1992 (2) TMI 33 - HC - Income Tax

High Court upholds Revenue's income addition, rules in favor of income accrual principle

The High Court ruled against the assessee in question No. 2, favoring the Revenue by upholding the addition of Rs. 5,85,025.10 to the income. ... Accounting, Agricultural Income Tax, Coffee Issues Involved:1. Adoption of the differential value received in respect of coffee pooled during the previous year for the purpose of assessment for the current year.2. Deletion of the addition of Rs. 5,85,025.10 received in the accounting year 1977-78 towards the difference in value of 1976-77 season's coffee.3. Whether the Tribunal's decision is opposed to the principles laid down by the Supreme Court in 59 ITR 254 (State of Kerala v. Bhavani Tea Co. Ltd.).Summary:Issue 1: Adoption of Differential Value for AssessmentThe Tribunal held that the procedure of the assessee, who maintains accounts on the mercantile system of accounting and returns the differential value received in respect of coffee pooled during the previous year, can be adopted for the purpose of assessment for the current year. However, the High Court found this approach unsustainable. The court emphasized that under the mercantile system of accounting, income is taxable in the year it accrues, not when it is received. Therefore, the income from the coffee delivered during the accounting period July 1, 1976, to June 30, 1977, should be assessed in that period, even if the exact value was determined later.Issue 2: Deletion of Addition of Rs. 5,85,025.10The Tribunal directed the deletion of the addition of Rs. 5,85,025.10, which was received in the accounting year 1977-78 towards the difference in value of the 1976-77 season's coffee. The High Court disagreed, stating that the assessing authority was justified in adding this amount to the income returned by the assessee. The court noted that the Coffee Board's award, which became known before the assessment was completed, should be considered for the relevant accounting period. The Tribunal's decision to delete this addition was deemed a clear error of law.Issue 3: Tribunal's Decision vs. Supreme Court PrinciplesThe High Court found that the Tribunal's decision was opposed to the principles laid down by the Supreme Court in State of Kerala v. Bhavani Tea Co. Ltd. [1966] 59 ITR 254. The Supreme Court had held that under the mercantile system of accounting, income accrues when the relevant entry is made in the accounts, even if the payment is delayed. The High Court concluded that the Tribunal's view was incorrect and that the income should be assessed in the year it accrued, not when it was received.Conclusion:The High Court answered question No. 2 in the negative against the assessee and in favor of the Revenue, and question No. 3 in the affirmative, in favor of the Revenue and against the assessee. Question No. 1 was declined as it was hypothetical and fully addressed by the answers to questions Nos. 2 and 3. The references were answered accordingly, and a copy of the judgment was ordered to be forwarded to the Agricultural Income-tax Appellate Tribunal, Additional Bench, Kozhikode.