Income Tax Appellate Tribunal - Mumbai
Indian Express Newspapers (Bombay) ... vs Inspecting Assistant Commissioner on 29 May, 1991
Equivalent citations: [1991]39ITD276(MUM)
ORDER
N.R. Prabhu, Accountant Member
1. This is an appeal, directed against the order passed by the CIT under the provisions of Section 263 of the I.T. Act, 1961.
2. The brief facts of the case have to be set out. Assessee belongs to the Indian Express group of companies and is engaged in printing and publication of news papers and journals. The principal ingredient or the raw material for the business is the news print and the source of supply of this news print is either imports or through the news print manufacturing company at Nepa. The supply and distribution of news print in large quantities was not available in the open market. In the event of short-fall or nonavailability of news print by a company in the group, the practice was to borrow news print from a sister concern for which there was an understanding and such understanding is consistent with the requirements of the rules of the news print policy of the Government of India that the stocks taken on loan were returned in kind within a reasonable time to the loaner company. There is a penalty for non-return of the stock within three months and such penalty is in the form of forfeiture or reduction of news print quota granted to the consumer under the News Print Control Act. The provisions entailing the penalty are observed more in their breach than in actual practice. The accounting entries that used to be made at the time the news print is borrowed, is to debit the news print consumption account with the value of the stock of the news print at the prevailing market price and credit the loaner company with an equivalent amount. When the news print is returned in kind, its market price as on the date of return, is determined. The difference between the amounts debited to the consumption account and the market price as on the date of return is debited or credited to the Profit & Loss account of the year in which the return of news print took place. Such was the practice, followed by the assessee up to the assessment year 1981-82. In the immediately preceding year there appeared to be a change in the method followed by the assessee. At the time of borrowal of the news print, the value of the same is debited to the consumption account at the prevailing market price. As on the last day of the accounting year, the value of this news print, which had remained in the loan account or, in other words, which had to be returned in kind by the assessee to the sister concern or the members of the same group, was determined at the prevailing market price. The difference between this amount and the amount which was debited to the consumption account at the time of borrowal was debited or credited to the Profit & Loss account, as the case may be. Normally, since the price of the news print keeps escalating, there is always a debit. Then again, assessee maintains current accounts of the members of the Indian Express group of companies. Four of the members of this group owed substantial sums to the assessee. On the outstanding from these parties, no interest was computed. It may be recalled in this connection, that the assessee had substantial borrowings from banks and other sources, on which large amount of interest was paid. The assessment for the year under appeal was completed by the AO in the normal course.
3. The CIT had an occasion to peruse the records of the assessee. He, on perusal of the records, came to the conclusion that the order passed by the AO was erroneous being prejudicial to the interest of the revenue. He, thereafter issued a notice under Section 263. In the said notice, the CIT highlighted the fact that there was a notional debit of Rs. 21,34,199 being liability in respect of news print taken on loan and this was allowed by the AO as deduction, without proper verification. According to the CIT, the debt was in the nature of a contingent liability. He also found that assessee had not charged any interest on the debit balances in the name of four parties of the group to which assessee also belonged. This was against the earlier practice of the assessee to charge interest to the sister concern on their debit balances. After hearing the assessee in this regard, the CIT passed an order setting aside the order of the AO. He directed the AO to verify the amount to be disallowed on account of the notional debit in regard to the news print borrowed and also to make enquiries and thereafter determine the amount of proportionate interest that was to be disallowed in view of the fact that no interest was charged by the assessee on the debit balances of the group companies. Assessee is aggrieved.
4. At the time of appeal hearing, assessee has raised a preliminary objection that the order passed by the CIT, since it was not based on the record available at the time the AO had passed his order, was ab initio void. The contention of the assessee in this regard is that the record to which a mention has been made in Section 263, refers to the record as it existed at the time of passing of the assessment order. According to the learned counsel for the assessee, materials which were not in existence at the time when the order was passed, would be irrelevant in initiating action under Section 263. It is pointed out that the material which form the basis for issue of a notice under Section 263 was collected by the IAC by issue of a letter dated 9-6-87 to the assessee. The material that was collected by the IAC could not form part of the records. This would be evident from the amendment brought about by the Finance Act, 1988, to the provisions of Section 263. The word "record" has been redefined and as per the new definition the same shall include and shall be deemed always to have included, all records relating to any proceeding under this Act available at the time of examination by the Commissioner. The new definition takes effect from 1-6-1988 and the same would not be available to the CIT for passing an order for the year 1983-84, especially when the AO had passed the same long before the new amendment came into force.
