Delhi High Court
C.I.T. vs Jagatjit Industries Limited on 6 September, 2010
Author: Dipak Misra
Bench: Chief Justice, Manmohan
* HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on : 6th August, 2010
% Judgment Pronounced on: 6th September, 2010
+ ITA No.848/2010
C.I.T. ..... Petitioner
Through: Mrs.Prem Lata Bansal, Advocate
Versus
JAGATJIT INDUSTRIES LIMITED ..... Respondent
Through: Ms. Satyen Sethi, Advocate
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN
1. Whether reporters of the local papers be allowed to see the judgment?Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
DIPAK MISRA, CJ
The present appeal preferred under Section 260A of the Income Tax
Act, 1961 (for brevity „the Act‟) was admitted on the following substantial
question of law:
"Whether ITAT was correct in law in deleting the
addition applying Rule of consistency holding that
such a practice was adopted by the assessee and
accepted by the Department in past?"
2. The facts that have been depicted are that the respondent-assessee is
engaged in the business of manufacturing and sale of Indian made foreign
liquor, country liquor, malted milk food, SMP, Ghee, Glass and Plastic
Containers, etc. It also manufactures malted milk food products for M/s
ITA No.848/2010 Page 1 of 12
SmithKline Beechem Consumer Health Care Ltd. and Ghee for M/s Milk
Food Ltd. In the course of assessment proceedings, the assessing officer
noticed that the assessee was maintaining mercantile system of accounting
and had claimed expenses amounting to Rs.14,55,720/- under the head „prior
period expenses‟ pertaining to earlier years. The auditor, in column 22(b) of
the Tax Audit Report, stated that prior period expenses amounting to
Rs.14,55,720/- had been debited to the Profit & Loss Account. The assessee
in pursuance of notice under Section 143(2) appeared before the Assessing
Officer and was required to explain the nature of the expenses covered under
the said head. He was asked to further explain why the said amount should
not be disallowed. The assessee by letter dated 11.12.2006 submitted the
details of the expenses clubbed in prior period expenses in the Tax Audit
Report. The Assessing Officer noticed that a loss on the sale of fixed assets
amounting to Rs.23,813/- had already been added back by the assessee while
computing his total income. He also filed a copy of the notice from the
Chief Administrative Officer, New Okhla Industrial Development Authority,
wherein the lease rent of industrial plot 35-C, Sector-57, Noida had been
increased with retrospective effect. The total demand raised was for
Rs.1,02,982/- out of which an amount of Rs.17,373.78/- pertained to the
financial year 2003-04 and the rest, that is, Rs.85,608/- related to the prior
period. As the assessee had received notice for the said payment pertaining
to the earlier year during the current year, the same was allowed as an
expenditure crystallized during that year. The Assessing Officer scrutinized
the letter of explanation dated 11.12.2006 which pertains to various
ITA No.848/2010 Page 2 of 12
expenses like security expenses, LTA, rent, payments to staff members,
managerial remuneration, legal and professional expenses, sales promotion
expenses, miscellaneous expenses and repair and maintenance expenses
under the head „prior period expenses‟. The nature of expenditure as was
observed by the Assessing Officer could easily be classified as provisions
made for the said expenditure in the year in which the expenditure was
incurred.
3. Considering the submissions of the assessee, the Assessing Officer
held that the nature of the expenses was such that they had occurred and
crystallized during the earlier years. It was further held that as the same had
been crystallized during the relevant year, the same could not be allowed in
the later years. Being of this view, the Assessing Officer came to hold that
the assessee had claimed Rs.13,46,299/- as expenditure of prior period
allowable in the current year and, accordingly, disallowed the same. After
disallowing the same, he initiated a proceeding under Section 271(1)(c) of
the Act on the ground that the assessee had furnished inaccurate particulars
of income.
4. Being dissatisfied with the aforesaid order, the assessee preferred an
appeal before the CIT(A) forming the subject matter of appeal No.523/06-07
wherein the first appellate authority came to hold that the assessee-appellant
was maintaining the mercantile system of accounting and it had different
offices spread throughout the country and hence, at the end of the financial
year, it was not possible to account for all the expenditure incurred by the
ITA No.848/2010 Page 3 of 12
various branches. The CIT(A) further observed that there may be certain
increase in the rate and, hence, the difference was paid in the subsequent
years. Vouchers have been received from the employees after 31st March of
the financial year for the expenses incurred in the previous year. It was held
by it that looking into the turnover of several hundred crores, such an
expenditure which had spilled over other financial years could not be
debited. It was also held that regard being had to the business practice of the
assessee and keeping in view the accounting system, the addition of
Rs.13,46,299/- deserved to be deleted and, accordingly, it was so directed.
