The Judgment of the Court was delivered by
Dipak Kumar Sen, J.:— This reference arises out of the assessments to income-tax of M/s. Snow White Food Products Co. Ltd., the assessee, in the assessment years 1971-72 and 1972-73, the corresponding previous years whereof ended on the 31st December of the calendar years 1970 and 1971, respectively. The ITO, following the assessments in earlier years, included the amounts of Rs. 1,97,657 and Rs. 2,01,517, being interest accrued on loans advanced by the assessee, in the latter's income, rejecting the contention thatthe assessee had changed its system of accounting, in respect of income from interest, from mercantile to cash.
2. In the appeals against the said orders of assessment, the AAC, following an order passed in respect of an earlier assessment year 1969-70 in a similar appeal by the assessee, which was affirmed by the Tribunal, upheld the orders of the ITO. The assessee preferred further appeals to the Income-tax Appellate Tribunal. In the appeals, the Tribunal considered its order passed in the earlier assessment year 1969-70. Both the assessee and the Revenue reiterated their respective contentions as urged in the said earlier appeal. The Tribunal followed its earlier order and upheld the addition in the assessment recording that no new issues were raised in the present appeal.
3. On an application by the assessee under s. 256(1) of the I.T Act, 1961, the Tribunal has drawn up a statement of case and referred the following questions stated to be arising out of its order in the said two assessment years:
1971-72:
“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 system to the cash system in so far as credits in the interest account were concerned and thus in holding that the sum of Rs. 1,97,657, being interest accrued during the relevant year but not received, was liable to be included in the assessment year 1971-72?”
1972-73:
“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 system to the cash system in so far as the credits in the interest account were concerned and thus in holding that the sum of Rs. 2,01,517 being interest accrued during the relevant year but not received was liable to be included in the assessment for 1972-73?”
4. In the instant reference it is necessary to consider the assessments of the assessee in the earlier assessment years 1968-69 and 1969-70.
5. In the assessment year 1968-69, the assessee, for the first time, claimed a change in its method of accounting in respect of interest receivable from mercantile to cash system. The change was not accepted by the Revenue authorities.
6. The Tribunal upheld the decision of the Revenue, inter alia, on the ground that on the materials before it the assessee had failed to establish that the change was intended to be regular. The decision of the Tribunal was challenged by the assessee in Income-tax Reference No. 356 of 1977 in which we have delivered a judgment to-day [Snow White Food Products Co. Ltd. (No. 1) v. CIT, [1983] 141 ITR 847 (supra)]. We upheld the order of the Tribunal on the sole ground that there was no material before the Tribunal to hold that the assessee had changed and/or had decided to change its regular method of accounting by another regular method of accounting.
7. In the next assessment year, i.e, 1969-70, the assessee came armed with a resolution of its board of directors sanctioning the change in the method of accounting in respect of its interest income. This resolution was, however, passed on the 2nd January, 1969, after the accounting year was over. The claim of the assessee was again rejected by the Revenue authorities.
8. In the appeal preferred by the assessee against the assessment, the Tribunal held, inter alia, that as the resolution of the board of directors was passed on the 2nd January, 1969, after the accounting year was over, the passing of the said resolution did not result in any change in the circumstances in the said year from the circumstance prevailing in the preceding assessment year 1968-69. The Tribunal also examined the particulars of the debtors of the assessee and rejected the contentions of the assessee with the following observations;
“In the assessment year 1968-69 the assessee had only two debtors, R.N Poddar & Sons and G.B & Co. The loan of G.B & Co. was advanced for the first time in that year. The loan to R.N Poddar & Sons had been advanced in 1964. There was another debtor, Howrah Soap Co. Ltd., till the assessment year 1967-68. The assessee realised the entire principal and interest in the subsequent years from this debtor. The loan to G.B & Co. was advanced for the first time in the assessment year 1968-69. This shows that there was only one debtor, R.N Poddar. & Sons, the interest from whom was not realisable according to the assessee and that the change was intended only so far as the interest receivable from the debtor is concerned.