Our attention in this connection is also invited to the decision of the Bombay High Court in 188 ITR 508 (sic) wherein the court has held that the amendment has limited retrospectivity and shall be operative only from 1-6-1988. Assessee further contends that the amendment brings to focus an important fact that the record for the purpose of Section 263 prior to the amendment would mean only the record that was available to the AO.
5. We have heard the parties to the dispute on this preliminary objection and we feel that the same has to be rejected. The material relied upon by the CIT was available on the record. The notes forming part of the account of the assessee for the year 1983-84, indicate the amount outstanding from the sister company and also the amount due to sister companies on account of loan of news print account The letter addressed by the IAC dated 10-6-87 has not brought on record any new fact which formed the basis for the CIT 's opinion that the order passed by the AO was erroneous and prejudicial to the interest of the revenue.
6. It is then contended on behalf of the assessee that the order passed by the CIT deserves to be vacated. Assessee had been following a method of accounting where the value of the news print taken on loan from group companies was debited to the consumption account at the prevailing market price. Such accounting procedure was not found reflecting the true profits of the business. Since, news print has necessarily to be taken on loan because of its non-availability in large quantities in the open market and the same has also to be returned in kind, the liability in regard to news print taken on loan and which is outstanding, had to be determined on the basis of the prevailing market price as on the last day of the accounting year. The financial accounts are intended to reflect the true profits and gains of the business of a particular year. By this revised procedure, assessee was only determining the correct amount of liability that was outstanding on account of news print loan as on the last date of the accounting period. The earlier procedure was found to be totally unscientific. It was for that reason that the same was substituted by a more scientific method. It is open to an assessee to follow any recognised method of accounting and the AO has to accept the same. There is no statutory bar against making a departure from the method of accounting that was regularly followed. The law only insists that one recognised method of accounting is substituted by another recognised method of accounting and the revised method of accounting is followed by the assessee consistently thereafter. It is only a casual departure that has been frowned upon. This is a consistent refrain of the court's decisions. The CIT has not pointed out that the revised method of accounting was not scientific. He has also not adduced any material to show that the amount that was debited, which he described as notional debit in his notice and in his order under Section 263 was in the nature of contingent liability. This liability is real, according to the sound accountancy principle. Adverting to the guidelines on accounting standards published by the Institute of Chartered Accountants, it is claimed that the term 'contingent' is restricted to conditions or situations at the balance-sheet date, financial effect of which is to be determined by future events which may or may not occur. This being not the case here, the liability that has been debited into the books of accounts is a real liability as the return of news print cannot be described as a future event which may or may not occur. The same guidelines clearly state that the estimates are required for determining the amounts to be stated in the financial statements for ongoing and recurring activities of an enterprise. However, the caution administered is, one must, distinguish between an event which is certain and one which is uncertain. Our attention thereafter is invited to the decision of the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1. In the said decision, the Supreme Court had clearly held that if a liability has definitely been incurred, the same has to be allowed as a deduction and the difficulty in estimation thereof did not convert the accrued liability to a contingent one as it was always open to the income-tax authorities to arrive at the proper estimate thereof having regard to all the circumstances of the case. In this case, there was no difficulty at all in determining the actual liability as on the last date of the accounting year.
