Pradeshiya Industrial And … vs Income-Tax Officer on 17 March, 1987

ORDER

Egbert Singh, Accountant Member

1. Both the assessee and revenue have brought these appeals before us. The facts and the background were identical and the points involved also are interlinked. Accordingly, the learned counsels of both the sides have addressed us in one set. We, therefore, consolidate all these appeals for disposal by this common order.

2. We shall take up the appeal by the assessee for the assessment year 1981-82, being ITA No. 169(Alld)/1985, in which the grounds of appeal are that the Commissioner of Income-tax (Appeals) [CIT (A)] erred in confirming the assessment made by the Income-tax Officer [‘ITO’ for short] on the basis of the accounts, which were not approved by the Board of Directors of the assessee nor they were adopted by the Members at Annual General Meeting and that the revised return should have constituted the foundation for assessment. It is also the appeal by the assessee that the CIT (A) erred in confirming the assessment made on the basis of the original return disregarding the revised return and that the revised return should not have been declared as invalid within the meaning of Section 139(5). The assessee has also taken a ground that the change over of the system of accounting from mercantile to cash has been rejected by the authorities below on arbitrary and flimsy grounds.

3. Briefly speaking, the assessee is a State Industrial & Investment Corporation of U.P. Its objects are stated to be for accelerating industrialisation through various assistance to entrepreneurs and other agencies. In that process, it gave advances and loans on which interest was earned. It also paid interest on its own borrowings and deposits etc. It has been stated before us that the assessee right from the inception, has been following mercantile system of accounting and the accounting period followed was the financial year i.e. March ending. For the assessment year 1981-82, the previous year ended on 31-3-1981. The assessee filed a return for the assessment year 1981-82 on 15-10-1981 with an income of Rs. 56,56,910. The assessee also filed application for extension of time in Form No. 6 for filing a return on 15-10-81, which was filed on 29-7-81 and was allowed. Subsequently, the assessee filed other return on 31-3-1982 showing a loss of Rs. 2,37,550, which was claimed by the assessee to be a revised return. The Assessing Officer noted that this return was filed in view of the fact that the assessee had changed the method of accounting from mercantile to cash with retrospective effect from 1-4-1980. Accordingly, the ITO questioned the right of the assessee to file revised return within the meaning of Section 139(5). He noted that after the accounts had been finalised and results deduced therefrom, the assessee filed the first return on the basis of the accounts maintained by it on mercantile system. He also pointed out that it was clear that up to that date i.e. 15-10-1981, the assessee had been proceeding on the basis that the taxability of the income should be on regular and established mercantile system of accounting. He also observed that the books of account of the assessee were re-cast and re-adjusted with retrospective effect on cash basis of accounting. He, therefore, inferred that the legal and factual acceptability of such a unilateral and retrospective switch over in the method of accounting has to be enquired into. It was clarified that the major sources of finance of the company were loans from the U.P. Government, Banks and Corporations apart from the assessee’s own bonds and debentures, on which interest was paid. It was also indicated that the assessee advance d money to various persons on interest and such loans were advanced which were secured by hypothecation made by the borrowers. The ITO pointed out as per their terms of the hypothecation interest was payable and even compound interest would have to be charged if there was default in payment of the earlier interest. He also indicated that the assessee had right to recover receipt and to take other coercive action for recovery of the dues. The Assessing Officer pointed out further that for the accounting period ending on 31-3-80, the return has been based on accrual basis in respect of both the income and expenditure. He also indicated for the year under consideration i.e. for the accounting period ended 31-3-81, the original return was filed on that basis on 15-10-1981 as indicated earlier and that return was accompanied by copies of balance-sheet and other accounts ended on 31-3-1981. The said return was verified and signed by the Managing Director on 6-10-1981. He also indicated that the assessee filed an estimate of his income for the purpose of advance tax on 12-9-1980 at Rs. 5,54,150 on which Rs. 33 lakhs was worked out as advance tax payable, that estimate of advance tax was revised on 13-3-1981 and the income was reduced to Rs, 46,89,000. The ITO pointed out that even at the time of filing of those papers, the assessee-Corporation was very clear in its view that it has to return the income on the basis of the mercantile system of accounting, which has been followed since the past many years and that there was no indication of switching over from mercantile system of accounting to cash system for the accounting period 1980-81 relevant to the assessment year 1981-82.

4. He pointed out that only on 12-2-1981, the Board of Directors decided to change over to cash system with effect from 1-4-1981. He reproduced the resolution to that effect in the assessment order itself. He also pointed out that it was only after the return was originally filed on 15-10-1981 that a decision was taken in the meeting of the Board of Directors held on 19-10-1981 that the cash system of accounting was made effective from the financial year 1980-81. In view of that, the profit and loss account etc, were recast on cash system, though entries in the books of account for the period ended 1-4-1980, were made as per the mercantile system of accounting. He also pointed out that the revised return showed the results on the basis of the final accounts as recast on the basis of cash system. He also indicated that the director’s report to the shareholders for the year ended 31-3-1981 also were prepared originally on mercantile system and presented to the Board on 19-10-1981. The ITO mentioned also about the report of the Chartered Accountant dated 15-1-1981, which did not indicate that the assessee had failed to realise its earnings from the constituents or that the amounts due remained unpaid or were not likely to be realised and that the only ground given in those returns for the change over was that the tax liability under the mercantile system exceeded the funds generated from the assessee’s operation and that such a situation had caused severe strain on the resources of the assessee.

