Income Tax Appellate Tribunal - Mumbai
Dwarikesh Trading Co. Pvt. Ltd. ... vs The Asst. Commissioner Of Income-Tax on 18 August, 2006
Equivalent citations: [2007]104ITD295(MUM)
ORDER
R.P. Garg, Vice President
1. A difference of opinion has arisen between the Members over Miscellaneous Applications by the assessee seeking reconsideration of the common order of the Tribunal dated 30thAugust, 2001 and therefore a reference was made to the Third Member, stated to be on the following points:
(i) Whether Under Section 254(2), the Tribunal can enlarge the scope of the controversy by itself examining the correctness of the findings of fact already given by the first appellate authority.
(ii) Whether under the facts and circumstances of the case, the Tribunal has committed an error in not correctly understanding the factual findings which tantamount to an error rectifiable Under Section 254(2) of the I.T. Act.
(iii) Whether facts and circumstances of the case revealed that the assessee has adopted a method of accounting of interest on cash basis applicable to both interest earned as well as interest paid and if so, Tribunal has committed an error in not understanding the correct facts.
(iv) Whether it is open to the Tribunal to give an adverse finding contrary to the facts recorded by the lower authority and in doing so, committed an apparent error rectifiable Under Section 254(2) of the I.T. Act.
2. The assessee was following mercantile system of accounting up to Asst.Year 1985-86 and shifted to cash system of accounting from Asst.Year 1986-87 and passed a resolution on 18.11.1985. The Assessing Officer did not accept the change because it was not bonafide and that it was only for receipt and not the expenditure and the expenditure was being accounted for on accrual basis as noticed in the Asst.Year 1987-88 and 1988-89. For AY 1986-87 he also observed that income had already accrued and the resolution dated 18-11-1985 was passed after the close of the accounting year on 30-06-1985. The CIT(A) allowed the assessee's claim by stating that the assessee was facing some difficulties in recovering its debts and that it was a bonafide change followed consistently for both receipts and expenditure. The Tribunal accepted the assessee's right to change the method of accounting but reversed the order of the CIT(A) by stating that the change was not bonafide; that there was no material or evidence before the CIT(A) to give the finding that the assessee was lacing difficulty in recovering its debts and that no material was produced by the assessee even before the Tribunal. It also noted that huge amounts were advanced to the Managing Director but no interest was charged from year to year. For Asst.Year 1986-87 the change was also held not permissible as the 18.11.1985 resolution was passed after the close of the assessment year ended on 30thJune, 1985. It also vacated the finding of the CIT(A) as there was no material to hold that in Asst.Year 1987-88 and 1988-89, the cash system was followed both for receipts and not the expenditure and that it followed only for receipts which is not permissible.
3. The assessee moved an application praying for reconsideration as the order does not seem to be correct in view of the finding of the CIT(A) and that as it resulted in double assessment. This is evident from the application. In paragraph 1 of the application, it is stated that Yashodhan Industrial Investment Company Ltd. has been merged with Dwarikesh Trading Co. Ltd. consequent to Bombay High Court order dated 26th July, 2002. In paragraph 2 of the application, it is mentioned that the appeal of the assessee came up before Mumbai 'B' Bench of the Tribunal on 24th July, 2001. In paragraph 3, it is stated that Mumbai Bench 'B' has passed consolidated order dated 30thAugust, 2001 for Asst.Year 1986-87, 1987-88 and 1988-89 and the said order was received by the assessee on 30thSeptember, 2001. In paragraph 4, it is stated that there are certain factual error in the said order, but what are those, are not stated. The application only states what the tribunal held i.e., the change of method of accounting in respect of interest income by the assessee for the year under consideration was not bonafide and that the change in method of accounting followed by the assessee cannot be allowed on the basis of the facts found by the Assessing Officer in the assessment orders for the assessment years 1987-88 and 1988-89. Then the facts as per the A.O. are stated, that the assessee effected change in method of accounting only in respect of interest income and not in respect of expenditure on account of interest and that the A.O. had already recorded that the assessee continued to claim deduction of interest payable by it on accrual basis irrespective of actual payment and that an assessee is not entitled to follow one system for its receipts and another system for its payments. In paragraph 5, the assessee stated what is recorded by the CIT(A) for assessment year 1986-87, namely, "it is pertinent to point out that this method of accounting of interest on cash basis has been applied to both interest earned as well as interest paid. It is also seen that this change in the method of