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Commissioner of Income-tax, Andhra Pradesh Vs. Margadarsi Chit Funds (P) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 149 and 153 of 1978
Judge
Reported in(1985)44CTR(AP)5; [1985]155ITR442(AP)
ActsIncome Tax Act, 1961 - Sections 145
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentMargadarsi Chit Funds (P) Ltd.
Excerpt:
.....accounting system - section 145 of income tax act, 1961 - assessee following consistent system of accounting - income tax officer (ito) sought to alter the method of accounting followed by assessee to a new one - choice of accounting is that of assessee and not of tax department - said choice is not unlimited because ito can always examine whether accounting system followed by assessee is defective and whether correct figures can be deduced from the same - ito can apply provisions of sections 145 if he finds that correct profits are not being revealed and make assessment in proper manner - in instant case no material to indicate that accounting system followed by assessee was defective - ito cannot alter system of accounting merely on ground that new system of accounting commands better..........enable the ito to determine the income correctly, inasmuch as the assessee has been postponing the income received by it till after the expiry of the period of the chit, without offering the same for assessment. according to the learned counsel, as and when the dividend was received, it constituted the income of the assessee, inasmuch as the assessee became a subscriber to the chit the moment it entered into the shoes of the defaulting subscriber. the dividend received by the assessee was in its capacity as a subscriber to the chit and, consequently, it was a revenue receipt in the hands of the assessee, liable to be taxed for each of the assessment years under consideration. according to the learned counsel, if subsequently the assessee makes over the dividend to a new subscriber, it.....
Judgment:

Anjaneyulu J.

1. These are references at the instance of the Commissioner of income-tax, under s. 256(1) of the I.T. Act, 1961. In R.C. No. 153 of 1978, which relates to the income-tax assessment years 1970-71 and 1972-73, the following question of law is referred for our opinion :

'Whether, on the facts and in the circumstances of the case, the accrued dividends on vacant chits and arrears are assessable in the year in which such dividends arise ?'

2. In R. C. No. 149 of 1978, which relates to the income-tax assessment year 1973-74, the following question of law is referred for our opinion :

'Whether, on the facts and in the circumstances of the case, the accrued dividends on vacant chits are assessable in the year in which such dividends were allowed to the foreman ?'

3. Although the questions of law in both the references are in a slightly different form, they represent the same controversy. Indeed, in R. C. No. 149 of 1978, it was agreed that the decision in R.C. No. 153 of 1978 would automatically cover.

4. The assessee is a private limited company carrying on business in the conduct of chits among its members. The controversy in these references relates to the assessability of the dividend received by the assessee in respect of defaulting subscribers to chits. It happens sometimes that subscribers to the chits discontinue after paying a few instalments. On such discontinuance, the assessee-company enters into the shoes of the defaulting subscribers, as a 'foreman', and pays the subscription for the instalments becoming due, until a new subscriber is found. If the assessee is unable to find a new subscriber, it continues to subscribe the necessary instalments till the period of the chit expires. If it is able to find a new subscriber in the place of the defaulting subscriber, the new subscriber negotiates terms with the assessee in the matter of paying the defaulted instalments and enters into the shoes of the defaulting subscriber. Until a new subscriber is found, the assessee becomes entitled to the dividend whenever the chit is bid. It appears, all such dividend received by the assessee is credited in its account books to an account called 'Accrued Dividends Account' and carried over until a new subscriber is found. When the new subscriber takes over, all the dividend received by the assessee subsequent to the defaulting subscriber's exit from participation in the chit, is paid over to the new subscriber. It also appears that, very frequently, the assessee pays not only the amount of dividend received by it, but also pays a further discount by way of inducement to a new subscriber, to take over the defaulting subscriber's place. The assessee has been following a system of accounting, whereby the dividend received by it is not accounted as income, as and when it is received, but is carried over, as already stated above, till either a new subscriber is found, or the period of the chit runs out. If a new subscriber is not enlisted, the entire dividend received by the assessee till the expiry of the period of chit is accounted as its income in the year in which the period of the chit expires. It is not in dispute that this system of accounting for the dividend has been consistently and regularly followed by the assessee for the past several years and the Department did not question the correctness of such a system of accounting followed.

5. It appears, the matter has been given a fresh look for the assessment years under consideration, as the ITO felt that the assessee should account for, as its income, the dividend as and when it is received. The ITO was of the opinion that this method followed by the assessee in accounting for the income at the expiry of the period of the chit, was not proper. In that view, the dividend received by the assessee during the accounting years relevant for the assessment years under consideration, in respect of such defaulting chits (popularly called 'vacant chits') was brought to assessment as the assessee's income for the assessment years under consideration. On appeal, the AAC declined to endorse the ITO's view and allowed the appeal filed by the assessee, on the ground that the assessee had been following a consistent method of accounting, and there is no reason why the ITO should substitute another method of accounting. In that view, the AAC cancelled the assessment of the dividend in the hands of the assessee. Aggrieved by the order of the AAC, the ITO filed appeals before the Tribunal. The Tribunal, after a critical examination of the various facts, affirmed the view of the AAC and dismissed the appeals filed by the ITO. Hence, these references at the instance of the Commissioner.

