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2001 (6) TMI 824
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....of plant and machinery called SCADA system on 30th March, 1993, to M/s Reliance Capital & Finance Trust Limited (hereinafter called RCFTL) for a total consideration of Rs. 8,03,38,800. The assessee thereafter entered into a lease agreement with RCFTL and leased back the said SCADA system for a period of 60 months and the total lease rentals were Rs. 10,55,65,200. The said lease agreement is given at pages 1 to 31 of the paper-book. The schedule to the agreement mentions the date of commencement, period, rate of rental and lease management fees for the rental. The first lease agreement was entered into on 30th March, 1993, and as per this agreement each monthly lease rent instalment was for an amount of Rs. 17,59,420. The assessee entered into a supplemental agreement on 5th April, 1993, which provided for amending cl. (iv) relating to the period and schedule of lease rentals and cl. (ii) relating to variation in rentals. The period referred to in the schedule to the agreement dt. 30th March, 1993, was replaced by the supplemental agreement dt. 5th April, 1993. The supplemental agreement extended the period of lease into a 'primary' period of 60 months from the commencement ....
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....s of rental regularly and punctually, without any deduction or abatement, irrespective of whether the said properties are in use by the lessee are or working for one or more shifts or not or are under repair or maintenance or replacement for any period whatsoever, without affecting the lessee's obligation to pay the rental for the fixed period and in addition to the right of the lessor specified in cl. 8 hereof, in the event of the lessee being in arrears or any such rentals, such arrears of rental shall carry interest @ 2 per cent per month on compounding basis with monthly rests from the respective due date specified in the Schedule till date of actual payment. 2.3. Upon termination of this agreement by efflux of time, or otherwise, the lessee, shall at its own cost and expense, forthwith deliver or cause to be delivered to the lessor the said properties, at such time and place as may be directed by the lessor, in goods repair, order and condition (subject to normal wear and tear). 4. Lessee covenants : During the subsistence of this lease and till the said properties are delivered back to the lessor in good order and condition, the lessee shall : 4.4. Maintain th....
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....ve lakhs sixty-five thousand and two hundred only), which has been worked out on the basis of the total acquisition cost. The rents would be payable by the lessees on the dates mentioned in the schedule herein below given. Such rentals should be payable by the lessees for the entire fixed period of the lease as follows : Schedule of lease rentals S. No. Rent payable on Amount Rs. 1. 31-3-1993 17,59,420 2. 7-5-1993 17,59,420 60. 7-3-1998 17,59,420 Total 10,55,65,200 (Rupees ten crores fifty five lakhs sixty five thousand and two hundred only)." It will be pertinent to mention the relevant clauses from the agreement dt. 5th April, 1993, which are mentioned as under : "(ii) The parties hereto are desirous of amending cl. (iv) relating to period, schedule of lease rentals and cl. (ii) relating to variation in rentals, of the schedule to the said agreement as specifically agreed and appearing hereinafter. Period Primary period 60 months from the commencement date Secondary period'120 months from the end of the primary period. Under schedule of lease of rentals to ad....
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....ary period of 10 years). Lease rentals were proportionately written off over the period of lease (5 + 10 years). In view of the above, Rs. 70,83,671 was written off during the year in the P&L a/c and thus the same amount was debited to the P&L a/c under the head "Establishment and other expenses" (Schedule 13) and Rs. 1,40,29,364 was debited to prepaid expenses on the assets side of the balance sheet. In brief, the case of assessee-company was that as per the lease agreement, accrued liability was Rs. 2.11 crores and the entire amount was paid during the previous year. The book entry should be override the accrual and book entry is immaterial if it is an accrued liability. And lastly the principles of accountancy do not override the statute. As per the lease agreement dt. 30th March, 1993, 12 instalments had accrued due and paid. The agreement required the assessee-company to pay Rs. 2.11 crores and under the mercantile system of accounting these amounts of lease rentals were accrued. Absence of book entry not defeat the accrual of liability. 4. However, the AO was of the view that the assessee was bound to compute its total income on the basis of books of account and it was not....