accounting has repeatedly been consistently followed by the assessee in future." This according to the assessee is that the basis on which the Tribunal rejected the change in method of accounting and is stated as seems to be incorrect and ought to be reconsidered by the Tribunal. But how so, no reasons are given or stated. Only in paragraph 6 of the application, it is stated that the Tribunal by following the order of A.O. in which finding of facts were not correct, did not consider that the said findings have resulted in double taxation in respect of income on accrual basis and on receipt basis that "these facts were brought to the notice of the Tribunal at the time of hearing and the Counsel appearing on behalf of the assessee had filed necessary statements to demonstrate and to show that in fact interest income of the assessee has been taxed twice on the basis of accrual and also on cash, when received." The Tribunal has inadvertently not considered the said aspect while considering the appeal of the assessee. In paragraph 7 of the application, the assessee prayed that the Tribunal may reconsider its order dated 30thAugust, 2001 and may modify and pass appropriate order in the interest of justice.
4. When the matter came up for hearing before the Division Bench there struck the difference of opinion. According to the Judicial Member, the assessee has explained the necessity for change in the method of accounting. The Revenue authorities have given a finding that the assessee company has faced difficulties in recovering its debts including interest thereon and repeatedly such debts were written off so thought it fit to change its method of accounting in so far as interest account is concerned from accrual to cash basis. There is no denial as far as the existence of this fact is concerned. So the Tribunal has not appreciated this aspect correctly and wrongly mentioned that no material has been placed before the Tribunal to suggest that the change in the method of accounting was bonafide on reasonable ground. This being an altogether wrong appreciation of facts deserves rectification because originally the Tribunal has understood the very basic fact wrongly as well as inaccurately and the discovery of this mistake is apparent not dependent upon any arguments. The other mistake according to him is in respect of recording a wrong fact that the assessee has effected change in the method of accounting only in respect of interest income and not in respect of expenditure on account of interest. In this regard, he observed that the assessee has not only produced the related accounts but also drawn our attention on the factual finding recorded by Id. CIT (A) and that on examination of the accounts it is evident that the method of accounting was changed from accrual to cash basis not only in respect of interest income but also in respect of interest paid. This, according to him, was a wrong observation that the assessee has followed one system for its receipts and another system for its payment; that the first appellate authority has categorically stated that the changed method of accounting has applied to both interest earned as well as interest paid and that the Id. CIT (A) has also given a finding that the said change has been followed consistently in the subsequent years. He then observed that through these miscellaneous applications it was also pointed out that certain statements have also been filed before the Tribunal during the hearing to show that in fact the said interest income had been taxed twice on the basis of accrual and also on cash basis which fact, according to these petitions, has also not been considered, hence the mistake was committed. Considering the over all factual matrix, he observed that a mistake has actually been committed by the Tribunal while considering the method of accounting adopted by the assessee. He also observed that by this rectification there is no obliteration of the order originally passed, rather precisely a correction of an error. He therefore held that there was a mistake in the order of the tribunal and opined that the interest was to be taxed on cash basis.
5. The Accountant Member, on the other hand, held that there was no mistake pointed out in Miscellaneous Application and that in the Miscellaneous Application only referred to the finding of fact recorded by the Assessing Officer and a different finding recorded by the CIT(A). In his opinion, whether as a consequence of the Tribunal's order, the income is liable to be doubly taxed, has no relevance to the point at issue. In any case, having regard to the clear finding of the Tribunal that the interest income has to be brought to the charge of tax on accrual basis only, there is no reason why the interest income should suffer double taxation. He has also held that the Tribunal gave clear finding that change was not bonafide and that it could not be so in Asst. Year 1986-87, also because the resolution was passed after the accounting year and that the change was for income only and not for the expenditure. According to him, the assessee failed to point out any mistake in the Tribunal order and therefore, he opined that the application was to be dismissed.