5. According to the ITO, the assessee was not entitled to file a revised return under Section 139(5) and that the assessee cannot change over the system of accounting with retrospective effect to avoid proper incidence of tax which it became liable on the basis of the method of accounting employed by it regularly since the last many years, and that the assessee without the approval of the department could not unilaterally change the system of accounting so that the incidence of taxation could be postponed, reduced or avoided. According to him, a revised return can only be filed under Section 139(5) when there was any omission or wrong statement discovered by the assessee in the original return. He found that there was no omission or any wrong statement in the return filed earlier, which has been verified and signed by the authorised person. He, therefore, concluded that the assessee was not entitled under Section 139(5) to file the revised return. He found that the conditions for the purpose of Section 139(5) have not been fulfilled. He observed that the change over of the system of accounting with retrospective effect cannot constitute a bona fide mistake on the basis of which a revised return can be filed and that the said revised return cannot be acted upon.

6. The Assessing Officer also considered the provisions of Section 4 and Section 145 in dealing with the point of accrual. He was of the view that the Income-tax Act permits the assessee to adopt any method of accounting and once such a method was adopted, the same method would have to be followed consistently and cannot be changed at the will of the assessee. He referred to the decision of the Hon’ble Allahabad High Court in the case of Balraj Virmani v. CIT [1974] 97 ITR 69 to emphasise that under the mercantile system of accounting an income became assessable when it accrued even if it was not received. According to him, the assessee cannot be permitted to change the system of accounting just to avoid incidence of taxation. Reference was made to the decision in the case as reported in CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal.). According to the ITO, the retrospective change of accounting method in the case of the assessee cannot be said to have been made in good faith because the purpose behind the change was to avoid proper assessment of tax on the income, which had already accrued according to the system regularly followed by the assessee in the past. He also considered the ratio in the decision given in the case as in Ramkumar Kedarnath v. CIT [1937] 5 ITR 261 (Bom.). In the case of the assessee and on the facts of the case, the ITO held that the change over cannot be said to be a bona fide act.

7. Before the ITO, the assessee relied on the decisions as reported in Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.), Snow White Food Products Co. Ltd. v. CIT (No. 1) [1983] 141 ITR 847 (Cal.) and also Snow White Food Proddcts Co. Ltd. v. CIT (No. 2) [1983] 141 ITR 861 (Cal.). In these decisions, it was held that permission from the Department was not necessary for change of accounting method. He pointed out that the Hon’ble Allahabad High Court in the case of Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 held a different view. The ITO was, therefore, of the view that if the assessee has chosen mercantile system and has been regularly-employed the system, it was not open to him unilaterally at any time to change the system subsequently. The ITO placed reliance on the observations of the Hon’ble High Court as appearing at page 130 of the above ITR. Amongst other things, the Assessing Officer mentioned that each year’s assessment is self contained and even subsequent year cannot be considered as each year being separate and independent. He also pointed out that on the case of the assessee, he found that the claim was not tenable as the accounts indicated that the adjustment for the change over has not been made in all cases. He pointed out to certain expenses on maintenance, licence Office etc. have been maintained on mercantile basis. On these circumstances and on the reasonings recorded by him, the Assessing Officer declined to accept the revised return filed by the assessee and proceeded to complete the assessment on the basis of the return filed originally on 15-10-1981. He dealt with the various aspects of the items of expenditure and incomes and computed the income at Rs. 98 lakhs in round figure.

8. The assessee took up the matter before the CIT (A), who heard the assessee and held that there cannot be any question of applying the changed method retrospectively and once the accounts were prepared and finalised they cannot be changed to suit the needs of the assessee. He found that there was no dispute that up to the end of the accounting period concerned, the assessee has been following the mercantile system of accounting and during that period, the assessee had no intention of following the cash system, as indicated in the assessment order. He, therefore, held that the ITO was justified in rejecting the claim of the assessee for the change of the accounting method and consequently the revised return filed by the assessee. In other words, the CIT (A) sustained also the decision of the ITO to disregard the revised return. The CIT (A) also referred to Section 211 of the Companies Act, 1956, which required a company to prepare balance-sheet which gives a true and fair picture at the end of the financial year and that the profit and loss account should also give the same picture. According to him, the cash system followed by the assessee would not give a true and fair picture of the affairs of the company. He also remarked that even the auditors had objected to the change of the accounting system and under ground also, the change of the accounting was not accepted.

9. For the assessment year 1981-82, the grievance of the assessee as mentioned earlier was against the confirmation of the CIT (A) in respect of the order of assessment made on the basis of the accounts etc., which were not approved by the board of directors and that the revised returns should have been the basis and foundation for the year under consideration. It is submitted on behalf of the assessee that it was not proper or justified on facts and in law to disregard the revised return filed by the assessee which was accompanied by the audited accounts, balance-sheet, profit and loss account etc. which cannot be at all treated as invalid within the meaning of Section 139(5). It is also stressed that the change of system of accounting from mercantile to cash was arbitrarily rejected on flimsy grounds. It is argued at length by the assessee’s learned counsel that since the beginning the assessee had been maintaining mercantile system of accounting and at a later stage as could be seen from the accounts and, from the report of the Directors, the real income could not be reflected on the basis under that system as the assessee had to show hypothetical interest income although the same had not been received or receivable by the assessee from the various parties to whom loans and advances were given. It is stressed that the assessee is a State Financial Corporation wholly owned by the Government for the purpose of rapid industrialisation of the area by assisting entrepreneurs etc. It is also urged that if the assessee had to pay tax on the hypothetical income, the stage would come soon when the assessee-Corporation would have to be wound up as the capital itself would be eaten up by tax.