6. Learned standing counsel for the Income-tax Department, Sri M. Suryanarayana Murthy, contended that the method followed by the assessee in the present case did not enable the ITO to determine the income correctly, inasmuch as the assessee has been postponing the income received by it till after the expiry of the period of the chit, without offering the same for assessment. According to the learned counsel, as and when the dividend was received, it constituted the income of the assessee, inasmuch as the assessee became a subscriber to the chit the moment it entered into the shoes of the defaulting subscriber. The dividend received by the assessee was in its capacity as a subscriber to the chit and, consequently, it was a revenue receipt in the hands of the assessee, liable to be taxed for each of the assessment years under consideration. According to the learned counsel, if subsequently the assessee makes over the dividend to a new subscriber, it would be entitled to claim deduction of the dividend paid to the new subscriber. If a new subscriber is not found and the assessee continues to subscribe to the chit till after the expiry of the period of chit, then the dividend received by the assessee from year to year is liable to be taxed in the assessee's hands. Learned counsel, accordingly, urged that the Tribunal was in error in holding that the assessee is not liable to be taxed in respect of the dividend received during the three accounting years relevant for the assessment years under consideration as, admittedly, this dividend was received in respect of chits for which no new subscribers were enlisted in the accounting years under consideration.

7. The question whether the assessee received the dividend in the capacity of a subscriber, or otherwise, does not, in our opinion, assume significance, although the Tribunal devoted considerable discussion on this aspect of the matter. The basic question for consideration is, whether the assessee has been following an acceptable method of accounting for declaring its income in respect of the defaulting subscribers' chits, and whether the method employed by the assessee is such that correct profits cannot be deduced from the accounts of the assessee, so that the provisions of s. 145 of the I.T. Act could apply. It is not in dispute that the assessee has been following the same system of accounting for its income by way of dividends in respect of the defaulting subscribers' chits for the past several years. The assessee has, therefore, been following a consistent system of accounting and regularly employing the same system of accounting for computing its income from year to year. It is also not in dispute that this system of accounting was not found to be defective by the ITO in the past years. All that happened was that the ITO gave a fresh look to the matter and felt that the more appropriate system of accounting would be to declare the dividend as and when received as income, and endeavoured to substitute that method of accounting for the method of accounting regularly followed by the assessee. It must be said at the outset that the choice to account for income on an acceptable basis is that of the assessee, and not of the Department. This is, however, not an unlimited choice, because the ITO has always the liberty to examine the system of accounting regularly employed by the assessee, to determine whether the system of accounting is defective, and whether by following such system of accounting, correct profits can be deduced from the account books maintained by the assessee. If, on such scrutiny, the ITO comes to the conclusion that with reference to the method of accounting followed by the assessee, correct profits cannot be deduced, it is open to him to apply the provisions of s. 145 of the I.T. Act and make the assessment in an appropriate manner. In the present case, there is no material to indicate why the ITO considers the system of accounting regularly followed by the assessee to be defective, or the system of accounting followed to be such that correct profits cannot be deduced therefrom. The ITO's power to substitute a system of accounting for the one followed by the assessee, flows from the provisions of s. 145 of the I.T. Act. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. As already observed above, there is no finding to that effect in this case. The ITO's view that there could be a better system of accounting is no reason to the application of the provisions of s. 145 of the I.T. Act, especially in view of the fact that this system of accounting is followed by the assessee uniformly and regularly for the past several years, and was accepted by the Department without quarrel. It is not open to the ITO to intervene and substitute a system of accounting different from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better.

8. Attention may be invited to the decisions in :

(i) CIT & EPT v. Chari and Ram : [1949]17ITR1(Mad) ;

(ii) CIT v. Srimati Singari Bai : [1945]13ITR224(All) ;

(iii) CIT v. K. Doddabasappa : [1964]54ITR221(KAR) ; and

(iv) Juggilal Kamlapat, Bankers v. CIT : [1975]101ITR40(All) .

9. These are all decisions which lend support to the proposition that the Department is bound by the assessee's choice of accounting regularly employed unless it can be said that the method of accounting followed by the assessee does not reflect the true income. The AAC, as well as the Income-tax Appellate Tribunal, after a careful scrutiny, came to the conclusion that the system of accounting employed by the assessee is consistent and regular and the ITO, therefore, is not entitled to interfere with the system of accounting followed by the assessee, unless it is possible for him to make out and bring the case within the terms of s. 145 of the I.T. Act. On this basic issue itself, the Department's contention that the dividend should be assessed in the hands of the assessee as and when it is received, in substitution of the method of accounting followed by the assessee, should fail. Even otherwise, we are not persuaded to accept the view that the system of accounting followed by the assessee is in any way defective. It is not denied that the assessee is under an obligation to make over the dividend received by it, if and when it finds a new subscriber. Since the assessee-company is formed for the basic purpose of conducting chits and not for the purpose of subscribing to the chits, the assessee would always be in search of new subscribers to take the place of the defaulting subscribers, and as and when new subscribers are enlisted, the obligation to pay over the entire dividend received by the assessee in the interregnum to such new subscribers, materialises. Thus, there is an element of uncertainty, and this uncertainty will prevail till the last instalment of the chit is paid. It is obviously for these reasons that the assessee has been carrying over the dividend income till the expiry of the period of chit and has been accounting for the entire income in the year in which the chit runs out. We do not find any defect in this system of accounting which is regularly followed by the assessee. Thus, even on merits, we are unable to subscribe to the view that the ITO is entitled to tax the assessee on the dividend income received from year to year, in substitution of the method of accounting followed by the assessee.

10. For the aforesaid reasons, we consider that the Tribunal has arrived at the correct decision. Accordingly, we answer the questions referred to us in the negative, i.e., in favour of the assessee and against the Department. No costs. Advocate's fee Rs. 500 in each.


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