S.C. Tiwari, A.M.
These two appeals filed by revenue related to assessment year 1996-97. Appeal in ITA No. 1703/Mum/2000 is in relation to assessment order under section 143(3). Appeal in ITA No. 1705/Mum/2000 is in relation to proceedings under section 143(1)(a). We shall take up revenue's appeal in ITA No. 1705/Mum/2000 relating to proceedings under section 143(1)(a) first. Facts of the case in this behalf are that the assessee filed return of income declaring Nil income on 26-11-1996. The assessing officer made an intimation under section 143(1)(a) of the Act on 31-10-1997, in which dry dock expenses claimed by the assessee were disallowed to the extent of Rs. 4, 53,61,339 by way of adjustment. On receipt of this intimation the assessee filed appeal before the learned Commissioner (Appeals)-XVI, Mumbai, on 20-2-1998, and also filed an application under section 154 before the assessing officer. Thereafter the assessing officer passed an order under section 154 on 30-3-1998, whereby the addition of Rs. 4,53,61,339 made by way of adjustment of part disallowance of the assessee's claim of dry dock expenses was deleted. On receipt of this order under section 154 the assessee withdrew the appeal which had been filed before the learned Commissioner (Appeals) against the adjustments in the order of intimation dated 31-10-1997. Thereafter the assessing officer issued a notice under section 154 on 24-11-1998, stating that the intimation made under section 143(1)(a) on 31-10-1997, required rectification since
"Loss on sale of investments Rs. 19,67,751 debited to profit & loss account is proposed to be adjusted under section 143(1)(a)/154(1)(b) as it is a capital loss". The assessee objected to this rectification and pointed out that as per article 17 of memorandum and articles of association of the company, to make investments in shares, securities, debentures, fixed deposits, etc. was one of the business of the assessee-company. The assessee also argued that it had been taxed on dividend or interest income received on investments as business income as well as profit on sale of assets had been assessed as business income. Hence, there was no logic in disallowing loss on investments. The assessing officer did not find this contention of the assessee as tenable. She argued that the assessee had not treated the investments as stock-in-trade. Therefore, loss on sale of investments was a capital loss and could not be allowed against the business income of the assessed. The business of the assessee-company was operation of ships. She, therefore, rectified the intimation under section 143(1)(a) so as to add capital loss amounting to Rs. 19,67,751. Aggrieved by this order of rectification the assessee preferred appeal before the learned Commissioner (Appeals) and reiterated the contentions as made at the time of the rectification proceedings. The assessee also argued that as it was a debatable issue it was outside the scope of rectification under section 154. For this purpose reliance was placed on the Supreme Court judgment in the case of T.S. Balram, ITO v. Volkart Bors. & Ors. ( 1971) 82 ITR 502 (SC). The learned Commissioner (Appeals) held that the view that the issue involved was not such which could be subject-matter of assessment under section 143(1)(a) and consequently no action under section 154 could be taken. He, therefore, deleted the adjustment of Rs. 19,67,751 made by the assessing officer in the order under section 154(1)(b) read with section 143(1)(a). Aggrieved by this order, under section 154(1)(b) read with section 143(1)(a). Aggrieved by this orders, revenue is in appeal before us.
2. During the course of hearing before us, the learned Departmental Representative argued that in the books of accounts as well as in statement of accounts the assessee had itself referred it to be "loss on investments". As the assessee never treated these investments as stock-in-trade, the loss arising to the assessee was capital loss and was, therefore, rightly adjusted to by the assessing officer in the intimation under section 143(1)(a) by way of subsequent order under section 154(1)(b). The learned Departmental Representative pointed out that in the order under section 143(3) made on 26-3-1999, the assessing officer had made similar addition of Rs. 19,67,751. In the appeal filed before the learned Commissioner (Appeals) against the assessment order under section 143(3) assessee did not even object to this adjustment.