In the immediately preceding year the Tribunal was not satisfied about the bona fides of the assessee in claiming the change of system of accounting. The circumstances in the year under consideration on this point are the same as those were in the earlier year.”
9. It is am atter of record that the assessee sought to initiate a reference against the order of the Tribunal for the said assessment year 1969-70 but was unsuccessful.
10. At the hearing, Mr. Poddar, learned advocate for the assessee, reiterated the contentions urged by him in Income-tax Reference No. 356 of 1977 (Snow White Food Products Co. Ltd. v. CIT (No. 1), [1983] 141 ITR 847 (supra)). The same have been recorded in detail in our judgment in the said reference and need not be reiterated fully. The main points urged were, inter alia, as follows i
(a) In law, an assessee was entitled to change its regular method of accounting in respect of one part of his business or one class of its customers provided he substituted one regular system by another regular system.
(b) The 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 or continued.
(c) The assessee had admittedly changed its system of accounting from mercantile to cash in respect of its income from interest since 1968-69. It was not open to the Revenue to deny the factum of this change.
(d) In the circumstances, the Revenue was not entitled to treat the mercantile system as the assessee's regular method of accounting and assess the interest income accordingly. If the change was not accepted, assessment would have to be made on the basis of best judgment.
11. Mr. Poddar further submitted that it was a matter of record that the assessee, after changing its method of accounting in respect of its interest income from the mercantile to cash system, had followed the substituted system regularly for several years.
12. Mr. Poddar contended that in the assessment year 1968-69, the Tribunal did not find nor record that the change in the method of accounting of the assessee was not bona fide. In 1969-70, the Tribunal proceeded on the erroneous basis that in the earlier year it had been held that there was lack of bona fides on the part of the assessee in introducing the change. There was no finding even in the instant reference that the change introduced earlier and continued was not bona fide.
13. Mr. Poddar submitted last that the intention of the assessee in changing its system of accounting was wholly irrelevant in the context of s. 145 of the Act and the expression “bona fide” did not occur in the said section.
14. In support of his contentions Mr. Poddar relied on the following decisions and cited the same.
(a) Sarupchand v. CIT, [1936] 4 ITR 420 (Bom). Here the assessee, a partnership, were money-lenders. The debtors of the firm refused to pay interest on account of a litigation between the partners and the interest received was much less than the interest 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. The Bombay High Court, on facts, refused to state a case on a question of law.
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, [1959] 36 ITR 162 (Mad). In this case, an amount of commission was not received by the assessee who claimed that it had adopted the cash system of accounting. There was no express finding by the Tribunal that the said system of accounting had been regularly employed. 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 em ployed” must be held to be satisfied. It was, however, held on other facts that the adoption of this system failed to disclose the true income of the assessee who thus came under the mischief of the proviso to s. 13 of the Indian I.T Act, 1922.
This decision 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 reduce the true income of the assessee.”
(c) Indo-Commercial Bank Ltd. v. Commissioner Of Income-Tax, Madras., [1962] 44 ITR 22 (Mad). In this case, it was held by the Madras High Court on reference that the method adopted by an assessee for valuing his closing stock was a “method of accounting” within the meaning of s. 13 of the Indian I.T Act, 1922. The High Court observed, 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 requirements of section 13…Neither principle nor authority bars an assessee from substituting one method of accounting for another at his choice…In other words, while the assessee can exercise more than once his option to choose his method of accounting…provided, of course, 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. Commissioner Of Income-Tax., [1975] 101 ITR 40 (All). In this case the assessee 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. It was 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 the cash system of accounting he could not be assessed on accrual. The option was with the assessee and the Revenue could not compel an assessee to adopt the mercantile system of accounting. On 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 the previous years was immaterial.
(e) Commissioner Of Income-Tax v. Eastern Bengal Jute Trading Co. Ltd., [1978] 112 ITR 575 (Cal). In this case the directors of the assessee, a limited company, passed a resolution that from the relevant accounting year the method of acounting of the assessee would be changed from mercantile system to cash and that this new method should be followed thereafter. The resolution was confirmed at a general meeting of the shareholders. The Tribunal accepted the change. On a reference this court held that under s. 291 of the Companies Act the directors were empowered to change the method of accounting. The court also noted that 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 up-held.