5. Grieved by the aforesaid order, the revenue preferred an appeal before
the tribunal. The tribunal has held thus:
"From the facts sated above it is clear that the
assessee has been claiming prior period expenses
on the ground that the vouchers of such expenses
from employees/branch offices were received after
31st March. The assessee had its branch offices
throughout the country. As per past business
practice, the expenditure spilled over to next year
had been debited in the subsequent year and the
same were claimed and allowed by the Assessing
Officer. This accounting practice has been
consistently followed by the assessee and accepted
by the department. Therefore, the rule of
consistency has to be followed. In our considered
view, Ld.CIT(A) has rightly deleted the addition
following the business practice adopted by
assessee and accepted by the department for past
so many years. Accordingly, we do not find any
infirmity in the order passed by Ld.CIT(A) in
deleting the addition of Rs.13,46,299/-."
6. We have heard Mrs. Prem Lata Bansal, learned counsel for the
appellant, and Mr. Satyen Sethi, learned counsel for the respondent.
ITA No.848/2010 Page 4 of 12
7. It is contended by Mrs.Prem Lata Bansal that the tribunal has fallen
into grave error by affirming the order of the CIT(A) solely on the ground
that the assessee has been following the mercantile system of accounting
consistently and the said business practice deserved to be accepted though
there was a Tax Audit Report which clearly pointed out that the said sum
had been debited by the assessee to the Profit & Loss Account. The learned
counsel has commended us to the decision in CIT v. British Paints India
Ltd., (1991) 188 ITR 45 (SC).
8. At the very outset, we may note with profit that there is no dispute
that the assessee was following the mercantile system of accounting. There
is also material on record that as per the past business practice the
expenditure spilled over to the next year and was debited in the second year
which was allowed by the assessing officer. The tribunal, as is evincible,
has followed the principle of consistency.
9. The submission of Mrs. Prem Lata Bansal, learned counsel for the
revenue, is that the assessing officer had dealt with the issues by ascribing
cogent and germane reasons but the CIT(A) as well as the tribunal, without
appreciating the same from proper perspective and without dwelling upon
the relevant aspects, have adopted a laconic approach which immensely
exposits the perversity of approach. It is canvassed by her that had the
approach been different and had there been a detailed discussion by way of
proper and apposite advertence to the facts by the tribunal, the conclusion
would have been different. Mr. Sethi, learned counsel for the
ITA No.848/2010 Page 5 of 12
assessee/respondents sounding a contra note, has contended that both the
first appellate authority as well as the tribunal have kept themselves abreast
with the factual situation in entirety and taken note of the business practice
prevalent in the previous years and, therefore, it would be totally incorrect to
say that there is perversity of approach. It is urged by him that the colossal
complaint made by the revenue that the order of the tribunal or, for that
matter, the order of the CIT(A) is a cryptic one or a laconic one, has no legs
to stand upon as there has been appropriate ratiocination of the factual
matrix which is the heart and soul of the order. It is contended by him that
consistency has to be maintained and when a particular method of
accountancy, a recognized one, has been accepted by the tribunal, the same
cannot be given a go-by as that would tantamount to paving the path of
deviancy without any seemly justification.
10. In this context, we may refer to the decision in Director of Income
Tax (Exemption) and another v. Apparel Exports Promotion Council
(No.1), [2000] 244 ITR 734 (Delhi) wherein it has been held that when there
was no material change in the activities of the assessee as compared to the
earlier years, the question of exemption under Section 11 of the Act which
had been examined in earlier years cannot be raised again though the
doctrine of res judicata would not strictly apply to income tax proceedings,
yet in order to maintain consistency, the revenue could not be permitted to
take up stale issues merely because the scope of appeal is wider than a
reference.
ITA No.848/2010 Page 6 of 12
11. A Division Bench of the Gauhati High Court in CIT V. Doom Dooma
India Ltd. [1993] 200 ITR 496 (Gauhati) while dealing the concept of
Section 145 of the Act has held as under:-
"It is for the assessee to adopt any recognised method
of accounting for his business. The income shall be
computed in accordance with the method of accounting
regularly employed by the assessee. In other words, it is
open to the assessee to opt for such method of accounting as
he deems reasonable and appropriate. He may opt to adopt
the manufacturing cost price method or the market price
method provided the method is followed in regard to both the
opening stock and the closing stock. It is not open to him to
adopt one method for valuing the opening stock and a
different method for valuing the closing stock so as to
intentionally suppress the income derived or derivable in the
particular previous year. Even where an assessee has
adopted a particular method for a period of years, there is no
provision of law which prevents him from changing to any
other method, provided the change-over is not made in the
same assessment year."