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....5 : (1991) 188 ITR 218 (Cal), Industrial Machinery Mfg. (P) Ltd. vs. CIT (1993) 114 CTR (Guj) 8 : (1993) 203 ITR 442 (Guj), CIT vs. O.E.N. India Ltd. (1995) 213 ITR 718 (Ker) and CIT vs. Mogul Line Ltd. (1962) 46 ITR 590 (Bom). However the CIT(A) was not convinced with the argument of the assessee and concurred with the view taken by the AO. Besides discussing the cases cited before him, he has also discussed cases such as the decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). The assessee is aggrieved against disallowance of claim for lease rentals in all these years. 6. The learned counsel for the assessee submitted that the AO had mentioned that the assessee could not claim an amount different from the amount debited in the books of account. In this connection the AO has relied upon the decision of the Calcutta High Court in the case of CIT vs. Uco Bank (supra) for the proposition that the assessee in that case claimed a notional loss on account of stock valuation only in the computation of income without following the same method in its regular books while finalising the accounts. On the basis of this decision, the AO....
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....cisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by s. 53 of the Banking Regulation Act and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on the mercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income." Thus, it is clear that the decision lays down the principle that entries in a balance sheet, which is required to be maintained in a statutory form, may not be decisive or conclusive in determining real income of the assessee. It may sometime disentitle a deduction simply because under some misapprehension or mistake assessee fails to make an entry in the books of account, although under the law a deduction must be allowed by AO. The claim made by the assessee is in line with the method of accounting followed by the assessee, which is mercantile system of accounting....
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....an entry in the books of account and although, under the law, a deduction must be allowed by the ITO, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776 being the amount of sales-tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or Courts which failed. The appeal is consequently allowed and the judgment of the High Court is set aside. The question which was referred is answered in favour of the assessee and against the Revenue." Our attention was also invited to the ratio laid down by the Gujarat High Court in the case of CIT vs. Gujarat Mineral Development Corporati....
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....ferred to the decision of Supreme Court in the case of Keshav Mills Ltd. vs. CIT (supra) for the proposition that the method of accounting regularly adopted by the assessee is to be accepted by the IT authorities except in the case when the provisions of s. 145 come into operation. It is submitted that the proposition laid down is not in dispute. However, this proposition is the basis on which the claim is being made. The assessee is following mercantile system of accounting. The method of accounting required that any liability, which accrued during the year, ought to be claimed as a deduction in determining the income for the year under consideration. Therefore, this proposition does not militate against the view of Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). In both these cases emphasis is laid on the principle that when one follows the mercantile system of accounting the liability which accrues must be allowed or upheld. The issue which arose in Kedarnath Jute Mfg. Co. Ltd. and State Bank of India (supra) was whether the deductibility of an amount in the mercantile system of accounting is a prisoner of entries being made or not being made in the books of a....
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....gning of the first agreement, he held that the two agreements must be held to be artificial. This conclusion of the CIT(A) is self-contradictory. At one stage the CIT(A) mentions that no reason has been given as to why the supplemental agreement was signed within a week of signing the original agreement. But he does not set out the consequences of this finding. If no explanation has been given, one consequence can be that the supplemental agreement is to be ignored. If that is the only consequence, then clearly only the first agreement dt. 30th March, 1993, exists. Under this agreement, the amount of lease rent payable is Rs. 2,19,57,539 and that is the amount which is claimed deductible by the assessee. Thus, the consequence of finding is that the amount of lease rent is allowable. The other possibility is that even though no explanation is offered as to why the second agreement was signed, the two agreements must be read together. The conclusion which would follow from the proposition that the two agreements must be read together are that everything in the second agreement is valid and subsisting and must be given effect to. The second agreement modifies the first agreement in fo....
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....les of accountancy must override the claim made under the income-tax law. The deduction claimed by the assessee is on the footing that according to the contract entered into on 30th March, 1993, liability used or accrued is Rs. 2.19 crores. It means that if the assessee has defaulted in the payment of the rent of Rs. 2.19 crores, the lessor would have a right to sue the assessee for the recovery of this amount. In this connection, the Department had laid emphasis on the decision of the Supreme Court in Keshav Mills' case (supra). The question, therefore, to be asked is, applying the principle of the Supreme Court decision, what is the legal liability of the assessee on 31st March, 1993. Is it open to the assessee to tell and submit before the Court in a suit filed by the lessor that although the contract provides for an obligation in the payment of disputed sum of Rs. 2.19 crores because of supplemental agreement and the entries in the books of account, it is legally liable only to the extent of Rs. 70 lakhs. The learned counsel submitted that it is preposterous to suggest that a legal liability can be changed unilaterally in the case of contractual obligation by a simple entry....