3. The learned counsel for the assessee argued that the adjustment made was not in the nature of prima facie adjustment. For this reason the assessing officer herself omitted to make the adjustment in the original order of intimation under section 143(1)(a) made on 31-10-1997. Thereafter the adjustment as originally made was deleted in an order under section 154 passed by the assessing officer by order under section 154(1)(b), dated 30-3-1998. At that stage also, no such rectification to the intimation originally made was done. It was only during the course of assessment proceeding under section 143(3) that the assessing officer decided to treat it as capital loss and before completion of assessment under section 143(3) on 26-3-1999, the assessing officer made fresh order under section 154(1)(b) on 22-3-1999. Whether the loss arising to the assessee was a capital loss or revenue loss could not be determined without detailed consideration of the facts of the case and, therefore, it was not in the nature of prima facie adjustment. The learned counsel for the assessee referred to the judgment of Hon'ble Supreme Court in Investment Ltd. v. The Commissioner Of Income Tax, Calcutta. (1970) 77 ITR 533 (SC) and argued that no firm conclusion in this respect could be drawn. Hence, the adjustment was clearly outside the scope of section 143(1)(a) or for that matter section 154(1)(b). In support of this contention the learned counsel placed reliance on the judgment of Hon'ble Bombay High Court in the case of Khatau Junkar & Ors. v. K.S. Pathania & Anr. (1992) 196 ITR 55 (Bom). Secondly, the learned counsel for the assessee argued that in this case notice under section 154 was issued and the order under section154 was made after a notice under section 143(2) had already been issued. Once assessment proceedings under section 143(2) had been initiated, there was no room for any adjustment under section 143(1)(a). For this purpose the learned counsel placed reliance on the judgments of Hon'ble Gujarat High Court in Modern Fibotax India Ltd. & Anr. v. Dy. CIT (1995) 212 ITR 496 (Gal), Gujarat Poly-Avx Electronics Ltd. v. Dy. CIT (1996) 222 ITR 140 (Guj) and Lakhanpal National Ltd. & Ors. v. Dy. CIT (1996) 222 ITR 151 (Guj) as well as Tribunal decision in Nahar Spinning Mills Ltd. v. Asstt. CIT (1996) 59 ITD 51 (Chd).
4. We have carefully considered the rival submissions. We are in agreement with the view held by the learned Commissioner (Appeals) that the adjustment was outside the scope of the provisions of section 143(1)(a) and consequently rectification order under section 154(2) could also not be made. We, therefore, do not see any reasons to interfere in the order of the learned Commissioner (Appeals) in this behalf and dismiss this appeal filed by revenue.
5. We shall now deal with revenue's appeal in ITA No. 1703/Mum/2000, which is in relation to assessment order under section 143(3). The only ground of appeal taken in this behalf reads as under :
"On the facts and circumstances of the case and in law the learned Commissioner (Appeals) has erred in deleting disallowance of Rs. 4,53,61,339 being the dry dock expenses claimed by the assessee."
