S.H Kapadia, J.:— This Reference under section 256(1) of the Income Tax Act, 1961 has come for our opinion at the instance of the Department. The said Reference concerns Assessment Year 1977-1978 and Assessment Year 1978-1979. The question referred to above is as follows:
“Whether on the facts and in the circumstances of the case and in view of the admitted position that the assessee has been following mercantile system of accounting in respect of its business activities, the Tribunal was justified in law in holding that the export duty draw back and cash assistance from the Govt. is assessable in the hands of the assessee on the receipt basis and not on accrual basis and consequently holding that the addition of Rs. 2,26,227/- and Rs. 5,34,255/- made by the ITO are not warranted?”
FACTS:
2. Assessee is a Public Limited Company. It is engaged in the business of manufacturing electrical appliances. It follows the accounting year ending 30th September. The assesse is also engaged in exporting its products. The assessee receives cash assistance and duty draw backs from Government of India. Prior to the assessment years in question, the assessee was accounting for receipts of cash assistance and duty draw backs on mercantile basis as its accounts were maintained on mercantile basis. For the Assessment Year in question, the assessee filed its original return of income on 29th June, 1977 showing a loss of Rs. 21,62,981/-. This return was revised on August 30, 1978 wherein loss was claimed at Rs. 24,70,850/-. In the revised return, cash assistance and duty draw backs were accounted on cash basis. They were earlier accounted on mercantile basis. The assessee's argument regarding accounting of cash assistance and duty draw backs on actual receipt basis was rejected on the ground that the assessee was following, regularly, mercantile system of accounting. The AO held that the assessee cannot maintain mixed system of accounting for different types of income. Therefore, the assessee's claim of increase in the loss by Rs. 21,26,227/- on account of change in the method of accounting was rejected. Being aggrieved, the assessee went in appeal to CIT (Appeals). The assessee succeeded in the appeal on the ground that the change in the method of accounting was bona fide and no loss was sustained by the revenue. Being aggrieved, the Department carried the matter in appeal to the Tribunal which confirmed the order of CIT (Appeals) on this point. Therefore, the Tribunal decided the matter in favour of the assessee. Hence, this Reference.
3. ARGUMENTS:
4. Mr. R.V Desai, learned Senior Counsel for the Department contended that the assessee was following mercantile system of accounting and that, for the first time during the Assessment Years in question, the assessee changed the system of accounting only restricted to cash assistance and duty draw backs. He contended that the assessee cannot have a mixed system of accounting for a part of the source of the income, namely, business income. He contended that the assessee has continued with mercantile system of accounting for all other receipts except cash assistance and duty draw backs which was not permissible.
5. FINDINGS:
6. We do not find any merit in the above argument advanced on behalf of the Department. The Commissioner of Income-tax (Appeals) has recorded a finding of fact that on several occasions cash assistance and duty draw backs come under litigation with Government of India and, therefore, the change in the method of accounting was bona fide. The Appellate Authority has further found that by this change no loss is sustained by the revenue. This finding of fact has been confirmed by the Tribunal. Therefore, we see no reason to interfere with the Judgment of the Tribunal. In the case of Commissioner of Income-tax, Bombay City III, Commissioner Of Income-Tax, Bombay City Iii, Bombay v. Citibank N.A reported in 208 ITR 930 mixed system of accounting has been approved in respect of interest on problem loans receivable by banks by the Bombay High Court. It has also been approved by the Judgment of Supreme Court in UCO Bank v. Commissioner of Income Tax reported in 237 ITR 889. Basically, mixed system of accounting is not to be discarded unless there is loss of income. In the present case, there is no such loss. In the present case, the change is held to be bona fide.
CONCLUSION:
7. Accordingly, we answer the above question in the affirmative i.e in favour of the assessee and against the Department.
8. Reference is accordingly disposed of. No order as to costs.
Reference answered in favour of assessee.