view that income has to be computed in accordance with the method of accounting regularly employed by the company, and since the assessee had followed mercantile system on account of amendment in Companies Act, profits for the purpose of income-tax should also be computed on mercantile basis and not hybrid basis.
(v) Assessee was of the view that amendment in Companies Act did not have any effect on section 145(1) of the Income-tax Act, and hence, assessee could determine its profits on the basis of the regular method of accounting followed by it, that is, the hybrid system.
(vi) Assessing Officer rejected the contentions of the assessee and proceeded to compute the total income of the assessee on the basis of accounts maintained on mercantile basis.
B. (i) In the first appeal, CIT(A), vide his order dated 30-9-1992, observed that the method of accounting adopted consistently should not be rejected by the department in subsequent years unless correct income cannot be deduced from the method of accounting adopted.
(ii) CIT(A) also observed that the Assessing Officer appeared to have been carried away by the amended provisions of section 209 of the Companies Act, however, according to the CIT(A), the said amendment did not change the position under the Income-tax Act, especially the provisions of section 145(1).
(iii) Accordingly, CIT(A) directed the Assessing Officer to calculate the income on the basis of hybrid system of accounts maintained by the assessee.
(iv) So far as the ground relating to computation of book profit under section 115J was concerned, the CIT(A) observed as follows:
"The learned counsels for the appellant stated that this is purely an academic issue and therefore need not be discussed."
C. (i) Assessing Officer passed an order dated 27-11-1992 giving effect to the above order of CIT(A) dated 30-9-1992.
(ii) In this order, Assessing Officer computed the total income as per the provisions of the Act at Rs. 44,13,576. Below this computation, the Assessing Officer simply mentioned "Income under section 115J" at Rs. 1,09,80,935 without showing the computation thereof. This amount being higher, Assessing Officer determined the total income at Rs. 1,09,80.935.
D. (i) Being aggrieved by the above order dated 27-11-1992, assessee filed an application dated 24-12-1992 for rectification under section 154 contending that book profits should be computed on the basis of its profit and loss account prepared on hybrid basis. Book profits computed on this basis, according to the assessee, would amount to a loss of Rs. 13,36,437 and hence total income should be adopted at Rs. 44,13,576 computed as per the provisions of the Act.
(ii) Simultaneously, assessee also filed an appeal before the CIT(A) against the order dated 27-11-1992 giving effect to CIT(A)'s order dated 30-9-1992, raising inter alia, a ground against adoption of book profits at Rs. 1,09,80,935.
E. (i) Out of the two remedial measures sought by the assessee, the appeal was decided first on 23-2-1993. C1T(A) did not decide the issue relating to book profits on the ground that the order of the Assessing Officer dated 27-11-1992 was not a speaking order CIT(A), therefore, directed the Assessing Officer to pass a speaking order and while passing a speaking order, he should also dispose off assessee's application under section 154 dated 24-12-1992.
(ii) Assessing Officer disposed off the application under section 154 on 1-3-1993 holding that total income under section 115J has been determined at Rs. 1,09,80,955 after full discussion in the assessment order. Hence, according to the Assessing Officer there was no mistake apparent on record and that appeal effect of the CIT(A)'s order dated 30-9-1992 had been properly given. Rectification application thus stood rejected.
F. (i) Assessee filed an appeal against rejection of rectification application.
(ii) CIT(A) by his order dated 17-1-1994, allowed the appeal of the assessee as regards the ground relating to determination of book profits. He observed that there was only one set of annual accounts prepared on hybrid basis covering the entire period of the previous year, i.e. 1-7-1987 to 31-3-1989. For the purposes of Companies Act, assessee had two sets of accounts, one for the period 1 -7-1987 to 30-6-1988 and the other for the period 1 -7-1988 to 31 -3-1989. According to him, since the department was concerned with the entire period of 1-7-1987 to 31-3-1989, the accounts compiled for this period on hybrid basis were only relevant for determining liability under section 115J.
(iii) CIT(A) observed that liability under section 115J cannot be determined on different sets of accounts - i.e. (1) for the period 1-7-1987 to 30-6-1988; and (2) for the period 1-7-1988 to 31-3-1989, both prepared on mercantile basis.