10. As mentioned earlier, the original return was filed on 15-10-1981 with a total income of more than Rs. 56 lakhs. In other words, the return was filed much after the end of the accounting year i.e. 31-3-81 relevant to the assessment year 1981-82. But on the basis of the resolution passed by the Corporation at a much later date, effect was given to such resolution effecting the change over from mercantile to cash system from 1-4-80. The assessee’s learned counsel refers to several resolutions passed by the Corporation to that effect that the change over for the year 1980-81 would be effected in respect of the account on cash system and profit and loss account and balance-sheet would be modified accordingly. That resolution was passed on 19-10-81. It was further also resolved that the Executives of the Company be authorised to take necessary steps in taking follow up action. It is argued at length by the assessee’s learned co,unsel that the original return was filed provisionally along with those copies of accounts which have not been audited at all and, therefore, the first return should not have been acted upon particularly when the assessee filed a revised return in the instant case, which in fact was a correct and valid return in the eye of law and the first return has become non est. It is also argued that the assessee has right to file a revised return and, therefore, the authorities below went wrong on facts and in law in making the assessment for the year 1980-81 on the basis of original return as mentioned earlier.

11. Reference is made to various case laws in respect of the assessee’s contention. It is also urged that the assessee has got a right to choose a particular method of accounting and the Income-tax Department could not compel the assessee to adopt a particular method of accounting at any time. It is also urged that there is no need for obtaining prior approval from the department at their change over of system was to be effected. Reference is made to the following case laws as reported in Dhampur Sugar Mills Ltd. v. CIT [1973] 90 ITR 236 (All.), CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj.), Snow White Food Products Co. Ltd.’s case (supra), Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.), J.K. Bankers v. CIT [1974] with emphasis at page 111 and Juggilal Kamlapat, Bankers v. CIT [1975] 101 ITR 40 (All.). It is also stressed by the assessee’s learned counsel that the change over was not only effected but it was regularly followed by the assessee henceforth as could be seen from the accounts from the next years although the department may not have accepted the change. It is urged that as far as the assessee is concerned, the change over of mercantile to cash system was complete and to be regularly followed by the assessee. Reference is also made to the decision in Investment Ltd. v. CIT [1970] 77 ITR 533 (SO) with emphasis at page 534, and also to another decision as reported in Eastern Bengal Jute Trading Co. Ltd.’s case (supra). It is also submitted that even if a small item had not been changed, it would not materially affect the claim of the assesaee and that the ITO cannot compel the assessee to change the method. Reference is also made to the decisions as reported in CIT v. Padamchand Ramgopal [1970] 76 ITR 719 (SC), Shiv Prasad Ram Sahai’s case (supra), Dr. Ishwari Prasad v. CIT [1983] 143 ITR 789 (All.) with emphasis at page 791 and Reform Flour Mills (P.) Ltd.’s case (supra). It is urged, therefore, that the a,ppeal by the assessee on these points may be allowed.

12. The learned departmental representative, on the other hand, supports the order of the CIT (A). It is stressed that the assessee was not entitled to file a revised return as the first return was complete and valid in contents and in its entirety. It is stated that the return was signed by the authorised person and the accounts were also signed by the executive personnel of the Corporation. It is urged that the claim of the assessee cannot be supported on this point particularly in view of Section 215(3) of the Companies Act. According to the revenue, the fact that return was filed on un-approved account would not invalidate the first return. The learned Departmental Representative refers to the decision of the Appellate Tribunal as reported in (sic) 3 ITD, page 362, Bombay. It is emphasised on behalf of the revenue that Section 139(5) would come into play only when there was any omission or mistake in the original return and that in the instant case, the assessee has not shown any omission or mistake which had crept in the original return. Reference is also made to the decision as reported in [1985] 22 Taxman, page 222, in which it is stated that the decision as reported in Eastern Bengal Jute Trading Co. Ltd.’s case (supra) had not been considered.

13. At this juncture it was pointed out by the learned Departmental Representative that for the next year i.e. 1981-82, the assessee filed a Writ Petition before the Hon’ble Allahabad High Court. But the claim of the change over was rejected, which fact would support the fact that the filing of the revised return was not proper for the year 1980-81. Reference is made to a decision as reported in CIT v. Bharat Refineries Ltd. [1986] 162 ITR 652 (Cal.). It is, therefore, submitted that when the first return in the instant case was valid there was no question of filing a second return. Reference is made in Kma Ltd. v. ITO [1986] 15 ITD 307 (Bom.), Sandvik Asia Ltd. v. ITO [1986] 17 ITD 78 (Pune), Shiv Prasad Ram Sahai’s case (supra) and (sic) 143 ITR 116 at page 728, Alld., Eastern Bengal Jute Trading Co. Ltd.’s case (supra). It is argued at length that on the facts of the case, the authorities below have acted correctly in accordance with law and the appeal by the assessee on this point may be rejected.

14. We have heard both the parties at length and we have been benefited by their contribution to the issue. We have gone through the orders of the authorities below for our careful consideration. As pointed out earlier, the first return was filed on 15-10-1981 i.e. much after the close of the accounting year of the assessee, along with the return. It has been pointed out before us that copies of balance-sheet, profit and loss account etc., were signed and verified by the executive of the Corporation and no mistake has been pointed out in that return, which would justify the filing of the second return, in the instant case. In fact, we have not been able to locate any omission or mistake which might have crept in the first return which would necessitate filing of a revised return as claimed under Section 139(5). In a similar situation in the case of CIT v. Garia Industries (P.) Ltd. [1983] 140 ITR 636, the Hon’ble Calcutta High Court held that the return is valid as the return disclosing- loss was duly verified and containing required particulars along with the statement of accounts without Auditor’s report being furnished. In a slightly different situation, in the case of F.C. Agarwalla, 102 ITR page 408, the Hon’ble Gauhati High Court has come to the conclusion that the revised return can be filed only when there were omissions or mistakes in the original return and not in disclosure of any material fact. Of course, this was in the context of penalty under Section 271(l)(c). As mentioned earlier, we have not been able to locate that there was any omission or mistake in the original return or the statements accompanying the return so as to bring about a necessity of filing a second return. Considering the entire aspect of the matter, and the facts available on record, as well as the submissions made by both the sides, we are of the opinion that the claim of the assessee that the first return should not have been acted upon, cannot be accepted. It is also difficult to accept the contention of the assessee that the assessment should have been completed on the second return which was accompanied by audited accounts etc. as discussed earlier. This point of appeal by the assessee fails.

