Dipak Kumar Sen, J.
1. The facts relevant to this reference as found and/or on record are shortly as follows :
M/s. Snow White Food Products Co. Ltd., the assessee, in the assessment year 1968-69, the relevant previous year ending on the 31st December, 1967, filed a revised return claiming that its income by way of interest should be assessed on cash basis and not on accrual as was being done in the previous assessment years.
2. The ITO held that it was not entitled to revert to accounting on cash basis in respect of its interest income. Interest, accrued but not received, amounting to Rs. 1,58,886 was treated as the income of the assessee in the said year.
3. Being aggrieved the assessee preferred an appeal from the assessment and contended before the AAC that interest in respect of its outstanding loans had not been received for a number of years and that there was no chance of recovery of either the interest or the principal amounts. Accounting on receivable basis would give a false impression of its profits. It was contended further that this change in the method of accounting was bona fide.
4. The AAC held that such departure from the previously employed system was not permissible as the accounts would then cease to reflect the true profit and loss. The assessment by the ITO was upheld.
5. The assessee went up on further appeal before the Income-tax Appellate Tribunal. Before the Tribunal it was reiterated on behalf of the assessee that for some years past it had not been receiving interest from its debtors whose position was such that there was little chance of realisation of the debts. Therefore, the method of accounting in respect of the assessee's interest income had been changed and unless such change was made the accounts would give a false impression of income from interest. The assessee contended that it was open to it to make change in its regular method and employ a different method of accounting even in respect of different parts of its business or different classes of its customers.
6. It was contended on behalf of the Revenue, on the other hand, that in Pt. IV of the return filed by the assessee the amount of interest was shown with a remark that it had been 'decided to account for on the basis of realisation--cash basis'. This, it was argued, did not indicate that a different method of accounting for this head of income had been adopted. There was no resolution of the board of directors of the assessee approving the change. It was also not known whether the shareholders of the assessee had considered this matter in a general meeting. Admittedly,the mercantile system of accounting prevailing earlier had been followed even in this year except in respect of interest. The change sought to be introduced by the assessee, it was contended, was casual and irregular and that the assessee had not written off the interest receivable as bad debts, but had accounted the same as income accrued.
7. The Tribunal noted that the assessee had been following the mercantile system of accounting hitherto and had done so even in this year except for the interest income. The assessee had conceded that there was no resolution by the board of directors or the shareholders of the assessee supporting the change, except for a statement in the annual report as follows:
'Interest receivable amounting to Rs. 1,58,336 has not been accounted for in the accounts. The management has decided to account for the same on the cash basis.'
8. The Tribunal held that from this it was not established that the assessee had decided to change its regular method of accounting and had adopted something else as the regular method. Having found that there was no variation, change or innovation in the contracts between the assessee and its debtors in respect of the interest receivable and there being no material on record to show that the debtors were unable to pay such interest or that there was no prospect of realisation of such interest, the Tribunal relied on and applied Shiv Prasad Ram Sahai v. CIT : 61ITR124(All) , where the Allahabad High Court held that it was not open to the assessee unilaterally at any time during the accounting year to say that the regular system will not be followed in respect of a particular transaction. The assessee's appeal was rejected.
9. On an application of the assessee under Section 256(2) of the I.T. Act, 1961, the Tribunal as directed has drawn up a statement of case and has referred the following question of law for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not entitled to change its method of accounting from the mercantile to the cash system in so far as the credits in the interest account were concerned and thus in holding that the sum of rupees one lakh fifty eight thousand three hundred and thirty-six only being interest accrued during the relevant year but not received was liable to be included in the assessment year 1968-69?'
10. At the hearing, Mr. Poddar, learned advocate for the assessee, submitted that the following had been found as facts and stood undisputed. The assessee had in fact changed its system of accounting from mercantile to cash basis in respect of its income from interest in the relevant assessment year. This was accepted by the revenue authorities and also theTribunal. It was also found that interest from a joint venture of the assessee was being accounted for on cash basis and that for several years past the assessee had not been receiving payment of interest from its debtors.