6. Facts of the case leading to this appeal, briefly, are that the assessee was engaged in the business of shiping. It owned three ships, viz., "Orient Prosperity". "Orient Commerce" and "Orient Independence". During the year the assessee incurred an expenditure of Rs. 5,67,01,674. However, in the profit & loss account, only a sum of Rs. 1,13,40,335 was debited following the principle of deferred revenue expenditure. But in the return of income filed, in the computation of total income the assessee claimed deduction of the entire sum of Rs. 5,67,01,674. It was claimed that dry dock and special survey expenses are normally incurred twice over a period of five years. Therefore, the assessee had rightly written off only the proportionate expenses in the profit & loss account which was the normal practice in the shipping trade. However, for the purpose of computation of income for tax purposes the entire amount was allowable as deduction. During the course of assessment proceedings the assessing officer asked the assessee to show cause as to why the entire expenditure had been claimed as deduction. In reply, the assessee relied upon the judgment of Hon'ble Bombay High Court in the case of CIT v. Chowgule & Co. (P) Ltd. (1995) 214 ITR 523 (Bom). The learned assessing officer found that the issue decided by the Hon'ble Bombay High Court was different from the issue under consideration. In the books of accounts the assessee had been regularly treating such expenditure as deferred revenue expenditure, as was found on reference to the returns of income for assessment years 1997-98 and 1998-99. The entire expenditure of Rs. 5,67,01,674 had not been incurred by the assessee for the year itself. The benefit and advantage of this expenditure was spread over number of years. There was no justification for the assessee not to follow its own accounts in the return of income. For this proposition, the assessing officer relied upon the judgments Sardar C.S. Angre v. CWT (1968) 69 ITR 336 (SC), CIT v. Singari Bai (1945) 13 ITR 224 (All), Bangalore Woollen, Cotton & Silk Mills Co. Ltd. v. CIT (1950) 18 ITR 423 (Mad) and so on. Reference was also made to the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and it was argued that only erroneous entries in the books of accounts could be corrected in the return of income. Reference was also made to the provisions of section 145(1) of the Act. The assessing officer, therefore, disallowed the assessee's claim of deduction in this behalf to the extent of Rs. 4,53,61,339.
7. During the course of hearing before the learned Commissioner (Appeals) the assessee submitted that it was the industrial practice that the dry dock and special survey expenses were charged to the books of accounts for a period of 2-1/2 years. Under the Income Tax Act, however, there was no concept of deferred revenue expenditure and there were only two types, of expenses, i.e., capital expenditure and revenue expenditure. The expenditure which was not capital expenditure was allowable as revenue expenditure. It was for this reason that the entire deduction was claimed and entries made in the books were not conclusive in this behalf. Reliance was placed on the judgment of Hon'ble Bombay High Court in the case of Chowgule & Co. (P) Ltd. (supra). The assessee also placed reliance on the Supreme Court judgments in (1971) 82 ITR 363 (SC) (supra) and Sutlej Cotton Mills Limited v. Commissioner Of Income Tax, Calcutta. (1979) 116 ITR 1 (SC) that entries in the books of accounts could not determine whether the assessee had earned any profit or suffered any loss. The learned Commissioner (Appeals) considered these arguments of the assessee, to be tenable. He held that there was no concept of deferred revenue expenditure under the Income Tax Act, except in the sections where it-had been specifically brought in. The expenditure in question had not been doubted by the assessing officer and the same had been incurred during the year under consideration. Therefore, the entire amount was allowable to the assessee, irrespective of the entries made in the books of accounts. He, therefore, allowed the assessee relief of Rs. 4,53,61,339. Aggrieved by this order revenue is in appeal before us.
8. During the course of hearing before us, the learned Departmental Representative placed reliance on the assessment order. The learned counsel for the assessee argued that the expenditure was undoubtedly on repairs and, therefore, in the revenue field. The assessee had carried out extremely heavy repairs and for this reason, in the books of account the expenditure was spread over more than one accounting year. However, in the income-tax assessment proceedings the expenditure was allowable in toto because it was revenue expenditure. This fact had not been disputed by the assessing officer himself who allowed that part of the expenditure which had been debited to profit & loss account by the assessee. He lost sight of the fact that in the income-tax assessment there was no concept like deferred revenue expenditure. For this purpose the learned counsel for the assessee placed reliance on the judgments Hindustan Commercial Bank Ltd., In re (1952) 21 ITR 353 (All) and Commissioner Of Income Tax, Gujarat v. Gujarat Mineral Development Corporation.. Corpn. (1981) 132 ITR 377 (Guj). The learned counsel argued that the amount of expenditure incurred on repairs could not have entitled the assessing officer to make only part allowance. For this purpose he placed reliance on the judgment of Hon'ble Bombay High Court in the case of Chowgule & Co. (P) Ltd. (supra). The learned counsel also argued that the assessing officer could not have insisted upon following the entries as made in the assessee's books of accounts. The same were not decisive, as held by Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. (supra)
