2003 (1) TMI 278 - AT - Income Tax

Tribunal enforces accrual accounting for company post switch from cash, citing Companies Act.

The Tribunal upheld the Assessing Officer's decision to reopen assessments and revise income on an accrual basis for a company that switched from cash to ... Income Escaping Assessment, Non Disclosure Of Primary Facts Issues Involved:1. Reopening of assessment under section 147.2. Justification of revising income based on accrual basis.Detailed Analysis:Reopening of Assessment under Section 147:The appeals pertain to the assessment years 1990-91 and 1991-92, where the assessments were originally completed based on the cash system of accounting. The Assessing Officer (AO) later discovered that the assessee had switched to the accrual system starting from the assessment year 1990-91 due to an amendment in the Companies Act, 1956. Consequently, the AO reopened the assessments under section 147, believing that income had escaped assessment because it should have been computed on an accrual basis.The learned Chartered Accountant (CA) for the assessee argued that the company had maintained accounts on a cash basis for over 20 years, being a service organization. Although the Companies Act amendment required accounts to be maintained on a mercantile basis, the company continued to maintain day-to-day accounts on a cash basis, only adopting the mercantile system for annual returns. The CA contended that there was no factual basis for the AO's finding that the company had changed its accounting method.The CA cited the Supreme Court's decision in United Commercial Bank v. CIT, which allowed different accounting methods for different purposes, and the ITAT Hyderabad Bench's decision in Chenai Finance Co. Ltd. v. Asstt. CIT, which held that section 209(3) of the Companies Act does not override section 145 of the Income-tax Act.Justification of Revising Income Based on Accrual Basis:The Departmental Representative (DR) argued that section 145 of the Income-tax Act does not permit different methods of accounting for different purposes. If the final accounts are prepared on a mercantile basis, they should be used for income-tax purposes as well. The DR asserted that the day-to-day cash basis bookkeeping was irrelevant for determining the accounting method, emphasizing the final accounts prepared on an accrual basis.The DR dismissed the relevance of the United Commercial Bank case, stating it dealt with the valuation of investments, not accounting methods. Similarly, the DR argued that the ITAT Hyderabad Bench's decision in Chenai Finance Co. Ltd. and the ITAT Chennai Bench's decision in Ashok Leyland Finance Ltd. did not apply to the current issue.The DR relied on the Madras High Court's decision in Bangalore Woollen Cotton & Silk Mills Co. Ltd. v. CIT and the ITAT Delhi Bench's decision in Amarpali Mercantile (P.) Ltd. v. Asstt. CIT, which supported the view that an assessee cannot maintain accounts on a cash basis for income-tax purposes while using a mercantile system for other purposes.Tribunal's Decision:The Tribunal concluded that the assessee-company, being a limited company, was bound by the Companies Act to maintain accounts on a mercantile basis. The Tribunal emphasized that the day-to-day cash basis bookkeeping was merely a matter of book-keeping and did not determine the accounting method. The Tribunal found that the assessee had to compute its income for income-tax purposes based on the accrual system, as mandated by the Companies Act.The Tribunal supported its decision with the ITAT Delhi Bench's ruling in Amarpali Mercantile (P.) Ltd. and the ITAT Chennai A-Bench's decision in Sreevari Apparels (P) Ltd., along with the Madras High Court's observations in Subramaniam Chettiar's case. Consequently, the Tribunal upheld the AO's reopening of the assessments and the revision of income on an accrual basis, deciding both issues against the assessee-company.