(f) CIT v. Rajasthan Investment Co. (P.) Ltd., [1978] 113 ITR 294 (Cal). The assessee in this case was an investment company and derived its income from interest on loans and advances. Its accounts were maintained on the 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 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 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, [1978] 114 ITR 227 (Cal). In this case, the assessee, a limited company passed a resolution in 1967 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 on realisation. 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 in earlier years and that 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 s. 145 of the I.T Act did not debar an assessee from changing his accounting method. It was observed that 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 s. 144 of the Act. The matter was remanded to the Tribunal for being considered afresh.
15. Mr. B.L Pal, learned advocate for the Revenue, contended in reply that an assessee was entitled to change its method of accounting in respect of a particular head of account and not in respect of merely one item of his account and that such a change must be made bona fide. Mr. Pal submitted that the facts and circumstances which prevailed in the assessment year 1969-70, continued to prevail in the assessment years 1970-71 and 1971-72. There were no new facts before the Tribunal and no new issue was raised. The principles of res judicata were to be applied in such circumstances and the Tribunal was entitled to and rightly followed the earlier order passed in the assessment year 1969-70.
16. Mr. Pal next submitted that in the assessment year 1969-70, it had been found as a fact that the change in the method of accounting by the assessee was not bona fide and such finding has become final. Even in this reference, the finding has not been challenged as perverse. The absence of bona fides on the part of the assessee in changing his accounting method disentitles the assessee from claiming assessment under the changed method.
17. In support of his contentions Mr. Pal cited the following decisions:
(a) Messes. Ramkumar Kedarnath v. Commissioner Of Income-Tax, Bombay, [1937] 5 ITR 261 (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 difficulties 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 the accounting was only for a half year.
(b) In the matter of Chouthmal Golapchand, [1938] 6 ITR 733 (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) Forest Industries Travancore Ltd.…Applicant;* v. Commissioner Of Income Tax, Kerala…., [1964] 51 ITR 329 (Ker). In this case the assessee, on the basis of an engineer's report, wrote off 75% of the book value of its stores and spares and claimed deduction for the loss. The Tribunal confirmed the disallowance of the claim by the Revenue authorities on the ground that there has been clear change in the method of accounting as in earlier years the item had been valued at cost. The High Court answered a reference in favour of the assessee with, inter alia, the following observation (p. 333):
“There is no allegation in this case of any lack of bona fides or a statement to the effect that the changed method was not followed in subsequent years.”
(d) Shiv Prasad Ram Sahai v. Commissioner Of Income-Tax, Uttar Pradesh., [1966] 61 ITR 124 (All). This decision was cited for the following observation of the Allahabad High Court (p. 130):
“Once the assessee had 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 debit in its accounts for any reason whatsoever.”
(e) New Victoria Mills Co. Ltd. v. CIT, [1966] 61 ITR 395, 397 (All).
“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.”
18. Mr. Pal also cited the decision in Sarupchand, [1936] 4 ITR 420 (Bom), Indo-Commercial Bank Ltd., [1962] 44 ITR 22 (Mad), Eastern Bengal Jute Trading Co Ltd., [1978] 112 ITR 575 (Cal) and Rajaslhan Investment Co. (P.) Ltd., [1978] 113 ITR 294 (Cal), on the question of bona fides.
19. From the various decisions cited in this reference and as observed in our judgment in Income-tax Reference No. 356 of 1977 [Snow White Food Products Co Ltd. (No. 1) v. C/r, [1983] 141 ITR 847 (supra)], the law appears to be settled that an assessee is entitled to change his regular method of accounting by another regular method and such a change can be effected in respect of a part of the assessee's income.
20. There is nothing on record to show that in the two assessment years involved, interest received from any debtor was accounted for by the assessee on the mercantile basis. We are, therefore, unable to accept the contention of the Revenue that the change in the method of accounting was being followed in respect of only one item in the assessee's account.