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....er the IT Act where the assessee is following mercantile system of accounting. On the other hand, Accounting Standards which are issued by the ICAI are governed by different disclosure norms and have different objectives. 9. The learned Departmental Representative very vehemently argued that the view of the assessee-company is clearly untenable in view of the following : "(A) The appellant has failed to offer any explanation as to why the second agreement (supplemental agreement) was signed within a week of signing of the original agreement. The supplemental agreement is silent in this respect. (B) No justification has been brought on record for introduction of the concept of 'primary period' and 'secondary period'. This is apparently an artificial device for enlarging the period of lease to 15 years. (C) The original lease agreement and the supplementary lease agreement are in reality only one agreement with the prime objective of taking the asset on lease for the period of 15 years to that higher deduction could be claimed in the initial 5 years period. (D) The so-called two agreements are in spirit only one agreement. Accordingly, lease rentals sho....
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....ve invited our attention to para 4 of the order (for asst. yr. 1994-95) of the CIT(A) where he gave four significant findings with respect to the two agreements. It is submitted that the two agreements, in spirit, constitute one integrated and indivisible agreement and they should not be read separately. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Chamanlal Mangaldas & Co. (1960) 39 ITR 8 (SC) in which the Supreme Court held that clause in regard to commission in that case has to be read as one integrated whole. It is submitted that similarly in the present case the lease period has been increased by a supplemental agreement from five years to 15 years and, therefore, both the agreements should be treated as one. 10. It is further submitted that the assessee is following mercantile system of accounting, according to which the profits earned and credited to the accounts will be taken as the basis of computation of total income. Our attention was invited to the mercantile system of accounting as explained by the Supreme Court in the case of Keshav Mills Ltd. (supra) and it was pointed out that the Supreme Court held that the mercantile system of....
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.... the books of account. Under the mercantile system of accounting, the transactions relating to "accounting period" are recorded in the books of account irrespective of payment. In the present case lease rent is a contractual obligation and the Bench has to decide the quantum of liability relating to this year. The learned Departmental Representative gave the following examples : "(1) An assessee has taken machinery on lease for 4 years on 1st April, 1995 and the contract stimulates that the total rent for the entire lease period is Rs. 4,00,000 and the entire rent of Rs. 4 lakhs requires to be paid at the beginning of the contract. While preparing the P&L a/c for the year ending 31st March, 1996, how much is the accrued liability for the previous year 1995-96? I humbly submit that in the mercantile system of accounting, the accrued liability of rent is Rs. 1,00,000 and this amount requires to be debited to the P&L a/c. For the year ending 31st March, 1996. In the balance-sheet for the year ended 31st March, 1996, lease rent advance of Rs. 3,00,000 will appear on the asset side of the balance sheet as "Rent in advance". 2(1) An assessee has taken machinery on lease for 15 y....
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.... of right to use goods specified in the Schedule. The tax paid by the assessee works out to 11.92 per cent or 12 per cent of the lease rent. The assessee added the lease tax to the lease rental recorded in the books of account. The basis on which lease tax has been paid has not been discussed by the CIT(A) in his order but a finding has been given that lease rental includes lease tax. Therefore, the assessee paid the lease tax on the accrued lease rent of Rs. 70.83 lakhs and not on the lease rent paid in advance of Rs. 1,40,29,364. Therefore, accrued lease rent requires to be restricted to Rs. 79.28 lakhs. If entire lease rent of Rs. 2.19 crores is allowed as deduction without corresponding payment of lease tax under Lease Tax Act, it would lead to violation of Lease Tax Act. In this connection, reliance was placed on the decision of the Supreme Court in the case of Muddi Venkataratnam & Co. Ltd. vs. CIT (1998) 144 CTR (SC) 214 : (1998) 229 ITR 534 (SC). It is submitted that the assessee is not entitled to follow one method of accounting for preparation of P&L a/c and balance sheet and another method of accounting for tax purpose. In this connection, reliance was placed on the deci....