9. We have carefully considered the rival submissions. We would like to begin with the judgment of Hon'ble Bombay High Court in the case of Chowgule & Co. (P) Ltd. (supra), which has been heavily relied upon by the assessee throughout the proceedings, i.e., before assessing officer, before the learned Commissioner (Appeals) as well as before us. In that case, the assessee effected major repairs to one of its vessels "Maratha Transhipper" which resulted in an expenditure of Rs. 99,52,440. The assessee claimed deduction of the entire amount of expenditure as current repairs. The assessing officer noticed that part of this expenditure had been reimbursed to the assessee by insurance company and he, therefore, allowed the assessee deduction only of the balance amount of expenditure. The Commissioner, Bangalore, however, held the opinion that the order of the assessing officer was erroneous and prejudicial to the interests of revenue. He, therefore, issued notice under section 263. During the course of proceedings before him the assessee relied upon the fact that in the draft order under section 144B the assessing officer had proposed disallowance of the entire amount but the learned Inspecting Assistant Commissioner after having examined facts of the case in his directions under section 144B(4) directed that the entire amount should have been allowed as deduction. The Inspecting Assistant Commissioner had found that the entire expenditure had been actually incurred and no new asset had come into existence and that despite a large amount being involved, the expenditure in question was revenue expenditure. The Commissioner did not accept these contentions of the assessee. He observed that the written down value of the vessel was only Rs. 1,12,21,713 whereas the assessee had claimed expenditure of Rs. 99,52,448 for replacement of certain parts. The learned Commissioner, therefore, considered the expenditure to be of capital nature and directed the Income Tax Officer to disallow the expenditure. The assessee preferred appeal before the Tribunal. The Tribunal observed that the details of the expenditure incurred by the assessee on repairs had been thoroughly gone into by the Inspecting Assistant Commissioner before holding that it was not an expenditure of capital nature. The Tribunal further observed that the Commissioner had not given any reason as to why he considered the expenditure to be of capital nature except saying that the total expenditure on repairs together with the written down value of the ship had exceeded the original cost. The Tribunal, therefore, set aside the order of the Commissioner and restored the deduction as allowed by the assessing officer. At the instance of Commissioner the Tribunal referred the matter under section 256(1) to Hon'ble Bombay High Court for their esteemed opinion. Hon'ble High Court held that the approach of the Commissioner that the amount of expenditure on repairs together with the written down value of the ship exceeded the original cost was not correct. The original cost was not indicative of the value at the time when the repairs were undertaken. Hon'ble High Court further held that current repairs meant repairs undertaken in the normal course of user for the purpose of preservation, maintenance or for proper utilisation or for restoring it to original condition. Current repairs do not mean only petty repairs or repairs necessitated by wear and tear during the particular year. Neither the quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of the machine or ship is decisive of the true nature of the expenditure. Original cost of the asset is not at all relevant for ascertaining the true nature of the expenditure on repairs.
10. In our opinion, the judgment of Hon'ble Bombay High Court in the case of Chowgule & Co. (P) Ltd. (supra) is not of much assistance to the assessee. In that case, Hon'ble Bombay High Court were not concerned with the question of deferred revenue expenditure or the treatment given by the assessee in the books of accounts vis-a-vis return of income filed. The main question for consideration before Hon'ble High Court was as to whether total expenditure together with written down value of the ship having exceeded original cost, the expenditure could be treated as incurred on repairs. As a matter of fact, Hon'ble Bombay High Court have themselves clearly recorded at page 531, "such repairs should not bring into existence nor obtain a new or different advantage".
