Income Tax Appellate Tribunal - Kolkata
Sandeep Investment (P.) Ltd. vs Income-Tax Officer on 27 January, 1989
Equivalent citations: [1989]29ITD565(KOL)
ORDER
T.A. Bukte, Judicial Member
1. Both these appeals are filed by the appellant-company against the common order of the CIT (A) dated 7-1U986 on the only common ground that the CIT (A) has erred in confirming the orders of the ITO who disallowed the interest of Rs. 49,435 for the assessment year 1980-81 and ks. l 42,205 for the assessment year 1981-82 on the ground that the appellant-company has not changed the method of accounting bona fide and has not followed the said method cosnistently. The appellant-company followed the mercantile system of accounting It changed its method of accounting so fax as the realisation of the interest is concerned from mercantile system to cash system. The ITO held that the appellant-company has changed its method of accounting mainly with a view to reduce its liability to income-tax. The CIT (A) has confirmed the said view.
2. The brief facts pertaining to the issue under consideration are that undoubtedly the " appellant-company is an investment company. The appellant-company followed the mercantile system of accounting for all its activities. However, the appellant-company changed its system of accounting so far as the item of interest is concerned. The cash system is adopted by the appellant-company for the interest received while in respect of other items of income it followed the mercantile system of accounting. The ITO asked the appellant-company to explain the change in the method of accounting so far as the realisation of interest is concerned. The appellant-company by its letter dated 28-9-1982 stated the difficulty it faced in realising interest. It further stated its difficulty in claiming the credit for tax deducted at source in income-tax proceedings. The ITO did not consider the explanation satisfactory and held that there was no proof that the appellant-company had not realised any interest receivable by it from the debtors even after efforts having been taken in this regard. The ITO has further held that the difficulty in claiming the credit for tax deducted at source in income-tax proceedings cannot be taken as sufficient ground for changing the basis of accounting. He has further held that the appellant-company was following the mercantile system of accounting up to the assessment year 1979-80 even in respect of interest. He has held that the appellant-company has not followed the changed method consistently. Another ground in the view of the ITO to reject the changed method of accounting was that the debtors from whom the assessee had to receive interest had all provided for interest due to the assessee on mercantile basis. Therefore, the ITO calculated the difference between the interest receivable and the interest received by the assessee and added the same to the income of the assessee. The ITO gave these reasons for the assessment year 1980-81.
3. However, the ITO gave some more reasons not to accept the changed method of accounting for the assessment year 1981-82. He has stated that the appellant-company is under the control of the Jalan family of M/s Soorajmull Nagarmull. Out of 2,00,000 issued and paid up equity shares of the company about 90 per cent of them are held by the Jalans, their associates and companies under their management. Of the 4 Directors one is a share-broker, other three are paid employees of the concerns of the Jalan family. The investments of money advanced as loans are to the firms and companies under the same management of the Jalan family. However, from where these materials were collected by the 1TO is not on record. Moreover, the appellant-company has challenged that there is no basis for the ITO to give these reasons not to accept the changed method of accounting adopted by it. It would be sufficient here not to rely on these reasons to arrive at a final conclusion in these appeals as there is no basis behind the said reasons.
4. The appellant-company being aggrieved by the orders of the ITO rejecting the changed method of accounting so far as the item of realisation of interest is concerned and making additions of Rs. 49,435 for the assessment year 1980-81 and Rs. 1,42,205 for the assessment year 1981-82 being the difference between the interest received and the interest receivable by the appellant-company, took the dispute before the CIT (A). The CIT (A) agreed with the action taken by the ITO and confirmed his orders. It is this common order of the CIT (A) which is challenged before the Tribunal.
5. In the light of the facts narrated above the only question which has arisen for our consideration is whether the change of the method of accounting from mercantile system to cash system in respect of realisation of interest alone is allowable, whether the difference between the interest received and the interest receivable by the appellant-company should be added to its income and whether the bona fide of the appellant-company plays any important role in giving findings on the said question.