11. Mr. Poddar submitted further that it was also a fact that the changed method of accounting in respect of income from interest was regularly followed in the years subsequent to the relevant assessment year. Though there was no finding to this effect, the records of subsequent years would clearly establish the same.
12. Mr. Poddar next submitted that an assessee was entitled to change his regular method of accounting, provided he substituted one regular system by another regular system. An assessee was also entitled to employ one regular method of accounting for a part of his business or for one class of his customers and a different regular method for other parts of his business or for other classes of customers. Adoption of any particular system or systems of accounting was the option of the assessee and it was not open to the Revenue to insist that any particular system should be followed.
13. Mr. Poddar next contended that, in the instant case, where it was established that the assessee had changed its regular method from mercantile to cash, the Revenue was not in any event entitled to treat the mercantile system as the assessee's regular method of accounting and assess the interest income of the assessee on accrual. Section 145(2) of the I. T. Act provided that where there was no regular method of accounting, assessment had to be made on best judgment basis.
14. Mr. Poddar next contended that the Tribunal had erred in taking into account that there was no resolution of the board of directors or the shareholders of the assessee deciding to change the method of accounting. He submitted that every decision of the board of directors of the company was not required to be recorded in resolutions. The directors were empowered under Section 291 of the Companies Act, 1956, to change the method of accounting of the company and under Section 292 of the said Act such a decision need not be recorded formally in a resolution. A decision of this nature could be inferred from conduct and, in the instant case, the conduct of the assessee in continuing the change in the method in subsequent assessment years established and confirmed its initial decision.
15. Mr. Poddar next contended that the Tribunal had further erred in Considering whether there was any variation, change or novation of the contracts of the assessee with its debtors and in holding that there was no material on record to show that the debtors were unable to pay interest or that there was no prospect of realisation of interest in the relevant period. He submitted that under Section 145 of the I.T. Act the assessee hadthe option of choosing his own method of accounting and to change the same unilaterally. The assessee was not required to enter into any contract with his customers nor to obtain the permission of the I.T. authorities for this purpose. The fact whether the debtors of the assessee were unable to pay interest or not was in the strict sense wholly irrelevant to the issue.
16. Mr. Poddar next submitted that the Tribunal was in error in following and applying the decision of the Allahabad High Court in Shiv Prasad Ram Sahai : 61ITR124(All) , as the said decision has been expressly dissented from by this court in Reform Flour Mills P. Ltd. v. CIT : 114ITR227(Cal) .
17. Mr. Poddar next submitted that none of the authorities below, viz. the ITO, the AAC and the Tribunal, found clearly or recorded that the assessee did not follow the changed method of accounting regularly. The point was not even raised before the Tribunal and as such it must be presumed that the changed method was followed regularly by the assessee in subsequent years. It was also submitted that, in any event, it was the duty of the tax authorities to ascertain whether the changed method was followed regularly in the subsequent years and record a finding to that effect.
18. Mr. Poddar invited us to look into the assessment records of the assessee for subsequent years or remand the matter to the Tribunal for a supplementary statement.
19. Mr. Poddar concluded with the submission that in the instant case, the Tribunal had misdirected itself in law, failed to appreciate the scope and effect of Section 143 of the I.T. Act, wrongly thrown the onus of establishing the regularity of the changed system of accounting on the assessee, approached the matter from a wrong angle and that the facts found and recorded by it were irrelevant and inconclusive.
20. Accordingly such finding should either be reviewed by this court though not challenged as perverse or the matter should be remanded to the Tribunal for a proper finding of facts.
21. In support of his contentions Mr. Poddar cited the following decisions:
(a) Sarupchand v. CIT : 4ITR420(Bom) . Here the assessee carried on business of money-lending in partnership with another. Till the period ending on November, 1932, the firm had maintained its accounts on a mercantile basis. Shortly before the end of the said period the debtors of the firm refused to pay interest on account of a litigation between the partners and the actual amount of interest received was much less than the amount accrued. In the circumstances the assessee sought to change its method of accounting from mercantile to cash basis. This was not accepted by the Revenue. An application under Section 66(3) of theIndian I.T. Act, 1922, for a direction to the Commissioner, to state a case on a question of law, was rejected by the Bombay High Court on facts.
