Income Tax Appellate Tribunal - Chandigarh
Deputy Commissioner Of Income Tax vs Punjab State Industrial Development ... on 11 June, 1996
Equivalent citations: [1996]59ITD635(CHD)
ORDER
J. Kathuria, A. M.
1. These two appeals by the Revenue for asst. yrs. 1988-89 and 1991-92 raise identical issues and are disposed of by a combined order for the sake of convenience.
2. The only issue in the appeal for asst. yr. 1988-89 is against the deletion of addition of Rs. 1,72,04,280 and the only issue for asst. yr. 1991-92 is against the deletion of addition of Rs. 6,39,727.
3. Brief facts of the cases are these. The assessee is a company whose accounting period relevant to asst. yr. 1988-89 ended on 30th June, 1987, and for asst. yr. 1991-92 on 31st March, 1991. The assessee is a State Government Industrial Development Corporation. Its objects are acceleration of industrialisation in the State of Punjab by giving financial assistance to certain entrepreneurs and other agencies. For this purpose the assessee-company gets loans from State Government, Industrial Development Bank of India and also generates funds from its own resources. In that process, the corporation charges interest on the advances of loans made to the entrepreneurs and other agencies. Upto the asst. yr. 1987-88 the assessee-company was following mercantile system of accounting except in respect of commitment charges, sitting fees and dividend income which were being accounted for on receipt basis. However, with effect from the year relevant to asst. yr. 1988-89, the assessee-company switched over from mercantile to hybrid system of accounting in respect of interest income from the loans granted by it. The company felt that in certain cases, it was not realising the interest in time but was unnecessarily paying taxes on the interest income on accrual basis. The company accordingly asked M/s S. B. Billimoria & Co., Chartered Accountants, New Delhi, to submit a report as to how to streamline the procedure and how to minimise the tax effect by showing a correct picture of the profits earned. The Chartered Accountants submitted a report in April, 1985, and particularly recommended a switch-over in the assessee's system of accounting from mercantile to hybrid system in respect of interest on loans granted by it. According to this report, if certain parties or entrepreneurs committed consecutive defaults in the payment of instalment of principal amount of term loans/interest on any type of loan for a period of two years or more, such accounts were to be treated as memoranda cases and these continued to be treated as memoranda cases until all the outstanding claims had been cleared. The assessee-company passed a resolution on its 145th Board meeting held on 11th Nov., 1985, when it was decided that the report submitted by the aforesaid Chartered Accountants in respect of accounting system and tax planning was to be implemented in consultation with them. Pursuant to the said resolution, the assessee-company adopted a hybrid system of accounting for the first time in asst. yr. 1988-89 in respect of the interest income flowing from the loans advanced. As many as 27 parties (as per list on record) were treated as memoranda accounts for the asst. yr. 1988-89. The total amount of interest receivable from these defaulting parties amounted to Rs. 1,87,88,990. Certain interest was, however, received on cash basis during the year relevant to asst. yr. 1988-89 and the same amounted to Rs. 15,84,708. This amount was reduced from the aforesaid amount of Rs. 1,87,88,990 and the balance of Rs. 1,72,04,281 was claimed as a deduction from the profits of the year relevant to asst. yr. 1988-89 on account of change of method of accounting.
4. The AO held that the change-over from the mercantile system of accounting to the hybrid system was not a bona fide act. He accordingly made an addition of Rs. 1,72,04,280 on account of interest which had accrued on loans advanced and which had been claimed as not taxable in the year relevant to asst. yr. 1988-89. The learned CIT(A) deleted the addition.
5. The learned Departmental Representative submitted that the method of accounting adopted by the assessee was not a recognised method of accounting, inasmuch as interest on certain loans was taken on mercantile basis whereas interest on certain other loans in respect of memoranda accounts was taken on receipt basis. It was submitted that the assessee in the past had been following mercantile system of accounting and on that basis, the entire interest receivable by the assessee on accrual basis had to be held as taxable income of the assessee. It was submitted that the assessee was paying interest to IDBI, etc. still on the basis of mercantile system of accounting and it was only in respect of certain loans where the parties receiving loans had defaulted for a period of two years or more that an exception was made and the interest receivable on those accounts was offered for assessment on receipt basis and not on accrual basis. It was submitted that the purpose of obtaining the report from the Chartered Accountants by the assessee was to minimise its tax liability and hence the change was colourable and was not in good faith. Relying on the Allahabad High Court decision in the case of Balraj Virmani vs. CIT (1974) 97 ITR 69 (All), the learned Departmental Representative submitted that where the assessee followed the mercantile system of accounting, interest on loans accrued became assessable even if it had not been received. Reliance was also placed on the Allahabad High Court decision in the case of Shiv Prasad Ram Sahai vs. CIT (1966) 61 ITR 124 (All) for the proposition that if the assessee had once chosen the mercantile system for a transaction and had regularly employed that system, it was not open to him unilaterally during a subsequent accounting year to change that system and that the variation could be only by mutual consent. Relying on yet another decision of the Allahabad High Court in the case of CIT vs. Cosmopolitan Trading Co. (1979) 116 ITR 728 (All), the learned Departmental Representative submitted that where the assessee who was following mercantile system of accounting and crediting interest due on that basis, could not change the system to cash system of accounting in respect of that debt on the ground that interest was not being paid. It was submitted that the High Court held that when the debtor was admitting its liability and the assessee was claiming interest during the relevant year, change of method of accounting was not justified. It was pointed out by the learned Departmental Representative that no correspondence had been produced to show that the defaulting parties were in financial difficulties and because of that they were not able to pay the instalment/interest on time. It was submitted that the assessee was entitled to take coercive measures against such defaulting parties and so the switch-over to a hybrid system of accounting in respect of certain loans was not permissible. It was, therefore, urged that the addition of Rs. 1,72,04,280 be restored.
