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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.3093 OF 2009
The Commissioner of Income Tax, )
Central III, R. No.109, Aayakar Bhavan, )
M.K. Road, Mumbai - 400 010. ) ..Appellant.
V/s.
The Bank of Rajasthan Ltd.,
11/12, Senapati Bapat Marg,
)
)
Raghuvanshi Mill Compound, )
Lower Parel (W), Mumbai. ) ..Respondent.
Mr. Suresh Kumar i/b. Ms. Anamika Malhotra for appellant.
Mr.Percy J. Pardiwala, Senior Advocate with Sudhakar G. Lakhani
for respondent.
CORAM : DR. D.Y.CHANDRACHUD
AND J.P.DEVADHAR, JJ.
DATED : 23RD APRIL, 2010
ORAL JUDGMENT (PER DR. D.Y.CHANDRACHUD, J.)
1) This appeal by the Revenue under Section 260A of the
Income Tax Act, 1961, arises out of the order passed by the Tribunal
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for assessment years 2002-03 and 2003-04 on 11 December 2008.
The appeal is for assessment year 2002-03. The questions of law
which have been formulated are as follows:-
a) Whether on the facts and in the circumstances of the case, the
ITAT was justified in law in deleting the addition made on
account of excess cash received at the cash counters of the
branches in some years ?
b) Whether on the facts and in the circumstances of the case, the
ITAT was justified in law in directing the AO to ascertain the
correct date of payment of PF dues (employees’ contribution)
and to allow the same if the same has been made within the
grace period of five days within the due date ?
c) Whether on the facts and in the circumstances of the case, the
ITAT was justified in law in deleting the addition made on
account of interest ‘accrued’ on Govt. securities ?
d) Whether on the facts and in the circumstances of the case, the
ITAT was justified in deleting the disallowance of deduction
claimed under Section 36(1)(vii)(a) ?
e) Whether on the facts and in the circumstances of the case, the
ITAT was justified in deleting the addition made on account of
advance income received by way of commission, exchange
and discount, including locker rent ?
2) In so far as the first question is concerned, the Tribunal
has followed the order of the Jodhpur Bench for assessment years
2001-02 and 2001-02. The Jodhpur Bench held that the liability on
account of excess cash received at the cash counters of the bank
represents the liability to pay the customers as and when they may
demand payment. The Tribunal, therefore, held that it cannot be
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considered as the income of the assessee. On this ground, the
addition was directed to be deleted. We have perused the order of
the Jodhpur Bench of the Tribunal for assessment years 2000-01
and 2001-02 which has been relied upon in the impugned order by
the Tribunal. The Jodhpur Bench has also observed that the bank,
in respect of the collection of excess cash at its counters in various
branches has a liability to pay back the amount to the real owners.
After applying the principles laid down in the judgment of the
Supreme Court in United Commercial Bank V/s. C.I.T.1, the
Tribunal held that collection of excess cash, in the circumstance,
does not represent income of the assessee bank. This part of the
reasoning has not been demonstrated to suffer from any perversity.
Before the Jodhpur Bench, reliance was also placed on the Cash
Manual of the assessee which provides that the bank has to make a
record of the excess cash, this has to be considered as a liability of
the bank and the collection is required to be handed back to the real
owner in accordance with the prescribed procedure. In view of the
aforesaid, the first question of law does not give rise to any
substantial question of law.
3) In so far as the second question is concerned, the
Tribunal has remanded the issue to the Assessing Officer for
1 240 I.T.C. 355 (SC)
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verification of the actual date of payment of the disputed sum. The
Tribunal observed that if the payment has been made within the
grace period of five days from the due date, then the deduction
claimed by the assessee has to be allowed in terms of the judgment
of the Madras High Court in Shri Ganapathy Mills Ltd.1 Since the
Tribunal has remanded the matter to the Assessing Officer, no
substantial question of law, as such would arise. We would like to
clarify that upon remand, due regard would be given to the relevant
provisions of the law, including the judgments which hold the field.
4) In so far as the third question is concerned, it is brought
to our notice that in assessment years 1991-92 and 1992-93, this
issue was considered by the Jodhpur Bench of the Tribunal. The
Jodhpur Bench held that interest on Government securities can be
said to accrue only when it becomes due and, therefore, there
cannot be a charge to such income until such time that it becomes
due. Counsel appearing on behalf of the Revenue has stated
before the Court that he has written instructions to the effect that an
appeal against the order of the Jodhpur Bench of the Tribunal was
dismissed by the High Court of Rajasthan on 23 January 2008. In
that view of the matter and particularly, since the finding of the
Tribunal has not been shown to suffer from any perversity, no
1 245 I.T.R. 879 (Mad)
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substantial question of law would arise.
5) As regards the fourth question, the Tribunal observed
that the assessee has made a claim for deduction under Section 36
(1)(viia) for bad and doubtful debts in respect of advances made by
Rural branches. The view of the Tribunal is consistent with the
provisions of Section 36(1)(viia) which refer to “an amount not
exceeding ten per cent of the aggregate average advances made by
the rural branches of such bank”. Counsel appearing on behalf of
the Revenue stated that against the order of the Jodhpur Bench of
the Rajasthan High Court of 7 March 2008 in ITA 13/2005, a Special
Leave Petition was dismissed by the Supreme Court on 16 January
2009. In that view of the matter, no substantial question of law
would arise.