15. Another important aspect of the assessee’s contention is regarding the change of the system of accounting. As indicated earlier, return was filed on 15-10-81 on the basis of the accounts and other records maintained by the assessee on mercantile basis as has been done in the past years. In fact the return was filed on that basis, but the second return was filed much after the resolution which was made after a long gap from the end of the accounting period. This change after the accounts have been finalised, and after the return has been filed after proper verification, cannot said to be admissible and permissible. In fact, in the resolution passed on 19-10-81 for the assessment year 1981-82, the wordings were that ‘ resolved that the accounts for the year 1980-81 be prepared on Cash System of Accounting and the profit and Loss Account and Balance Sheet be modified accordingly. Further resolved that the Managing Director/General Manager/ Secretary of the Corporation be and are hereby authorised to take all necessary steps in pursuance of the foregoing resolution.

16. From this resolution, it is seen that the change over of accounting was resolved to give retrospective effect after the first return had been filed, and that too for the year 1980-81 only. There is no indication, that this intended change was meant on regular basis and this resolution itself would not prevent the assessee from returning back to the mercantile system in future. But as has been pointed out before us that by another resolution passed on 12-3-81, it was resolved that with effect from 1-4-1981, the assessee switches over to the cash system of accounting and would submit return accordingly and the executives have been authorised to take necessary steps in that regard. It is pointed out on behalf of the assessee that the change over as per resolution meant for the year 1980-81, was not only for the year but for all years to come and that in fact the returns for the subsequent years were filed on the basis of the accounts maintained on cash basis although the ITO might not have accepted the changed system.

17. In a slightly different situation, in the case of CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 728 (All.) relied on by the revenue the change of accounting method from mercantile to cash system was in respect of a particular debt on the ground that interest was not being paid. It was held that the facts subsequent to the relevant year, were not relevant and, therefore, the change of method of accounting was not justified.

18. Having regard to the entirety of the facts and circumstances of the case, we are of the opinion that filing of the revised return in the instant case, as indicated earlier, is not permissible and the second return could not have been acted upon by the ITO which has rightly based the assessment order on the first return, which, in our opinion, is valid, on facts. At the same time, the change over was given effect to after the accounts have been closed, finalised and the return was filed. Thus, the authorities below, in our opinion, were justified in not accepting the claim of the assessee in this regard.

19. The next other grounds of the assessee are regarding that the authorities below went wrong in confirming the disallowance of listing fee of Rs. 1,875, leave salary and pension of Rs. 5,555 and salary of Shri M.C. Goyal, Rs. 1,308. It is submitted that without prejudice to the earlier grounds of appeal, the claim of the assessee in respect of these amounts should have been allowed. We have heard both the sides. Since complete details and relevant facts are not readily available, we would restore these few points to the Assessing Officer for fresh disposal keeping in view our decisions in the earlier grounds of appeals dealt with by us in the preceding paragraphs.

20. Thus, as far as the assessment year 1981-82 is concerned, the appeal by the assessee is rejected.

21. For the assessment year 1982-83 the appeal by the assessee is that the order of the CIT (A) was not a speaking order relating to the first three grounds of appeal raised before him to the effect that the Assessing Officer acted beyond jurisdiction disregarding the facts of the case in recommending audit of accounts of the assessee under Section 142(2A) to the Commissioner of Income-tax, and that the persons named as auditors could not be nominated or hold office as auditors under Section 142(2A) and that the direction given by the Assessing Officer under Section 142(2A) transgressed the lawful and reasonable limits. Briefly speaking, the facts of the case are as under.

22. For the assessment year 1982-83, the Assessing Officer observed that the return was filed on the basis of cash system of accounting which was adversely commented upon by the auditors. He adverted to such a report. He indicated that the assessee tried to meet the objections of the statutory audit. The Assessing Officer referred to the facts relating to the assessment year 1981-82 dealt with by us in the earlier preceding paragraph regarding the change in the accounting method followed by the assessee. According to the Assessing Officer the change in the accounting system was being done to defer the taxability of the interest income which remained to be realised. The reason given by the Corporation for the change was due to non-recovery of the accrued interest, which was not accepted by the Assessing Officer as sound and satisfactory as recovery of such interest could be dealt with reference through other available procedures and method. He pointed out that merely on the ground that the assessee failed to realise accrued interest, the change of system of accounting to different method for such unrealised interest was totally unjustified which cast a doubt on a bona fide intention of the Corporation as the change in the accounting system was done only to suit the purpose of the company.

23. It was on the background of this that the Assessing Officer noted that in view of the complexity of the accounts, action under Section 142(2A) of the Income-tax Act, was necessary to get the accounts audited after recasting the accounts on mercantile basis as was being done by the assessee till 1981-82. The Assessing Officer obtained the approval of the CIT as provided by that section as per order dated 19/20-12-85, by which the Commissioner of Income-tax has appointed M/s. M.P. Singh & Associates, C.A. for getting the accounts audited, for which the Assessing Officer allowed time to the assessee.

24. The assessee soon thereafter filed a writ petition before the Hon’ble High Court against the direction contained in the notice issued by the ITO under the above section. It was stated that the writ petition was dismissed. It was also mentioned that the audit report could not be filed as the assessee could not comply with the direction issued by the Assessing Officer. The Assessing Officer extended more time to the assessee for compliance. He found that the directions had not been carried out by the assessee and in the circumstances he proceeded to complete the assessments under Section 144 dealing with the facts of the case on merits. Additions and disallowances were made in the computation of the income which was computed at Rs. 4,53,43,564 before depreciation.