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....ng. 13. The learned Departmental Representative submitted that the arguments advanced by the learned counsel for the assessee have no substance and that the decisions cited by him are not applicable to the facts of the present case. 14. In reply, the learned counsel for the assessee submitted that the decision in the case of Madras Industrial Investment Corporation Ltd. (supra) was a decision rendered by two Judges of the Supreme Court for the proposition that the accounting standards must override the statute. That was the case where the discount relating to issue of debentures was claimed for the period for which the debentures were issued. The decision does not at all refer to any accounting standard but refers to an extract from two books which set out the principle that the discount on the issue of debentures is, in fact, deferred interest and should accordingly be written off over the period having the use of money. It is clear that it is in that context the Supreme Court has held that liability which has been incurred to generate funds which are used for his business activity must be allowed over the period of time for which the funds were used. This decision, therefor....
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.... that the assessee has paid lease tax of Rs. 8,44,524. According to him, the tax paid is on the lease rent of Rs. 70,83,671 and in the circumstances the accrued lease rent is only Rs. 79.28 lakhs because if the entire lease rent of Rs. 2.19 crores is allowed as a deduction without corresponding payment of lease tax, it will violate the Lease Tax Act and, therefore, not deductible under s. 37 of the IT Act. It is pointed out that the learned Departmental Representative had submitted that because the lease rent tax has been paid on 70,83,671 instead of on Rs. 2.19 crores, the lease rental allowable is Rs. 70,83,671 and not Rs. 2.19 crores. In this connection, attention is invited to the Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any Purpose Act, 1985. It is pointed out that levy of lease tax is under s. 4 of the above Act, which is given below : "There shall be levied a tax on the turnover of sales in respect of the transfer of the right to use goods specified in the Schedule at such rate not exceeding fifteen paise in the rupee as the State Government may by notification in the Official Gazette, specify from time to time and different rates may be spe....
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....nery called SCADA. The assessee-company entered into lease agreement with RCFTL and leased back the said SCADA system. The lease rental originally was fixed for a period of 60 months vide agreement dt. 30th March, 1993, and each instalment was fixed for an amount of Rs. 17,59,420. However, by a supplemental agreement entered on 5th April, 1993, the original agreement was amended in cl. (iv) relating to the period and schedule of lease rental and in cl. (ii) relating to variation in rentals. The supplemental agreement extended the period of lease into primary period of 60 months from the commencement date and secondary period of 120 months from the end of the primary period. Consequently, the lease rentals, which were to end on 7th March, 1998, were extended by 10 further rentals as mentioned above. The first objection of the Department is that the two agreements dt. 30th March, 1993, and 5th April, 1993, could be treated as the agreement. The findings of the CIT(A) with regard to these agreements are that (1) the assessee-company failed to offer any explanation as to why the supplemental agreement was signed within a week of signing the original agreement, and (2) the artificial de....
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....nd ignore the other parts. If we go through the two agreements, the first and primary fact to be noticed is that it does not affect, truncate, determine, change or deviate from any contents of original agreement. All that the supplemental agreement does is to effect the period after the end of five years. Therefore, the CIT(A) has not taken into account the consequence which flows from the finding that the two agreements must be read together, i.e. that it does not affect the claim of the assessee at all as regards the allowability is concerned. 19. The other objection of the Department is that the assessee's claim is not in accordance with the standards issued by the ICAI. According to the Departmental Representative, the lease period has been increased by supplemental agreement from 5 to 15 years. Thus, the lease period is 15 years and lease rentals have to be spread over for 15 years in accordance with the Guidance Notes issued by the ICAI. To support this, he has given two hypothetical illustrations mentioned above. He further submitted that the method adopted by the assessee in respect of lease rental has resulted in a distorted picture of true state of chargeable incom....