(iv) CIT(A) also held that like should be compared with like and, therefore, 115J tax liability cannot be based upon the accounts which were not germane for finding out the total income in the normal manner.
(v) Accordingly, CIT(A) directed the Assessing Officer to determine the tax liability under section 115J as per hybrid system of accounts for which the accounts were prepared for a continuous period from 1-7-1987 to 31-3-1989.
G. Against this order of the CIT(A), the department has filed the present appeal before us.
H. Before we proceed to record the arguments of both the sides one more important fact also needs to be taken note of. Against the first order of the CIT(A) dated 30-9-1998, department had preferred a second appeal in ITA No. 9452/Bom/1992, challenging the direction to calculate the income on the basis of Hybrid System as against mercantile system adopted by Assessing Officer. Assessee was also in appeal against some other grounds in ITA No. 9253/Bom/1992. By its consolidated order dated 22-6-1998, Tribunal dismissed the revenue's ground by holding that the provisions of section 209 of the Companies Act could not ipso facto be applied to the Income-tax Act prior to 1 -4-1997 when similar provision has been brought on the statute of the Income-tax Act.
3. The first objection of the ld. D.R. was that it was not open to the CIT(A) to adjudicate on the order under section 154. It was submitted that in the first order of the CIT(A) dated 30-9-1992, CIT(A) disposed off ground No. 3 (i.e. relating to book profits under section 115J) without any discussion or direction. It was not clear what was in his mind. In fact, the ld. D.R. submitted, it is a clear case of not pressing the ground and hence no effect was given by the Assessing Officer as regards that ground. Even in his second order dated 23-2-1993 CIT(A) did not give any finding. Subsequently the order under section 154 dated 1-3-1993 was passed against which the CIT(A) adjudicated upon. Thus, when on earlier two occasions there was no direction at all by the CIT(A), it was quite debatable as to whether the matter was at all decided earlier. Hence, it was contended, it was not open for the CIT(A) to adjudicate on the order under section 154.
4. Coming to the merits of the case, the contention of the ld. D.R. was plain and simple - that after the amendment in section 209 of the Companies Act, company was required to maintain books of account on mercantile basis. The company had maintained two sets of accounts on mercantile basis covering the 21 month period and hence books profits under section 115J had to be computed on the basis of such books. Thus, summing up his arguments, the ld. D.R. submitted that firstly, the CIT(A) should not have decided against the order under section 154, and secondly, it was not proper to determine the book profits under section 115J on the basis of hybrid system.
5. The first technical objection of the ld. Counsel for the assessee was that the department did not raise any ground in this connection before the Tribunal against the order of the CIT(A) dated 30-9-1992. Hence, it had missed the bus and it was not now open for the department to agitate the issue which it could have agitated earlier. For this contention, the ld. Counsel relied on the decision of the Calcutta Bench of the Tribunal in the case of Amritlal Agarwal v. Asstt. CIT[1998] 64 ITD 7 (at page 21) and on the decision of the Supreme Court in the case of Bhopal Sugar Industries Ltd. v. ITO [1960] 40 ITR 618. Reference was also made to the commentary by Chaturvedi and Pithisaria on page 5276 of volume 5 (Fourth edition).
6. On the merits of the issue, it was contended by the ld. Counsel that section 209 of the Companies Act merely mentioned that proper books would not be deemed to have been kept if they were not kept on accrual basis. However, what was relevant for our purposes was the profit and loss account. Profit and loss account, it was submitted, was to be prepared as per section 211(2) of the Companies Act. The ld. Counsel referred to the said provision and submitted that there was no mention at all that it had to be prepared on mercantile basis. It merely mentioned about complying with the requirements of part II of Schedule VI. Reference was then made to Part II of Schedule VI to the Companies Act and it was contended that Part II also did not require the company to prepare the profit and loss account as per mercantile system of accounting. Hence according to the ld. Counsel, the assessee-company was at liberty to prepare its profit and loss account on hybrid system of accounting for income-tax purposes. To drive home this point, the ld. Counsel relied on the decision of the Supreme Court in the case of United Commercial Bank v. CIT[1999] 240 ITR 355, in which our particular attention was drawn to the observations of the Court at page 367 of the report. Reliance was also placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Bell Ceramics Ltd. [1999] 69 ITD 156 (also reported in 64 ITTJ 771). Further support was drawn from an article appearing in the November 19-25, 1990 issue of FE Investment Week, a copy of which it placed in the paper book. Finally, the ld. Counsel also strongly canvassed the view that like should be compared with like. In other words, if for normal computation of income hybrid system was followed, then for computing income under section 115J also, the profit and loss account should be made according to hybrid system of accounting.
