1. This appeal has been filed by the assessee against the order dated 25-4-1980 of the Commissioner (Appeals), relating to the assessment year 1976-77, the previous year of which ended on 30-6-1975.
2. The assessee is a partnership firm which started its business, for the first time, during the previous year under consideration, as distributors and selling agents of various products. The assessee was constituted by a partnership deed dated 27-9-1974. The assessee took up the selling agency of Trac Industries and Components Ltd. ('Trac Industries'), Madras, with effect from 4-10-1974. During the previous year under consideration, the assessee earned a commission of Rs. 1,36,231 under the selling agency agreement. After debiting overhead expenses, an income Rs. 1,04,947 was returned by the assessee on 17-12-1976. This return was based on the books of account, which were duly closed on 30-6-1975, following the mercantile basis of accounting.
Subsequently, on 26-7-1977, the assessee filed a revised return showing a net loss of Rs. 27,010. It was explained by the assessee that the original return showing a profit was filed on the basis of the mercantile system of accounting, followed in the books of account.
Later, the assessee thought it proper to follow the cash system of accounting, because, under the terms of agreement with Trac Industries, commission would be realised to the assessee only after the said company realised the bills from the customers. Hence, the books of account for the year under consideration were re-written on cash basis and the revised return showing a loss was filed.
3. The ITO asked the assessee to explain as to why it changed its system of accounting so soon after adopting the same. The assessee replied that in the line of business carried on by it, it would be correct to follow only the cash system. Further, it was urged that the assessee was entitled to choose any proper method of accounting and that they have made a bonafide change with no intention to evade tax.
The ITO observed that the assessee had already made the choice of the mercantile system of accounting right from the commencement of its business and had actually closed its books of account on that basis on 30-6-1975 and had already drawn up the profit and loss account and the balance sheet and filed the original return accordingly. The fact that the commission from Trac Industries would be realised only after the bills were realised, was well-known to the assessee right from the beginning. Even so, it adopted the mercantile system of accounting.
Hence, he held that the books were written on cash basis not because of any bona fide change in the system of accounting regularly employed, but only with a view to avoid payment of tax on the commission which had already accrued due. Hence, the ITO rejected the assessee's request to change over from the mercantile system of accounting as reflected in the original return, to the cash system of accounting as reflected in the revised return. He observed that if for any reason, the assessee was not able to recover the whole or any part of the commission which had already accrued due, then it was entitled to claim the same as bad debt in future. With these remarks, be completed the assessment on the basis of the original return.
4. The assessee appealed to the Commissioner (Appeals) and contended that its claim before the ITO should have been accepted. The arguments advanced before the ITO, as contained in the assessee's letter dated 21-3-1979, were reiterated before the Commissioner (Appeals). He did not agree with the contentions of the assessee, on the ground that the assessee had already adopted the mercantile system of accounting for the year under consideration and there was no good reason for changing the same before the assessment is completed. Further, he observed that the revised return, based on the books re-written on the cash system, could not enable the ITO to deduce the correct profits of the business carried on by the assessee. The commission income had already accrued to the assessee and the same had been duly accounted for in the books of account which were closed. Hence, he upheld the action of the ITO and rejected the contention of the assessee.
5. Shri Y.P. Trivedi, the learned counsel for the assessee, urged before us that the revenue authorities erred in their decision. He stated that the assessee, no doubt, maintained the accounts on the mercantile basis originally, but later it found that it did not receive any commission from the principal, on the ground that the bills were not realised. Hence, the assessee gave a second thought to its system of accounting and decided to change over to the cash system. He referred to the decision of the Bombay High Court in the case of Sarupchand v. CIT  4 ITR 420 for the proposition that the assessee is entitled to change the system of accounting regularly employed by him. Then he referred to page 872 of Kanga and Palkkivala's Commentary on Income-tax, Seventh Edition, for the proposition that a bona fide change of the regular basis of accounting must be accepted by the department and may be given effect to, on such terms as may be necessary for preventing escapement from taxation or double taxation.
He urged that the account books were merely recasted and it need not be viewed as a change in the method of accounting. Without prejudice to the above contention, Shri Y.P. Trivedi raised an alternative contention, namely, that even under the mercantile system of accounting, no real income accrued to the assessee. His point was that under the agreement between the assessee and its principal, the commission became payable to tde assessee only after the realisation of the bills from the customers. No such realisation was made during the year under consideration and so, nothing became payable to the assessee during the year under consideration. Hence, he argued that merely because the assessee made entries in its books of account showing accrual of income, the same should not be taxed as real income, because in reality no income had even accrued due under the mercantile system.