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....In this connection, distinction between Accounting Standard-1 issued by ICAI and Accounting Standard-1 issued by CBDT is clear from the said two standards reproduced at page of this order. It will be seen that as per AS-1 of CBDT, profits can be anticipated even though dependent on certain future events and unrealised. This is the crux of the matching principle but finds no place in AS-1 issued by the CBDT. Therefore the CBDT does not recognize matching principle. We find substance in the argument of assessee's learned counsel that indiscriminate application of principle of accounting standard to determine income under the IT Act cannot be upheld. This is because accrual of liability is the crux of the matter under IT Act, where the assessee is following mercantile system of accounting. We further find substance in the argument of learned counsel for the assessee that in exercise of powers under s. 145 of the IT Act, the matching principle embodied in 'prudence' does not find place in AS-1 issued by CBDT. On the other hand, AS, which are issued by the ICAI, are governed by the disclosure norms and have different objectives. As such, we do not find any substance in the a....
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....ere the assessee is following mercantile system of accounting. 20. The assessee-company recorded annual lease rental by debiting Rs. 70.83 lakhs in its books of account. However, when return was filed, assessee wrote back the amount of Rs. 70,83,671 and claimed deduction of Rs. 2,11,13,040. The AO disallowed this difference of Rs. 1,40,29,369 on the ground that the assessee was not entitled to claim the larger amount if a lower amount has been debited in the books because provisions of s. 145(1) make it clear that once the assessee regularly followed a particular method of accounting, it is binding on IT authorities and on the assessee. 21. The claim of the assessee-company is that it had accounted lease rentals in books following the guidelines issued by ICAI. The assessee had claimed the entire expenditure of lease rent, which is a contractual liability as per agreement referred to above, because the company had paid Rs. 2,11,13,040 to RCFTL. According to the assessee, this claim is based on the method of accounting, i.e., mercantile system, followed by the assessee for the last several years and it is as per the guidelines of ICAI that the lease rentals are written off in ....
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.... like to mention here that the decision of the Calcutta High Court had been reversed by the Supreme Court in the case of Uco Bank vs. CIT (supra). While reversing the decision, it was observed that for the purpose of income-tax what is to be taxed is the real income which is deduced on the basis of accounting system regularly maintained by the assessee and that was not done by the assessee in the case of Uco Bank, it will be fruitful to mention here that the Hon'ble Supreme Court has quoted its earlier decision in the case of Investment Ltd. vs. CIT (supra). In nutshell, it was held that "whether the assessee is entitled to a particular deduction or not will always depend upon the provisions of law relating thereto and not on the view which the assessee might take on its rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter". Therefore, it is clear that making or non-making of entries in the books of account is immaterial for submitting a claim. In the present case, the assessee is following mercantile system of accounting and it is also not in dispute that the assessee has also paid Rs. 2.11 crores, the amount claime....
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....ies were made or not made in a particular year of account, is totally immaterial and in any event such entries are not decisive or conclusive of the matter. The present case of the assessee is distinguishable from the abovementioned case before the Gujarat High Court. On the other hand, we find that in the case of Backau Wolf New India Engineering Works Ltd. (supra) the facts were that the assessee had entered into a technical know-how agreement for sale and transfer of technical information knowledge for a lump sum of Rs. 1,00,000 payable in five equal annual instalments of Rs. 20,000 each. The assessee made a claim of Rs. 1,00,000 on the ground that the assessee's liability to pay the said sum was crystallized in the year although the assessee had obtained the facility of paying the amount in five annual instalments. The Bombay High Court, referring to the decision of Supreme Court in Kedarnath Jute Mfg. Co. Ltd. (supra), has taken the view that a particular deduction should be allowed or not will depend on the provision of law relating thereto and not on the view which the assessee might take of its rights nor can the existence or absence of entries in the books of account b....
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....ethod of accounting determines what income is brought to tax and what deductions are allowable in computing the income liable to tax. Such taxability and deductibility are not however defeated by making of entry or not making entry in the books of account. Thus, if the assessee omits to provide an income in the books of account and is following mercantile system of accounting, it is open to the AO to bring to tax such income despite the fact that no entry is made in the books of account. Similarly, this principle is applicable to the amount deductible irrespective of whether the entry is made in the books of account or not. Therefore, deductibility of an amount in the mercantile system of accounting is not a prisoner of entries being made or not being made. So the assessment of income and allowability of expenditure are dependent on the method of accounting followed by the assessee and not dependent on entries made in the books of account. In the present case, it is an admitted position that the method of accounting followed is mercantile system of accounting. The issue is whether the liability had accrued in pursuance of that method of accounting and whether the agreement dt. 30th....