Beaumont C.J. observed in his judgment that an assessee was entitled to change his method of accounting from a definite point of time but the Revenue had to be satisfied on proper evidence that the regular method of accounting had been changed. Whether a regular method of accounting had been changed or not was purely a question of fact. Rangnekar J. observed that there was nothing in the Act to prevent an assessee from changing his method of accounting provided he satisfied the Revenue authorities that he was doing so in good faith and if the Revenue was not likely to be defrauded, the ITO ought to accept the changed method.
(b) Sundaram & Co. Ltd. v. CIT : 36ITR162(Mad) . In this case, the dispute, inter alia, was whether an amount of commission not received by the assessee could be brought to tax though the assessee claimed that it had adopted cash system of accounting. There was no express finding by the Tribunal that the said system of accounting had been regularly employed by the assessee. On a reference, the High Court of Madras held that as the same system of accounting had been adopted by the assessee in subsequent years the test that the method had been 'regularly employed' must be held to be satisfied. It was, however, held on other facts that this system failed to disclose the true income of the assessee who thus came under the mischief of the proviso to Section 13 of the Indian I.T. Act, 1922.
(c) Indo-Commercial Bank Ltd. v. CIT : 44ITR22(Mad) . The assessee in this case carried on business of banking and held securities and shares as its stock-in-trade or circulating capital, which were valued usually at cost at the commencement and also at the close of the year of account. The assessee valued the securities at cost at the commencement of 1951 and at market value at the end of that year. In 1952, the securities were valued at the market rate both at the commencement and at the end of the year. On the basis of such valuation the assessee claimed a loss in both the assessment years 1952-53 and 1953-54, which was disallowed. The disallowances were upheld by the Tribunal. On a reference, it was held by the Madras High Court that the method adopted by an assessee for valuing his closing stock was a ' method of accounting' within the meaning of Section 13 of the Indian I.T. Act, 1922. The High Court answered the reference in favour of the assessee observing, inter alia, as follows (p. 36) :
'When an assessee bona fide changes his method of accounting and satisfies the Department that he intends to adopt the changed method of accounting thereafter or that he has in fact adopted it thereafter, that satisfies the requirement of Section 13...... Neither principle nor authoritybars an assessee from substituting one method of accounting for another at his choice...... In other words, while the assessee can exercise morethan once his option to choose his method of accounting......provided, ofcourse, the change is bona fide and he further satisfies the statutory requirement of Section 13 that the new or changed system......is for regular adoption and not merely for purposes of assessment in the year in question.' (d) Juggilal Kamlapat, Bankers v. CIT : 101ITR40(All) . The assessee in this case, a partnership firm, had leased out a factory premises on annual rent. In the relevant assessment year the assessee did not include such rent in its return as it had not been realised and as there was little likelihood of its being realised. The ITO included such rent in computing the assessee's income on the ground that such rent had accrued and that the assessee had been following the mercantile system of accounting. On appeal the Tribunal found that the assessee had never included such rent on accrual but was in fact being assessed on the basis of accrual. The Tribunal held that the inclusion of such rent on accrual was justified. On a reference, the Allahabad High Court held, inter alia, that if an assessee chose to adopt cash system of accounting he could not be assessed on an accrual basis. The option was with the assessee and the Revenue could not compel an assessee to adopt the mercantile system of accounting.
In the facts it was held that as the assessee had never offered its rent to be assessed on accrual and had followed the cash system in respect of this income, the Revenue was not entitled to assess such rent on accrual basis. The fact that the rent was assessed on accrual in previous years was immaterial.
(e) CIT v. Eastern Bengal Jute Trading Co. Ltd. : 112ITR575(Cal) . The assessee here was a company and derived income mainly from interest. It also had some dividend income. In the relevant assessment year the directors of the assessee passed a resolution that from the relevant accounting year the method of accounting of the company would be changed from mercantile system to cash and that this new method should be followed thereafter. This resolution was confirmed at a general meeting of the shareholders of the assessee. The Tribunal held that the assessee could elect to be assessed on cash basis and directed the ITO to make assessment on that basis. On a reference this court held that under Section 291 of the Companies Act, the directors were empowered to change the method of accounting. The Tribunal had proceeded on the evidence on record and had found that the change in the method of accounting was not mala fide. The decision of the Tribunal was upheld.