11. In the instant case, it is not the case of the assessee that the treatment given by it in the books of accounts is erroneous. On the contrary, it is the contention of the assessee that it is the industrial practice that the dry dock and special survey expenses are charged to the books of accounts for a period of 2- years. The contention of the assessee in the return on income is, therefore, based on short ground that there is no concept of deferred revenue expenditure in the Income Tax Act and there are only two types of expenses, i.e. capital expenditure and revenue expenditure. During the course of hearing before us the learned counsel for the assessee has reiterated this legal contention and relied upon the judgments reported in the cases of Hindustan Commercial Bank Ltd., In re. (supra) and CIT v. Gujarat Mineral Corporation Ltd. (supra). It is true that in these two judgments it has been held that revenue expenditure is to be allowed in full even if its benefit would enure for a number of years. At the same time, we find that in the case of Madras Industrial Investment Corporation Ltd. v. CIT (1997) 225 ITR 802 (SC) a contrary view has been taken. To stress this point, we quote the following two paragraphs as appearing at per page 802 and 803 :
"Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure.
Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuring years. In fact, allowing the entire expenditure in one year might, give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."
Thus, Hon'ble Supreme Court have accepted that there may be situations where allowing the entire expenditure in one year may give a very distorted picture of the profits of a particular year. They found issuing debentures to be one such instance and held that as there was continuing benefit to the business of the company, the liability should be spread over the entire period of the debentures. Thus, the extreme view canvassed before us that there has to be either revenue expenditure allowable in a single year or capital expenditure not allowable at all has not found favour with the Apex Court and for this reason the judgment of Hon'ble Madras High Court in the case of CIT v. Madras Industrial Investment Corporation Ltd. (1980) 124 ITR 454 (Mad) was reversed and the judgment of Hon'ble Madhya Pradesh High Court in the case of M.P. Financial Corporation Ltd. v. CIT (1987) 165 ITR 765 (MP) was accepted.
12. While on this subject, we wish to examine the legal position in some more detail. It has been canvassed before us that under the Income Tax Act there is no room for deferred revenue expenditure. This calls for some analysis of the relevant provisions and the scheme of the Income Tax Act in this behalf. The basis of charge of income-tax is laid down by the provisions of section 4 of Income Tax Act, 1961, to be the total income of the previous year of every person. Section 2(31) defines "Person" and section 3 defines "Previous year". Section 2(45) lays down that total income is income computed in the manner laid down in the Income Tax Act. Section 4 makes it clear that income-tax is an annual levy and "previous year" is the period of assessment. It is the periodicity of the levy of income-tax with which were are mainly concerned in this appeal. In the case of an on-going business, the profit or loss made by the businessman from that business, as aptly described in the case of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) remains in the "womb of future". The measurement of periodic income is, to that extent, a matter of estimation and it is for the accuracy and reasonableness of such an estimation that principles of accounting inevitably come into picture. There would have perhaps been no difficulty if there was one and only one correct principle of method of accounting, or, in the alternative, if by force of law any single method of accounting had been prescribed for the purpose of computation of total income. However, for and upto assessment year 1996-97, provisions of section 145(1) have conferred a choice upon the taxpayers in the following words :
"145. Method of accounting.(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 :
Provided that in any case where the accounts are correct and complete to the satisfaction of the assessing officer but that method employed is such that, in the opinion of the assessing officer, the income cannot properly be deducted therefrom, then the computation shall be made upon such basis and in such manner as the assessing officer may determine."
The provisions of section 145(1), as abovequoted, are practically the same as laid down in section 13 of 1922 act. There has been a significant departure effective from assessment year 1997-98. Section 145 until then mandates for computation of income chargeable under the heads "Profits and gains of business or profession" and "income from other sources" to be in accordance with the method of accounting regularly employed by the assessee. The only exception to this general principle is the cases where the method employed is such that the income cannot properly be deduced therefrom or as laid down in section 145(2) where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee. There are plethora of court pronouncements where it has been held that provisions of section 145 are mandatory and the proper method of accounting regularly followed by an assessee is binding on the assessee as well as assessing authorities, Further, the method referred to in section 13/145 is one as followed by the assessee while writing his books of accounts and not of separate method which the assessee might choose for filing his return of income. As early as in the case of CIT v. Sarangpur Cotton Manufacturing Co. Ltd. (1938) 6 ITR 36 (PC), the Judicial Committee of the Privy Council observed as under :
"Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes-in this case for the purposes of the company's business and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion-of the Income Tax Officer, the income, profits and gains cannot properly be deduced therefrom."