6. In this context, the difference are to be considered point-wise in the subsequent paragraphs as under:
(i) The Tribunal cannot enlarge the scope by itself Under Section 254(2) and to examine the correctness of the finding given by the CIT(A). Section 254(2) only permits the tribunal to amend its order if a mistake is brought to its notice by either party. The section for the sake of convenience is reproduced hereunder:
(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from record, amend any order passed by it under Sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer:
The Tribunal has to act under this sub-section and rectify the order if a mistake is there in its order and not in the order of CIT(A). The correctness of finding of CIT(A) is to be judged in proceedings under Sub-section (1) of Section 254 and not under Sub-section (2) thereof. Having reversed that finding Under Section 254(1), the Tribunal cannot reexamine the correctness of the finding Under Section 254(2) of the Act. It can only look into its own finding, if a mistake is brought to its notice and cannot enlarge the scope of Section 254(2) to examine the finding of the CIT(A) which is already reversed.
(ii) No material is there to hold that the Tribunal committed any error in understanding the factual finding which tantamount to an error rectifiable Under Section 254(2) of the Act.
(iii) The assessee not disputed in Miscellaneous Application nor any material is brought on record to hold that the assessee adopted cash system for both interest received and interest paid. There is nothing on record to support that the contention finding of the Tribunal was not correct.
(iv) The Tribunal can give an adverse finding contrary to the fact recorded by the lower authorities which it is not based on material facts. In this case the Tribunal had vacated the finding of the CIT(A) as it was not based on any material. Further even before the Tribunal while hearing the appeal no material was placed on record before passing the order Under Section 254(1) of the Act. Though the assessee says it did file some material before the Tribunal, but he could not prove that any such material was actually filed. The file was shown to the counsel. It contained no such papers as stated and alleged to have been filed. No material is found discussed in the consolidated orders of the three years passed Under Section 254(1) of the Act. There is thus no material on record on the basis of which it could be said there was any mistake much less an apparent one in the order which requires rectification.
7. The Tribunal does not have the power to review nor to reconsider its order passed in appeal. It can only rectify its order within the parameters of Section 254(2) of the Act. The assessee's impression that the Tribunal seems to have rejected the change in method of accounting and therefore its finding ought to be reconsidered is misconceived. In my opinion the Tribunal has considered the finding of the CIT(A) and finding no material on record came to the conclusion and reversed the finding of the CIT(A). No question, therefore, arise for reconsidering its finding and amending the order dated 30thAugust, 2001
8. The application is to be partly allowed, subject, however, to a direction to exclude interest on cash basis from the assessments, if assessed any, on the principles of double taxation for which the Judicial Member affirms that Tribunal has not considered the issue and therefore its order suffers from a mistake and the Accountant Member says there is no reason why it should suffer double taxation when the assessee is following accrual system.
9. The record shall now go back to the Division Bench for disposing of the application as per majority opinion.
REFERENCE UNDER SECTION 255(4) OF THE I.T. ACT, 1961
1. By virtue of the provisions contained in Section 255(4) of I.T. Act, we differ in opinion on the certain points, therefore, refer the following points to the Honourable President, ITAT, for necessary orders:
1) Whether Under Section 254(2), the Tribunal can enlarge the scope of the controversy by itself examining the correctness of the findings of fact already given by the first appellate authority.
2)Whether under the facts and circumstances of the case, the Tribunal has committed an error in not correctly understanding the factual findings which tantamount to an error rectifiable Under Section 254(2) of the IT. Act.