(f) CIT v. Rajasthan Investment Co. (P.) Ltd. : 113ITR294(Cal) . The assessee in this case was an investment company and derivedits income from interest on loans and advances. Its accounts were maintained on mercantile basis. By a resolution, the directors of the assessee decided that with effect from the 1st May, 1966, the method of accounting would be changed to cash basis to be regularly followed thereafter. This change was implemented in the assessment years 1968-69 to 1971-72.
The ITO found that one of the debtors of the assessee was a firm controlled by the assessee and it was by crediting the assessee with interest it was successfully claiming deductions regularly. The ITO held that the assessee's change in the method of accounting was only to avoid taxes and included all accrued interest in the income of the assessee. The Tribunal found that the payments received from the firm alleged to be in control of the assessee from 1961 was next to nothing and held that there was nothing to show that the change in the method of accounting was not bona fide, that the propriety of the change had to be determined with reference to the assessee's accounts and not that of the debtor. The Tribunal also found that the change was realistic. The conclusion of the Tribunal was upheld in a reference by this Bench.
(g) Reform Flour Mills P. Ltd. v. CIT : 114ITR227(Cal) . In this case, the assessee, a company, had income from business, house property and other sources. In 1967, the assessee passed a resolution that interest due on a loan advanced to a third party in an earlier year would be credited in its accounts not on accrual but only when realised. In the assessment years 1968-69, 1969-70 and 1970-71, the ITO brought such interest to tax on accrual on the ground that the assessee did not forgo such interest but merely deferred the entries by unilaterally changing its system of accounting from mercantile to cash. The decision of the ITO was upheld by the Tribunal. On a reference in respect of the assessment year 1970-71, a Division Bench of this court held that the assessee had altered its method of accounting not in the relevant year but earlier years and this fact had been overlooked by the Tribunal. The contention of the Revenue that an assessee could not change his method of accounting unilaterally was not accepted and it was held that Section 143 of the I.T. Act did not debar an assessee from changing his accounting method. Even if the altered method was not followed by the assessee regularly the taxing authority could not fall back upon the earlier method but had to make an assessment under Section 144 of the Act.' The matter was remanded to the Tribunal for being considered afresh.
22. On the questions of review of facts on a reference and of remand, Mr. Poddar also cited the following decisions :
(a) Liquidators of Pursa Ltd. v. CIT : 25ITR265(SC) , (b) Mahesh Anantrai Pattani v. CIT : 41ITR481(SC) , (c) CIT v. Sivakasi Match Exporting Co. : 53ITR204(SC) , (d) Parimisetti Seetharamamma v. CIT : 57ITR532(SC) , (e) CIT v. Webbing & Belting Factory Ltd. : 68ITR186(SC) , (f) Oriental Investment Co. P. Ltd. v. CIT : 72ITR408(SC) , (g) CIT v. Rajasthan Mines Ltd, : 78ITR45(SC) , (h) Smt. Chandravati Atmaram Patel v. CIT : 114ITR302(Guj) , (i) Phulchand Ratanlal v. CIT , (j) CIT v. Officer-in-Charge (Court of Wards), Paigah : 10ITR133(SC) , and (k) An unreported decision of this court in Income-tax Reference No. 451 of 1971 intituted CIT v. Jagdish Prasad Agarwalla (since reported in : 126ITR726(Cal) .
23. Mr. Ajit Sengupta, learned counsel for the Revenue, did not dispute the proposition that, under Section 145 of the I.T. Act, an assessee was entitled to change his regular method of accounting by another regular method not only in respect of his entire income but also as regards income from one particular source. He, however, contended that an assessee was not entitled to change his method of accounting with regard to only one particular item of income as has been sought to be done in the instant case in respect of interest receivable from particular debtors. He contended further that the assessee who was seeking a change for the first time in the relevant assessment year had failed to establish that this change from mercantile to cash system was intended to be followed by it regularly in future. He submitted that an assessee was not entitled to change his method of accounting for one particular year or period.