6. Shri M. L. Garg, the leaned counsel for the assessee, submitted that there was a background as to why the assessee-company changed its method of accounting in respect of certain loans. It was submitted that for asst. yrs. 1977-78, 1981-82, 1982-83, 1983-84, 1984-85 and 1985-86, the assessee had claimed waiver/remission of interest which had been shown as income in the earlier years but which could not be realised in actuality. It was submitted that a total of Rs. 56,85,085 (as per details of interest waived placed on record) was allowed finally by the Tribunal for the aforesaid six assessment years. It was submitted that this was giving a distorted picture of the profits actually earned by the assessee-company. On the one hand, the assessee was showing interest on accrual basis when it was unable to get the instalments of principal amount/interest on time and later on, it was claiming waiver/remission of such interest in subsequent assessment years. It was explained that with a view to presenting a more accurate picture of its profits and to get out of the situation in which the assessee was finding itself, the assistance of its Chartered Accountants was requisitioned with a view to streamlining the procedure. It was submitted that it was against this background that on the recommendation of the Chartered Accountants the assessee switched over to a hybrid system of accounting, inasmuch as interest on memoranda accounts where the parties had defaulted in the payment of principal amount/interest, the changed method envisaged the offering of interest income not on accrual basis but on receipt basis. It was submitted that the assessee-company passed the resolution for implementing the recommendations of the Chartered Accountants on 11th Nov., 1985, and applied the same w.e.f. the asst. yr. 1988-89 for which the accounting period started on 1st July, 1986. It was submitted that the assessee-company had made a classification which was based on intelligible criterion. The changed system was to apply only in respect of the memoranda cases where there had been default in the matter of payment of principal amount/interest for two years or more. It was submitted that there was a rationale behind what the assessee did and there was nothing wrong or mala fide about the changed system of accounting.
7. Relying on the Calcutta High Court judgment in the case of Snow White Food Products Co. Ltd. vs. CIT (1983) 141 ITR 861 (Cal), it was submitted that the assessee had a right to change the method of account and if that method of accounting was regularly followed, the AO could not but accept the change and that such a change was permissible in law. It was submitted that the assessee for the reasons mentioned aforesaid had, in a bona fide manner, switched over to a hybrid system of accounting and that the same had been followed regularly subsequently. It was submitted that for asst. yrs. 1989-90 and 1990-91 for which the assessments were completed respectively under s. 143(1) and 143(3), the AO had not attempted any such additions. It was submitted that it was in subsequent years, namely, asst. yrs. 1991-92 and 1992-93 that the AO again harped on the same theme and made similar disallowances as in asst. yr. 1988-89.
8. The learned counsel for the assessee next placed reliance on the Calcutta High Court decision in the case of Hada Textile Industries Ltd. vs. CIT (1991) 187 ITR 371 (Cal) for the proposition that where the change was bona fide, the method of accounting could be changed by the assessee. Referring to the reliance placed by the learned Departmental Representative on the Tribunal's order dt. 24th Nov., 1993, in the case of Munjal Sales Corpn., Ludhiana in ITA No. 124/Chd/1988 for asst. yr. 1984-85, it was submitted that the facts of that case were distinguishable from those of the assessee's. It was submitted that in that case, commission was being charged from four parties and the assessee changed the method of accounting in respect of one party. It was pointed out that it was not change in the method of accounting of a particular source of income but in respect of a particular party or transaction only whereas in the assessee's case, the interest income in respect of a class of persons to whom the loans had been advanced had been changed by the assessee and that too for valued reasons because the income being shown on accrual basis where even the principal amount was not being received, was giving a distorted picture of the true profits of the assessee.