He relied on the decisions in the cases of CIT v. Shoorji Vallabhdas & Co.  46 ITR 144 (SC), CIT v. Western India Engg. Co.  81 ITR 712 (Guj.), CIT v. Nantla Cold Storage & Ice Factory  104 TTR 148 (Ori.), Shiv Parkash Janakraj & Co. (P.) Ltd. v. CIT  112 ITR 872 (Punj. & Har.), Arvind Boards & Paper Products Ltd. v. M.T.Keshruwala, ITO  124 ITR 626 (Guj.) and CIT v. Motor Credit Co.
(P.) Ltd.  127 ITR 572 (Mad.), in support of his contention.
6. Shri L.N. Joy, the learned representative for the department, on the other hand, supported the orders of the revenue authorities. He stated that the assessee is entitled to choose any proper method of accounting, but once a method is chosen, it has to be regularly employed. No change therein is permitted, except dor bona fide reasons.
According to Shri L.N. Joy, the reason for the change stated by the assessee, before us, was not bona fide because it was guided solely by the intention to evade the payment of tax. He referred to page 873 of Kanga and Palkhivald's commentary, referred to earlier and pointed out that even bona fide changes, if too frequent, would disentitle the assessee to have his yearly income computed in accordance with his own changing methods and to justify an assessment under Section 143(3) of the Income-tax Act, 1961 ('the Act'), because the assessee's method of accounting becomes acceptable only if it is regularly employed.
Referring to page 171 of the same commentary, he stated that the income aeerued to assessee when it acquired a right to receive the same and made entries in its books, accordingly. Hence, he urged that the assessee was not entitled to change the method of accounting on the ground on which it has done and so the assessee's contention has been rightly rejected. Regarding the alternative argument raised by the learned counsel for the assessee, he stated that the matter has not been looked into from that angle and it would be necessary to verify the terms of the agreement, to find out as to when the commission became payable, under the terms thereof.
7. We have heard the contentions of both the parties as well as the facts on record. The first question that arises in this appeal is, whether the assessee was entitled to re-write its books adopting a different system of accounting and to file a revised return on that basis. We find that Section 139(5) of the Act authorises a person to file a revised return if he discovers any omission or any wrong statement in the original return filed by him. Admittedly, the original return filed by the assessee on 17-12-1976 did not contain any omission or any wrong statement. Evidently, it was correct and complete and reflected the true state of affairs in keeping with the books of account of the profit and loss account and the balance sheet (sic), prepared therefrom. Hence, the assessee was not entitled to file any revised return, much less to demand that the revised return filed by it should be accepted and acted upon. No doubt the assessee is entitled to choose any recognised method of accounting. In this case, the assessee deliberately chose the mercantile system of accounting right from the inception of its business, knowing all the facts relating to the aforesaid agreement. Having chosen one method, it cannot change the same except for bonafide reasons. The reasons explained by the assessee in support of the change of the method of accounting from mercantile to cash and re-writing the books, accordingly, do not appeal to us to be bona fide. It appears to us that the assessee had an after-thought after filing the original return showing a positive income and wanted to replace the original return by another, showing a lower income or a loss. This can hardly be a reason for changing the method of accounting. We, therefore, agree with the revenue authorities and reject the assessee's arguments on this point.
8. However, coming to the alternative contention of the assessee, we find force in the same. The authorities cited by the learned counsel for the assessee to establish the proposition that income must have really accrued, before it can be taxed and that such accrual does not depend upon the method of accounting, or the entries made in the books of account (sic). Whether income had accrued or not depends upon the crucial fact as to whether the same has become legally payable to the assessee. In other words, the assessee must have a right to receive the same and it should constitute a legally enforceable debt against the payer. Unless the above acid test is satisfied, an item cannot be regarded as income for the purpose of the Act. However, as rightly pointed out by the learned representative for the department, this point has not been looked into from this angle. In our opinion, this contention requires to be looked into, in the interest of justice, because it goes to the root of the matter. Hence, we remit this matter to the file of the ITO for deciding the same afresh, in accordance with law and our observations above, after giving a reasonable opportunity of being heard to the assessee.
9. The only other ground, in this appeal, states that the Commissioner (Appeals) should have allowed the assessee's ground against charging of interest under Section 139. We find that the Commissioner (Appeals) has declined to entertain this ground, because the assessee did not deny its liability to pay interest in toto. We have heard Shri Y.P. Trivedi as well as Shri L.N. Joy in the matter. It is not the case of the assessee that it was not liable to pay any interest at all. Hence, we uphold the decision of the Commissioner (Appeals), on this point, relying on the case of CIT v. Daimler Benz A.G.  108 ITR 961 (Bom).
10. In the result, the appeal may be treated as partly allowed for statistical purposes.