1. These three appeals raise a common contention. They are taken up for disposal by this consolidated order.
2. The assessee is an individual. He is the managing director of Sphinax Chemical Industries (P.) Ltd. He gets salary from the company.
This has been assessed under the head 'Salaries' for the three assessment years in appeal here, viz., 1976-77, 1977-78 and 1978-79.
There is no dispute that the correct head of income is 'Salaries'. The dispute is, however, with regard to the quantum of salary assessable for each of the above years. The revenue's claim is: the accounting year for the salary income can only be the financial year for each of the assessment years above, there being no accounts maintained by the assessee for such a source. On the other hand, the assessee's claim has been: the employer-company follows the accounting year ending 31st July and, hence, the accounting years for his salary income could and should be only as under:Assessment year Accounting year claimed by Remarks the assessee1976-77 The assessee started earning salary from 1-12-1975. The1977-78 1-12-1975 to 31-7-1976 --1978-79 1-8-1976 to 31-7-1977 -- 3. Shri M. Naganathan, the authorised representative of the assessee, pointed out that assessments for the first two years had been reopened under Section 147(a) of the Income-tax Act, 1961 ('the Act') to redeter-mine the salary income on the basis of the previous year being the financial year concerned, but that, however, no objection has been taken to the validity of the action under Section 147(a). Shri Naganathan's grievance is that in terms of Section 3(3) of the Act the assessee had the option to choose the previous year for his salary income. In accordance with this specific right conferred by the Legislature, the assessee chose the accounting year opening with the 1st of August and ending with the 31st of July of the following year as his accounting year for his salary income, and the authorities were, therefore, not justified in rejecting his claim. Shri Naganathan relied on the decision of the Andhra Pradesh High Court in Addl. CIT v. K.Ramachandra Rao  127 ITR 414.
4. For the revenue, Shri A.B. Martin David supported the ITO's action.
He pointed out that no doubt for the first two years, assessments were originally completed accepting the assessee's previous year for the salary income as correct. Accordingly, the salary income was taken at nil for the assessment year 1976-77 and the salary of Rs. 26,990 (drawn for the period 1-12-1975 to 31-7-1976) was assessed for the assessment year 1977-78. Both these assessments were incorrect in law as in the absence of the assessee having chosen to maintain any accounts for the salary income, assessments could have been only on the basis of financial year as the previous year. The ITO, therefore, reopened the assessments under Section 147(a) and revised the total income for these two years as under:Assessment year Income originally assessed Income assessed under section1976-77 Nil Rs. 38,601 (salary income was included at Rs. 10,0001977-78 Rs. 29,000 (salary income of Rs. 32,667 included by1978-79 Rs. 44,940 There was no reassessment.The original 5. Shri Martin David refers in this connection to the AAC's consolidated order for these three years. The AAC rejected the assessee's contentions holding that so far as the head of income 'Salaries' was concerned, the previous year could be only the financial year. No doubt in K. Ramachandra Rao's case (supra) the Court accepted a different previous year, also for income from salary but that case was distinguishable on facts, i.e., the salary income there was that drawn by a judge of the High Court. Such salaries are paid under Article 221 read with the Second Schedule to the Constitution of India, being payable from out of the consolidated fund of the State. Hence, it constituted a 'separate and distinct' source of income. Secondly, in that case the finding of the Tribunal was that accounts for this new source of income 'were opened on 21-8-1968 and were made up till 31-7-1969'. Both these features (according to Shri Martin David) being absent in this case, the assessee's reliance on K. Ramachandra Rao's case (supra) is misplaced.
6. The first question is whether there could be a previous year other than the financial year for income from salary. In view of the ruling in K. Ramachandra Rao's case (supra) this question has to be answered in the affirmative. We do not think it necessary that to constitute such a separate source, the salary has to be paid under a constitutional provision from out of the Consolidated Fund of India.
Salary per se is a 'separate and distinct' source of income and is distinguished as such from other specified sources of income in the Act itself.
