TaxTMI 
TaxTMI 
2017 (5) TMI 841
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....ant was liable to interest under section 215 of the Income- tax Act, 1961?" 3. The Tribunal accordingly proceeded to draw up a statement of case which states the following facts : (A) The assessee, a registered firm, earned income by way of commission for the accounting period ending March 31, 1984 from M/s. Hero Cycles (P.) Limited, M/s. Highway Cycle Industries Limited, M/s. Rockman Cycle Industries and M/s. Majestic Auto Limited (MAL). This reference relates to the validity of the assessees' having changed their accounting system from the mercantile system to the cash system in the midst of the accounting period ending March 31, 1984. The assessee had entered into an agreement dated March 18, 1981 with MAL titled "sole selling agent". The terms and conditions thereof are contained in a letter addressed by MAL to the assessee dated March 18, 1981. The assessee endorsed its acceptance at the footnote of the letter. MAL agreed to avail of the assessee's marketing services with effect from April 1, 1981 till December 31, 1982. The arrangement was to be reviewed thereafter. In consideration of a payment of Rs. 30,000 per month including expenses of TA, DA....
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.... cent. (including de-lcredere commission) upon the invoice price of the product issued by the principals in India, other than direct sales made by the principals as mentioned in column 3 above and sales to the Government Departments or the companies owned by the Government. The selling agents shall also be not entitled to any commission on exports. The above rate of commission is inclusive of the del-credere commission. 12. The selling agents shall not be entitled to commission on the amount of any invoice such amount shall be wholly or partly lost by reasons of the insolvency of the customers. The selling agents shall be responsible for making good the loss on account of bad debts arising out of sale of the products of the principals made during the period of agreement. 13. That all the disputed bills shall be settled by the selling agents at their expenses and the loss on return of goods shall also be borne by them." (C) After entering into the agreement dated October 1, 1983, the assessee changed its system of accounting from the mercantile to the cash basis. The change was only in respect of the commission received from MAL. The assessee continued sho....
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....essees sought to justify the change on account of their having entered into a fresh agreement with MAL dated October 1, 1983. The Commissioner of Income-tax (Appeals), however, held that the nature of income was almost the same even after and in respect of the new agreement dated October 1, 1983 and that it is the same source of income. He upheld the Assessing Officer's opinion that the assessees cannot be allowed to adopt two different methods of accounting. On behalf the Department, considerable emphasis was placed on the following observations in the assessment order : "5.1 . . . Further the income (net income) means the gross income less expenditure relevant for earning that gross income. In the case under appeal, the Income-tax Officer has established beyond doubt while arguing the case before me that the appellant has shown all the expenses on accrual basis whereas the income is shown on receipt basis. It is definitely not a proper method of keeping the books of account. There is no consistency in maintaining of the accounts of income because the expenses have been claimed on mercantile basis and the gross income has been shown on receipt basis. Keepi....
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....either point of view, there was no justification for making a change on the allegation that the payments were not received promptly and regularly from MAL. It was held that there was nothing on record to establish that arrears were due from MAL and that it was, therefore, to the detriment of the assessee on account of the income being shown on accrual basis. 10. There is nothing in the Act even as it stood at the relevant time that prevented an assessee from switching over from one system to the other. Further, at the relevant time, an assessee was entitled to follow a hybrid system, to wit, a different accounting system in respect of its various transactions. Even in respect of similar transactions, an assessee was entitled to follow either system. This, however, was subject to the Income-tax Officer's power under the proviso to section 145(1) to prevent the assessee from doing so. Under the proviso, even where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, the computation is to be made upon such basis and in su....
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.... 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 trans actions 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 debt in its accounts for any reason whatsoever. This is the very evil on account of which section 13 in the Act of 1922 was brought on the statute book. If the assessee could at any moment of time say that he will not debit the interest because of some reason or the other, then it would open the floodgates of evasion. There is also no hardship as the Legislature has expressly provided that, if....
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.... bona fide and it is regularly employed and not merely for the year in question." 14. Our view is also supported by the judgment of a Division Bench of the High Court of Gauhati in the case of CIT v. Doom Dooma India Ltd. [1993] 200 ITR 496 (Gauhati). The Division Bench held as under (page 500) : "It is for the assessee to adopt any recognised method of accounting for his business. The income shall be computed in accordance with the method of accounting regularly employed by the assessee. In other words, it is open to the assessee to opt for such method of accounting as he deems reasonable and appropriate. He may opt to adopt the manufacturing cost price method or the market price method provided the method is followed in regard to both the opening stock and the closing stock. It is not open to him to adopt one method for valuing the opening stock and a different method for valuing the closing stock so as to intentionally suppress the income derived or derivable in the particular previous year. Even where an assessee has adopted a particular method for a period of years, there is no provision of law which prevents him from changing to any other method, provided the chan....
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....account of the title, it would make no difference. On the other hand, under the agreement dated October 1, 1983, the assessee's responsibilities and obligations were entirely different. Under clause 4, the assessee was to procure orders from financially sound buyers for a minimum 75 per cent. of the total production of MAL's products. Moreover, in the event of the assessee failing to do so, MAL was entitled to terminate the agreement and the unsold goods were to be lifted by the assessee at MAL's selling price then in force. 18. Under clause 5, the assessee was not entitled to engage or be interested either directly or indirectly as principal, agent or employee in selling similar goods without MAL's consent in writing. There was no such bar under the earlier agreement. More important, whereas under the first agreement dated March 18, 1981, the assessee was entitled to a fixed remuneration of Rs. 30,000 per month, clause 11 of the agreement dated October 1, 1983 entitled the assessee to commission at 1.5 per cent. upon the invoice price. Equally important is the fact that under clause 13 the disputed bills were to be settled by the assessees at their expense and t....