Thus, the Hon'ble Judicial Committee decided way back in 1932 that an assessee cannot ask for two different methods, one for writing books of accounts for the purposes of his business and another for having his tax liability determined under the Income Tax Act. Along the same lines, decisions were given by Allahadad High Court in the case of CIT v. Smt. Singaribai (supra) and Madras High Court in the case of Bangalore Woollen & Silk Mills Co. Ltd. (supra) that an assessee cannot ask for different system of accounting for the purpose of his income-tax assessment.
13. In Keshav Mills Ltd., v. Commissioner Of Income Tax, Bombay. (1953) 23 ITR 230 (SC) the Hon'ble Supreme Court held that the provisions of section 13 of 1922 Act (corresponding to section 145 of 1916 Act) was compulsory on the income-tax authorities and imposed upon them an obligation to accept the method of accounting regularly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income (page 240). In CIT v. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC), the Supreme Court reiterated that the Income Tax Officer is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed :
"The only departure made by section 13 of the Indian Income Tax Act from the legislation in England is that whereas under the English legislation, the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income Tax Act, prima facie, the Income Tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income Tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income Tax Officer, the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits."
14. In the case of CIT v. Tata Iron & Steel Co. Ltd. (1977) 106 ITR 363 (Bom), the Hon'ble Bombay High Court pointed out that the method of accounting followed by the assessee has to be stressed and adopted for computation of total income if such method cannot be said to be unreasonable, even if a better method cannot be visualised. In the case of Md. Umer v. CIT (1975) 101 ITR 525 (Pat), the Hon'ble Patna High Court have categorically stated at page 530.
"Once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of proviso to sub-section (1) of section 145". In a recent case, CIT v. Smt. Vimla D. Sonwane & Ors. ( 1995) 212 ITR 489 (Bom), the Hon'ble Bombay High Court have held that the option regarding adoption of the method of accounting is with the assessee and not with the department and the assessee cannot be compelled to adopt any particular system of accounting.
15. From the various judgments enumerated in the foregoing paragraphs, which constitute only a fraction of the plethora of judgments to the similar effect from Hon'ble High Courts in India and the Hon'ble Supreme Court, it is well-settled legal position upto assessment year 1996-97 that the method of accounting followed by the assessee in writing his books of accounts has to be compulsorily taken as the basis of computation of income in the assessment proceedings. Such method was equally binding on the assessee inasmuch as he could not follow one method or system of accounting for writing his books of accounts and yet another method or system of accounting for the return of income filed by him. The provisions of section 13 of 1922 Act and section 145 of 1961 Act and various judgments of the courts in India give clear legal recognition to the fact that unlike laws of physics, there could be more than one correct answer in the fields of accounting. Even the accounting practices under the overall umbrella of the mercantile system do admit of considerable amount of diversity. In such a situation the question of choice arises and that choice is exercised by an assessee while writing his books of accounts. In other words, it is not the legal position that on identical facts, the same account of income could be assessable in the cases of all the assessees. The provisions of section 145(1) and the choice conferred upon the assessee would make no sense at all otherwise.
16. As pointed out earlier, income-tax is an annual levy. For the purpose of income-tax, each year is a separate self-contained period of time. As early as in the case of CIT v. P.L.S.M Concern (1934) 2 ITR 417 (Rang), Hon'ble Rangoon High Court emphasised this fact and observed thus :
"(d) what are chargeable to income-tax in respect of a business are the profits and gains of a year and in assessing the amount of the profits and gains of a year account must necessarily be taken, of all losses incurred in that year. When setting out to ascertain the profits and gains of one year, loss which had in fact been incurred before the commencement of that year cannot be deducted, since by doing so one would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant."
