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Commissioner Of Income-Tax, West Bengal-V, Calcutta v. Rajasthan Investment Co. (P.) Ltd.
Judgment Summary — Dipak Kumar Sen, J.
Factual and Procedural Background
This reference arises from income-tax assessments of Messrs. Rajasthan Investment Co. Private Ltd. (the assessee) for the assessment years 1968–69, 1969–70, 1970–71 and 1971–72 (previous years ending 30 April 1967, 1968, 1969 and 1970 respectively).
The assessee is an investment company whose income derives from interest on loans and advances. Its accounting year ends on 30 April. Historically it maintained accounts on the mercantile (accrual) basis. By a board resolution dated 17 March 1966 the company resolved to change its method of accounting from the mercantile to the cash basis with effect from the then-current accounting year (from 1 May 1966) and to follow the new method regularly thereafter. As a result, from 1 May 1967 the assessee included in its accounts interest actually received rather than interest merely receivable.
During the assessment years in question the assessee's interest receipts arose only from two debtors: Messrs. Surajmal Nagarmal and B.L. Bagla. The Income-tax Officer observed that Surajmal Nagarmal controlled the assessee, that the debtor credited interest in its own accounts and claimed deductions, and concluded that the assessee's change of accounting method was effected to avoid tax; accordingly the Income-tax Officer added all interest receivable to the assessee's income for the years in question.
The assessee appealed. The Appellate Assistant Commissioner confirmed the Income-tax Officer's additions for the first three assessment years but accepted the assessee's change for 1971–72. The Revenue and the assessee had further appeals to the Tribunal, which consolidated and disposed of them on 22 February 1974. The Tribunal examined the books and found that B.L. Bagla had made no interest payments since 1961 and its dues were ultimately written off in 1972, and that payments from Surajmal Nagarmal were negligible (Rs. 1,000 in 1968–69 and Rs. 5,000 in 1970–71). The Tribunal held the change to the cash basis to be bona fide and realistic with reference to the assessee's accounts, allowed the assessee's appeals, and dismissed the revenue's appeal.
At the instance of the Commissioner of Income-tax, West Bengal V, Calcutta, the Tribunal's order was referred to the court in the form of two questions (set out below). At the hearing before the court no counsel appeared for the assessee; Mr. Bagchi represented the revenue. The judgment was delivered by Dipak Kumar Sen, J.; Banerji, J. agreed.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, and in view of the fact that Messrs. Surajmal Nagarmal was controlling the assessee's business, the Tribunal's finding that the change in the method of accounting of the assessee from mercantile system to cash system was legally based on reasons?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of interest received from Messrs. Surajmal Nagarmal in respect of loan advanced to the said firm by the assessee is not includible in the assessment years 1968–69, 1969–70 and 1970–71 and whether the Tribunal was right in law in holding that the amount receivable from Surajmal Nagarmal and Sri B.L Bagla in respect of loans advanced to them by the assessee is not includible for the assessment year 1971–72?
Arguments of the Parties
Revenue's Arguments (as presented to the court)
- The Income-tax Officer had found as a fact that Messrs. Surajmal Nagarmal controlled the assessee; that finding was unchallenged and uncontroverted.
- Because of that control, the Tribunal's conclusion that the change of accounting method was bona fide could not be accepted; the change was intended to avoid payment of proper tax.
- Reliance was placed on precedent (Shiv Prasad Ram Sahai and New Victoria Mills) to support the proposition that an assessee who has adopted the mercantile system cannot selectively depart from it.
- It was also argued, faintly, that section 5 of the Income-tax Act, 1961 could be applied so that interest receivable should be taxed on an accrual basis notwithstanding the cash system followed by the assessee; reliance was placed on the Supreme Court decision in Commissioner Of Income-Tax, A.P v. A. Krishna Murthy.
Assessee's Contentions (as recorded by the Tribunal)
- The assessee contended it had been compelled to pay tax on amounts not actually received and not likely to be received; therefore the directors resolved to change the method of accounting so that the accounts would reflect the true and correct state of affairs.