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....t be allowable as deduction under s. 37 of the IT Act in view of the decision of the Supreme Court in the case of Muddi Venkataratnam (supra). In order to appreciate the above contention of the learned Departmental Representative, it will be useful to refer to s. 4 of the Maharashtra Sales-tax on the Transfer of the Right to use any Goods for any Purpose Act, 1985 (known as Lease Tax Act), which was quoted at para 16 (page 31) above. The relevant clauses of the Schedule to the said Act were also quoted above at para 16. On a perusal of the provision and the Schedule mentioned above of the Lease Tax Act, it will be clear that for our purpose entries at 3 and 8 of the Schedule are relevant. The notification issued by the Government of Maharashtra has specified the rate of tax as four paise in the rupee. Admittedly the lease tax paid by the assessee is Rs. 8,44,524. The lease rental claimed by the assessee was Rs. 2,11,13,040. If we calculate the percentage of lease rent, it will come to 4 per cent. Therefore, the assessee paid lease tax of Rs. 8,44,524 correctly on the amount of lease rental, which has accrued and paid, of Rs. 2,11,13,040. Therefore, the submission of the learned Dep....
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....usiness and cannot be said for the purpose of new business. The enhancement of the authorised capital was only to broaden the capital basis which would be conducive to the better conduct and efficiency and profitability of the business. Further, the expenses incurred by way of filing fees is of revenue expenditure under s. 37(1) of the IT Act, 1961.) In view of the above, our claim of Rs. 50 lacs being payment made towards filing fees to the Registrar of companies may please be allowed while computing the total income for the assessment year under reference. We enclose herewith a copy of Board of Resolution passed at Annual General meeting held in January, 1995 authorised the assessee company to increase its authorised capital from Rs. 100 to Rs. 200 Crores. We also enclose herewith a copy of receipt towards payment of Registrar of Companies. We further submit but without prejudice to our above contention and purely in the alternative, our claim of Rs. 50 lacs may be entertained under s. 35D of the IT Act, 1961. In this regard, we submit that the expenses have been incurred after the commencement of business in connection with the extension of industrial undertaking. Ho....
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....ofits making. In the present case, the assessee is not entitled to deduction under sub-s. (1) of s. 35D as held above. If the assessee is not entitled to any deduction under sub-s. (1), there is no question of operation of sub-s. (2) of s. 35D. Sub-cl. (iii) of cl. (c) of sub-s. (2) applies where the assessee-company has incurred an expenditure by way of fees for registering the company and sub-cl. (iv) applies in connection with public issue of shares and debentures. The emphasis is on the public issue of shares and debentures. In the present case, there is no connection of the expenditure with the public issue. Therefore, this expenditure is not allowable. The CIT(A) has rightly rejected the contention of the assessee. The order of the CIT(A) on this issue is confirmed. 31. In the result, the appeals for asst. yRs. 1994-95 and 1995-96 are allowed, whereas the appeal for asst. yr. 1996-97 is partly allowed. S.C. TIWARI, A.M. : 32. During the course of hearing of these appeals, considerable arguments took place on fundamental issues such as mercantile principles of accounting and entries in the books of accounts vis-a-vis claims/deductions admissible in law. It, therefore,....
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....tion of income chargeable under the heads "Profits and gains of business or profession" and "Income from other sources" to be in accordance with the method of accounting regularly employed by the assessee. The only exception of this general principle is the cases where the method employed is such that the income cannot properly be deduced therefrom or as laid down in s. 145(2) where the AO is not satisfied about correctness or completeness of the accounts of the assessee. There are any number of Court pronouncements where it has been held that provisions of s. 145 are mandatory and the proper method of accounting regularly followed by an assessee is binding on the assessee as well as assessing authorities. Further, the method referred to in s. 13/145 is one as followed by the assessee while maintaining his books of accounts and not a separate method which the assessee might choose for filing his return of income. As early as in the case of CIT vs. Sarangpur Cotton Manufacturing Co. Ltd. (1938) 6 ITR 36 (PC), the Judicial Committee of the Privy Council observed as under : "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed....