3) Whether facts and circumstances of the case revealed that the assessee has adopted a method of accounting of interest on cash basis applicable to both interest earned as well as interest paid and if so, Tribunal has committed an error in not understanding the correct facts.
4) Whether it is open to the Tribunal to give an adverse finding contrary to the facts recorded by the lower authority and in doing so, committed an apparent error rectifiable Under Section 254(2) of the I.T. Act.
2. The matter is. therefore, referred to the Hon'ble President for reference to a Third Member.
ORDER Mukul Shrawat, Judicial Member
1. These three miscellaneous applications pertaining to the assessment years 1986-87, 87-88 & 88-89 have been filed Under Section 254(2) and all dated 27/8/04 have arisen out of a common order of the Tribunal dated 30/8/01 in respect of the same assessment years now covered through these petitions. For convenience these petitions are hereby decided by this common order.
2. The issue is common for all the years and relates to taxability of interest income during the years under consideration in the hands of the assessee when there was change in the method of accounting. There is no dispute that earlier the assessee was following mercantile or (sic) basis in report of interest on loans and advances. During the assessment 1986-87 onwards the company had effected change in the method of accounting in respect of interest income from mercantile/accrual basis to receipt/cash basis. The grievance raised through these miscellaneous petition is that the Tribunal has made an error in recording certain factual findings.
3. From the side of the applicant Shri J.D. Mistry has appeared and relied upon the contents of the petitions and argued that the Tribunal being a final fact finding authority has to appreciate the correct factual aspect as existed on record. According to him there was a factual error in the said order of the Tribunal hence rectifiable Under Section 254(2) of IT Act. Ld. Counsel has categorically mentioned that in para-7 of the impugned order the Tribunal has wrongly recorded the fact that the assessee effected change in the method of accounting only in respect of income and not in respect of expenditure on account of interest. For ready reference a portion of this para is reproduced below:
7. There is yet another reason as to why the change in the method of accounting followed by the assessee cannot be followed. From the fact found by the Assessing Officer in the assessment orders for assessment years 1987-88 and 1988-89 it is seen that the assessee effected change in the method of accounting only in respect of interest income and not in respect of expenditure on account of interest. The Assessing Officer has clearly recorded that the assessee continued to claim deduction of interest payable by it on accrual basis irrespective of actual payment. An assessee is not entitled to follow one system for its receipts and another system for its payments....
Ld. Counsel has further elaborated that on one hand the Tribunal has recorded an incorrect factual finding and on the other hand wrongly reversed the factual finding of Id. CIT (A) without taking into account the material already on record. Ld. Counsel has reiterated that the first appellate authority has given a clear finding after appreciating the existing fact that, Quote It is also pertinent to point out that this method of accounting of interest on cash basis has been applied to both interest earned as well as interest paid. It is also seen that this change in the method of accounting has reportedly been consistently followed by the appellant in the future." Uquote. Ld. A.R has argued that the accounts of the assessee have properly been examined, copies again enclosed, and on appreciation of the existing facts this finding was recorded by Id. CIT (A) which was over looked by the Tribunal, hence being factual error is to be rectified by invoking Section 254(2) of IT Act.
4. From the side of the Revenue Id. D.R has supported the impugned order of the Tribunal and briefly argued that the findings of the Tribunal has two aspect, first relates to the question of bonafide change in method of accounting and second relates to the question of accounting of interest income. Since Tribunal has given its finding covering both the aspects, therefore, the same is not to be rectified Under Section 254(2) of IT Act, being not a mistake emerging from the said order of the Tribunal.