12. In CIT V. Guttoffnungashutto Sterkrado, [1992] 197 ITR 66
(Orissa), it has been ruled thus:-
"We have heard learned counsel for the Department. From the
records, we find that a similar dispute, i.e., whether the income
has to be assessed on "complete contract" basis, was before the
Tribunal for the assessment years 1965-66 and 1966-67. The
Tribunal recorded a categorical finding that no defect in the
accounts maintained by the assessee was pointed out by the
Assessing Officer and, on the contrary, the profits of the
assessee can be correctly determined from the method of
accounting adopted by it. With these conclusions, the orders of
the Commissioner of Income-tax passed under section 263 of
the Act were set aside, and the orders of the Income-tax Officer
were restored. It is not in dispute that the Revenue has not
assailed the correctness of the conclusions of the Tribunal. The
fact situation being identical, the Tribunal followed its earlier
judgment and observed that the "complete contract" basis was
the correct mode for determination of the assessee‟s income and
its income can be correctly determined from the method of
accounting adopted by it. It, therefore, upheld the direction of
ITA No.848/2010 Page 7 of 12
the Commissioner of Income-tax (Appeals) given to the
Assessing Officer for redoing the assessments on the "complete
contract" basis. The question that has been referred to this
court is whether the profits can be properly deduced from the
method employed by the assessee by maintaining its accounts
on "complete work" basis and by the method of dividing the net
profit yearwise in proportion to the yearly gross receipts. The
question whether the method employed by the assessee by
maintaining its accounts on a particular basis will be sufficient
for determination of profits is essentially one of fact. Whether
the income, profits and gains could or could not be properly
deduced from the method of accounting regularly adopted by
the assessee is a question of fact. (see Chhabildas Tribhuvandas
Shah v. CIT [1966] 59 ITR 733 (SC). Therefore, in our
opinion, no question of law arises out of the order of the
Tribunal. . . ."
[Emphasis supplied]
13. In Saurashtra Cement & Chemical Industries Ltd. V. Commissioner
of Income Tax, [1995] 213 ITR 523(Gujarat), the Division Bench has
expressed thus:-
"Merely because an expense relates to a transaction of an earlier
year it does not become a liability payable in the earlier year
unless it can be said that the liability was determined and
crystallized in the year in question on the basis of maintaining
accounts on the mercantile basis. In each case where the
accounts are maintained on the mercantile basis it has to be
found in respect of any claim, whether such liability was
crystallized and quantified during the previous year so as to be
required to be adjusted in the books of account of that previous
year. If any liability, though relating to the earlier year,
depends upon making a demand and its acceptance by the
assessee and such liability has been actually claimed and paid in
the later previous years it cannot be disallowed as deduction
merely on the basis the accounts are maintained on mercantile
basis and that it related to a transaction of the previous year.
The true profits and gains of a previous year are required to be
computed for the purpose of determining tax liability. The basis
of taxing income is accrual of income as well as actual receipt.
If for want of necessary material crystallizing the expenditure is
not in existence in respect of which such income or expenses
relate, the mercantile system does not call for adjustment in the
books of account on estimate basis. It is actually known income
or expenses, the right to receive or the liability to pay which has
ITA No.848/2010 Page 8 of 12
come to be crystallized, which is to be taken into account under
the mercantile system of maintaining books of account. An
estimated income or liability, which is yet to be crystallized,
can only be adjusted as a contingency item but not as an
accrued income or liability of that year. To illustrate, we find
from the details of the expenses that certain expenses related to
the fees paid to the experts, out-of-pocket expenses incurred by
the consultation firm and discharge of liability on account of
demurrage claimed by the port authorities. Such items without
investigation into the facts about the crystallization of such dues
cannot be disallowed merely on the ground that they relate to
transactions pertaining to an earlier accounting year..."
[Underlining is ours]
14. In CIT V. Bilahari Investment P. Ltd., [2008] 299 ITR 1 (SC), while
dealing with accounting standards, their Lordships referred to the decisions
in Taporia Tools Ltd. v. Joint CIT, [2003] 260 ITR 102 (Bombay) and J.K.