25. It may be mentioned that against the order of the Hon’ble High Court dismissing the Writ Petition filed by the assessee, the assessee went in appeal before the Hon’ble Supreme Cburt of India. It is stated that the Hon’ble Supreme Court has passed an order, a copy of which has been placed in our file. It has been observed by the Hon’ble Supreme Court that the petitioners having opted in favour of preferring appeals before the appellate authority against the assessment orders, the Hon’ble Supreme Court did not propose to interfere at that stage and, therefore, the Special Leave Petitions were accordingly dismissed. In respectful compliance with the above directions of the Hon’ble Supreme Court and keeping in view of the ratio enunciated by the Hon’ble Allahabad High Court in the case of Hindustan Construction Co., as reported in 1987 UPTC, Vol. 1, page 68, we proceed to deal with the matter.

26. Amongst other things, the assessee took up the matter before the CIT (A) contending that the Assessing Officer was not justified in making the assessment as mentioned above as he has transgressed the lawful action under Section 142(2A), for getting the accounts re-audited on the basis of mercantile system of accounting although the assessee has switched over to cash system much before, the start of the accounting period itself, and that there were valid reasons involving huge expenditure which would justify the assessee’s resistance to such action.

27. The CIT (A) found no merit in the submission made by the assessee as the provisions are statutory and that the authorities are entitled to get the accounts audited under the above section and in case of default, assessment would have to be done under Section 144 keeping in view of the decision as in Swadeshi Polytex Ltd. v. ITO [1981] 127 ITR 287 (All.). This action of the Assessing Officer was upheld. Hence, this appeal by the assessee.

28. It is submitted vehemently by the assessee’s learned counsel that the authorities below acted illegally and without jurisdiction in directing the assessee to re-audit the accounts as required under the above section, and that too after recasting the accounts entirely on mercantile system from the cash system which had been followed by the assessee during the entire period of the accounting year under consideration. It is urged that the ITO had not given any specific reason to point that due to what complexities and the nature of the accounts of the assessee and interest of the revenue, action under Section 142(2A) should be taken. According to the assessee, the ITO simply reproduced the wordings of the section before asking the assessee to re-audit the accounts. At this juncture, the assessee’s counsel reads out the wordings of the above section in order to stress the case of the assessee that the Assessing Officer has jurisdiction only to direct the assessee to have the accounts audited compulsorily by the auditors as pointed out by the Commissioner of Income-tax. But it is urged that the Assessing Officer cannot exceed his jurisdiction in asking the present assessee to re-cast the entire accounts for the year in mercantile system as against the cash system followed by the assessee right from the beginning of the accounting period itself. It is emphasised that the assessee was asked to re-write and re-cast the accounts entirely and have the same audited by the appointed auditors and to submit a report as under Section 142(2A). It is vehemently urged on behalf of the assessee that such direction cannot lawfully be given by the Assessing Officer and on that fact alone the whole procedure was void ab initio. It is pointed out that as the Assessing Officer has not given a copy of his report to the Commissioner of Income-tax, the reasons are obviously not spelt out, but as far as the approval of the Commissioner of Income-tax is concerned, the Commissioner has simply agreed to the proposal of the Assessing Officer, copy of which has been placed in our file. It is argued at length that in the entirety of the facts and circumstances of the case, both the authorities below went wrong in rejecting the bona fide claims of the assessee. It is also emphasised that the change over as urged earlier, was not for any motive or mala fide intention. It is also pointed out that the revenue have not shown any material or fact to show that the change over was not bona fide and was not intended to be followed hence thereafter. As mentioned earlier, the assessee’s learned counsel refers to various decisions of different High Courts to reinforce his arguments. It is also pointed out that the assessee as indicated earlier, had passed a resolution to change over the system much before the start of the accounting period and the change over was intended bona fide to be followed regularly in future years, which fact is proved by filing return of all the subsequent years on cash basis though the department might not have accepted the change over. It is urged, therefore, that the appeal by the assessee on this point may be accepted.

29. The learned Departmental Representative, on the other hand, resists the submissions made on behalf of the assessee contending that in the Writ Petition itself the assessee has taken up this very issue before the Hon’ble High Court and the Writ Petition was dismissed with an observation that, inter alia, that the change of method was not accepted by the Assessing Officer mainly on the basis that this would not reflect true result of the assessee’s business and the change was being done only for the purpose of wiping out the income as returned and instead claiming of loss. It was held that there was no error in the order of the opposite party No. 1 that is the Commissioner of Income-tax in directing the assessee to proceed and provide their accounts in mercantile method. The Writ Petition was dismissed. It is submitted that on the basis of the decisions relied on by the revenue, such change over unilaterally cannot be accepted particularly when the income had already been accrued to the assessee on mercantile system of accounting which had been followed by the assessee in the past. It is urged, therefore, that the appeal by the assessee may be dismissed.

