1. This appeal arises out of the income-tax assessment of KM A Ltd., formerly known as Kamani Metals & Alloys Ltd., the appellant herein.
The assessment year is 1978-79 for which the previous year ended on 31-12-1977.
2 to 7. [These paras are not reproduced here as they involve minor issues.] 8. The last ground relates to the addition of Rs. 2,83,835 made by the departmental authorities in respect of fees for sample testing and laboratory use receivable from Kamani Tubes Ltd. The facts relating to this addition are the following. The appellant-company has its own equipped laboratory for sample testing products. It allows others to make use of its laboratory on a payment of fees. During this year, the appellant gave such laboratory-assistance to three companies, viz., Kamani Tubes Ltd., Kamani Engg. Corpn. Ltd. and Kamani Metal & Oxides Ltd. For the charges levied and payable by the users to it, the appellant prepared debit notes and sent them to the users. Such charges are accounted for in its accounts as income/fees receivable. In this year, Kamani Engg. Corpn. Ltd. and Kamani Metal & Oxides Ltd. have paid the charges as per the debit notes or bills prepared by the appellant.
However, in the case of Kamani Tubes Ltd., the total of the debit notes for the fees chargeable amounted in all to Rs. 3,44,350 for the period January 1977 to December 1977. Out of this, Kamani Tubes Ltd. paid the fees for the months of January and February 1977 amounting to Rs. 60,575 only, leaving a balance of Rs. 2,83,835 representing charges for the remaining ten months. The said company, Kamani Tubes Ltd., did not pay the said amount and the appellant-company also did not account for the same in its accounts.
9. The appellant claimed before the ITO that it had changed its method of accounting for the job work done for Kamani Tubes Ltd., from mercantile basis to receipt basis. The ITO, however, rejected the above argument and proposed the addition of Rs. 2,83,835. The IAC, before whom the assessee objected to the said addition, sustained the said addition. He pointed out that the appellant had been maintaining its books of account on mercantile basis and raised debit notes for the job work done and just because the appellant was facing certain problems in realising the amount due to it, did not mean that the appellant should not offer for taxation the income that had legally accrued to it.
10. Before the Commissioner (Appeals) it was argued that Kamani Tubes Ltd. was facing financial difficulties during the relevant previous year and, therefore, the appellant decided to change its method of accounting from accrual basis to cash basis in respect of the service charges receivable from the said company. The Commissioner (Appeals) rejected this argument as of no force. He held that it could not be denied that the appellant maintained its books of account on mercantile basis. He further held that it was also a fact that in the past the appellant had been showing the income by way of sample testing and laboratory services fees on the basis of the debit notes raised, i.e., on due or accrual basis. He further held that the appellant's present contention implied that it still followed the mercantile basis insofar as the other two companies were concerned. It, however, made a departure from the regular method of accounting in respect of a particular transaction with Kamani Tubes Ltd. and that this was not allowable under law. He, therefore, held that the income of the appellant from sample testing and laboratory use fees in the present year was taxable on accrual or due basis and that since the fees of Rs. 2,83,835 receivable from Kamani Tubes Ltd. had already fallen due in this year on the basis of the debit notes raised, the said amount had been rightly included by the ITO in the impugned assessment order. This is being objected to by the appellant before us.
11. Shri Trivedi, the learned counsel for the appellant, submitted that the appellant was entitled to change its method of accounting from mercantile system to cash system unless its bona fides are doubted. In support of this plea, Shri Trivedi relied on the following three decisions: Sarupchand v. CIT  4 ITR 420 (Bom.), Reform Flour Mills (P.) Ltd. v. CIT  114 ITR 227 (Cal.) and CIT v. Eastern Bengal Jute Trading Co. Ltd.  112 ITR 575 (Cal.).
Shri Tvivedi also relied on the Special Bench decision of the Tribunal in ITO v. Bajaj Auto Ltd.  8 1TD 296 (Bom.). The learned counsel submitted that the appellant-company had not lealised this amount till today and that after this year these laboratory facilities were not made available to Kamani Tubes Ltd. He further stated that a suit had been filed for recovery of this amount and that the same was pending. It was also submitted before us that the entries which were originally made in the books of account debiting this party's account and crediting the service charges account were reversed at the end of the accounting year. In support of this, the learned counsel relied on Note No. 10 in the 32nd Annual Report for the yeat 1977 of the appellant-company.
Alternatively, it was submitted that this amount did not represent the appellant's income, as it represented merely an entry passed in the appellant's books of account. Shri Trivedi argued that what was taxable under the Income-tax Act, 1961 was the real income of the appellant and not some notional income represented by mere book entries. In support of this, the learned counsel relied on the decision of the Tribunal in the case of ITO v. Dyestvffs & Chemicals (P.) Ltd.  6 ITD 513 (Bom.), particularly on the discussion at pp. 520-521.