7. Section 3(1)(a) provides that 'previous year' means the financial year immediately preceding the assessment year. However, Section 3(1)(b) provides that if the accounts of the assessee had been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date. Section 3(3) goes on to add, 'subject to other provisions of Section 3', an assessee may have different previous years in respect of separate sources of his income. The various other provisions in Section 3 deal with the income from business or profession including share of profits of a partner from a firm. These are not relevant. In the light of the provisions of Section 3, which are relevant, no serious objection can be raised if an assessee makes up his accounts for a period other than the financial year with regard to his salary income also, especially in the light of decision in K. Ramachandra Rao's case (supra). But in this case the assessee cannot get the benefit of Section 3(1)(b). Admittedly, he has not kept any books of account or similar record on the basis of any previous year for his salary income. The result is, the case is covered by Section 3(1)(a). The assessee's reliance in Section 3(3), in our view, is misplaced because that merely enables an assessee, where he maintains accounts for any source of income, to choose his previous year for that source of income; where no accounts at all are kept, Section 3(3) does not operate. In the result, we do not find it possible to interfere with the orders of the authorities below.
1. The admitted facts in this case are as follows: The assessee is an individual. For the assessment year 1976-77 corresponding to the previous year ended 31-3-1976, the assessee filed a return on 27-9-1976 showing income from property and business and other sources. Under the head 'Salaries', the assessee did not show any income as the assessee had resigned from the job which he had in the preceding accounting year itself. The assessment was completed on 30-6-1978 on a total income of Rs. 30,600 taking the income from salary at nil. For the next assessment year 1977-78, the assessee filed a return on 27-10-1977 in which under the head 'Salaries' income shown was Rs. 17,000. In the statement annexed to the return, the assessee explained that this income represented the managing director's remuneration from Sphinax Chemical Industries (P.) Ltd. for the period ended 31-7-1976 amounting to Rs. 20,000 less standard deduction of Rs. 3,000. The assessee had also filed a certificate of deduction of tax from income charged under salaries showing income of Rs. 20,000 for the period December 1975 to July 1976. The assessment was completed, accordingly, on 6-11-1979 taking the income from salary at Rs. 17,000. For the next assessment year 1978-79, the assessee showed income from salary at Rs. 30,500. The statement filed along with the return explained that this was the managing director's remuneration from Sphinax Chemical Industries (P.) Ltd. for the period ended 31-7-1977 amounting to Rs. 34,000 less standard deduction of Rs. 3,500. A certificate of deduction of tax was also filed showing that the income was for the period August 1976 to July 1977. But the ITO was of the view that in the case of salary, the previous year should be taken as the year ending with 31st March and he proposed to assess the salary income accordingly and, therefore, issued notice under Section 148 of the Act in respect of the preceding assessment years 1976-77 and 1977-78 also. The assessee filed a reply dated 6-3-1981 to the notices and stated that he was appointed as the managing director of Sphinax Chemical Industries (P.) Ltd. which came into existence only in November 1975, that the first accounting year of the company ended on 31-7-1976 and, therefore, he had adopted the previous year for the income from that source as the year ended July 1976. The ITO, however, rejected this contention by stating that under Section 3 if no business is done by the assesses, the previous year to be adopted is only the financial year and the assessee has no option to adopt a different previous year. He, accordingly, revised the assessment for the earlier years also and brought to tax the salary income of each financial year amounting to Rs. 38,601 for 1976-77, Rs. 41,169 for 1977-78 and Rs. 44,940 for 1978-79.
2. The assessee appealed and pointed out to the AAC that as managing director, the assessee was entitled not only to the salary income, but also commission based on the profits earned by the company and, therefore, it was necessary to adopt as his previous year for this source of income the same accounting year as that of the company. The AAC, however, rejected this contention on the ground that as far as income under the head 'Salaries' is concerned, the previous year could only be the financial year.