30. We have heard the parties at length and we have perused the various orders of the authorities below for our consideration along with the paper book filed on behalf of the assessee. The case of the assessee is that much before the start of the accounting year relevant to the assessment year under consideration, the assessee-Corporation had resolved through a competent body to change the system of accounting from mercantile to cash basis on bona fide grounds and the department has not pointed out that there was no bona fide in the said change of accounting. It has been pointed out on behalf of the assessee that the case laws relied on by the revenue were on different facts and with reference to different context particularly in those cases the change over was in respect of a particular transaction or particular account. The case of the assessee is that the change over was for the entire system of accounting except some minor items which would not in any way materially affect the claim of the assessee. The assessee relied on the decision of Ganga Charity Trust Fund (supra) in which the various decisions of the Hon’ble Calcutta and other High Courts have been taken into account before holding that since there was no finding of fact that the switch over to the cash system was not bona fide, the assesseee was entitled to switch over and the revenue have not shown that the change lacks durability or regularity and was merely a stop gap arrangement to avoid, payment of tax. The case of the ITO in the instant case is that the change over of the system by the assessee was to defer the taxability of the returned income. This appears to be not correct as the return for the year under consideration made was not on mercantile system of accounting but on the basis of the cash system followed by the assessee right from the beginning of the accounting year itself. In matters of taxation each year is independent and subsequent development may not have a direct bearing on the issue. Of course, it has to be seen whether the change was made with bona fide intention and to be followed thereafter. In the instant case, we find that the assessee made a change and continued to follow the same regularly although the Assessing Officer in the subsequent year continued to reject the change over. It is seen that different High Courts have sustained the plea taken by the various assessees that the right to adopt a particular method lies with the assessee as required by Section 13 of the Income-tax Act, 1922 or Section 145(1) of the Income-tax Act, 1961. We have gone through the different case laws referred to by both the sides at the time of hearing of the appeals, for our consideration.

31. In a decision in the case of Cosmopolitan Trading Co. (supra), it was found that the change was in respect of a particular debt and was held by the Hon’ble High Court that the change of accounting was not justified. But the facts of the present case before us are distinguishable. In the case of the same assessee a report in CIT v. Cosmopolitan Trading Co. (No. 2) [1979] 116 ITR 815 (All.) it is seen that the decision was given on the facts of that case in which it was held that the change to cash system was based on a commercial expediency and sound, business methud, therefore, the interest due was not includible. It was observed that the change was not permissible if some payment is received.

32. In the case as reported in CIT v. K. Sankarapandia Asari & Sons [1981] 130 ITR 541, the Hon’ble Madras High Court held that the ITO cannot impose his own method of accounting disregarding the method employed by the assessee without any evidence that the method adopted by the assessee was defective. In the instant case, no such defect was indicated before obtaining approval of the Commissioner for taking action under Section 142(2A), but on the ground that due to complexities and due to the nature of the accounts compulsory audit was to be made. But while giving the direction, the Assessing Officer had directed the assessee to re-cast the entire accounts and to re-write the books and then give the same to the appointed auditors which again was claimed by the assessee to be in excess of jurisdiction prescribed under Section 142(2A). It is stressed before us that the assessee has the right to adopt any method which has been rightly done so for the year under consideration.

33. In the case of Dr. Ishwan Prasad (supra) it was held by the Hon’ble Allahabad High Court that there was no bar to the change of the system and bona fide of the assessee is prerequisite for the change. According to the ITO, the asses-see’s intention in the change was only to defer the taxability of the income which had already been accrued. This contention of the Assessing Officer cannot be supported as the assessee had been maintaining the system on cash basis for the entire year right from the beginning of the accounting period and there was, therefore, no question of delaying taxability or for avoidance of tax. We, therefore, do not find any mala fide on the part of the assessee in the method of accounting followed by the assessee for the year under consideration i.e. 1982-83. That apart, if the accounts of the assessee are defective from which income cannot be deduced, then the provisions of Section 145(1) etc., may be attracted. As far as the direction of the Assessing Officer to the assessee to recast the accounts, is concerned, we are of the opinion that the Assessing Officer in exercise of the powers under Section 142(2A) cannot so direct the assessee particularly when the CIT himself has not instructed the ITO to direct the assessee to re-cast the accounts before submitting the books for auditing by the appointed auditors. In other words, the Assessing Officer has not complied with the direction given by the Commissioner of Income-tax, as could be seen from the order of the CIT (dated 19-12-85 in Hindi), which directed the ITO to have the accounts examined and audited by the appointed auditors. Even otherwise, the ITO on his part had exceeded the directions given by the CIT himself. This has vitiated the proceedings of assessment made by the ITO on that basis. It is because of these directions given by the Assessing Officer, that the assessee had in our opinion validly declined to have the accounts re-cast or re-write the books before giving them to appointed auditors and again because of this the Assessing Officer resorted to Section 144. So, in our opinion, on the facts of the case the assessment made under Section 144 was not justified. On this point, it may be mentioned here that it has been urged before us by the assessee’s learned counsel that complete copies of accounts details etc. as would be required were filed before the ITO on the basis of which income can be deduced and tax computed, which were totally ignored or disregarded by the Assessing Officer. We find force in the contention of the assessee that on that ground alone the ex parte order cannot be upheld. Thus, in our opinion, the irregularity or illegality has crept in at the stage when the ITO asked the assessee to do the things which were not authorised by the Commissioner or by the section as indicated earlier. This aspect of the matter apparently has not been placed before the Hon’ble High Court at the time when the Writ Petition was dealt with. The order of the CIT was challenged in the Writ Petition and the Hon’ble High Court found no error in that direction of the Commissioner. But before us, the assessee complained of the excess of jurisdiction of the ITO in carrying out the mandate of Section 142(2A). Since, in our opinion, the illegality or irregularity has crept in at that stage, direction could be given to the Assessing authorities to re-commence the proceeding from that stage and to complete the proceedings in accordance with law keeping in view the decision of the Hon’ble Supreme Court in the case as reported in 131 ITR, page 451.

34. Furthermore, we may also mention that in the case as reported in Shiv Prasad Ram Sahai’s case (supra) cited before us supports the stand taken by the assessee. So is the decision in the case as reported in CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572, (Mad.) in which taxation of illusory interest was not upheld.