6. The appellant-company's contention for the change of the method of accounting regarding the interest item is that due to difficulties faced by it in realising interest and claiming credit for taxes deducted at source it started to maintain its books of account with regard to interest income on cash basis. There is no doubt that the appellant-company did not obtain securities from the debtors. The Board of Directors passed a resolution to change the method of accounting from mercantile system to cash system. According to the ITO, this change is to avoid tax. There is no dispute that the change of the method of accounting has been consistently followed from year to year. The appellant-company faced difficulties in realising interest. It is true that the appellant-company paid advances to some debtors even without realising interest. The figure of interest accrued is higher than the figure of interest realised. The appellant-company's contention is that tax need not to be paid on the interest which is not realised and tax is to be paid on the interest income as and when it is realised. There is no escapement of income because the interest income as and when realised is accounted for.
7. The appellant-company has filed a paper book. At pages 12 and 13 of the paper book loans and advances have been shown. At page 84 advances to Bagla & Co. are shown. The appellant-company advanced a loan of Rs. 4 lakhs to the said company on 25-2-1981 even without realising the earlier interest. The appellant-company realised some interest from Shree Hanuman Jute Mills and some interest was not realised. Advances were made to it. The interest accrued but yet to be received is also shown. From the facts on record and as narrated above the bona fide of the change of the method of accounting requires to be considered. However, the bona fide is immaterial, but, at the same time, the bona fide of the appellant-company cannot be doubted or it cannot be alleged that the appellant-company changed its method of accounting in respect of interest income to avoid tax. What is required to be seen is whether the accrued interest is realised or not. When the accrued interest is not realised the appellant-company is not required to pay tax on the unrealised interest income due to the change of the method of accounting.
8. The learned representative for the appellant-company, Shri N.K. Poddar has relied on the Judgment of the Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT [1983] 141ITR 861 wherein the Calcutta High Court has held that the assessee was entitled to change its method of accounting from the mercantile system to cash system in respect of credits in the interest account and the sums of Rs. 1,97,657 and Rs. 2,01,517 being interest accrued during the relevant years but not received, could not be included in the assessments for the assessment years 1971-72 and 1972-73. The ratio of the said decision is applicable to the instant case. The Calcutta High Court has further held in that case that the ITO cannot question the bona fide of the appellant-company. Shri Poddar also cited the Judgment of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. In that case, the assessment of royalty was involved. When the royalty accrued but not received, the Madras High Court has held that the royalty amounts should be assessed on cash basis for all the assessment years if the books of account are found to be maintained on cash basis. In the instant appeals, the appellant-company has continued to follow changed method of accounting year after year and maintained books of account on the basis of cash system of accounting.
9. Shri Poddar has cited another Judgment of the Calcutta High Court in the case of CIT v. Rajasthan Investment Co. (P.) Ltd. [1978] 113 ITR 294. In that case, the Calcutta High Court has upheld the finding of the Tribunal that the change of the method of account-Ing of the assessee was done bona fide and in consonance with the real state of affairs of its business and, such, the change of the method of accounting was proper. This Judgment also supports the appellant-company's change of the method of accounting from mercantile system to cash system in respect of interest income. Another Judgment of the Madras High Court in the case of CIT v. Carborundum Universal Ltd. [1984] 149 ITR 759 is also cited. Shri Poddar tried to draw support from this Judgment. The valuation of closing stock was involved in that case. The Madras High Court has held that the Tribunal was right in its conclusion that the assessee was entitled to, alter its method of accounting in respect of valuation of closing stock and consequently the difference between the valuation according to the old method and the new method could not be included for assessment. This decision of the Madras High Court also supports the appellant-company's contention not to assess the interest income on accrual basis. Yet, another Judgment of the Calcutta High Court in the case of Reform Floor Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 is relied upon in support of the contention that the appellant-company has followed the method of accounting year after year. It was held that the income should be computed in accordance with the cash system of accounting and, therefore, the interest on a loan which is not received cannot be included in the relevant accounting year.
