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Reform Flour Mills P. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 91 of 1976
Judge
Reported in[1978]114ITR227(Cal)
ActsIncome Tax Act, 1961 - Sections 144, 145(1) and 145(2)
AppellantReform Flour Mills P. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateSukumar Bhattacharyya and ;R. Dutta, Advs.
Respondent AdvocateB.K. Bagchi and ;B.K. Naha, Advs.
Cases ReferredKanwalnen Hamir Singh v. Commissioner of Income
Excerpt:
- .....it earned income from business and also from other sources and house property. in an earlier year, the assessee advanced a loan to the aforesaid party mentioned in the question. in 1967 the assessee passed a resolution deciding not to credit the interest on the aforesaid loan on due basis but to credit the same when realised. in terms of the said resolution the assessee did not enter the interest on the said loan in its books as they were not received by the assessee.4. in two earlier assessment years the income-tax officer brought the interest on the said loan to tax. the tribunal confirmed those additions in the quantum appeals relating to those assessment years with a finding that the assessee did not forgo the interest and merely deferred their entry in its books by.....
Judgment:

Deb, J.

1. This is a reference under section 256{1) of the Income-tax Act, 1961. The question before us is as follows :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on loan of M/s. Associated Industries (Assam) Ltd. was liable to be included in the assessment for the relevant assessment year '

2. The statement of the case relates to the assessment year 1970-71. The accounting year ended on 31st December, 1969.

3. The assessee is a company. It earned income from business and also from other sources and house property. In an earlier year, the assessee advanced a loan to the aforesaid party mentioned in the question. In 1967 the assessee passed a resolution deciding not to credit the interest on the aforesaid loan on due basis but to credit the same when realised. In terms of the said resolution the assessee did not enter the interest on the said loan in its books as they were not received by the assessee.

4. In two earlier assessment years the Income-tax Officer brought the interest on the said loan to tax. The Tribunal confirmed those additions in the quantum appeals relating to those assessment years with a finding that the assessee did not forgo the interest and merely deferred their entry in its books by unilaterally changing its method of accounting, namely, from mercantile to cash system of accounting. In those appeals, the Tribunal also held that the assessee was not entitled to change its method of accounting unilaterally.

5. The Income-tax Officer has also brought the interest on the said loanto tax in the accounting year relevant to the assessment year 1970-71,although it was not received by the assessee, nor it was entered in itsbooks. By following its aforesaid earlier orders, the Tribunal-has dismissedthe appeal filed by the assessee.

6. Mr. Sukumar Bhattacharyya, learned advocate for the assessee, argues before us that the Tribunal was not right in law in holding that the aforesaid interest was liable to be included in the assessment for the assessment year 1970-71, for, according to him, the assessee was entitled to change the method of accounting relating to this source of income as held in the cases of J. K. Bankers v. Commissioner of Income-tax : [1974]94ITR107(All) , Balraj Virmani v. Commissioner of Income-tax : [1974]97ITR69(All) and Commissioner of Income-tax v. E. A. E. T. Sundararaj : [1975]99ITR226(Mad) .

7. Mr. Bhattacharyya also . cites an unreported judgment dated January 18, 1978, of this court in Income-tax Reference No. 385 of 1970 [Commissioner of Income-tax v. Eastern Bengal Jute Trading Co. Ltd.--Since reported in : [1978]112ITR575(Cal) ]. It has been held in this case that under section 291 of the Companies Act, 1956, the directors of a company can change the method of accounting and if they do so in good faith and the new method is regularly followed by the company in the subsequent years, the tax must be assessed on the basis of the new method of accounting. Mr. Bhattacharyya, therefore, urges that the instant case before us is covered by the aforesaid decision of this court.

8. Mr. B, K. Bagchi, learned advocate for the revenue, argues, on the other hand, that the assessee cannot change the method of accounting unilaterally or in respect of a particular transaction as held by the Allahabad High Court in Shiv Prasad Ram Sahai v. 'Commissioner of Income-tax : [1966]61ITR124(All) . He also cites the case of Kanwalnen Hamir Singh v. Commissioner of Income-tax : [1938]6ITR675(All) , in support of his contention that an assessee cannot suddenly change the method of accounting to avoid his tax liability.

9. Now, section 145(1) of the Income-tax Act, 1961, provides that the '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. This section does not postulate any contract or agreement between any assessee and any person, whoever he may be, regarding the method of accounting to be employed by the assessee. It is settled law that a taxpayer is entitled to adjust his own affairs in such a way that his tax burden is thereby reduced. He is also entitled to adopt any lawful means for the aforesaid purpose. Section 145(1), as already stated, does not postulate any agreement or contract regarding the method of accounting to be employed by a taxpayer. This section also does not lay any embargo on him to alter his method of accounting.

10. For the aforesaid reasons and with due respect to their Lordships of the Allahabad High Court in the case of Shiv Prasad Ram Sahai [1966] 6 ITR 124, we are unable to accept their opinion, namely, that anassessee cannot change the method of accounting unilaterally. The argument of Mr. Bagchi in this behalf must, therefore, fail.

11. To us it appears that the authorities below and also the learned counsel appearing before us have not properly appreciated the relevant facts and the circumstances of the accounting year relevant to the assessment year 1970-71 and the issue involved in it. In this accounting year, the assessee did not alter any method of accounting. It had already changed its' method of accounting in an earlier accounting year.

12. The aforesaid facts were overlooked by them arid, therefore, neither the earlier orders of the Tribunal nor the aforesaid cases cited at the Bar can have any application to the facts and circumstances of the accounting year relevant to the assessment year 1970-71. Similarly, the other arguments noted earlier have no bearing on the issue involved in this reference and accordingly we do not propose to deal with them.

13. In our opinion, if the assessee has regularly employed the altered method of accounting, namely, the cash system, regarding its income from 'other sources' and its income from 'other sources' can properly be deduced therefrom by the taxing authorities, in that event its income from' other sources' must be computed in accordance with the cash system of accounting and in such circumstances the aforesaid interest cannot be included in the accounting year relevant for the assessment year 1970-71. If, however, the aforesaid altered method was not followed regularly by the assessee, the taxing authorities cannot, however, fall back upon the old method, namely, the mercantile system of accounting, because it cannot be said that the assessee had followed it regularly in view of its aforesaid altered method of accounting, and, in such circumstances, as stated in section 145(2) of the Act, the Income-tax Officer may make an assessment in the manner as provided in section 144 of the Act.

14. Since the relevant facts as indicated in the foregoing paragraph have not been ascertained by the Tribunal, we are unable to answer the question in this reference. In these circumstances, as submitted on behalf of both the parties, the Tribunal, after giving a reasonable opportunity to them of being heard, shall ascertain the material facts as indicated above and determine afresh whether the aforesaid amount was liable to be included in the assessment for the assessment year 1970-71.

15. This reference is accordingly disposed of without answering the question and without making any order as to costs.

Sudhindra Mohan Guha, J.

16. I agree.


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