35. In view of what we have discussed and in view of the ratio of the decisions enunciated by different High Courts and Hon’ble Supreme Court, we are of the opinion that the Assessing Officer erred in making the assessment under Section 144 in the circumstances of the case, and in our view the CIT (A) was not justified in not correctly appreciating the facts and the background of the case involved for the year under consideration.

36. As mentioned earlier, the Hon’ble High Court found no error in the direction given by the Commissioner of Income-tax. Copy of the direction of the Commissioner has been placed in the Paper Book. But as mentioned in the preceding paragraphs, the Income-tax Officer instead of complying with the direction of the Commissioner, did ask the assessee to get the accounts audited after recasting the accounts on mercantile basis as was being done by the assessee till 1981-82. He did so as in his view that merely on the ground that the assessee failed to realise the accrued interest, the change of accounting system to defer tax liability on such unrealised interest was totally unjustified and this cast a doubt on the bona fide intention of the assessee as the change in the accounting system has been done only to suit their own vested purposes. Thus it was the case of the Assessing Officer that as the accounts of the assessee were not correct or complete and that income cannot properly be deduced therefrom, compulsory audit under Section 142(2A) would be necessary. In such a situation the proviso to Section 145(1) or (2) would be applicable. The Assessing Officer expressed doubt on the bona fide intention of the Corporation in changing the system of accounting only to defer tax liability, but he has not given a finding that the intention to change the system of accounting was mala fide. That apart, as provided under Section 142(2A), the IAC may, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue and with the previous approval of the Commissioner direct the assessee to get the accounts audited by an accountant nominated by the Commissioner in this behalf and to furnish a report of such audit in the prescribed form. But as indicated repeatedly in preceding paragraphs, the Assessing Officer directed the assessee to get accounts audited after recasting the accounts on mercantile basis. This was neither the direction of the Commissioner nor the requirement as contained by the above section. Furthermore, the IAC has not spelt out or indicated any complexity in the accounts as maintained by the assessee. It appears that Section 144 was resorted to as the assessee, who kept the accounts on cash basis for the entire year relevant to the assessment year 1982-83, failed to recast the accounts on mercantile basis. It seems to us that the direction by the Commissioner of Income-tax vide order dt. 19-12-85 as opined by the Hon’ble High Court was not erroneous. But the Assessing Officer had exceeded his powers conferred by Section 142(2A) and the direction of the CIT which aspect of the matter has not been placed before the Hon’ble High Court for consideration.

37. It has not been shown before us as to what were the nature and complexities of the accounts as maintained for the entire accounting year 1981-82 by the assessee. From whatever facts and materials available, we do not find any complexity in the accounts, or any necessity for the Assessing Officer to direct the assessee to get the accounts audited compulsorily under Section 142(2A) after recasting the accounts. Thus, this action of the Assessing Officer under Section 142(2A) cannot be supported. In the circumstances, we would direct the Assessing Officer to recommence the proceedings afresh in accordance with law and after giving the assessee an opportunity of being heard.

38. For the assessment year 1982-83, the assessee has taken a ground that the Commissioner of Income-tax (Appeals) failed to decide the matter arising out of the ground No. 5 raised before him to the effect:

5. That it was unjustified on the part of the learned IAC to turn down the application of the appellant made under Section 129 which impinges on the validity of the assessment made.

The grievance of the assessee is that the Officer who passed the assessment order was a different incumbent from the Officer who had been dealing with the case of the assessee for the year under consideration and that was why the assessee applied for getting a fresh hearing by the new incumbent under Section 129. According to the assessee’s learned counsel this point would go to the root of the matter of assessment made ex parte under Section 144, particularly when the Assessing Officer did not at all look into or examined any part of the accounts or details thereof given by the assessee in course of the hearing.

39. We have heard the learned Departmental Representative and we have gone through the orders of the authorities below for our consideration along with other connected papers in their voluminous paper books. It is seen that certain basic facts are required to be investigated and found before the said ground of appeal by the assessee can be finally disposed of. Since the CIT (A) has omitted to deal, in any way, the said ground of appeal, we consider that in the interest of justice the matter could be restored to the file of the CIT (Appeals). But in the instant case and in view of what we have already decided in the preceding paragraphs relating to the issue of compulsory auditing under Section 142(2A), we consider that the matter raised by the assessee under Section 129 may also be dealt with simultaneously by the Assessing Officer, so that natural justice against the assessee is not violated.

40. The assessee without prejudice to those grounds dealt with by us has raised the issue on merits also regarding application of certain rate to be excessive and arbitrary and also in respect of disallowance of various expenses like printing and stationery, office maintenance etc. Since the matter has been restored to the Assessing Officer i.e. Inspecting Assistant Commissioner (Assessment), the matter relating to the merits would be dealt with afresh by the Assessing Officer in the light of the direction given above and after giving the assessee an opportunity of being heard. Both are at liberty to place materials introduced before the fresh assessment is completed.

41. We shall come now to the assessment year 1983-84 in which the first three grounds of appeal are identical, with those of the assessment year 1982-83 dealt with by us earlier. The grievance of the assessee is that in making assessment under Section 144, certain cardinal judicial principles were not observed and no opportunity was given to the assessee to have its say on various matters and that the authorities below were incompetent to interfere with the system of accounting regularly employed by the assessee. For this year also, the Assessing Officer dealt with the similar facts of the case that the assessee filed return on the basis of the accounts maintained on cash basis. In a similar situation as in earlier year, he directed the assessee to get the accounts audited after recasting the same on mercantile system as it was done till the assessment year 1981-82. The same facts were prevailing during the assessment year 1983-84 also. In view of what we have stated for the assessment year 1982-83, we find force in the contentions made on behalf of the assessee. For this assessment year also following our direction given for the earlier year, we set aside the orders of the authorities below for fresh disposal by the Inspecting Assistant Commissioner in the light indicated above.