- On the facts shown in the books, payments from the debtors had been negligible or non-existent for many years, supporting the change to cash basis as realistic and not made in bad faith.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Shiv Prasad Ram Sahai v. Commissioner Of Income-Tax, Uttar Pradesh, [1966] 61 ITR 124 (All) | Principle cited: Once an assessee has adopted the mercantile (accrual) system, income is to be computed on the accrual and not receipt basis; an assessee cannot unilaterally during an accounting year depart from that system for a particular transaction. | The court held that the facts of Shiv Prasad Ram Sahai were entirely different: in that case a single item was sought to be accounted on accrual basis for the first time. Consequently the decision did not advance the revenue's contentions and was distinguished on the facts. |
| New Victoria Mills Co. Ltd. v. Commissioner Of Income-Tax, U.P., [1966] 61 ITR 395 (All) | Principle cited: A change in method of accounting must be bona fide and not a casual departure from a regular method; bona fides must be present to permit a change. | The court observed that New Victoria Mills was against the revenue and supported the proposition that changes must be bona fide; since the Tribunal had accepted the change as bona fide (a finding not shown to be perverse), the revenue could not successfully attack bona fides further. |
| Commissioner Of Income-Tax, A.P v. A. Krishna Murthy, [1964] 53 ITR 122 (S.C.) | Principle cited: Regardless of bookkeeping method, stock-in-trade must be taken into account in computing profits of the year (cited by revenue in support of applying accrual concepts despite cash accounts). | The court regarded this decision as of little relevance to the facts; it noted that the revenue did not cite authority to show section 5 could be applied to bring items to tax on accrual basis where a cash system was followed. The court declined to pursue the point further because the argument was a new case not taken earlier in the proceedings. |
| Cit Bihar v. M/S Kirkend Coal Co., [1969] 74 ITR 67 (S.C.) | Principle cited: (As invoked by the court) authority for not entertaining a new point raised late in the proceedings. | The court relied on this authority to justify not going into the late-raised argument based on section 5 / A. Krishna Murthy decision, because that case had not been urged at earlier stages. |
| Keshav Mills Ltd. v. Commissioner Of Income Tax, Bombay, [1953] 23 ITR 230 (S.C.) | Principle cited: The Supreme Court observed that for a resident who regularly adopts the mercantile system, the income-tax authorities are bound to compute income on that system; the applicability is doubtful where a non-resident maintains books outside British India. | The court held this decision was of no assistance to the revenue on the facts of the present case. |
Court's Reasoning and Analysis
The court reviewed the factual findings of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. Central to the court's analysis was the Tribunal's factual finding that the assessee's change of accounting method from mercantile to cash basis was bona fide and more realistic in reflecting the assessee's accounts.
The court proceeded in these steps:
- Examination of precedent: The court considered the authorities cited by the revenue (Shiv Prasad Ram Sahai and New Victoria Mills). It found Shiv Prasad Ram Sahai distinguishable on the facts because that case involved an attempt to account for a single item on an accrual basis for the first time rather than a general change in accounting method. New Victoria Mills, by contrast, supported the requirement of bona fide change; the court observed that New Victoria Mills was against the revenue's position.
- Deference to Tribunal's factual finding: The Tribunal had found nothing suggesting mala fides and concluded the change was bona fide. The court noted that this finding of the Tribunal had not been shown to be perverse. Because the Tribunal's finding of bona fides stood unchallenged as perverse, the court held it was not open to the revenue to continue to contest bona fides.
- Consideration of the new legal point (section 5 argument): The revenue raised, somewhat faintly, an argument based on section 5 of the Income-tax Act (supported by A. Krishna Murthy), to contend that accrual-based taxation might still apply. The court regarded A. Krishna Murthy as of little relevance on the facts and observed the revenue had not cited authority to support the proposition that section 5 could be applied to tax accruals where a cash system is followed. Moreover, because this argument was not pressed at earlier stages, the court invoked the principle (citing Cit Bihar v. M/S Kirkend Coal Co.) that it would not entertain a new point raised late in the proceedings.
- Conclusion on applicability of precedents: The court concluded that none of the cited decisions advanced the revenue's case in the factual matrix before it, and some authorities were actually adverse to the revenue's contention.
Based on the above, the court accepted the Tribunal's conclusion that the change in accounting method was bona fide and in consonance with the real state of the assessee's business, and proceeded to answer the referred questions accordingly.
Holding and Implications
Primary Holding: The court upheld the Tribunal's finding that the change in the method of accounting from the mercantile system to the cash system was bona fide and legally based on reasons, and answered the referred questions in favour of the assessee as follows.
The court's responses to the two referred questions:
- Question No. 1: Answered in the affirmative and in favour of the assessee — the Tribunal's finding that the change of accounting method was legally based on reasons is sustained.
- Question No. 2: The court noted the Tribunal did not find that any amount received by the assessee from Messrs. V. Surajmal Nagarmal as interest was not includible for the first part of the question, and therefore that part did not call for an answer. The second part (whether amounts receivable from Surajmal Nagarmal and B.L. Bagla were not includible for assessment year 1971–72) was answered in the affirmative and in favour of the assessee.
Direct consequences (as recorded in the opinion): the Tribunal's allowance of the assessee's appeals and dismissal of the revenue's appeal were effectively upheld by the court's answers in favour of the assessee for the questions referred. Banerji, J. agreed with these conclusions.