5. Parties have been heard and the miscellaneous applications were considered. There is no doubt that the Tribunal has been statutorily conferred with the power to rectify mistakes apparent from the record but in order to attract the application of Section 254(2), the mistake must exists and it must be apparent from the record. Now it is a settled law that a "mistake" should be an error, a fault, a misconception, which is glaring and apparent. It is also settled that the mistake should be such which do not require discussion or having divergent views. So the mistake should be obvious and feasible on fair reading and only such mistake can be rectified not dependent on arguments or elaboration. Based upon these settled principle we have examined the error as pointed out in these miscellaneous applications and have found that the same is apparent on the face of records inter-alia because:
(i) Vide para six the Tribunal has accepted that the settled legal position is that, " an assessee cannot be held prisoner of a method of accounting once selected by it for all time to come and it would be entitled to change its method of accounting at any point of time as long as the change is bonafide and is followed regularly thereafter". These wordings are here by reproduced verbatim within quotes. Once the Tribunal has accepted that an assessee is entitled for a change in the method of accounting then the only course left is to examine the facts in this regard. The assessee has explained the necessity for change in the method of accounting. The Revenue authorities have given a finding that the assessee company has faced difficulties in recovering its debts including interest thereon and repeatedly such debts were written off so thought it fit to change its method of accounting in so far as interest account is concerned from accrual to cash basis. There is no denial as far as the existence of this fact is concerned. So the Tribunal has not appreciated this aspect correctly and wrongly mentioned that no material has been placed before the Tribunal to suggest that the change in the method of accounting was bonafide on reasonable ground. This being an altogether wrong appreciation of facts deserves rectification because originally the Tribunal has understood the very basic fact wrongly as well as inaccurately and the discovery of this mistake is apparent not dependent upon any arguments.
(ii) The other mistake as noted by us is in respect of recording a wrong fact that the assessee has effected change in the method of accounting only in respect of interest income and not in respect of expenditure on account of interest. In this regard the petitioner has not only produced the related accounts but also drawn our attention on the factual finding recorded by Id. CIT (A). On examination of the accounts it is evident that the method of accounting was changed from accrual to cash basis not only in respect of interest income but also in respect of interest paid. This was a wrong observation that the assessee has followed one system for its receipts and another system for its payment. The first appellate authority has categorically stated that the changed method of accounting has applied to both interest earned as well as interest paid. Further Id. CIT (A) has also given a finding that the said change has been followed consistently in the subsequent years. Through these miscellaneous applications it was also pointed out that certain statements have also been filed before the Tribunal during the hearing to show that in fact the said interest income had been taxed twice on the basis of accrual and also on cash basis. This fact, according to these petitions, has also not been considered, hence the mistake was committed. Considering the over all factual matrix a mistake has actually been committed by the Tribunal while considering the method of accounting adopted by the assessee By this rectification there is no obliteration of the order originally passed, rather precisely a correction of an error.
6. Once we have appreciated the merits and the facts of the case then we deem it proper to examine the other legal aspect that whether this rectification may tantamount to review or not. According to dictionary meaning the word "review" means reconsideration or re-examination "Review" means renewed study of material previously studied. In the present case there is no reconsideration or re-examination of facts and circumstances and also there is no fresh study of material. The scope of this petition is limited to those facts which were already on record but incorrectly appreciated. Due to this reason this petition in our humble opinion is out of the definition of review and being mistake glaring on the face of records hence falls within the definition of "rectification. As far as the term rectification is concemed the same has wider import than "review " both "dictionary " and "statutorily". Review is a statutory remedy for reconsidering the order due to discovery of some evidence or other sufficient cause but rectification is simply correction of any error. When prejudice resulting from an order is attributable to the Tribunal's mistake, error or omission, it is its bounden duty to set at right. So a duty has been imposed to rectify a mistake if committed by wrongly understanding the existing facts or inaccurately arrived at a conclusion due to certain misunderstanding. Once the facts in respect of method of accounting are glaring and undisputed then the mistake is definitely an apparent mistake not dependent upon any arguments or elaboration in view of the above opinion and on consideration of the existed material we are of the view that the interest income of the assessee is subject to tax on cash/reaction basis instead of accrual/mercantile basis. To this extent the said order of the Tribunal is hereby rectified and rest of the order shall stand as it was.