10. Shri Poddar has also drawn our attention to the commentary on Income-tax Law by Chaturvedi and Pithisaria, Vol. 3, 3rd Edition, page 2873 where the learned authors have commented that a recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accounting is substituted by another regular method, the same result will follow. If the changed method of accounting reflects the correct state of affairs in the accounts then it should not be rejected. The change-over to cash basis is more realistic and does not involve any mala fide on the part of the appellant-company.
11. All the above-cited decisions support the contention that the change of the method of accounting from mercantile system to cash system in respect of interest income is proper and realistic. The change of the method of accounting is also bona fide though the ITO cannot question the bona fide of the appellant. The change of the method of accounting cannot be rejected on the ground of avoidance of tax or the assessee has tried to reduce its tax liability. The Calcutta High Court has held in its Judgment in Rajasthan Investment Co. (P.) Ltd.'s case (supra) that detriment to revenue is no ground tp reject the method of account. It has further held that the reduction of the tax liability is also no ground to reject the claim.
12. The learned Departmental Representative, Shri S.C. Sen has argued at a great length. He has contended that the appellant-company has not taken proper steps to collect interest. According to him, the change of the accounting system regarding the interest income is not bona fide. He has also brought to our notice that the debtors have claimed deduction of interest in their books of account on the basis of mercantile system. Therefore, the appellant-company is not entitled to claim to be assessed on the interest income by adopting the cash system of accounting. According to him, the appellant-company has advanced loans to those debtors who had not paid the earlier debts. It is the appellant-company's affairs to advance loans or not in spite of non-realisation of interest on the earlier loans. It would be incorrect to say that no fresh loans should be advanced to the debtors who have not paid interest on the earlier loans. It is also contended that if the appellant-company did not have any control over Bagla & Co. then there was no necessity to advance loans to it. The ITO's remark that loans were advanced to Bagla & Co. without realising interest is not correct. According to Shri Sen, the learned Departmental Representative, the assessee has no right to change its method of accounting. The assessee's changing the method of accounting reduces its tax liability. However, it is not disputed that the change of the method of accounting is followed by the appellant-company year after year. If the changed method of accounting reflects a true picture of the appellant-company's state of affairs then it would be incorrect to say that the change is not bona fide. The appellant-company did not have overall control over its debtors. Shri Sen also pointed out that the reason shown by the Board of Directors is not correct. According to him, the reason shown is not supported and not acceptable. From page 9 of the paper book it is shown that all the principal amounts were realised up to 31-3-1980. Reverse of pages 20 and 29 also shows the correct affairs. In our opinion, the assessee has acted bona fide.
13. The learned Departmental Representative, Shri Sen proceeded further to contend that loans were not advanced against any securities. The ITO did not have mere doubt but made sufficient investigation. He gave findings on the basis of the investigation. Shri Sen's arguments would be appreciable if the true affairs of the activities of the appellant-company would not have reflected correctly. As long as the affairs are reflected correctly his arguments cannot be accepted.
14. It is a well-settled,principle that the appellant-company is at liberty to make its tax planning. The learned representative for the appellant-company, Shri N.K. Poddar in his reply has contended that the issue involved in McDowell's case was regarding sales-tax. There was a scheme to avoid bonus to workers and tax to the Income-tax Department in the case of Associated Bros. That is not the case in the instant appeals. It is also not the case of either the ITO or the CIT(A) that the income of the appellant-company cannot be properly deduced as per Section 145 of the Income-tax Act.
15. After examining the facts on record and the legal position, we are satisfied to come to the conclusion that the change of the method of accounting is bona fide. Moreover, it is a recognised method. The assessee is at liberty to switch over from mercantile system to cash system so far as its method of accounting in respect of interest income is concerned. The true affairs are reflected correctly. There is no scope of doubt in regard to the change of the method of accounting. The changed method of accounting is followed consistently year after year. Therefore, the appellant-company succeeds.
16. In the result, the appeals are allowed.