The opinion does not record any broader rule being laid down beyond application of the law to the specific facts; the court emphasized deference to the Tribunal's unchallenged factual finding of bona fides and declined to entertain a new legal point raised late in the proceedings.
The Judgment of the Court was delivered by
Dipak Kumar Sen, J.:— This reference arises out of the income-tax assessment of Messrs. Rajasthan Investment Co. Private Ltd., the assessee, for the assessment years 1968–69, 1969–70, 1970–71 and 1971–72, the relevant previous years ending on the 30th April of 1967, 1968, 1969 and 1970, respectively.
2. The facts found and/or admitted in these proceedings are shortly as follows:
The assessee is an investment company and its source of income is interest received from loans and advances. Its period of account ends on the 30th April each year.
3. The assessee used to maintain its accounts on the mercantile basis. By a resolution of the board of directors of the assessee passed on the 17th March, 1966, it was resolved that with effect from the then current accounting year, i.e, the 1st May, 1966, the assessee would change its method of accounting from mercantile basis to cash basis and this new method should thereafter be regularly followed from year to year. As a result of this change from the 1st May, 1967, onwards the assessee brought into its account whatever interest it actually received and not what was receivable.
4. During the assessment years involved the assessee was entitled to receive interest on loans advanced only from two parties, viz., Messrs. Surajmal Nagarmal and one B.L Bagla.
5. The Income-tax Officer took note of the fact that Messrs. Surajmal Nagarmal controlled the assessee and that the said firm was regularly crediting the assessee in its account with interest and claiming deductions therefor and concluded that the change of the method of accounting of the assessee was intended only to avoid taxes. Accordingly, the Income-tax Officer added to the income of the assessee all interest receivable by it in all the said years.
6. Being aggrieved, the assessee appealed to the Appellate Assistant Commissioner, who concurred with the decision of the Income-tax Officer in the appeals relating to the first three assessment years and confirmed the addition; but in the appeal relating to the assessment year 1971–72 the Appellate Assistant Commissioner, following the decisions of the Tribunal in other cases, accepted the contentions of the assessee and held that the change-over to the cash system of accounting by the assessee was acceptable and what was actually received as interest should be taxed.
7. From the aforesaid orders of the Appellate Assistant Commissioner, there was one appeal by the revenue and three appeals by the assessee. The Tribunal disposed of all the appeals by its consolidated order passed on the 22nd February, 1974.
8. At the hearing before the Tribunal copies of the books of account of the assessee were submitted and it was found that so far as B.L Bagla was concerned there had been no payment of interest whatsoever since 1961 and that the entire dues of B.L Bagla ultimately had to be written off at the end of the accounting year 1972. It was found further that since 1961, payments received by the assessee from Messrs. Surajmal Nagarmal had been next to nothing and that during the four assessment years there were only two payments, viz., a sum of Rs. 1,000 paid in 1968–69 and a sum of Rs. 5,000 paid in 1970–71. It was contended on behalf of the assessee that the assessee was compelled to pay tax on amounts which it had not received and was not likely to receive and, therefore, the directors of the assessee resolved to change the method of accounting so that the true and correct state of affairs would be reflected in the accounts.
9. The contentions of the revenue before the Tribunal were that the debtor, viz., Messrs. Surajmal Nagarmal, was enjoying deductions by crediting its accounts and that the object of the change of method of accounting was to avoid payment of proper tax and, therefore, the same should not be accepted.
10. The Tribunal held that there was nothing to show that the change effected by the assessee in its method of accounting was not in good faith and that the propriety of the change adopted by the assessee had to be determined with reference to the assessee's own accounts and not the accounts of its debtors. The Tribunal found that the change-over to the cash basis was more realistic and did not involve any mala fides on the part of the assessee. Accordingly, the Tribunal allowed the appeals of the assessee and dismissed the appeal of the revenue.
11. From this order of the Tribunal at the instance of the Commissioner of Income-tax, West Bengal V, Calcutta, the following questions have been referred to us:
“(1) Whether, on the facts and in the circumstances of the case, and in view of the fact that Messrs. Surajmal Nagarmal was controlling the assessee's business, the Tribunal's finding that the change in the method of accounting of the assessee from mercantile system to cash system was legally based on reasons?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of interest received from Messrs. Surajmal Nagarmal in respect of loan advanced to the said firm by the assessee is not includible in the assessment years 1968–69, 1969–70 and 1970–71 and whether the Tribunal was right in law in holding that the amount receivable from Surajmal Nagarmal and Sri B.L Bagla in respect of loans advanced to them by the assessee is not includible for the assessment year 1971–72?”