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....y properly be deduced, the ITO is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the ITO, the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits." 34. In the case of CIT vs. Tata Iron & Steel Co. Ltd. (1977) 10 6 ITR 36 3 (Bom), the Hon'ble Bombay High Court pointed out that the method of accounting followed by the assessee has to be stressed and adopted for computation of total income if such method cannot be said to be unreasonable, even if a better method could be visualised. In the case of Md. Umer vs. CIT 1975 CTR (Pat) 13 : (1975) 101 ITR 525 (Pat), the Hon'ble Patna High Court have categorically stated at page 530 (of 101 ITR), "once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of proviso to sub-s. (1) of s. 145". In a recent case, CIT vs. Smt. Vimla D. Sonwane (1995) 212 ITR 489 (Bom), the Hon....
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....since by doing so one would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant." Hon'ble Supreme Court also held in the case of Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC) that the profits earned and the losses suffered that are taken into consideration are of the tax year only and that in an assessment Revenue is concerned with profits or gains in each previous year and not with any potential profits likely to be made in another year or with losses likely to occur in the future. Different considerations may, depending on the facts and circumstances of each case, weigh to determine profits or gains or losses of the year but the position remains that an expenditure which arose in an earlier year or which may arise in a subsequent year cannot be allowed as deduction where the system of accounting is the mercantile system. The relevant year in which deduction becomes allowable need not necessarily be the year in which payment is made, as held by Hon'ble Supreme Court....
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....e might take of his rights nor can the existence or absence of entries in the books of accounts be decisive or conclusive in the matter. There cannot be any dispute about correctness of this proposition. Any entries made in the books of account of an assessee which are erroneous or not in accordance with the method of accounting followed by the assessee have to be substituted or adjusted properly. However, as pointed out earlier, in the field of accounts, unlike in the field of physics, there can be more than one correct answer. Hence, in a case where the view taken by the assessee and entries made in the books of accounts are correct and acceptable in accordance with the method of accounting employed and well established principles of accountancy, it would not be open to an assessee to seek a different basis of assessment in its returns of income in ensuing assessment proceedings on the ground that another view is also equally possible. To this extent, entries made in the books of accounts assume considerable significance and get priority. An illustration to this proposition may be found in the judgment of Hon'ble Bombay High Court in the case of CIT vs. Citibank N.A. (1994) 1....
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....unts on the mercantile basis as income, can claim the same to be excluded from his income for the purpose of taxation by resorting to the real income theory. The Supreme Court was required to answer how far the concept of real income could defeat accrual of income in any particular case according to the well recognised theory of accounting principles which are accepted by the legal standards so far followed. It is evident from the above that before the Supreme Court, it was not the case of the assessee that the income had not accrued to it. The assessee itself had maintained its accounts in respect of the so-called 'sticky' loans on the mercantile basis and debited the accounts of the parties with the amount of interest which formed part of its income. The assessee, however, wanted to keep the said amount separately in an "Interest suspense account" to avoid taxation in the relevant assessment year by resorting to the real income theory, which was not approved by the Supreme Court. The position is just the reverse in the case before us. Here the undisputed position is that the accounts of the parties were not debited with the amount of interest nor was any interest credi....
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....m entries made in the books of account but in order to make such an exception there must exist compelling reasons and justification, such as entries made in the books of account are erroneous or are not in accordance with the system of accounting followed or are otherwise not reflective of true nature of the transactions. On the facts of appeal before us being viewed against this legal backdrop, it appears that the decision in this appeal hinges on whether the two agreements dt. 30th March, 1993, and 5th April, 1993, between the assessee and RCFTL should be consolidated and read as only two parts of a single deal or these two agreements should be considered to be separate and independent from each other. If these agreements should be combined into one, the Revenue must succeed because in that event the case of Revenue is supported not only by the published accounts of the assessee himself but also Accounting Standard issued by ICAI. However, if these two agreements are required to be treated as separate and distinct from each other, the assessee should succeed. As the learned counsel for the assessee has stressed, under the first agreement the assessee incurred the liability to pay....