24. Mr. Sengupta next contended that an assessee was not entitled to change his regular method of accounting without cogent reasons which would establish his bona fides. The case of the assessee that its debtors had failed to pay interest for a long time and that there was little chance of such interest being paid in the near future was not supported by any evidence and had been rejected by the Tribunal.
25. Mr. Sengupta next contended that it was necessary for the directors of the assessee to pass a resolution at a regular meeting recording the decision to change the method of accounting as such a decision on a policy which would necessarily affect the rights of the shareholders, the profit and loss of the assessee and the declaration of its dividend. The directors were not entitled to proceed informally in the matter.
26. It was next contended that in the instant case there was no evidence that the decision of the assessee has been implemented by any change in the assessee's books and in fact the interest accrued was credited in the account, as would appear from the question referred. The assessee had also disclosed the interest as its income by including it in Pt. IV of the return.
27. Mr. Sengupta next contended that the AAC found that the departure of the assessee from its regular method of accounting did not reflect theassessee's true profit and loss. This finding was not challenged in the appeal before the Tribunal which upheld the order appealed from. It was submitted that as such the finding of the AAC had been accepted by the Tribunal.
28. It was next submitted that the Tribunal had indirectly held that the change in the method of accounting of the assessee was not bona fide as no evidence was produced in support of the change nor any reason given for the necessity for the change.
29. Mr. Sengupta lastly submitted that the assessee was not entitled to change the method of his accounting without the approval or satisfaction of the I.T. authorities.
30. In support of his contentions Mr. Sengupta cited the following decisions :
(a) Ramkumar Kedarnath v. CIT : 5ITR261(Bom) . In this case the assessee had adopted the mercantile system of accounting. In the year ending on the 31st December, 1933, the assessee did not include in its income, commission accrued from the 1st July till the 31st December, 1933, on the ground that the party concerned was in financial difficulty and there was a possibility that such commission might not be paid at all. The revenue authorities included such commission in computing the income of the assessee. On a reference the Bombay High Court held that the assessee had to satisfy the authorities on evidence that it had in fact changed the regular basis of its accounting which was not established on the facts of the case. The change in accounting was only for a half year.
(b) In the matter of Chouthmal Golabchand : 6ITR733(Cal) . In this case a Division Bench of this court, construing the then current Income Tax Manual, observed as follows (p. 741) :
'...there can be no doubt that a business firm which is liable to be assessed to income-tax is under an obligation to maintain a system of accounts with regularity and it is not permitted to change the system except upon a proper application being made to the income-tax authorities on that behalf.' (c) Sundaram & Co. Ltd. v. CIT : 36ITR162(Mad) . This decision also cited on behalf of the assessee was relied on for the following observations at p. 168 of the judgment :
'...the cash basis is a well known system of commercial accounting. It is equally true that the assessee is entitled to adopt its own system of accounting. None the less if in the circumstances of a given case that system failed to disclose the true income of the assessee in the relevant accounting period, it was open to the Department to ignore the results of that system of accounting and to deduce the true income of the assessee.' (d) Shiv Prasad Ram Sahai v. CIT : 61ITR124(All) . This decision was cited for the following observations of the Allahabad High Court (p. 130): ' ...once the assessee has adopted the mercantile system of accounting, there is no alternative for the Income-tax Officer but to compute the assessee's income on that system, i.e., on the accrual and not the receipt basis. The choice is entirely that of the assessee. He may even choose to adopt the mercantile system for certain transactions and the cash basis for other transactions, but once having chosen and regularly employed that system, it is not open to him unilaterally at any time during an accounting year to say that he will not now follow that system in respect of a particular transaction. It would be open to the assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purposes of income-tax, to say that he will not debit the interest which may have accrued as a debt in its accounts for any reason whatsoever.'
31. Mr. Sengupta also cited on the decisions in Sarupchand : 4ITR420(Bom) , Indo-Commercial Bank Ltd. : 44ITR22(Mad) , Eastern Bengal Jute Trading Co. Ltd. : 112ITR575(Cal) and Rajasthan Investment Co. (P.) Ltd. : 113ITR294(Cal) , which were cited on behalf of the assessee and have been considered earlier.