12. None appeared at the hearing on behalf of the assessee. Mr. Bagchi, learned advocate for the revenue, contended that it had been found as a fact by the Income-tax Officer that Messrs. Surajmal Nagarmal controlled the assessee and this was unchallenged and uncontroverted. The Tribunal not having come to any contrary finding, its conclusion that the assessee had changed its method of accounting bona fide could not be accepted.
13. In support of his contentions Mr. Shiv Prasad Ram Sahai v. Commissioner Of Income-Tax, Uttar Pradesh., [1966] 61 ITR 124 (All). The facts in that case were that the assessee, a firm carrying on money-lending business, had shown interest received from its debtors on the basis of mercantile system of accounting throughout for the assessment years 1948–49 to 1956–57 but in the next assessment year, i.e, 1957–58, the accrued interest was not included in its income on the ground that the debtor-firm was in an embarrassed financial position. The Tribunal having held that the said sum should be added to the income of the assessee, the matter came up to the Allahabad High Court. The High Court observed as follows (page 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.”
14. And upheld the order of the Tribunal.
15. Mr. Bagchi also cited New Victoria Mills Co. Ltd. v. Commissioner Of Income-Tax, U.P, [1966] 61 ITR 395 (All). The facts here were that the assessee, a limited company, had claimed deduction of bonus on the basis of actual payment throughout from 1943 to 1947. For the assessment year 1949–50, the previous year ending on the 31st December, 1948, the assessee claimed deduction for provision for bonus which was paid not in the relevant previous year but in the following year. At all stages from the Income-tax Officer up to the Tribunal this claim for deduction was disallowed. On a reference to the Allahabad High Court, the contentions of the revenue were upheld. The High Court observed at page 397 of the report as follows:
“It is no doubt open to the assessee to change his method of accounting but the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years. Merely because in the subsequent assessment year there was a loss and the bonus actually paid in that year could not be effectively set off but had to be carried forward would furnish no justification for permitting a change in the method of accounting. The bona fides, in the instant case, are absent and the Income-tax Officer was justified in resisting the attempt of the assessee to change its method of accounting.”
16. In our opinion none of the above decisions advance the contentions of Mr. Bagchi. The facts in the case of Shiv Prasad Ram Sahai, [1966] 61 ITR 124 (All) are entirely different from the facts before us. In that case, there was no general change in the method of accounting but one particular item was sought to be accounted for on an accrual basis for the first time during the accounting year.
17. The case of New Victoria Mills Co. Ltd., [1966] 61 ITR 395 (All) is definitely against the revenue. In the instant case, the Tribunal has accepted the change of method of accounting as bona fide which finding has not been challenged as perverse. Therefore, it is not open to the revenue to agitate the question of bona fides any further.
18. Mr. Bagchi faintly sought to argue that in the instant case the interest receivable should have been taxed under section 5 of the Income-tax Act, 1961. In support of his contentions Mr. Bagchi cited a decision of the Supreme Court in the case of Commissioner Of Income-Tax, A.P v. A. Krishna Murthy, [1964] 53 ITR 122, where the Supreme Court laid down that whatever be the method of book keeping, in computing the profits of the year, the stock-in-trade must be taken into account.
19. This decision appears to be of little relevance in the facts of the instant case. Mr. Bagchi could not cite any authority for the proposition that even where a cash system of account is followed, section 5 of the Act could be applied and any item brought to tax on accrual basis. In any event this new case was never agitated at any earlier stage and on the authority of the Supreme Court in Cit Bihar v. M/S Kirkend Coal Co. , [1969] 74 ITR 67, we do not feel inclined to go further into this new case. Mr. Bagchi also cited another decision of the Supreme Court in Keshav Mills Ltd., v. Commissioner Of Income Tax, Bombay, [1953] 23 ITR 230. The assessee in that case was a non-resident company. The Supreme Court observed that while in the case of a resident, mercantile system of accounting regularly adopted is obligatory on the income-tax authorities for computation of his income, it is doubtful whether that position would be available to a non-resident who maintains his books of account outside British India. This case is, therefore, also of no assistance to the revenue.
20. In our view, the matter has been concluded by the finding of the Tribunal that the change of method of accounting of the assessee was done bona fide and in consonance with the real state of affairs of its business. Accordingly, we answer question No. 1 in the affirmative and in favour of the assessee. As regards question No. 2, it does not appear that the Tribunal has found that any amount received by the assessee from Messrs. V Surajmal Nagarmal as interest was not includible in its assessment and, therefore, the first part of the question does not call for any answer. The second part of the question is answered in the affirmative and in favour of the assessee.
Banerji, J.:— I agree.
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