SRINIVASAN J. - The assessees are coffee estates. They maintain their accounts on the mercantile basis. For the year ending 31st March, 1959, assessments to agricultural income-tax were made. Appeals were taken to the Appellant Assistant Commissioner before whom among other objections it was contended that the assessments of the assessees income on the mercantile basis had been improperly made. It was also pointed out that if the mercantile basis was adopted, the department should have made allowance for the difference between the closing stock of coffee or tea on hand and the opening stock, which was however not done. It was further pointed out that during all the previous years, though the assessees had been maintaining the accounts on the mercantile system, the assessment were made only on the cash basis, that is to say, on the receipts. The Appellate Assistant Commissioner held that the system of accounting which was regularly adopted by the assessees should be accepted and that the Agricultural Income-tax Officer held that the system of accounting which was regularly adopted by the assessees should be accepted and that the Agricultural Income-tax Officer has a discretion, only in cases where either there is no regular method of accounting or the true profits cannot be deduced from the method of accounting followed by the assessee. Dealing with the contention of the assessees that, for the assessments of the years 1955-56 and 1956-57, the assessment had been made on a cash basis, even though the system of accounts was accepted as mercantile and that assessments were made on the same case basis even in 1957-58 and 1958-59, the Appellate Assistant Commissioner held that it was the regular method of accounting that was employed by the assessees that should be the basis of the assessments and the cash basis, though the assessments might have been based on it in the earlier years. The Appellate Assistant Commissioner accepted the position that it was not a case of rejection of accounts on any ground whatsoever. But he posed the question whether the true profits of the assessees could be deduced from the accounts viewed as on a cash basis and he felt inclined to answer this question in negative. He thought therefore that the assessments on the basis that the accounts were maintained on the mercantile system were correct. He next dealt with the question whether in making an assessment on that basis, it was not necessary to have regard to the opening and the closing stock and to take note of the difference between the two for the purpose of ascertaining the profit. He conceded that both in the assessments under question and in the previous years, the closing and the opening stocks had been ignored, but nevertheless he did not feel inclined to interfere with the assessments made admittedly on an inaccurate basis.
Further appeals were taken to the Appellate Tribunal. The Tribunal rightly came to the following conclusions :
'The contention of the appellant that if the closing stock is taken into account without giving deduction for the opening stock, it would result in adopting both the years income for the assessment years, has some force. We fail to see as to how if under the mercantile system the closing stock is included, it can be done without deducting the opening stock. Otherwise, the income for the year is apt to be arbitrary and wrong. The fact that there was no closing stock in the cash system and therefore there is no question of opening stock, cannot be alter the situation. In fact, one must go to the opening stock on April 1, 1954, and the income for the subsequent years to arrive at a true picture of the closing stock during the last year of adopting the cash system, to give correct picture of the income in the year assessment under the mercantile system. We are conscious about the opening stock being more that the closing stock here. However, since the real income of the assessees cannot be asscertained under the mercantile system without taking into account both the opening stock and closing stock, it is inescapable that the opening stock should be deducted if the account is taken including closing stock.'
The Tribunal also felt that if the assessing officer chose to alter the system and proceeded to act upon the mercantile system instead of on the cash basis which was adopted for the purpose of assessment in the previous years, it might be that the revenue stood to lose. But on the ground, it was not open to the assessing authority to purport to follow the basis of the mercantile system only partially, that is to say, to ignore the opening stock but make only the closing stock into consideration. Having said so much, the Tribunal made a somewhat curious order remanding the cases to the Appellate Assistant Commissioner for revising the assessment 'giving effect should be done taking into account both the opening stock and the closing after verification as the correctness. It is open to the Assistant Commissioner to continue to the assessment as of old under the cash system.' In effect, therefore, the appeals were remanded to the Appellant Assistant Commissioner not to revise the assessments in any particular manner but giving that authority the discretion to adopt either system as the basis of the assessment.
It is this order that is challenged in these revision petitions. There is not the slightest suggestion anywhere in any of the orders of the authorities below that the mode of accounting adopted by the assessees does not display the true income; nor is it in dispute that it is the mercantile system of accounting that has been regularly employed by the assessee. It is only in the event of no method of accounting being regularly employed by the assessee or if the method employed is such that the true income cannot properly deduced therefrom, that ample discretion is given to the Agricultural Income-tax Officer to make the computation of the income on such basis and in such manner as may be prescribed. Ever since the Agricultural Income-tax Act was enacted, these assessees had been assessed on the basis of their receipts notwithstanding that they were maintaining their accounts on the mercantile system. It may be that a computation on such a basis was not in accord with section 7 of the Act. When for the purpose of the assessment for 1959-60, the department purported to adopt the mercantile basis, it is imperative that they should adopt it with all incidents thereof. It is open to them, as the Tribunal itself fully realised, to mutilate the method of assessment of the profits which is inherent to the calculation of the profits on the basis of the mercantile system and discard those parts of the method of assessment which might be detrimental to the revenue. That is precisely what the Income-tax Officer appears to have done in these cases. For instance, the valuation of the closing stock has been taken as receipt of income ignoring wholly the opening stock which, as a normal incident to the mercantile system of accounting, should be deducted from the closing stock in order to arrive the true profit position. The department cannot possibly have it both ways, to adopt the cash basis or the mercantile basis as it suits them with reference to the assessment for the same year.
We are concerned only with the direction that has been given by the Tribunal that it would be open to the Appellate Assistant Commissioner to adopt either to one system of the other as the basis for the assessment. The contention of the learned counsel is that the Tribunal should have definitely directed the adoption of the one method or the other in the circumstances of the case. We are satisfied that this contention has considerable force. It may be that in this particular year, the opening stock is higher than the closing stock which may lead to a deficit and bring down the assessable income. But, as has been pointed out in several decisions, the systematic adoption of one method of accounting wipes out the advantages to either side, the assessee or the department, and in the long run evens out these differences; and that is why exphasis is laid upon the adoption of a regular method of accounting. Notwithstanding that the accounts are maintained and have all along been maintained on the mercantile basis, the department has been assessing the assessees on the basis of the receipts, that is to say, on the cash basis. That is not in not in conformity with section 7 of the Madras Agricultural Income-tax Act. When once it is recognised that the regular method of accounting is on the mercantile basis and that the method of accounting as adopted by the assessees cannot be said to be defective in that the agricultural income cannot properly deduced therefrom, the department must take the assessment only in accordance with that method of accounting. It should follow therefore that the proper direction that should have been made by the Tribunal is that the assessment should be made on the basis that the assessees follow the mercantile system.
The revision petitions are allowed to this extent varying the direction given by the tribunal. There will however to be no order as to costs.