7. Our attention also is further invited to the decision in East Coast Conductors (P.) Ltd. v. ITO [1988] 25 ITD 25 (Mad.). According to the assessee, that decision was rendered on identical facts. That was a case where assessee company was manufacturing aluminium conductors which were sold to the Electricity Board. For this purpose, the Government allotted aluminium to various users including the assessee. Whenever the assessee did not have adequate stock of aluminium to carry out the orders, it borrowed the requisite quantity on loan basis and which was to be returned in kind. Assessee was following the mercantile system of accounting. When the loan was taken the value of the material so taken was deposited with the dealer but the goods were not treated as having been purchased. At the end of the accounting year the prevailing rate of aluminium ingots or the value was ascertained and the difference in price between the date of borrowing and the last date of the accounting year was debited to the profit and loss account by way of provision in respect of an obligation which arose on account of borrowal of the raw material which was returnable and which remained to be returned at the end of the accounting year. The ITO disallowed the claim but it was allowed in appeal by the CIT(A) and the Tribunal. The Tribunal observed that the provision made for definite obligation was in accordance with the method of accounting consistently followed by the assessee and would be permissible deduction in computing taxable profits. As regards noncharging of interest, assessee contends, that except on 2 or 3 occasions, assessee has not made any advances to the members of the group. The debit balances occurred on account of inter corporate transactions. In the case of the business of the assessee, collections on account of advertisement and circulations are made by the various centres all over India. The revenue so collected, might pertain partly to the receiving company and partly to the associate company. Such revenues are also allocable on the basis of circulation. Each of the group companies pass appropriate entries in its books of account for share of revenue belonging to the other companies and on the basis of information received from the particular group companies, entries are made by the company receiving such information. Assessee contends that this would be evident from the copy of the accounts of the group companies in the books of account of the assessee. It is only on three occasions advances have been made by the assessee but that were in the nature of accommodation loan. Thus, on 22-5-1981 a sum of Rs. 20 lakhs was remitted to IEM. On 22-4-1982 a sum of Rs. 60,99,287 was also remitted. On 30-4-1982 a sum of Rs. 7 lakhs was remitted from Express Towers Unit current account. The amounts remained outstanding in the accounts for less than a month on each occasion. The interest that assessee had to pay on this account was very marginal. In the past, assessee has also received similar accommodations from the group companies and it was for this reason it was thought not to charge any interest on the debit balances appearing in the name of the group companies. Our attention in this connection is invited to the decision of the Bombay High Court in the case of Bombay Samachar wherein the court has clearly held that the only conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital under Section 10(2)(iii) of the I.T. Act, 1922, were that firstly, money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business, and thirdly, assessee must have paid interest on the said amount and claimed it as a deduction. All the three conditions have been satisfied in this case and, therefore, there would be no case for disallowing any part of the interest. In any case, it is pointed out that the reasons given by the CIT in his order apart from being not very clear are also not tenable. The CIT in his order has observed as under:
It was, therefore, necessary for the sister concerns immediately to transfer these collections to the assessee company. The failure of the sister concerns to transfer these funds to the assessee company and the non-action of the assessee company to ask them to transfer such funds would amount to conversion of the collections made by the sister concerns from deposits to loans.
It is contended by the learned D. R that the order passed by the CIT is not open to challenge. Assessee in this connection contends that the claim this year, which is in the nature of notional debit, represents merely a contingent liability. It is only when the news print taken on loan is returned, a debit could be made in the Profit & Loss account. This is a sound accounting principle and was in fact followed consistently by the assessee in the past. A departure, according to the Departmental Representative, would not lead to the determination of the true profits and gains of business. The learned Departmental Representative thereafter contends, that the decision of the Supreme Court in Calcutta Co. Ltd.'s case (supra) on which reliance has been placed by the assessee, has no relevance in deciding the issue before the Tribunal. Our attention is invited to the decision in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) which according to the Departmental Representative, should clinche the issue in dispute. In that case, the Supreme Court has observed that expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure, which was deductible for income-tax purposes, according to the court, was one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event was not expenditure. In this case, assessee has not in any way incurred any expenditure, in the sense it is understood in tax parlance or in the sense its meaning was explained by the Supreme Court. Therefore, the claim for deduction of notional debit is not tenable. Our attention is then invited to the decision of the Bombay High Court reported in 88 ITR 244 (sic) which, according to the Departmental Representative, should govern the decision in this appeal. That was a case where the assessee was following mercantile system of accounting and claimed deduction in regard to provision for leave wages. The court observed that the assessee had not incurred any liability to pay leave wages in the accounting year.
In the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 also, the Supreme Court has held, that contingent liability is not one which could be allowed as a deduction. The Departmental Representative also took us through the decisions reported in 70 ITR 65 (sic) and CIT v. Instrumentation Ltd. [1987] 167 ITR 354 (Raj.). These decisions, according to him, support the view that he has been canvassing before the Tribunal. It is further submitted by the Departmental Representative that the liability in regard to news print taken on loan from group company, can be compared with the set on liability under Section 15(1) of the Bonus Act. Such liability has been held to be contingent by the courts and in this connection our attention has been invited to the decisions reported in P.K. Mohammed (P.) Ltd. v. CIT[1986] 162 ITR 587 (Ker.) and Rayalaseema Mills Ltd. v. CIT [1985] 155 ITR 19 (AP). In the light of these decisions, for the assessee to contend that what is debited to the profit & loss account was an accrued, actual and ascertained liability would be a travesty. The CIT's assuming jurisdiction under Section 263 has not in any way infringed any provisions of the Act. The CIT also on perusal of the records, found that there was substantial debit balances in the names of the sister concerns. Assessee had been charging interest on these debit balances in the past. For some obscure reasons, no such interest was charged during the year. It is for this reason that the CIT thought it necessary to initiate action under Section 263. His formation of prima facie opinion that the order passed by the AO was erroneous being prejudicial to the interest of the revenue, cannot be faulted on the facts and circumstances of the case.
