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Commissioner of Income-tax, Tamil Nadu-iii Vs. North Arcot District Co-operative Spinning Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 151 of 1977 (Reference No. 125 of 1977)
Judge
Reported in[1984]148ITR406(Mad)
ActsIncome Tax Act, 1961- Sections 33, 33(1) and 145
AppellantCommissioner of Income-tax, Tamil Nadu-iii
RespondentNorth Arcot District Co-operative Spinning Mills Ltd.
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateP. Veeraraghavan, Adv.
Excerpt:
.....for the reason that in all the prevails years the interest payment had been recorded only in the accounting years subsequent to the years in which the interested had accrued and that such method of accounting had been accepted and deductions have been allowed in the subsequent years as claimed, without raising any contention that the method of accounting followed by the assessee is one from which the true profits of the assessee could not be clearly ascertained. it is no doubts true on the facts of the this case that the sixth installment with the interest accrued thereon fell due on june 24, 1968, that is within the assessment year 1969-70. 7. however, the payment of the installment and the interest was recorded in the books of account in november, 1968, which clearly fell within the..........development rebate at thirty-five per cent. in respect of the machinery used in the manufacture of cotton yarn. the assessee's claim was that since it a manufacturer of cotton yarn which falls within entry 32 of sch. v. to the i.t. act, 1961, it is entitled to the development rebate at thirty-five per cent. as per s. 33(1)(b)(b)(i) of the act. the revenue resisted that claim on the ground that since the assessee is not a manufacturer of textiles which is an item referred in entry 32 of sch. but only a manufacturer of cotton yarn, it is not entitled to the development rebate at thirty-five per cent. the tribunal, however, upheld the assessee's claim for development rebate at thirty-five per cent. on the basis that though the assessee is a manufacturer of cotton yarn, in view of the fact.....
Judgment:

Ramanujam, J.

1. The assessee in this case is a co-operative society carrying on business in the manufacture of yarn. It imported from Japan blow rooms and preparatory machine, etc., and the payments for these machines was to be made in instalments. The sixth instalments due by the assessee to the foreign company who supplied the machine with interest fell due on June 24, 1968. However, the said payment with interest was recorded in the books of account of the assessee in November, 1968, after receipt of communication from the Director of Handlooms through whom the transaction of import took place. The amount of interest paid on the sixth installment was claimed as deduction in the assessment year 1970-71 based on the entry made in November, 1968, in the books of accounts of the assessee. This deduction claimed by the assessee was disallowed by the ITO on the ground that the assessee, having followed the mercantile system of accounting and the interest on the sixth instalment having become due on June 24, 1968, which fell within the accounting period relevant to the assessment year 1969-70, the deduction claimed cannot be allowed in the assessment year 1970-71. The said disallowance was confirmed in appeal by the AAC. The assessee took the matter in appeal to the Income-tax Tribunal. The Tribunal found that the assessee has recorded the payment of interest in its books only after getting confirmation from the Director of Handlooms and without reference to the actual date of accrual of liability for interest, that this method of accounting had been accepted as reflecting the true profits by the Revenue in the earlier years, that the claim for deduction of the interest payment had been allowed by the Revenue accordingly and that, therefore, it is not open to the Revenue to contend that the method of accounting followed by the assessee is such that it is difficult arrive at the true profits only in the assessment years in question. In this view, the Tribunal has held that as in the previous years, the assessee's claim for deduction of the interest payment on the sixth installment should be allowed as in the previous years without reference to the question as to whether the method of accounting followed is mercantile basis or cash basis.

2. On other question that arose before the Tribunal was whether the assessee is entitled to claim development rebate at thirty-five per cent. in respect of the machinery used in the manufacture of cotton yarn. The assessee's claim was that since it a manufacturer of cotton yarn which falls within entry 32 of Sch. v. to the I.T. Act, 1961, it is entitled to the development rebate at thirty-five per cent. as per s. 33(1)(b)(B)(i) of the Act. The Revenue resisted that claim on the ground that since the assessee is not a manufacturer of textiles which is an item referred in entry 32 of Sch. but only a manufacturer of cotton yarn, it is not entitled to the development rebate at thirty-five per cent. The Tribunal, however, upheld the assessee's claim for development rebate at thirty-five per cent. on the basis that though the assessee is a manufacturer of cotton yarn, in view of the fact that in entry 32 of Sch. V 'textiles' has been referred to as including 'cotton yarn', the assessee should be taken to be a manufacturer of textiles for the purpose of development rebate and this will enable the assessee to get the development rebate at thirty-five per cent. Aggrieved against the decision of the Tribunal, the Revenue sought for and obtained a reference to this court on the following two questions of law.

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing a sum of Rs. 11,691 towards interest claim in the assessment year 1970-71

2. Whether the Appellate Tribunal was right in allowing development rebate at 35 per cent. in respect of the machinery used in the manufacturer of yarn ?'