3. In the appeals before us, the contention of the assessee is that the authorities below were in error in proceeding on the basis that the assessee could never have a different previous year for the income assessable under the head 'Salaries'. Reliance was placed on the decision of Andhra Pradesh High Court in the case of K. Ramachandra Rao (supra). On the other hand, the contention of the revenue is that the salary income could be assessed only on the basis of the financial year as the accounting year. This contention of the revenue appears to be opposed to the provisions of Section 3 which defines 'previous year' to mean (a) the financial year immediately preceding the assessment year, or (b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date. Clearly/therefore, the assessee is entitled to choose a different previous year if the accounts of the assessee had been made up to the date within the financial year relevant to the assessment year. Hence, the only question that survives for consideration is whether the accounts of the assessee have been made up to a date within the financial year. On this issue, the contention of the revenue is that the assessee not having any accounts for the income derived under the head 'Salaries', the provisions of Section 3(1)(b) should not at all apply. The answer of the assessee to this contention is that the very fact that the assessee has filed a return along with the statement showing the income computed on the basis of the accounting year of the company satisfies this provision.
It does not appear that when Section 3(1)(b) talks of accounts being made up, it could refer to any regular books of accounts maintained by the assessee because even in the case of K. Ramachandra Rao (supra), we do not find any reference to the assessee maintaining regular books of accounts, such as, cash book, ledger, etc. That was a case of a judge of the High Court who was only getting a monthly salary and it would be difficult to imagine the maintenance of regular cash book only to show the receipt of salary in each month. If that was all that was required, it would be quite easy for the assessee even in the present case to prepare a note book showing his monthly income and close the accounts up to July of every year for the purpose of satisfying that definition.
The expression 'accounts being made up to date' must, therefore, mean something else if it is to be meaningful. The generally accepted definition of accounting describes it as '...the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are. in part at least, of a financial character and interpreting the results thereof (American Institute of Certified Public Accountants, Committee on Terminology, Accounting Terminology Bulletin No. 1, New York). Yorston's Advance Accounting (Vols. 1 and 2, Sixth edition) says 'Accounting which has been referred to as the language of business is not an end in itself, it is essentially a service function designed to provide relevant information concerning an entity for those who are interested in interpreting and using that information. It follows that if it is to be useful, accounting must be adapted to the particular needs of the enterprise and of those interested in it. It is further stated that an accounting period is an interval of time at the end of which the income or revenue statement and balance sheet are prepared in order to show the result of operations and the change in resources which have occurred since the previous statements were prepared. This shows that Section 3(1)(b) does not refer to the mere recording of the entries relating to the financial transactions but to the striking up of the result over a period of time and, hence, the expression 'made up' if it should be meaningful, must relate only to a statement prepared by the assessee determining the results of the transactions over a period of time. Obviously, there is a difference between the expression 'accounts being made up' and 'accounts being maintained' because this expression cannot refer to mere recording of the transactions but must refer to taking stock of the transactions over a period of time. Looked at from this point of view, it is quite reasonable for the assessee to claim that since his income is derived as salary and commission from a company in which he was the managing director, it would be appropriate to determine the financial position on the same date on which the company also makes up its accounts. If the only objection of the revenue is that there is no evidence to show that the assessee has made up its accounts on the date the company has closed its accounts, we need only refer either to the statement filed along with the return showing the income of the assessee from under the head 'Salaries' determined at the end of the accounting period of the company or if necessary to the certificate of deduction of tax at source given by the company. It can even be said that the ledger page maintained by the company in which the salary and remuneration paid to the managing director is credited could as well be regarded as the accounts maintained by the company on behalf of the assessee if the section had required that the assessee should have maintained the accounts instead of only making up the accounts. But it is unnecessary to go to that extreme step of recognising the accounts of the company as that of the assessee as it would be sufficient to confine to the statement filed with the return which shows that the assessee had consciously adopted the year ending July as the year of account as far as the income under the head 'Salaries' is concerned. There is no reason to reject this claim especially when it would be so convenient for the assessee as well as the ITO who could easily verify the income accruing to the assessee with reference to the books of the company and, hence, there could not be any valid reason for rejecting the claim of the assessee.