Industries Ltd. v. Union of India, [2007] 13 Scale 204 and thereafter
adverted to the recognition and identification of income under the 1961 Act
as is attainable by several methods of accounting. Their Lordships referred
to the completed contract method and the percentage of completion method
which were the issues in the said case. After so stating, the Apex Court
expressed the view as follows:-
"19. In the judgment of the Bombay High Court in Taparia
Tools Ltd., [2003] 260 ITR 102 it has been held that in every
case of substitution of one method by another method, the
burden is on the Department to prove that the method in vogue
is not correct and it distorts the profits of a particular year.
Under the mercantile system of accounting based on the
concept of accrual, the method of accounting followed by the
assessees is relevant. In the present case, there is no finding
recorded by the Assessing Officer that the completed contract
method distorts the profits of a particular year. Moreover, as
held in various judgments, the chit scheme is one integrated
scheme spread over a period of time, sometimes exceeding 12
months. We have examined computation of tax effect in these
cases and we find that the entire exercise is revenue neutral,
ITA No.848/2010 Page 9 of 12
particularly when the scheme is read as one integrated scheme
spread over a period of time.
20. As stated above, we are concerned with assessment
years 1991-92 to 1997-98. In the past, the Department had
accepted the completed contract method and because of such
acceptance, the assessees, in these cases, have followed the
same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and
follow the method of accounting, which the Department has
earlier accepted. It is only in those cases where the Department
records a finding that the method adopted by the assessee
results in distortion of profits, the Department can insist on
substitution of the existing method. Further, in the present
cases, we find from the various statements produced before us,
that the entire exercise, arising out of change of method from
the completed contract method to deferred revenue
expenditure, is revenue neutral. Therefore, we do not wish to
interfere with the impugned judgment of the High Court."
[Emphasis added]
15. In CIT v. Kataria Road Lines, [2009] 316 ITR 115 (Raj), the Division
Bench came to hold as under:-
"9. It is not in dispute that the mercantile accounting system
was adopted by the assessee and was permitted by the Revenue
for several years. By virtue of the said accounting system, the
assessee was claiming benefit of finance commission in the
year of hire purchase agreement itself irrespective of the fact
that the amount of instalments as per the hire-purchase
agreement was actually paid in the subsequent years. Answer to
the question whether such an accounting system was
permissible or not, is not before us, further the Department
itself was permitting the said accounting system according to
which, the assessee was accounting the entire finance
commission in the year of hire purchase itself irrespective of the
fact that the instalment pursuant to the hire-purchase agreement
was actually paid in the subsequent years. The assessment on
the aforesaid basis was continued for years together and it is
only for the assessment years 1980-81 and 1981-82 that the said
system was not accepted by the Department. It is also the fact
that the firms have closed their business. Thus, looking to the
aforesaid facts and circumstances, and also the judgment of the
hon‟ble apex court in the case of CIT v. Bilahari Investment
(P.) Ltd. [2008] 299 ITR 1, we are of the view that the
ITA No.848/2010 Page 10 of 12
Department having permitted the assessee to claim the benefit
of finance commission in the year in which hire-purchase
agreement was entered, the same system is required to be
continued for the assessment years 1980-81 and 1981-82,..."
16. The present factual matrix has to be tested on the touchstone and anvil
of the aforesaid enunciation of law. On a scrutiny of the facts that have been
brought on record, it is discernible that the assessee has been claiming prior
period of expenses on the ground that the voucher of such expenses from the
employees/branch employees were received after 31st March of the financial
year. It has also come as a matter of fact that the assessee has branch offices
throughout the country. The assessee has been debiting the expenditure spill
over to the subsequent years and the assessing officer had been allowing the
same. The said accounting practice has been consistently followed by the
assessee and accepted by the department. If a particular accounting system
has been followed and accepted and there is no acceptable reason to differ
with the same, the doctrine of consistency would come into play. The said
accounting system has been followed for a number of years and there is no
proof that there has been any material change in the activities of the assessee
as compared to the earlier years. Nothing has been brought on record to
show that there has been distortion of profit or the books of account did not
reflect the correct picture in the absence of any reason whatsoever, there was
no warrant or justification to depart from the previous accounting system
which was accepted by the department in respect of the previous years.
ITA No.848/2010 Page 11 of 12
17. In view of our preceding analysis, we do not perceive any merit in this
appeal and, accordingly, the same stands dismissed without any order as to
costs.
CHIEF JUSTICE
MANMOHAN, J.
SEPTEMBER 06, 2010 sv/vk ITA No.848/2010 Page 12 of 12