Abad Fisheries vs Commissioner of Income Tax

Arijit Pasayat, C.J.—The Income Tax Appellate Tribunal, Cochin Bench (in short "the Tribunal"), has referred the following questions for the opinion of this court u/s 256(1) of the Income Tax Act, 1961 (in short "the Act") :

"1. Whether the Tribunal was correct in law and on facts in holding that the assessee has deviated from the regular method of accounting followed by them and that the change was without reasonable justification ?

Whether, on the facts and circumstances of the case, was the Tribunal correct in law in holding that the sum of Rs. 7,19,598 representing the cash assistance in respect of the last quarter of the previous year has accrued during the year and hence includible in the total income for the assessment year 1988-89 ?

Whether the Tribunal is correct in law and fact in not allowing the change in the method of accounting from mercantile to cash holding it as not a bona fide change when neither principle nor authority bars an assessee from substituting one method of accounting for another at his choice ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in rejecting the change in the method of accounting in spite of the fact that it is settled law that a taxpayer is entitled to adjust his own affairs in such a way that his tax burden is reduced and that Section 145(1) does not postulate any agreement or contract regarding'' the method of accounting to be employed by the assessee and also this section does not lay any embargo on the assessee to alter his method of accounting ?

Is the Tribunal right in law in rejecting the change in the method of accounting in spite of the fact that the assessee continues the changed method even thereafter and thereby as his regularly employed method of accounting within the meaning of Section 145(1) ?

Is the Tribunal right in its view that the assessee has been changing their method of accounting frequently when as a matter of fact they changed the method only once before in an earlier year ?

Is the Tribunal right in law in rejecting the change in the method of accounting in spite of the fact that when an assessee also bona fide changes its method of accounting thereafter or that it has in fact adopted it thereafter and thus satisfied the requirement of Section 145(1) ?"

The factual background as set out in the statement of case is as follows : The assessee is a partnership firm. During the course of assessment proceedings for the assessment year 1988-89, the Assessing Officer noticed that though a sum of Rs. 7,19,598 was due to the assessee as cash incentive, the same was not included in the return of income filed by it. The assessee had not offered the said amount for taxation on the ground that the amount was not received during the previous year, but only in a subsequent year. It was claimed that in respect of cash incentive, it had changed its method of accounting from the mercantile system to cash system, and the amount was to be considered for assessment for the subsequent year, i.e., 1989-90. The Assessing Officer felt that the change in the method of accounting was not bona fide. Accordingly, the amount in question was included in the total income. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (in short "the CIT (A)"), who concurred with the Assessing Officer. In second appeal before the Tribunal, the assessee contended that the Assessing Officer was not justified in including the cash incentive in the total income on accrual basis rejecting the change in the method of accounting. The Revenue''s stand was that the assessee was going on changing its method of accounting in respect of a particular item amongst various receipts. The obvious purpose was to claim exclusion of the amount in question by claiming deduction u/s 80HHC of the Act in the subsequent assessment year with a view to escape tax liability. The assessee was switching over to a different method of accounting for the said purpose and the intention is not bona fide. The Tribunal noticed that the assessee became entitled to cash incentive on the basis of exports. Previously, it was accounting for the cash incentive on cash basis, but during the previous year relevant to the assessment year 1987-88, it had changed to "due basis on mercantile system". That was accepted by the Assessing Officer for the year 1987-88 and the assessment was also made on that basis. The assessee became entitled to receive Rs. 7,19,598 as cash incentive during the concerned assessment year 1988-89. On due basis, i.e., in accordance with the mercantile system of accounting, this amount was to be included in the assessment year 1988-89. The assessee did not show this amount for 1988-89 and postponed its inclusion to 1989-90. The obvious purpose was to avail of a benefit u/s 80HHC in the subsequent assessment year. The change of accounting was found to be not bona fide. The assessee was accounting for all other receipts and outgoings on due basis. It was noticed that there was no uncertainty regarding receipt of the cash incentive and that there would be no difficulty in getting the amount from the Government Departments. There was no justifiable reason for the assessee to account for the cash incentive on receipt basis deviating from the hitherto followed method of accounting. Accordingly, the view of the Assessing Officer as well as the Commissioner of Income Tax (Appeals) was affirmed by the Tribunal.

Learned counsel for the assessee submitted that the Tribunal has fallen into grave error by observing that there was frequent change. Only for the previous year, there was a change and adopting a different method of accounting for different items of income is clearly permissible. It was further submitted that the change of accounting is bona fide and the observations to the contrary are unsustainable. Learned counsel for the Revenue submitted that the Tribunal noticed the background facts and came to a conclusion that the change was not bona fide and, therefore, has rightly declined to accept the assessee''s stand.

It is permissible to an assessee to change the method of accounting regularly employed by him. What he must alter, however, is its regular method, i.e., he must abandon what up to that part of time has been his regular method and start a new regular method and not merely a new method for a casual period. When an assessee bona fide changes his method of accounting and satisfies the Department that he intends to adopt a changed method of accounting thereafter or that he has, in fact, adopted it thereafter, that satisfies the requirement of Section 145. When an assessee continues with one method of accounting with the changed method, it becomes his regular employed method within the meaning of Section 145(1). The Assessing Officer is bound to base his computation on the changed method provided that the income is properly deducible from such method. If, however, the changed method is not followed regularly by the assessee, the taxing authority can adopt the earlier method of accounting. This is so because in such a case, it cannot be said that the assessee had followed the earlier method regularly. In view of the intermediary change in the method of accounting, such a case will fall u/s 145(2). Frequent switching over from one method to another goes against the concept of method of accounting regularly followed. In respect of the self-Same source of income the assessee had adopted a changed method of accounting in different years. There is, therefore, no regularity in following the method of accounting. Additionally a factual conclusion has been arrived at by the Tribunal that change in the method of accounting was not bona fide. The conclusion is factual. The authorities were, therefore, right in refusing to accept the assessee''s stand.

The questions are, therefore, answered in the affirmative, in favour of the Revenue and against the assessee.