TaxTMI 
TaxTMI 
1995 (9) TMI 113
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....enditure was normal business expense and not covered by Explanation 2 to section 37(2A) of the Income-tax Act. 4. The aforesaid submissions did not find favour with the Commissioner of Income-tax (Appeals), who at the outset, set out the details of the expenditure in question as follows :- " Date Ch. No. To whom paid Particulars Amount Rs.12-9-1987607789 Chicken Inn Dinner for 500 persons 42,800.00 on3-9-198714-9-1987607793 Hotel Sofital Stay charges of Surya. stockists 39,942.751-9-1987194140 M/s. Bhagwan 30 Safari Suit case. 18,315.00 Das & Sons. ----------- 1,01,057.75 " ----------- 5. By referring to Explanation 2 to section 37(2A) the Commissioner of Income-tax (Appeals) opined that entertainment expenditure included the amount spent on provision of hospitality of every kind by the assessee to any person whether by way of food or beverages or in any other manner. According to him it was immaterial whether such provision was made by reason of any express or implied contract or custom or usage of trade. He, therefore, concluded that the entire amount of Rs. 1,01,057 was covered by Explanation 2 to section 37(2A) and liable for disallowance/deduction in accordance therewith. A....
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....excluded from the purview of the disallowance being allocated to the employees of the assessee on an estimated basis. The Assessing Officer is now directed to recompute the disallowance in accordance with the aforesaid directions. 10. The second ground in the appeal pertains to the disallowance of a sum of Rs. 18,67,822 in respect of the depreciation on vehicles which were leased out by the assessee. The Assessing Officer in the course of the assessment proceedings noted that the following vehicles had been purchased and leased out on the last day of the accounting period : " Date Description of Vehicle Amount (Rs.) 30-3-1989 D. C. M. Toyota 23,75,920 31-3-1989 Truck TATA 1,60,000 30-3-1989 Maruti  ....
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....tant case there being no evidence to prove such a fact she, in the final analysis, disallowed depreciation to the tune of Rs. 18,67,822. 12. Before the Commissioner of Income-tax (Appeals) detailed arguments were advanced on behalf of the assessee, but for purposes of disposing of the present appeal it would suffice if we summarise these as under :- (i) That the vehicles were owned by the assessee and leased out before the end of the accounting year ; (ii) That the vehicles were used for purposes of the leasing business of the assessee ; (iii) All relevant conditions stipulated by section 32 stood fulfilled to entitle the assessee to claim the depreciation ; (iv) That the assessee had received rentals from the lessees of the said vehicles and the transaction between the parties was complete as soon as the assets viz., the vehicles had been given on lease ; (v) It was not the concern of the assessee as to what use the vehicles were put to by the lessees after the same had been given on lease ; and (vi) That the vehicles had been insured and temporary registration certificates duly obtained. On the basis of the aforesaid facts and submissions, it was urged that depreciation b....
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....f a motor vehicle ; (viii) That section 43 of the said Act provided for the grant of a temporary registration by the Authorities concerned and in the present case such temporary registration had been duly obtained and this being a fact not disputed by the tax authorities ; and (ix) That the lease rentals from the various lessees amounting to Rs. 75,306 had been duly received and accounted for as the assessee's income for the assessment year under consideration. 15. On the basis of the aforesaid submissions, the learned counsel urged that depreciation as claimed be allowed. In support the following decisions were relied upon :-- 1. Capital Bus Service (P.) Ltd. v. CIT [1980]123 ITR 404 (Delhi) ; 2. CIT v. L. G. Ramamurthi [1977]110 ITR 453 (Mad.) ; and 3. Indian Management Advisers & Leasing (P.) Ltd. v. Dy. CIT [1994] 51 ITD 566 (Delhi). 16. The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities and in addition to the reasons recorded in the said orders it was canvassed that the transactions of lease had not to be considered in substance, but in form. It was, however, submitted that there was no dispute between....
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....id vehicles was on the WDV and not the gross amount. In our opinion, some consistency was required to be maintained on the part of the Revenue authorities in processing the claim on account of depreciation. In the final analysis, we accept the arguments advanced by the learned counsel on behalf of the assessee as these find apt support from the decisions cited and more so the one of the Delhi Benches of the Tribunal in the case of Indian Management Advisers & Leasing (P.) Ltd. The Assessing Officer is accordingly directed to allow necessary relief on account of the depreciation claimed. 19. We now come to the last ground in the appeal, which by far was the most contested. As per the memorandum filed before the Tribunal, the said ground reads as under :--- " 3. (i) The CIT (Appeals) erred in rejecting the method of accounting followed by the assessee and thereby upholding an addition of Rs. 97,22,280. (ii) The CIT (Appeals) erred in holding that under the new method of accounting the assessee had not accounted for the lottery tickets despatched before the end of the accounting year in the closing stock when it was clearly shown to the CIT (Appeals) and the Assessing Officer and i....
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....e down to 10.71 per cent in the assessment year under appeal. However, the difference of 5.43 per cent was explained to be on account of the higher prize money paid and this was accepted by the Assessing Officer, but the balance of 1.60 (correct figure should be 2.61%) per cent was attributed to the change in the method of accounting. 22. On the basis of the above, the Assessing Officer, in the ultimate analysis, concluded that the changed method had been adopted by the assessee " to reduce its profit and tax incidence. " The difference between the old method and the changed method, viz., Rs.97,22,290 was added to the returned income. In making the impugned addition the Assessing Officer referred to various reported judgments and these are duly discussed at page 4 of the assessment order and also find due mention in para 9.4 of the order of the CIT (Appeals). 23. Being aggrieved with the rejection of its " changed method " by the Assessing Officer and the consequent addition the assessee took up the matter before the CIT (Appeals) and at which stage arguments more or less identical to those tendered before the Assessing Officer were advanced. These may be summarised as under :---....