7. In the result, these miscellaneous application are hereby decided protanto.
K.K. Boliya, Accountant Member
1. I have carefully gone through the order proposed by the ld. Judicial Member, wherein the finding of the Tribunal that the assessee was not entitled to change the method of accounting with regard to interest income from mercantile system to cash system has been reversed and it has been held that the interest income of the assessee should be brought to the charge of tax on cash/receipt basis instead of accrual/mercantile basis. I have discussed the matter with the ld. Judicial Member and I regret my inability to persuade myself to agree with the conclusion arrived at by the ld. Judicial Member, while disposing of the Miscellaneous Applications filed by the assessee. Therefore, I have to write a separate order as under:
2. The assessee filed three M.A.s in respect of three AYs, which are identically worded and the grounds for filing the M.A.s are stated at Paras 4, 5 and 6 of the M.A.s, which are reproduced below.
There are certain factual errors in the said order of the Tribunal. The Tribunal has held that the change of method of accounting in respect of interest income by the Respondent for the year under consideration was not bona fide. The Hon'ble Tribunal also held that change in method of accounting followed by the Respondents cannot be allowed on the basis of the facts found by the AO in the assessment orders for the AYs 1987-88 and 88-89. The facts as per the AO are that the assesses effected change in method of accounting only in respect of income and not in respect of expenditure on account of interest. The AO has clearly recorded that the assessee continued to claim deduction of interest payable by it on accrual basis irrespective of actual payment and that an assessee is not entitled to follow one system for its receipts and another system for its payments.
The findings of facts, however to that effect, have been recorded by the CIT(A) for AY 86-87. The CIT(A) has clearly recorded that 'it is pertinent to point out that this method of accounting of interest on cash basis has been applied to both interest earned as well as interest paid. It is also seen that this change in the method of accounting has repeatedly been consistently followed by the appellant in future. This clearly shows that the basis on which the Tribunal rejected the change in method of accounting is seems to be incorrect and ought to be reconsidered by the Hon'ble Tribunal.
The Hon'ble Tribunal by following the order of AO in which finding of facts were not correct, did not consider that the said findings have resulted in double taxation in respect of income on accrual basis and on receipt basis. These facts were brought to the notice of the Tribunal at the time of hearing and the counsel appearing on behalf of the Respondent had filed necessary statements to demonstrate and to show that in fact interest income of the Respondent has been taxed twice on the basis of accrual and also on cash, when received. However, the Tribunal has inadvertently not considered the said aspect while considering the appeal of the respondents.
From the above, it would appear that at Para 4 of the M.A.s, it is stated that as per the facts brought out by the AO, the change in the method of accounting was only in respect of interest income and not in respect of interest expenditure. At Para 5 of the M.A.s, it is stated that the ld. CIT(A) recorded a finding that the change in the method of accounting was applicable both to interest earned and interest paid. In Para 6, it is stated that as a result of the Tribunal's order, interest income is likely to be doubly taxed. From the above, it is clear that no mistake apparent from record in the impugned order of the Tribunal has been pointed out in the M.A.s The M.A.s only refers to finding of facts recorded by the AO and a different finding of fact recorded by the ld. CIT(A). Whether as a consequence of the Tribunal's order, the income is liable to be doubly taxed, has no relevance to the point at issue. In any case having regard the clear ending of the Tribunal that the interest income has to be brought to the charge of tax on accrual basis only, there is no reason why the interest income should suffer double taxation.
3. The power of rectifying its order is derived by the Tribunal Under Section 254(2) of the IT Act, which reads as under:
(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under Sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer.