9. The learned counsel further pointed out that it was not the case of the Revenue that the assessee by resorting to this exercise had evaded or avoided certain tax because when that interest was received on cash basis, the same had been offered for assessment. Reliance was placed on another decision of the Calcutta High Court in the case of CIT vs. Bikaner Trading Co. (1989) 180 ITR 286 (Cal) for the proposition that a bona fide change in the method of accounting was permissible in law. For a similar proposition, reliance was placed on the Bombay High Court decision in the case of CIT vs. West Coast Paper Mills Ltd. (1992) 193 ITR 349 (Bom). As regards the decisions relied on by the learned Departmental Representative, Shri Garg submitted that these were either irrelevant or they supported the assessee's case. It was for instance pointed out that the decision of the Allahabad High Court in the case of Balraj Virmani (supra) did not involve the question of change of accounting method but laid down the broad proposition that where the assessee was following mercantile system of accounting, interest on accrual basis had to be assessed to tax. It was submitted that there was no quarrel with the proposition of law laid down by the High Court but that decision was not applicable to the facts of the instant case where change in the accounting system was involved. It was pointed out that the decision of the Calcutta High Court in the case of CIT vs. Eastern Bengal Jute Trading Co. Ltd. (1978) 112 ITR 575 (Cal) in fact helped the assessee because in that case, the High Court held that the directors had power to change the method of accounting adopted by the company and if the motive was bona fide and the changed method had been followed regularly subsequently, no fault could be found with the same. The learned counsel for the assessee further submitted that the reliance by the Revenue on the Calcutta High Court decision in the case of Reform Flour Mills P. Ltd. vs. CIT (1978) 114 ITR 227 (Cal) also helped the assessee rather than the Department. In the said decision, it was held that it is a settled law that a tax-payer is entitled to adjust his own affairs in such a way that his tax burden it thereby reduced. The learned counsel for the assessee strongly supported the impugned order.
10. We have carefully considered the rival submissions. We have given the background of the case in which the assessee sought to change the system of accounting. The motive was to depict a picture of true profits earned by the assessee because certain parties were not paying the instalment of principal amount/interest on time and the assessee by following a rigid system of accounting in respect of all the parties to whom the loans had been advanced was giving a distorted picture of its true profits. The assessee accordingly, on the recommendations of its Chartered Accountants, switched over to a method according to which in respect of the memoranda accounts where the parties had defaulted for two years or more in the matter of payment of principal amount/interest, interest was to be accounted for on receipt basis and not on accrual basis. This, in our opinion, was a legitimate and bona fide need of accounting by the assessee. There was no mala fide intention involved. The learned Departmental Representative has not been able to point out that by this method the assessee has sought evasion or avoidance of any tax liability because interest as and when received has been offered for assessment. The case law discussed above clearly lays down that the assessee is entitled to change its system of accounting provided the change is bona fide and the changed system is regularly followed in the subsequent years. Looking to the background of the case when interest income was being shown on accrual basis even from the defaulters and such huge remissions were being claimed thereafter, the assessee in a bona fide manner changed over to a method which reflected a true state of affairs and a correct picture of the profits earned. We, therefore, hold that the change was bona fide and no mala fide motive can be attributed to the assessee which is a Government Corporation and serving the laudable objective of maximising the industrial growth of the State of Punjab. The changed method has been followed consistently by the assessee in the subsequent years and no evidence has been placed on record by the Revenue that there has been any departure from the changed method in the subsequent years. For asst. yrs. 1989-90 and 1990-91, the Department itself has accepted the changed method of accounting, inasmuch as no such additions have been made as has been done in the year relevant to asst. yr. 1988-89. The case law cited by the learned Departmental Representative either supports the assessee's case or is distinguishable on facts or is irrelevant as rightly pointed out by the learned counsel for the assessee. In the case of Munjal Sales Corporation (supra), this Bench of the Tribunal has taken a view that change could not be effected in respect of the transaction or in respect of one party and that the change has to be in respect of a class of persons or source of income. The facts of that case are, therefore, clearly distinguishable from those of the assessee's. In the present case, the assessee has given a particular treatment not to one individual but to a class of persons to whom the loans had been advanced and that too to meet the legitimate exigencies of the situation. The assessee correctly thought that it was being saddled with the responsibility of paying tax on accrued interest income when even the principal amounts and the interest were not being received in time and the parties were defaulting for more than two years at a stretch. The method adopted by the assessee after effecting the change cannot be said to be a method by which true profits cannot be deduced. The learned Departmental Representative vehemently argued that by changing the method of accounting, the true profits of the assessee would not be deducible. This, however, has to been demonstrated before us. The assessee claims that in the subsequent years, as and when the interest income was received, the same was offered for assessment. This claim has not been contradicted by the Revenue and we have no reason to disbelieve the same. The list of 27 parties shows that some of them are either Govt. concerns or assisted by the Govt. and those accounts have been treated as memoranda accounts. Taking into consideration the entire facts and circumstances of the case, we uphold the impugned order and dismiss the Revenue's appeal.
11. For asst. yr. 1991-92, an addition of Rs. 6,39,727 was made on account of accrued interest. The AO placed reliance on the Supreme Court decision in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) and made an addition of Rs. 6,39,727. The learned CIT(A) following her order in the case of the assessee for asst. yr. 1988-89 deleted the addition. Since we have upheld the order of the learned CIT(A) for asst. yr. 1988-89, for the same reasons we uphold the deletion of addition of Rs. 6,39,727 also.
12. In the result, both the appeals are dismissed.