Hon'ble Supreme Court also held in the case of Kikabhai Premchand v. CIT (1953) 24 ITR 506 (SC) that the profits earned and the losses suffered that are taken into consideration are of the tax year only and that in an assessment revenue is concerned with profits or gains in each previous year and not with any potential profits likely to be made in another year or with losses likely to occur in the future. Different considerations may, depending on the facts and circumstances of each case, weigh to determine profit or gains or losses of the year but the position remains that an expenditure which arose in an earlier year or which may arise in a subsequent year cannot be allowed as deduction where the system of accounting is the mercantile system. The relevant year in which deduction becomes allowable need not necessarily be the year in which payment is made, as held by Hon'ble Supreme Court in the case of CIT v. Associated Electrical Industries India (P) Ltd. (1986) 157 ITR 72 (SC). As the mercantile system of accounting is concerned with the year of "accrual" and not with the year of "payment", difficulties" or disputes do arise from time to time as to when a right or liability has ripened and become enforceable. This issue is not always free from difficulty and for resolution of the same, courts have time and gain relied upon the authority of time-honoured books of accountancy or Accounting Standard issued by Institute of Chartered Accountants of India.
17. From the discussion in the foregoing paragraphs we find that the legal position in nutshell is that computation of income under the heads "Profits and gains of business or profession" or "income from other sources" should be made in accordance with the method of accounting regularly employed by the assessee as long as the method of accounting is such as income may properly be deduced therefrom. In such a scenario we find it hard to accept the proposition that under the Income Tax Act there is watertight compartmentalisation of expenditure to be either allowed in one single year as revenue expenditure or to be disallowed altogether as capital expenditure. As a matter of fact, the complexities and variety of businesses that assessees do carry on would simply militate against such inflexible approach. There are hundreds of assessments being completed in the cases of builders and construction firms based on "Project completion method". Under this method, even revenue expenditure incurred by the assessee year after year is simply carried forward as "work-in-progress" to be finally reckoned with in the year when the project is substantially completed or sales are substantially executed. These cases are standard examples of deferred revenue expenditure. There can be myriad similar situations. Having regard to this, Hon'ble Supreme Court have held in the case of Madras Industrial Investment Corporation Ltd.'s (supra) that the general rule that revenue expenditure must be allowed in its entirety in the year in which it is incurred admits of exceptions and on the contrary there may be cases where rigid observations of the general rule may result into a very distorted picture of the profits of a particular year.
18. In the instant case, it is not the case of the assessee that there is any error committed by it while writing the books of accounts in. this behalf. It is also not the case of the assessee that the treatment given in the books of accounts is not reflective of the true nature of transactions. We, therefore, do not see any reason as to why the provisions of section 145(1) as applicable to the assessment year should not be given full effect. It is admitted position that the expenditure incurred by the assessee, according to the standard trade practice, required to be set off in five half years of business of which only one was completed during the previous year under consideration. On the facts of the case, it is obvious that the assessee has rightly charged dry dock and special survey expenses to the books of accounts in three assessment years, viz. assessment years 1996-97, 1997-98 and 1998-99. We, therefore, hold that the assessing officer rightly insisted upon completing the assessment in accordance with the treatment given by the assessee itself in its books of accounts rather than being swayed by any dogmatic compulsions.
19. In passing, we also like to refer to the judgment of the Hon'ble Supreme Court in the case of Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC). Hon'ble Supreme Court have held that the expression "Current repairs" cannot be equated with the expression "repairs". Current repairs would mean expenditure on buildings, machinery, plant or furniture, which is not for the purpose of renewal or restoration but which is only for the purpose of preservation or maintaining an already existing asset.
20. In view of the decision in the foregoing paragraphs we reverse the order of the learned Commissioner (Appeals) in this behalf and restore the assessment order.
21. In the result, while revenue's appeal in ITA No. 1705/Mum/2000 is dismissed, revenue's appeal in ITA No. 1703/Mum/2000 is allowed in full.
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