The scope and ambit of the aforesaid provision has been defined and explained in a number of judicial pronouncements. It is an established position of law that the power of the Tribunal to amend an order passed by it under Sub-section (1) of Section 254 is limited. Such power is confined to rectification of mistake 5 which are apparent from record. The Tribunal does not have any inherent power of reviewing its own orders. The Tribunal has merely power to amend its order if any mistake apparent from record is brought to its notice. Review of its own order by the Tribunal is not permissible Under Section 254(2). In this connection, a reference may be made to the following cases:
i. J.N. Sahni v. ITAT 257 ITR 16 (Del.) ii. Smt. Baljeet Jolly v. CIT 250 ITR 113 (Del.) iii. Anamika Builders Pvt. Ltd. v. CIT 251 ITR 585 (Cal.) iv. K.L. Bhatia v. CIT 181 ITR 361 (Del.) The M.A.s filed by the assessee have to be considered having regard to the provisions of law as explained by various judicial pronouncements. The controversy which arose for the AYs 86-87, 87-88 and 88-89 pertained to the change in the method of accounting by the assessee in respect of interest income. Admittedly, the assessee company was following mercantile or accrual system in respect of interest income up to the AY 85-86. For the first time during the AY 86-87, it was claimed that the company effected a change in the method of accounting of interest income from mercantile to cash w.e.f. 1.7.84 by a resolution of the Board of Directors dated 18.11.85. This issue has been considered by the Tribunal in the impugned order dated 30.8.2001 in detail At Para 2 of the order, the Tribunal has discussed the facts which have been brought out by the AO in the relevant assessment orders. The AO held that the assessee could not retrospectively change its method of accounting. It was also held that the change in the method of accounting was not bona fide as no evidence was available to show that there was any change in the terms for payment of interest and no circumstances were shown justifying a change in the method of accounting. The Tribunal also referred to the AO's finding that a change in the method of accounting was effected simply to reduce income. The Tribunal further referred to the AO's finding with regard to the AY 87-88 that the assessee itself debited interest of Rs. 30,944/- in the case of Morarka Holdings Ltd. and the AO also enumerated the names of the parties in whose accounts interest amounting to Rs. 5,06,681/-was chargeable on accrual basis. The AO held that the change in the method of accounting kn is not bona fide. The AO also found that while the assessee provided interest on loan taken by it, it had not charged interest on loans advanced to the other parties and the Tribunal has referred to the assessment order wherein the AO has given particulars in respect of thirteen parties. Thus, the Tribunal has referred to the AO's finding that the change in the method of accounting was not consistent. The Tribunal has also referred to the finding of the AO that in the case of Shri G.R. Morarka, M.D. of the company, large amount had been advanced by the assessee as loan and the debit balance was being carried over from year to year without charging any interest.
4. At Para 3 of the Order, the Tribunal has referred to the orders of the ld CIT(A) and the findings recorded by him. The Tribunal has also referred to the observations of the ld. CIT(A) that the change in the method of accounting has been effected both in respect of income as well as expenditure. The finding of the Tribunal has been recorded at Paras 6 and 7 of the order. At the beginning of Para 6, it is observed by the Tribunal that the assessee would be entitled to change its method of accounting as long as such change is bona fide and is followed regularly thereafter. It has been observed that no evidence was filed before the AO to justify the change in the system of accounting. It has also been observed by the Tribunal that even though the AO disputed the bona tide 5 of the change effected by the assessee, no material has been relied upon in the impugned order of the ld. CIT(A) to support his finding that the change in the method of accounting was bona fide. The Tribunal further observed that in the order of the ld. CIT(A) for the AY 86-87, there is a small mention that the assessee company faced difficulties in recovery of its debts. With regard to this finding of the ld. CIT(A), the Tribunal has observed at Pages 7 and 8 as under:
However, no particular facts or details or material have been relied upon by the ld. CIT(A) in this respect. During the course of hearing before us also, no material has been placed before us to suggest that the change in the method of accounting was bona ride on reasonable grounds. this was one of the major grounds on which the AO rejected the assessee's claim of change in the method of accounting but the case made out by the AO has not been effectively met by the ld. CIT(A). The impugned order has also not been buttressed by the assessee company in the proceedings before us by any details, facts or material. Even the contention of the AO that huge amounts had been advanced to the M.D. of the company without charging interest year after year has not been disputed before us. As mentioned by us, some other closely connected relatives of the directors of the company having been given the similar treatment cannot be ruled out. In these circumstances we hold that the assessee failed to discharge its burden of proof that the change in the method of accounting was bona fide and for this reason we are of the view that the impugned orders of the ld. CIT(A) in this respect require to be reversed and that of the AO is required to be restored.