21. We also cannot accept the contention that the facts and circumstances of the present reference are the same as those prevailing in the assessment year 1969-70. In any event, two years passed since the assessment year 1969-70 during which the assessee maintained the change in its method of accounting. This fact appears to have been lost sight of by the Tribunal. This new fact also stands in the way of the contention of the Revenue that the matter in issue is res judicata. In any event, it is well settled that the principles of res judicata are not applicable in revenue matters and findings of fact in an earlier year are not binding in the assessments in subsequent years and can be reagitated on new evidence.
22. It remains to be considered if the assessee acted bona fide in changing its method of accounting. It is matter of record that the assessee sought to introduce the impugned change first in the assessment year 1968-69. In the assessment of that year the Revenue authorities rejected the assessee's case which have been upheld by us in the Income-tax Reference No. 356 of 1977 (Snow White Food Products Co. Ltd. v. CIT (No. 1), [1983] 141 ITR 847 (supra)) on the sole ground that the material on record was not sufficient to establish that the change was introduced on a regular basis. It was not (sic) found by us that the change was not bona fide.
23. In the assessment year 1969-70, the Tribunal appears to have re-examined whether the change in the method of accounting effected by the assessee in the assessment year 1968-69 was bona fide, on further evidence, as noted earlier. The Tribunal came to the conclusion that the object of the assessee in effecting the change in its method of accounting was only in respect of interest receivable from one debtor and, therefore, the change was not bona fide. Even assuming that such a finding is correct and has become final, it still remains to be examined whether in continuing the changed method of the subsequent years 1970-71 and 1971-72, the assessee acted mala fide. Particulars of the debtors of the assessee and their payments to the assessee in the said subsequent years were neither called for nor examined. In any event, there is no specific finding in the relevant assessment years that the assessee, in maintaining the change in its method of accounting, was not acting bona fide.
24. The concept of bona fides in the context of a change in the method of accounting appears to have its genesis in Sarupchand, [1936] 4 ITR 420 (Bom). Rangnekar J. of the Bombay High Court observed that an assessee was entitled to change its method of accounting provided he satisfied the Revenue authorities that he was doing so in good faith. This observation does not occur in the judgment of Beaumont C.J In Indo-Commercial Bank Ltd., [1962] 44 ITR 22 (Mad), the Madras High Court, following Sarupchand, [1936] 4 ITR 420 (Bom), observed that where an assessee changed its method of accounting bona fide and satisfied the department that he intended to adopt the changed method of accounting, thereafter the requirements of s. 13 of the Indian I.T Act, 1922, would be satisfied.
25. In Eastern Bengal Jute Trading Co. Ltd., [1978] 112 ITR 575 (Cal) this Court upheld a change in the method of accounting, noting, inter alia, that the Tribunal had found that the change was not introduced mala fide. A similar observation of the Tribunal was noted by this Bench in CIT v. Rajasthan Investment Co. (P.) Ltd., [1978] 113 ITR 294 (Cal).
26. Section 145 of the I.T Act, 1961, 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.”.
27. All that the section lays down that if an assessee regularly employs a method of accounting his income should be computed in accordance therewith. The section, in its terms, does not require any enquiry into the bona fides of the assessee in following a regular method.
28. A recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accouating is substituted by another regular method the same result will follow. Only in a case where the assessee changes his regular method of accounting by another method and does not follow the change regularly thereafter it might be possible for the assessee by introducing successive changes in his methods of accounting to exclude items of his income from being included in the computation of his total income. Therefore, when an assessee changes his regular method of accounting by another regular method the question of his bona fides have little relevance.
29. Only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the Revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the expression “good faith” and “bona fide” occur in the observations in the earlier judgment noted earlier.
30. In our opinion, where it is found that an assessee has employed (changed?) his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change. For the above reasons the assessee succeeds in this reference. The question referred to us are both answered in the negative and in favour of the assessee. In the facts and circumstances, there will be no order as to costs.
C.K Banerji, J.:— I agree.