6) The last question which has been formulated by the
Revenue relates to the accounting system followed by the assessee
in respect of income received in advance. This income consists of
commission, exchange and discount, including locker rent. The
assessee follows the mercantile system of accounting. During the
course of the previous year, income from these sources was
accounted for on a receipt basis. As a result of a change in the
method of accounting followed by the assessee, while continuing
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with the mercantile system of accounting, the assessee has
accounted for the receipts in relation to the year in which payment
has accrued. Consequently, though in a given case the entire
payment may be received in advance, the assessee accounted for
the payment as it accrues over a period of time. The Assessing
Officer made an addition of Rs.3.46 crores on the ground that the
change in the method of accounting resulted in lower profits to that
extent. The Commissioner (Appeals), however, directed a deletion of
the amount. This has been confirmed by the Tribunal.
7) Section 145 (2) provides that income chargeable under
the head “profits and gains of business or profession” or “income
from other sources” shall, subject to the provisions of sub-section
(2), be computed in accordance with either the cash or mercantile
systems of accounting regularly employed by the assessee. Hence,
under sub-section (2) of Section 145, income under these two heads
has to be computed either in terms of the cash or mercantile
systems. Moreover, that system of accounting which is adopted by
the assessee must be regularly employed. Under sub-section (2)
the Central Government may notify in the Official Gazette, from time
to time, accounting standards to be followed by any class of
assessees or in respect of any class of income. Under sub-section
(3) the Assessing Officer may make an assessment under Section
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144 where he / she is not satisfied about the correctness or
completeness of the accounts of the assessee, or where the method
of accounting provided in sub-section (1) or accounting standards
notified in sub-section (2) have not been regularly followed by the
assessee.
8) Under Section 145(2), the Central Government has
notified accounting standards which are required to be followed by
assessees
following the mercantile system of accounting.
Accounting standard I relates to disclosure of accounting policies. It
provides that (i) All significant accounting policies adopted in
preparation and presentation of financial statements shall be
disclosed; (ii) Such disclosures shall form part of the financial
statements and significant accounting policies shall normally be
disclosed in one place; (iii) Any change in an accounting policy
which has a material effect in the previous year or in years
subsequent thereto, shall be disclosed; (iv) The impact of, and the
adjustments resulting from, such change, if material, shall be shown
in the financial statements of the period in which such change is
made to reflect the effect of such a change; (v) The accounting
policies adopted by the assessee should represent a true and fair
view of the state of affairs of the business, profession or vocation in
the financial statements prepared and presented on the basis of
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such accounting policies and that for this purpose, norms of
‘prudence’, ‘substance over form’ and ‘materiality’ shall be adopted.
The expression ‘accrual’ has been defined to refer to the assumption
that revenues and costs are accrued, that is, recognized as they are
earned or incurred (and not as money is received or paid) and
recorded in the financial statements of the period to which they
relate. Clause 9 of Accounting Standard II provides that a change in
an accounting policy shall be made only if the adoption of a different
accounting policy is required by statute or if it is considered that a
change would result in a more appropriate preparation or
presentation of financial statements by an assessee.
9) In the present case, the undisputed position before the
Court is that (i) The assessee has adopted the mercantile system of
accounting since inception; (ii) This system is regularly employed;
and (iii) There is no change in the method of accounting on a
mercantile basis.
10) The assessee is listed with the Jaipur Stock Exchange.
By a communication dated 11 September 2001, the Stock Exchange
informed the assessee of a requirement communicated to it by the
Securities and Exchange Board of India on 31 August 2001 by
which amendments to listing agreements were notified. Clause 50
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relates to compliance with accounting standards. SEBI by its
communication dated 31 August, 2001 mandated that a new clause
shall be added to the listing agreement, as clause 50, to provide that
companies shall mandatorily comply with all the accounting
standards issued by the Institute of Chartered Accountants of India
from time to time. The Stock Exchanges were advised to
incorporate the amendment in the listing agreements immediately
and to report compliance. The Commissioner (Appeals) observed in
the present case that the Assessing Officer had not given any
finding that any of the entries in the books of account are incorrect
or that the assessee was not employing a method of accounting on
a regular basis and it was not the finding of the Assessing Officer
that the trading results could not be deduced from the entries in the
books of account regularly maintained. The Commissioner (Appeals)
also observed that out of the four items, bank locker rent was
received for a period of upto three years and other charges are
received for about six to nine months. The locker rent of one year
alone ought to be treated as taxable income in the accounts for the
particular year rather than the entire advance locker rent of the two
subsequent years. The advance locker rent of the following two
years was shown as income in the respective subsequent years.
The finding of fact which was arrived at by the Commissioner
(Appeals) was that the change in the method of accounting was
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bonafide and it has been followed regularly and consistently in the
subsequent assessment years. The changed method has been held
to be a better method for preparing and presenting financial
statements of income of the assessee. The Tribunal has, in appeal,
also arrived at a conclusion that the change in the method of
accounting is not detrimental to the interest of the Revenue. The
Tribunal affirmed the finding of fact of the Commissioner (Appeals)
that the change was bonafide and consistently followed after the
year in which it was changed. This is a pure finding of fact of both
the Commissioner (Appeals) and by the Tribunal. In the result, on
the basis of the material on record, the Revenue has not established
before the Court any perversity in the findings of the Tribunal or any
illegality on the part of the assessee.
11) In the circumstances and for the reasons already stated
earlier, none of the questions which have been formulated by the
Revenue would raise any substantial question of law. The appeal
shall accordingly stand dismissed.
(J.P.DEVADHAR, J.) (DR. D.Y.CHANDRACHUD, J.)
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