In the circumstances, the original assessments made for the assessment years 1976-77 and 1977-78 were correct and need not have been revised at all. The assessment for the assessment year 1978-79 should, therefore, follow the same pattern and the previous year for the income under the head 'Salaries' having been already adopted for the first assessment year as the year ended July, the income for this assessment year also should be determined on the same basis. The orders of the authorities below for the assessment years 1976-77 and 1977-78 are cancelled and the original assessments made for these assessment years are restored. The orders of the authorities below for the assessment year 1978-79 is set aside and the ITO is directed to recompute the total income taking the income under the head 'Salaries' in accordance with the previous year ended July 1977. The appeals are allowed.
Since there is a difference of opinion on the following point, the matter may be placed before the President, ITAT, for hearing and deciding the point in accordance with the majority of those hearing the case: Whether, on the facts and in the circumstances of the case, the statement filed along with the return is sufficient to show that the assessee has made up his account within the financial year so as to have a different previous year within the meaning of Section 3(1)(b) of the Income-tax Act, 1961 1. On a difference of opinion between my learned brothers, the President of the Tribunal has nominated me as Third Member to express my opinion under Section 255(4) of the Act. The point of difference referred to me is as under: Whether, on the facts and in the circumstances of the case, the statement filed along with the return is sufficient to show that the assessee has made up his account within the financial year so as to have a different previous year within the meaning of Section 3(1)(b) of the Income-tax Act, 1961 2. The assessee in this case is an individual who is the managing director of a company known as Sphinax Chemical Industries (P.) Ltd. from where he gets salary. This salary was assessed to tax under the head 'Salaries' in the three assessment years 1976-77, 1977-78 and 1978-79. The assessee, Mr. John Peter, started earning salary from 1-12-1975. The accounting year of the company ended on 31-7-1976. The assessee adopted the previous year as in the case of the company's accounting year and the salary for the period from 1-12-1975 to 31-7-1976 was offered for assessment in the assessment year 1977-78.
The contention of the revenue is that for the salary income, the previous year can only be the financial year and, therefore, the income from salary for the above period should be assessed for the assessment year 1976-77. For the other two years 1977-78 and 1978-79, the assessee adopting the previous year as that of the company's accounting year, returned the salary for the subsequent two years which the revenue negatived. Another point we may notice here is that the ITO had accepted the assessee's contention and completed the assessments originally taking the income from salary for the year 1976-77 at nil and at Rs. 26,990 for the assessment year 1977-78. Thereafter, the ITO reopened the assessments under Section 147(a) and revised the total income at Rs. 38,601 for the year 1976-77, Rs. 41,169 for the assessment year 1977-78 and for the assessment year 1978-79 the income originally assessed was Rs. 44,940 adopting the financial year and, therefore, there was no reassessment.
3. On the rejection of the assessee's contention by the AAC, further appeals were preferred before the Tribunal and before the Tribunal, the contentions raised on behalf of the assessee were that in respect of income from salary, the assessee can choose any previous year other than the financial year if accounts are maintained. The accounts maintained by the company in the name of the assessee and copy of which was furnsihed to the ITO, constituted account maintained by the assessee in that behalf and that account must be deemed to have satisfied the requirement of Section 3(1)(b). The further contention was that the statement filed by the assessee before the ITO also constituted 'account'. In any case, together these two constituted 'account' maintained by the assessee and since that account showed the previous year different from the financial year, that previous year must be adopted by the ITO also. Reliance was placed upon the decision of the Andhra Pradesh High Court in the case of K. Ramachandra Rao (supra).