12. Shri S.K. Srivastava, the learned departmental representative, submitted that the appellant was admittedly following the mercantile system of accounting not only in the year of account but also in the earlier years and also in the subsequent years. He submitted that the appellant's claim of change of method of accounting was only in respect of one customer, that too for a part of the accounting year, namely Kamani Tubes Ltd. He argued that this alleged change of method of accounting sought to be achieved by a mere reversal of entries, which were originally recorded in the books of account, just before the finalisation of the account after the close of the accounting year. The learned departmental representative submitted that this was not permissible in law in view of the decision of the Bombay High Court in CIT v. Confinance Ltd.  89 ITR 292. It was further submitted by the learned departmental representative that the appellant did not raise any plea regarding the bad financial condition of Kamani Tubes Ltd. nor produce any evidence in the form of balance sheet, etc., to prove the financial condition of Kamani Tubes Ltd. before the departmental authorities or even before the Tribunal. He, therefore, submitted that the decisions relied on by the learned counsel for the appellant were inapplicable to the facts of the present case. He further submitted that the decision of the Calcutta High Court in the case of Reform Flour Mills (P.) Ltd. v. CIT  132 ITR 184, directly answers the contentions raised by the appellant and, therefore, the appellant's contentions deserved to be rejected. The learned departmental representative also relied on the decision of the Calcutta High Court in the case of James Finlay & Co. v. CIT  137 ITR 698.
13. Shri Trivedi, the learned counsel for the appellant, argued that the decision of the Calcutta High Court in James Finlay & Co.'s case (supra) relied on by the learned departmental representative was distinguishable on facts.
14. On a careful consideration of the submissions urged on both sides, we are of the considered view that the decision of the Commissioner (Appeals) on this point is correct and does not call for any interference at our hands. We may mention here that there is no dispute on the facts found by the Commissioner (Appeals) in paragraph Nos. 15 and 16 of his order. The appellant's claim is that it had changed its method of accounting from accrual or due basis to cash system only in respect of the fees amounting to Rs. 2,83,835 receivable from Kamani Tubes Ltd. for the months of March to December 1977. There is no dispute that even in respect of this amount of Rs. 2,83,835 the appellant-company had actually raised debit notes against Kamani Tubes Ltd. by debiting the account of the said company in its books and crediting the service charges account consistent with its regular method of accounting, and that such entries were reversed at the end of the accounting year at the time of the finalisa-tion of the accounts.
In our view, Note No. 10, at page 28 of the 32nd Annual Report of the appellant-company does not adv ance the case of the appellant. Of the various decisions that have been cited at the bar, the only decision, which is directly applicable to the facts of the present case is the one in the case of Reform Flour Mills (P.) Ltd.'s case (supra). In this case, it was held that an assessee, who is following a particular system of accounting and does claim to effect a change in the method of accounting, cannot treat a particular transaction differently or separately from the method followed by him. In the said case, the ITO completed the assessments for 1968-69 and 1969-70 of the assessee-company by including Rs. 1,36,170 as interest receivable from A.I. Ltd. on accrual basis, as the system of accounting followed by the assessee was the mercantile system. The assessee objected and submitted that it had changed the method of accounting from mercantile to cash system and moreover the interest not having been received for a number of years, in the past, and there being no change of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing the interest income in the accounts.
These contentions were rejected by the AAC and by the Tribunal. The Calcutta High Court held that on the facts there was no question of a change of method as such, but only the treatment of a particular transaction differently or separately from the method followed by the assessee and this was not permissible. Their Lordships held that the Tribunal was right and the interest from A.I. Ltd. amounting to Rs. 1,36,170 was liable to be included in the assessments for 1968-69 and 1969-70. In our view, this decision of the Calcutta High Court relied on by the revenue is directly applicable to the facts of the present case. What the appellant in the present case has sought is only treatment of certain transactions with Kamani Tubes Ltd. differently or separately from the method regularly followed by it under the mercantile system of accounting and this is not permissible in law.
This decision is also supported by the decision of the Bombay High Court in Confinance Ltd.'s case (supra). Further, as rightly contended for the revenue, there is no evidence placed either before the departmental authorities or even before us to prove the alleged difficult financial condition of Kamani Tubes Ltd. to justify the contention of the appellant on the basis of real income which has been taken as an alternative plea before us. We, therefore, hold that the decision of the Tribunal in Dyestuffs & Chemicals (P.) Ltd.'s case (supra) relied on by the appellant's learned counsel is not applicable to the facts of the present case. Similarly, the other decisions relied on by the learned counsel are also inapplicable to the facts of the present case. The decision of the Calcutta High Court in James Finlay & Co.'s case (supra) also supports the contentions of the revenue. We, therefore, respectfully follow these three decisions in Confinance Ltd.'s case (supra), Reform Flour Mills (P.) Ltd.'s case (supra) and James Finlay & Co.'s case (supra) and uphold the decision of the Commissioner (Appeals) and sustain the addition of Rs. 2,83,835 as the income of the appellant for the year under appeal.