8. We have heard the parties to the dispute and we are of the view that the order passed by the CIT cannot be upheld. Assessee has been following a method of accounting in respect of the news print taken on loan from group companies. The method followed resulted in a debit to the consumption account of the value of the news print taken on loan. The news print taken on loan had to be returned in kind and when this was done the difference between the market value of the news print returned determined at the prevailing market price and the value of such news print as debited to the consumption account, is claimed as a deduction if there was an increase in the price of the news print and created to the profit & loss account if the price had fallen. The return of news print sometimes involved delay. It was for that reason the assessee decided to value the outstanding news print in the loan account at the prevailing market price as on the end of the accounting year and adjust the difference by means of suitable accounting entries. In our opinion, the revised method of accounting adopted by the assessee is a more scientific method inasmuch as it is capable of reflecting true profits and losses of an undertaking in a more scientific manner. It is permissible to an assessee to change from one recognised method of accounting to another recognized method of accounting. The AO could step in only if such change is of a casual nature. In this case the assessment for the year under consideration has resulted in a mammoth loss. It would, therefore, be difficult to allege that by switching over to a different method of accounting, assessee was seeking some milage in its income-tax proceedings. In such circumstances, the CIT was not justified in holding that the order passed by the AO was erroneous being prejudicial to the interest of the revenue.
9. As regards the interest, the position is the same. The debits in the various accounts are mostly on account of group companies receiving revenues belonging to the assessee on advertisements, circulations and the like. Assessee has centralised system of collection and in such circumstances at any given time the companies receiving amounts on behalf of the assessee would have debit balances in assessee's books of account. It would be wrong to determine the interest on notional basis on such debit balances and treat them as the income of the assessee. We shall reject the findings of the CIT in this connection that the failure of sister concerns to transfer funds to the assessee company and non-action of assessee-company to ask them to transfer such funds would amount to conversion of collections made by the sister concern from deposits to loans. The reliance placed by the assessee in this connection on the decision of the Bombay High Court in CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 is quite appropriate. Disallowance of interest, only on the ground that the assessee had huge borrowals on which it had been paying interest and such interest payment could have been reduced if assessee had expedited the collection of funds due to it from sister concern, would be totally unjustified. We shall further refer to the decision of the Madras High Court reported in Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 where the court has held that scope of interference under Section 263 was not to set aside merely unfavourable orders and bring to tax some more money to treasury. The prejudice contemplated under Section 263 is a prejudice to the tax. administration. Then again, the grounds on which the CIT took the view that interest on the debit balances should have been brought to tax is not at, all tenable. Probably, if the CIT had proceeded on the basis that there were few instances where assessee had advanced interest free loans to the sister concern out of its borrowed funds and, therefore, a part of the interest paid by the assessee had to be disallowed, a favourable view could have been taken. Here, as observed earlier, the CIT had proceeded on an entirely different footing and as the premises on which order under Section 263 has been passed do not exist, there could be no case for upholding such order. In this connection, it would be worthwhile to refer to the decision reported in 140 ITR 490. In that case the court has held that jurisdiction vested in the CIT under Section 263(1) of the Act is of a special nature and the CIT alone has exclusive jurisdiction under the Act to revise orders of the ITO which are erroneous insofar as they were prejudicial to the interest of the revenue. The court has added that if the assessee could satisfy the Tribunal that the ground for decision given in the order of the Commissioner was wrong on facts or was not tenable in law, the Tribunal would have no option but to accept an appeal and set aside the order passed by the Commissioner. The courts cautioned that the Tribunal could not uphold the order of the Commissioner on any other ground which in its opinion was available to CIT. In the light of the above discussion, we are of the view, that there would be no basis for upholding the order of the CIT and we, therefore, shall cancel the same.
10. In the result, the appeal is allowed.