4. The learned Accountant Member, in view of the ruling of the Andhra Pradesh High Court in K. Ramachandra Rao's case (supra), held that there could be a previous year other than the financial year for income from salary if the assessee maintains accounts and make them up to a date within the financial year. The learned Judicial Member also agreed with this view. Thus, there is no difference of opinion between my learned brothers on the point that if accounts are maintained and made up to a particular date, then the previous year for the income from salary could be that year to which the accounts are made up and not the financial year. But, the learned Accountant Member was not prepared to accept the latter part of the assessee's submission that the copy of the account maintained by the company in its books or the statement of accounts furnished by the assessee to the ITO supported by a salary certificate issued by the company, constituted 'accounts'. His objection was that the assessee had not kept any books of account or similar records on the basis of any previous year for his salary income. But, the learned Judicial Member was of a different opinion.
The learned Judicial Member took the view that when Section 3(1)(b) refers to 'accounts' being made up to a date, it could not refer to any regular books of account maintained by an assessee because even in the case before the Andhra Pradesh High Court, there was no regular books of accounts maintained such as cash book and ledger and, therefore, 'accounts' must be such that would furnish the required information and that information was furnished by the statement of account that the assessee had filed before the ITO.6. The point of difference as framed by my learned brothers also points out whether the statement filed along with the return is sufficient to show that the assessee has made up his accounts within the financial year within the meaning of Section 3(1)(b). It is to be noted at the outset that the Act does not anywhere define 'accounts' and for that matter even the method of account feferred to elsewhere in several sections of the Act. The expression 'accounts' used by the Parliament in Section 3(1)(b), which I do not think I need quote here, is to be understood in the same sense in which that expression is commonly understood by a common man in the business world as also by the accountants all over.
7. A generally accepted definition of accounting describes it as "...the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof".
8. Accounting, which has been referred to as the language of business, is not an end in itself; it is essentially a service function designed to provide relevant information concerning an entity for those who are interested in interpreting and using that information. It, therefore, follows that accounting, if it is to be useful, must be adapted to the particular needs of the enterprise and of those interested in it.
Broadly, there are those who require information relating to past events and others who are equally concerned, if not more, with the future and, thus, need accounting data projected into periods ahead.
Information generated by the accounting process is of interest to various groups directly or indirectly concerned with a business unit.
Parties interested in the performance of a business enterprise include among others, Governments which are mostly for the purpose of taxing the income or to fixing a cost. Vitally affecting the whole of accounting method is the requirement that the records must conform to the rules of law. These rules arise by virtue of a force outside the enterprise itself and must be read into the recording of events and transactions to which they apply. The practice of accounting is influenced and guided by conventions, doctrines and various rules, methods and standards which have from experience proved acceptable and useful. It is difficult to reduce accounting practice to a rigid set of rules. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experiences, historical precedent, statements by individuals and professional bodies and regulations of Governmental agencies. Thus, the accounting process is based on conventions designed from experience to serve the needs of those using accounting information.
9. From the definition of 'accounts', thus, seen above, it will be at once clear that it is the art of recording, classifying and summarising in a significant manner the transactions and events that have taken place so as to provide the relevant information to different users of the accounts, constitute accounts and accounting. Thus, the art of classifying transactions must necessarily depend upon the need and the skill of the person maintaining accounts subject to the conventions, methods and standards which have by experience proved acceptable and useful, taking into account the regulations of governmental agencies, if any. If accounting or maintaining accounts is regarded as an art of recording transactions, the art of recording, classifying and summarising the transactions relating to income from salary can be maintained in as many ways as human ingenuity can think of alternatives. It cannot, thus, be laid down rigidly that recording of salary transactions must of necessity be always in a particular way.
The object of accounts being to provide the relevant information concerning salaries, the accounts can be maintained in any manner provided the relevant information is furnished and its authenticity is established.