32. Before dealing with the points at issue it may be convenient to refer to the relevant portions of Section 145 of the I.T. Act which reads as follows :
'145. (1) Income chargeable under the head ' Profits and gains of business or profession' or 'Income from other sources ' shall be computed in accordance with the method of accounting regularly employed by the assessee...
(2) Where the Income-tax Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in Section 144. '
33. The said section and the corresponding Section 13 of the earlier Act have been considered in the courts of India in a large number of decisions. The law appears to be settled that in the event the assessee regularly employs a method of accounting its income has to be computed in accordance with such regular method. The assessee is, however, entitled to change his regular method of accounting by another regular method. An assessee is also entitled to follow one method of accounting in respect of income from one source and another method in respect of other sources.
34. We are unable to accept the contention of the Revenue that a change in the method of accounting has to have the approval of the I.T. authorities. The further contention that a change has to be supported by cogent reasons showing the bona fides of the assessee cannot also be accepted. If the method of accounting followed by the assessee does not reflect the correct income, the ITO can always compute the income on a different basis under Section 144 of the Act.
35. In the instant case, the assessee sought to change its method of accounting in respect of only interest. Interest receivable by the assessee on a joint venture has been found to be accounted for on cash basis. There is no evidence, nor is it the case of the Revenue, that the assessee is receiving other interest which are being accounted for on accrual under the mercantile system. The contention of the Revenue that the assessee is seekiag to change a particular item of income and not income from a particular source, therefore, also cannot be accepted.
36. Section 291 of the Companies Act, 1956, empowers the directors of a company to change its method of accounting and under Section 292 of the said Act such a decision need not be recorded in a resolution. In any event, the Board can always ratify a decision by a resolution. In this case, the annual report of the assessee where a decision to change its method of accounting has been recorded has been adopted and passed by the shareholders. In our view the intention of the assessee to change its method of accounting is sufficiently established.
37. The contention of the Revenue that the change in the method of accounting was not followed by a change in the books of account of the assessee was for the first time raised in this reference. This is a question of fact which was not gone into earlier and we are unable to entertain the same at this stage. The fact that the assessee had disclosed the amount of interest in Part IV of its return is, in our view, not of much relevance to the points in controversy.
38. The finding of the AAC that the changed system of accounting does not reflect the true profit and loss of the assessee was neither agitated nor adverted to before the Tribunal, If the method of accounting did not reflect the true profit or loss it was for the ITO to proceed on the basis of best judgment. The ITO proceeded merely by rejecting the change claimed by the assessee.
39. We are unable to appreciate the contention of the Revenue that the Tribunal has held indirectly that the change claimed by the assessee was not bona fide. Fides of an act have to be found as a fact and such a finding of fact must be specific.
40. The Tribunal has, however, held specifically that on the evidence on record it cannot be said the assessee had decided to change its existing regular method of accounting by another regular method. This conclusion of the Tribunal appears to be correct. The statement in the annual report of the assessee only records that the management had decided to account for the interest receivable during the year on cash basis and this indicates that the change was suggested only for the year. There is nothing else on record to indicate that the change was intended to be followed regularly in future by the assessee. On this ground only the Revenue is entitled to succeed in this reference.
41. We are unable to accept the contention of the assessee that it was the duty of the Revenue to probe further into the matter and establish the regularity of the change. The order of assessment in the instant case is dated the 21st December, 1971, and the order of the Tribunal is dated the 5th September, 1973. It was possible for and open to the assessee to produce evidence at the earlier stages to establish that it had followed the changed method of accounting in subsequent years and thus prove the regularity of the change.
42. We are also unable to entertain the submission of the assessee that it should be allowed to adduce further evidence at this reference to enable it to prove its case or that the matter should be remanded to the Tribunal for a fresh consideration. The Tribunal might have taken into account some irrelevant grounds and facts but it cannot be held that the approach of the Tribunal was entirely incorrect or that its findings are totally vitiated. The assessee, in our view, is not entitled to have the entire matter reopened at this stage.
43. For the reasons given above we answer the question referred in the affirmative and in favour of the Revenue. In the facts and circumstances, there will be no order as to costs.
C.K. Banerji, J.
44. I agree.