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....e system had been abruptly changed whereby the lottery tickets despatched towards the end of the accounting period and in respect of which the draw had not been held had neither been accounted for in the sales and nor in the closing stock ; and (iii) The assessee had accounted for the opening stock according to the new method whereas it did not account for the tickets despatched on the last dates of the accounting period either in sales or in the closing stock and this gave a distorted picture of assessee's taxable profits. 26. In support of the aforesaid proposition and findings, the Commissioner of Income-tax (Appeals) placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd [1991]188 ITR 44. The aforesaid judgment in fact has been discussed at length in paras 9.10 and 9.11 of the order of the first appellate authority and the ultimate conclusion being reached to reject the changed method. 27. We have heard both the parties at substantial length in respect of the aforesaid issue and have also perused the material on record, to which our attention was invited during the course of the hearing. The learned counsel for the assesse....
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....of the various clauses would indicate that the tickets continued to be the property of the assessee ; (8) That although the assessee had been following a different method all along in the past it was on the expert advice of the auditors that it was obliged to change the method, but the latter also being a recognised method followed by others in the same line of business and accepted by the Department. That in fact it was not a change in the method, but only the removal of certain " anomalies " in the earlier method ; (9) That the change on the facts and circumstances of the case was bona fide and this had also been accepted by the Assessing Officer in the remand report sent to the Commissioner of Income-tax (Appeals) in assessment year 1990-91 ; and (10) No finding had been recorded by the tax authorities to the effect that the despatch of lottery tickets tantamounted to a sale. 28. In support of the viewpoint canvassed, the learned counsel placed reliance on various reported decisions and sought to distinguish the judgment of the Hon'ble Supreme Court in the case of British Paints (India) Ltd. According to him a decision of a Court had to be read in the relevant context and wi....
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....ird condition is that the new method should be an acceptable one in law and also approved by the profession of accountancy. 31. Further a change of any type is likely to affect adversely one party and which in tax proceedings would be the revenue and though at the first instance the assessee would " gain " the effect would be neutralised both ways over a period of time. For instance in the present case the admitted fact is that the assessee has not booked as sales the tickets despatched to the stockists for which the draws have not been held prior to 31-3-1989, but it is an accepted fact on the part of the revenue before us that the closing stock thereof valued at Rs. 57,87,163 is included in the accounts although not separately, but by an adjustment in the prepaid expenses account by debit and the corresponding credit being to the " paper consumed account " which is shown less by the said figure in the profit and loss account under the head " Cost of sales ". This fact is also accepted by the Assessing Officer in the remand report sent to the Commissioner of Income-tax (Appeals) in the appellate proceedings for assessment year 1990-91 and thereafter echoed by the CIT (Appeals) in....
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....arly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accounting 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 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. 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. Where it is found that an assessee has changed his regular method of accounting by another recognised method and has followed the latter method regularly, it is not open to the Revenue authorities to go into the question of bona fides of the introduction and continuance of the change. " (ii) Carborandum Universal Ltd.'s....
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....h Paints (India)(P.) Ltd would not apply to the facts of the present case as in that case the assessee was following a method of valuation of stocks whereby the overhead expenditure was totally excluded. Their Lordships opined that this method was likely to give a " distorted picture " of the business for purposes of computing the chargeable income. In the case before us, the system which the assessee has switched over to is one which is followed by others in the same line of business and accepted by the Department. Then again it is not against legal and accountancy principles. 35. We would now proceed to examine the arguments of the parties on the agreement between the assessee in its capacity as " organising agent " and the " stockists " to whom the tickets are despatched. As per the Revenue's case the despatch is to be treated as a sale on the part of the assessee whereas the learned counsel referred to various clauses of the agreement to contend that it at the most constituted " an agreement to sell " rather than a " sale agreement ". Section 4 of Sale of Goods Act was referred to. A sample agreement was placed by the learned counsel at pages 72 to 75 of his compilation and bo....
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....ganising Agent at least 24 hours before the draw. " " 30. That the stockist has deposited interest free but refundable security with the Organising Agent. This security shall be refunded when this agreement is terminated. However, the Organising Agent shall have the right to adjust from the security all dues which are payable by the stockist to the Organising Agent." 37. A reading of the entire agreement and more specifically the aforesaid clauses reveals an arrangement by which the assessee sends the tickets to the stockists who in turn sell these to their " agents ". The freight outwards on tickets despatched is borne by the assessee whereas the freight on unsold tickets returned to the assessee is to the charge of the stockists. Further, service charges at 3 per cent on the total value of the tickets sold is payable by the assessee to the stockists and which they may deduct even while remitting the sale proceeds to the assessee. The stockists are also obliged to make the payment of a particular draw to the assessee " positively one week in advance of the actual date of draw. In otherwords, the condition of payment is with reference to the date of the draw. Further, any failure....
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.... would have been no need to incorporate in the agreement clauses pertaining to return of unsold tickets and reduction in the quota of tickets to be despatched to a stockist on its failure to fulfil certain conditions including the one pertaining to payment of sale proceeds. In a sale the seller is not really bothered what the buyer does with the goods and items purchased and the limited concern is with reference to goods which are defective and these are taken back under stipulated terms and conditions and sales to this extent are reduced. 40. Then again as per clauses 28 and 29 the stockists are required to send " proper accounts " to the organising agent, i.e., the assessee for every draw at least one week before the date of the draw. This also indicates some sort of control by the assessee over the working of the stockists although with a view to safeguard its own interests. 41. Another aspect of the matter which requires mention is that whereas the agreement is between the assessee and the stockist there is another party which finds mention in the said agreement and that is the " agent " to whom the tickets " shall be sold by the stockist ". Although the " agent " is not priv....