7. In his counter reply, the ld. D.R. responded only to the technical aspect that there was no question of missing the bus by the revenue as the issue was not pressed in the first appeal at all by the assessee.
8. The delicate degree of difference in perception as presented to us by both the sides has received our anxious consideration and we are thankful to both the learned representatives for providing the necessary insight.
9. First as regards the issue whether the revenue had missed the bus at the first instance or not. Well, in our opinion, the bus never took off, and hence, there was no question of missing it by anyone. Though the assessment order is not placed on record, from the order under section 154 it is evident that the issue relating to profits under section 115J was fully discussed and the income was assessed at Rs. 1,09,80,955. This was over and above the normal computation of income under the provisions of the Act in which the Assessing Officer had rejected the method of accounting adopted by the assessee. For this reason, assessee had raised distinct grounds in the first appeal. From the order of the CIT(A) dated 30-9-1992, it is evident that first two grounds related to the rejection of method of accounting, whereas ground No. 3 related to calculation of book profit under section 115J. It cannot be denied that both the computations are done in different manner and what is applicable to one set of computation does not automatically apply to the others. In the discussion relating to first two grounds, there is no mention at all about computation of book profit under section 115J. The same CIT(A) passed the second order dated 23-2-1993 against the order giving effect to his earlier order. If he had intended to make applicable the hybrid system of accounting for the purpose of section 115J, then in his second order dated 23-2-1993, he would have given clear direction to that effect instead of saying that the order giving effect to his earlier order is not a speaking order. The order giving effect to CIT(A)'s order is passed in the manner in which it is generally passed. It can hardly be called a non-speaking order. Even otherwise, as to how the income of Rs. 1,09,80,935 determined under section 115J is arrived at, is fully discussed in the original assessment order. Hence, the Assessing Officer giving effect to CIT(A)'s order had hardly anything to do in the matter. The very fact that it was the same CIT(A) who passed the second order, knew the implication of his first order and could have given clear direction instead of throwing back the ball. The inference is loud and clear that the CIT(A) did not intend to apply hybrid system of accounting for the purpose of section 115 J. The Tribunal also proceeded on the same lines, adjudicating as to whether the Assessing Officer had rightly rejected the method of accounting. This adjudication, in our opinion, and as we understand it, has no bearing on the determination of profits under section 115J. The Tribunal also discussed the provisions of section 145 at length and the amendment brought in it with effect from 1-4-1997. Nowhere it discusses the implication on section 115J. Hence, in our view of the matter, the issue whether hybrid system could be adopted for the purpose of section 115J or not, remained wide open even after the order of the Tribunal. Otherwise also this is obvious because when the said issue was not adjudicated upon in the first appeal itself, it cannot be a subject matter of appeal before the Tribunal also. Considering the manner in which the CIT(A) had disposed off the ground as reproduced in para 2B(iv) above, it can be said that the department was under a bona fide belief that the issue was not pressed at the time of the hearing. The bona fide belief of the revenue got corroborated, as mentioned earlier, by the fact that on second occasion also the CIT(A) did not give any direction in this regard. Under these circumstances, the revenue could not have agitated the issue before the Tribunal. Therefore, it cannot be said that on merits, the issue stood concluded by the order of the Tribunal. The facts and circumstances of the present case being quite distinct, and our categorical finding being that the issue was never adjudicated upon by the CIT(A), the decisions relied upon by the ld. Counsel do not help the assessee in any way.