3. The second question does not present us any difficulty. Section 33(1)(B)(b)(i)(a) proceeds on the basis, that in the case of machinery or plant, installed for the purpose of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, thirty-five per cent. of the actual cost of the machinery or plant to the assessee where it is installed before the 1st day of April, 1970, shall be the rate of development rebate. Therefore, the primary question that arises is to find out whether the machinery has been used in the manufacture of any one of the articles or things specified in the list in the 5th Schedule. Entry 32 of Sch. V specifies the following articles or things :

'Textiles (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery, and rope.' The said entry covers textiles made wholly or mainly of cotton, cotton yarn, hosiery and rope. The purpose of Sch. V is to specify the articles or things which will be covered by s. 33(1)(b)(B)(i). Entry 32 actually specifies textiles, cotton yarn, hosiery and rope. To restrict the scope of the expression 'textiles', it has been made clear that textiles made wholly or mainly of cotton alone will come under the operation of the above provision in s. 33. Th expression 'including' occurring before 'cotton yarn, hosiery and rope', makes it clear that, in addition to the 'textile' made wholly or mainly of cotton, cotton yarn, hosiery and rope are also specified articles. The learned counsel appearing for the Revenue contends that the expression 'including' will qualify 'cotton' and not 'textile.' We are not inclined to agree with the interpretation suggested by him, for, if that is the interpretation to be given, then hosiery and rope have to be taken as articles from which textiles are made. Hosiery and rope are already manufactured articles and they cannot certainly be brought within the scope of the expression 'cotton'. Apart from the improbability in accepting the mode of interpretation suggested by the learned counsel for the Revenue, even the collocation of the words occurring in entry 32 suggest that the intention of the Legislature was to give the benefit of development rebate at 35 per cent. not only to the manufacturers of textiles but also to the manufacturers of other articles of other articles such as cotton yarn, hosiery and rope. On this interpretation of entry 32, it should be taken to specify, in addition to textiles 'cotton yarn, hosiery and rope'. The assessee who is a manufacturer of cotton yarn should be taken to be a manufacturer of an item specified in entry 32. The machinery and plant in respect of which development rebate has been claimed had admittedly been used in these manufacture of cotton yarn, an item specified in entry 32. In a recent decision in T.C. Nos. 74 and 75 of 1977 (CIT v. Premier Mills Ltd.,) a Division Bench of this court, to which one of us was a party, construed entry 32 of Sch. V as a list specifying textiles, cotton yarn, hosiery and rope, for the purpose of s. 33 of the Act.

4. The view we have taken is in accord with the view expressed in that case. In this view, we are inclined to agree with the opinion expressed by the Tribunal that the assessee is entitled to claim development rebate at thirty-five per cent. under s. 33(1)(B)(i)(a) read with entry 32 of Sch. V to the Act. Coming now to the first question, the contention of the learned counsel for the Revenue is as follows :

5. The assessee admittedly followed the mercantile system of accounting and not cash systems and, therefore, the proper thing for the assessee would have been to claim the deduction for the interest paid on the sixth installment in the previous assessment year 1969-70, as the interest has legally accrued even on June 24, 1968, which clearly fell within that assessment year. According to the Revenue, the assessee cannot claim the deduction for the interest paid on the sixth installment in the assessment year 1970-71, taking advantage of the date of payment entered in the books of account in November, 1968, ignoring the date of accrual of liability which was in the previous assessment year.

6. The Tribunal did not accept the plea put forward by the Revenue for the reason that in all the prevails years the interest payment had been recorded only in the accounting years subsequent to the years in which the interested had accrued and that such method of accounting had been accepted and deductions have been allowed in the subsequent years as claimed, without raising any contention that the method of accounting followed by the assessee is one from which the true profits of the assessee could not be clearly ascertained. The Tribunal held that if the assessee's method of accounting which it had regularly adopted had been accepted by the Revenue as correctly representing the true profits, it is not open to the Revenue to go back and call upon the assessee to adopt either cash basis or mercantile basis of accounting. The question is whether the view taken by the Tribunal on this part of the case is reasonable in the circumstances of the case. It is no doubts true on the facts of the this case that the sixth installment with the interest accrued thereon fell due on June 24, 1968, that is within the assessment year 1969-70.

7. However, the payment of the installment and the interest was recorded in the books of account in November, 1968, which clearly fell within the assessment year 1970-71. Based on the payment recorded in November, 1968, the deduction has been claimed in the assessment year 1970-71, as in the earlier years. The same method of accounting had been followed by the assessee in the previous years. The Revenue has not chosen to question the said recording of payment subsequent to the year when the interest fell due. It is seen from these order of the Tribunal that the assessee has been regularly following this method and it has been regularly accepted by the Revenue as a method of accounting from which the true profits earned by the assessee could be ascertained. While the same method of accounting regularly adopted by the assessee had been accepted by the Revenue in the earlier years, it is unreasonable on the part of the Revenue now to say that the method of accounting adopted by the assessee is one from which the true profits of the assessee cannot be clearly determined. We are not inclined to agree with the contentions of the learned counsel for the Revenue that an assessee has to adopt either a mercantile system of accounting or cash system and that it is not open to the assessee to adopt any other system of accounting. It is well established that even apart from the two systems of accounting referred to above, there is a possible of an assessee adopting a hybrid system of accounting if it is possible to as certain the true profits on the basis of such accounting. In this case, though the assessee has generally adopted the mercantile system of accounting, so far as these transaction of import of plant and machinery from foreign sellers is concerned, it has been regularly showing the payment of interest in the year in which the interest was actually paid and not in the year in which the interest legally fell due. Having regard to the fact that it is not the case of the Revenue that it is not possible to ascertain the true profits from the method of accounting regularly followed by the assessee, the Tribunal is right in holding that it is not open to the Revenue to go back on its stand taken in the earlier years and call upon the assessee either to adopt cash system or mercantile system of accounting. In this view of the matter, we have to free with the view of the Tribunal in respect of both the questions.

8. The references is, therefore, answered in the affirmative and against the Revenues. The assessees will have its costs. Counsel's fee Rs. 500.


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