10. In the case of an assessee who has got income only from salary, he can maintain the salary particulars on a sheet of paper showing the date of receipt of salary and the amount received or he may maintain the same in a diary or he may purchase a note book and record the transactions therein. All these acts of recording amount to accounting of the salary received. The assessee is not obliged or need not maintain the expenses made out of that salary. If at the end of the year, the salary received is totalled up and furnished by way of statement to the ITO, that statement would constitute accounts made up by the assessee for the income from salaries. Similarly, if the assessee's account for the purpose of salary is maintained by the company and if copy of account is furnished to the assessee by the company and if the assessee adopts it and records those transactions in a book for the purpose of record, that also would amount to maintaining account by the assessee. Thus, there are myriad ways of maintaining accounts and in the absence of any particular requirement of law under the Act, it is not possible to contend that the accounts should be maintained in a manner as is commendable to the mind of the ITO. A businessman may maintain such accounts as are necessary for the purpose of his business. A person receiving income from salary may maintain such record as is necessary to present to himself the total amount received from salary. Similarly, a person receiving income from dividend may maintain such records as would show the income from dividend. Making up of accounts is now judicially noticed as closing up of accounts to profit and loss account for the purpose for finding out the profit or loss made at the end of a given period. The record so maintained is totalled up and furnished in support of the income. So long as the benefit of Section 3(1)(b) is available to all categories of income, then the accounts to be maintained by an assessee in respect of those categories of income must be left to the assessee and to the needs of that particular source of income. The accounts presented by the assessee to the ITO, thus, affords evidence in support of the income returned. The ITO may accept the account as truly reflecting the income or may reject it as unreliable. Rejecting the accounts as unreliable and not reflecting the true income or the relevant income, is not to be confused with either the method of accounting maintained by the assessee or the accounts themselves. Maintaining of accounts is one thing. Arriving at the income on the basis of that account is another thing and accepting the results as disclosed by those accounts as reflecting the true income is yet another thing. It is the third part that is causing confusion in understanding the meaning of the expression as used in Section 3(1)(b). It is also judicially noticed that for entitling an assessee to exercise an option under Section 3(1)(b) in respect of any separate source of income, it is not necessary for him to have either a separate book of account in respect of the income from the separate source or even to have a separate part of the book confined to income from that source. It is enough if the account in respect of the separate source of income has been maintained by the assessee, and that account has been made up to a date within the twelve months ending on the 31st day of March next preceding the year for which assessment is to be made to entitle an assessee to exercise the option in question for the first time in respect of the separate source--CIT v. Patiala Sales Corporation (P.) Ltd.  77 ITR 443, 448 (Punj. & Har.). In this case the question was whether the assessee could have a separate previous year for the income from dividend. The ITO treated the dividend declared by the company on 29-10-1952 as 'Income from other sources' and included it in the return for the assessment year 1953-54 while the contention of the assessee was that it should be assessed for the assessment year 1954-55 because the relevant entry for that was made in the assessee's books which were closed for the year ending 31-8-1953, which date fell within the assessment year 1954-55. Accepting the assessee's contention, the Punjab and Haryana High Court held that since the assessee, admittedly, accounted for this dividend in the books of account maintained by it, it must be held to have maintained accounts and closed the profit and loss account, and it satisfies the requirements of Section 2(ll)(i)(d) of the Indian Income-tax Act, 1922. The above observations made by the High Court, in my view, support the view that I am now taking.
11. Since it is common ground between my learned brothers that in respect of income from salary if accounts are maintained, a previous year difference from the financial year could be adopted, can it be said that the statement of accounts furnished by the assessee showing salary received and supported by a certificate given by the company in which he is employed, constitutes accounts for the purpose of Section 3(1)(b) Since there is no prescription of accounts in the Act, it must be left to the assessee to maintain accounts in a manner as he chooses, and the manner he chose to depict the income from salary cannot be said to be not an act of recording of transactions relating to salary, though it may be unskilful art or a badly executed art, still it is an art. I am, therefore, inclined to agree with the view expressed by the learned Judicial Member and hold that the assessee's contention must prevail.
12. The matter will now go back to the regular Bench which heard the appeals for passing necessary orders in accordance with the view of the majority.