10. We now come to the merits of the issue. What is contended before us is that section 209 enjoins upon the company to maintain books of account as per accrual system of accounting. But that docs not necessarily require the company to draw up its profit and loss account on accrual basis. This ingenious idea thrown to us is simply inconceivable. Firstly, annual accounts have to be drawn from the books maintained by the company. If the books are not maintained on accrual basis, proper books shall not be deemed to have been kept by the company. As a natural fall out, annual accounts also will not be proper and hence cannot be said to be showing a true and fair view of the stale of affairs of the company. Similarly, if books are maintained on accrual basis, then certainly proper books can be said to have been kept. However, if annual accounts are recast on hybrid or cash basis, it cannot be said that profit and loss account gives a true and fair view. The argument to divorce section 211 of the Companies Act from section 209 appears to be quite specious. The Legislature also thought that if the books are not kept on accrual basis, it will not reflect a true and fair picture of the state of affairs. Thus, when it comes to reflecting a true and fair picture of the state of affairs of the company, not only the books should be on accrual basis, but also the profit and loss account be on accrual basis. This amendment was brought on the recommendation of Sachar Committee which stated in its report, "We have observed that some companies maintain all or certain accounts on 'cash' basis. In such cases, a true and fair picture of the state of affairs of the company may not always be reflected. We recommend that section 209 be suitably amended so as to make it obligatory on all companies to maintain accounts on mercantile system of accounting only", (pages 635-636 of Guide to The Companies Act by A. Ramaiya--Eleventh edition).
11. Summing up the above discussion, we hold that book profit as envisaged in section 115J of the Income-tax Act is the true and fair profit as disclosed by the profit and loss account drawn as per section 211(2) of the Companies Act. The profit and loss account as envisaged in the said section 211 (2) can be said to be disclosing a true and fair profit or loss only if it is drawn on the basis of books maintained by the company as envisaged by section 209 of the Companies Act, that is, the profit and loss cannot be recast on cash or hybrid basis for the purpose of section 115J. It is contended that part II of Schedule VI to the Companies Act nowhere prescribes for drawing up the profit and loss account on accrual basis. We are of the view that the requirements under Part II are procedural in nature and cannot either overrule or substitute the substantive provisions of sections 209,210 and 211 of the Companies Act, all of which have to be read together without causing disharmony.
12. In para 6 of this order, we have noted Shri Trivedi's reliance on the decision of the Supreme Court in the case of United Commercial Bank (supra) (UCO Bank for short) in 240 ITR 355. In it, the Supreme Court observed at page 367 of the Report as follows :
"Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly."
In the instant case, the above proposition cannot be brought in to the aid the assessee. Yes, for computing the income of the assessee as per the provisions of the Act, certainly, the above principle laid down by the Apex Court, would have been helpful. However, section 115J deviates from the normal computation of income and requires the company to pay tax on the basis of the accounts prepared as per statutory provision only, subject to certain adjustments. Hence, the said decision of the Supreme Court is not applicable to the facts of the case before us.
13. The decision of the Ahmedabad Bench of the Tribunal in the case of Bell Ceramics Ltd. (supra) is rendered in a different context and hence not applicable in the present case.
14. The view expressed by the CIT(A) that profit and loss account cannot be drawn from two sets of account, that is, one for the period 1-7-1987 to 30-6-1998, and the other from 1-7-1988 to 31-3-1989, is not at all appealing. Consolidation of the two profit and loss accounts is not unfeasible as per accounting principles and procedures. The arguments of the ld. Counsel that like should be compared with like, is also specious. Section 115J envisages two sets of computation - one as per the provisions of the Act, and the other as per books. For the purpose of normal computation, assessee may adopt a method consistently followed by him and which may actually be different than followed in the books maintained as per statutory provisions [Supreme Court in United Commercial Bank's case (supra)]. But for the other set of computation, it has to be as per the method adopted in the books only which are maintained as per statutory provisions, and this alone can be called "book profits" as envisaged in section 115J. Section 115J itself does not envisage the so called comparison of like with like. Hence, this argument is also rejected.
15. Thus, we hold that for the purpose of section 115J, the company cannot recast its accounts on any system other than accrual system of accounting. We reverse the order of the CIT(A).
16. In the result, the appeal of the department is allowed.