From the above, it is clear that the Tribunal recorded an unambiguous finding that the change in the Method of accruing was not bona fide and mainly on that ground the assessee's claim was rejected.
5. Secondly, at Page 8, the Tribunal has recorded a categorical finding that even otherwise insofar as the AY 86-87 is concerned, the issue has to be decided in Revenue's favour and against the assessee having regard to the fact that the resolution of the Board of Directors was passed on 18.11.85 whereas the accounting year had already ended on 30.6.85. Thus, on this additional ground, the change in the method of accounting was denied by the Tribunal for the AY 86-87.
6. The third ground for denial of the assessee's claim, as reproduced in Para 7 of the Tribunal's order, is that the change in the method of accounting was only in respect of interest income and not in respect interest expenditure which is not permissible.
7. From the above, it is apparent that the assess claim was rejected by the Tribunal on account of the following reason:
i. Change in the method of accounting is not bona fide which is the main ground for rejecting the assessee's claim.
ii. Insofar as the AY 86-87 is concerned, the assessee's claim has to be rejected as the resolution of the Board of Directors cannot have retrospective effect.
iii. The assessee has been inconsistent inasmuch as different systems of accounting have been followed for interest receipts and interest expenditure.
On carefully going through the Tribunal's order and the factual. position emerging form the record any mistake apparent from record in the order of the Tribunal which is capable of rectification Under Section 254(2) of the IT Act. The Tribunal has consciously came to its finding after elaborately discussing therefore, of the view that the assessee's M.A.s for the three all the relevant facts and circumstances as also the legal position and in my view there is no mistake apparent from record. I am, AYs are liable to be rejected.
ORDER K.K. Boliya, Accountant Member
1. On a difference of opinion amongst the Members, who originally heard the relevant Miscellaneous Applications filed by the assessee, the Hon'ble President, ITAT referred the following questions for the opinion of the Third Member:
(i) Whether Under Section 254(2), the Tribunal can enlarge the scope of the controversy by itself examining the correctness of the findings of fact already given by the first appellate authority.
(ii) Whether under the facts and circumstances of the case, the Tribunal has committed an error in not correctly understanding the factual findings which tantamount to an error rectifiable Under Section 254(2) of the I.T. Act.
(iii) Whether facts and circumstances of the case revealed that the assessee has adopted a method of accounting of interest on cash basis applicable to both interest earned as well as interest paid and if so, Tribunal has committed an error in not understanding the correct facts.
(iv) Whether it is open to the Tribunal to give an adverse finding contrary to the facts recorded by the lower authority and in doing so, committed an apparent error rectifiable Under Section 254(2) of the I.T. Act.
2. The Hon'ble Vice President, sitting as a Third Member has concurred with the view expressed by the Accountant Member and at the end of para 7 of his order has held that no question arises for reconsidering the Tribunal's finding and amending the order dated 30thAugust 2001. However, the learned Third Member, at para 8 of his order has observed that the Miscellaneous Applications are to be partly allowed with a direction to exclude interest income, if any, brought to a charge of tax on cash basis from the assessments.
3. In consonance with the order of the learned Third Member, we hold that there is no mistake in the order of the Tribunal dated 30thAugust 2001 in so far as rejection of the assessee's claim regarding change of the method of accounting is concerned. However, the said order of the Tribunal dated 30thAugust 2001 is modified and the Assessing Officer is directed to exclude interest income, if any which has been brought to a charge of tax on receipt basis.
4. In the result, the Miscellaneous Applications as also the relevant appeals in ITA Nos. 5162 to 5164 stand partly allowed.
Order pronounced at the time of hearing.