42. The assessee has also taken grounds of appeal relating to merits regarding disallowances of expenses and other points, which according to the assessee was excessive and uncalled for. Again, in what we have discussed for the assessment year 1982-83, the grounds relating to the merits of the case are to be restored to the file of the Assessing Officer for fresh disposal as indicated by us for the assessment year 1982-83.

43. This disposes of the assessee’s appeals for the above years. We shall now come to the appeal by the Revenue for the assessment year 1981-82 in which the first ground of appeal is that the CIT (Appeals) erred in allowing a relief of Rs. 3,35,337 out of the disallowance of Rs. 3,45,901 made by the Assessing Officer in respect of the expenses of the earlier year written off during the year under consideration. Briefly speaking, the facts of the case are as under :

44. The assessee claimed as deduction in respect of Rs. 3,45,901 being debit balances written off as per Schedule J to the final accounts. It was stated that these various items of expenditure relating to the earlier years, the same became due and for that matter as expenditure in the year under consideration. The details of the expenditure were filed along with an application to substantiate the claim. It was pointed out to the OIT (Appeals) on appeal by the assessee that for the assessment year 1979-80, the predecessor CIT (Appeals) had allowed the claim of the assessee to some extent. Appropriate relief was claimed for the year under consideration. The present CIT (Appeals) went through the details and other material facts. He was of the opinion that certain items did not constitute accrued liability for the year under consideration, i.e. salary to Mr. M.C. Goyal (Rs. 1,308), listing fee Rs. 1,875, rebate on interest Rs. 1,926 and leave salary (Rs. 5,555) totalling to Rs. 10,664. Among other things, the CIT (Appeals) found an amount of Rs. 3,07,783 included in the rebate of interest on term loan in the case of M/s. Wool Fibres Ltd. and Rs. 18,826 in the name of P.V.K. Distillery. It was noted that there were certain disputes regarding charge of basic interest rate and the loans were sanctioned prior to May, 1975. It was pointed out, but for holiday of 28th May, 1975, the disbursement would have been taken place by that time. It was pointed out that, however, from 29-5-1975 the rate of interest was enhanced, which was agitated by the parties and the matter was finally decided during the accounting year by resolutions dated 28-10-1980 and 12-2-1981 respectively and the assessee-Corporation agreed to the representation made by these parties and relief was provided to the extent mentioned above. The CIT (Appeals) considered the facts of the case and the various aspects of the matter and found that the rebates and interests arose for the first time during the year under consideration and was a proper charge on the profits of the current year. He, therefore, felt that the Assessing Officer was not justified in disallowing the claim and, therefore, the assessee was entitled to the relief of Rs. 3,35,337.

45. We have heard both the sides and we have gone through the orders of the authorities below for our consideration. We have also gone through the other papers in the Paper Book for our perusal. Having regard to the fact that the resolution was passed during the year under consideration as per finding of the CIT (Appeals) we are of the opinion that the claim of the assessee was rightly sustained by the CIT (Appeals). No interference is called for.

46. The next ground of appeal by the revenue is that the CIT (Appeals) erred in allowing the claim of Rs. 1,133 being gratuity which was rightly disallowed by the Assessing Officer. The Assessing Officer disallowed the claim. The assessee took the matter before the CIT (Appeals) and argued that the assessee had applied for recognition of gratuity fund before the appropriate authority and if no action was taken on the application, the assessee should not be allowed to suffer. It was pointed out that similar claim was made for the assessment year 1979-80, which was admitted while disposing of the appeal filed by the assessee for that year. It was observed that the assessee had prepared the gratuity fund deed on 20-2-1979 and filed the same with the CIT on 30-3-1979. The CIT (Appeals) was informed that till that date no order was passed on the said application. He, therefore, agreed with his predecessor that in the circumstances the assessee should not be allowed to suffer for no fault of theirs. He also observed that the gratuity is a statutory liability and would be allowable as a deduction even under Section 37. Therefore, the disallowance was not sustained.

47. We have heard both the sides and we have gone through the orders of the authorities below for our consideration. In our opinion, it is essential that the matter should be restored to the file of the Assessing Officer to ascertain finally whether the CIT had disposed of the application of the assessee in respect of gratuity fund and at the same time we are quite hopeful that the Commissioner of Income-tax might have since disposed of the application of the assessee which fact would be taken by the Assessing Officer before finally disposing of the claim of the assessee on this score. Therefore, this part of the orders of the authorities below is set aside for fresh disposal by the Assessing Officer as directed above.

48. We shall now come to the third ground of appeal by the revenue against the disallowance of Rs. 38,99,410 under Section 36(l)(viii). Briefly speaking, the assessee claimed Rs. 38,99,410 as deduction under Section 36(1). It was submitted that in the original accounts prepared by the assessee based on mercantile system of accounting the amount had been transferred to a capital reserve as required under Section 36(1) and the same should have been allowed now as the assessment as well as the appeal the method of accounting had been determined as mercantile. It was urged before the CIT (Appeals) that the Assessing Officer cannot blow hot and cold by the same breath. The CIT (Appeals) sustained the contention of the assessee in that respect. He observed that once the first return and the sets of accounts filed along with the original return had been made the basis of assessment, then the claim for deduction has to be considered and determined as such. He found that the appellant had transferred the sum in question to the special reserve under Section 36(l)(viii).The claim was, therefore, allowable subject to 40% of the income finally determined.

49. We have gone through the orders and findings of the authorities below along with the other papers for our consideration. We have heard both the parties. The year in question is assessment year 1981-82 and in the assessee’s appeal we have given our opinion that the assessee was not entitled to change the method of accounting after the end of the previous year and after finalising of accounts and after filing of the fresh return. For the assessment year 1981-82 in the assessee’s appeal, we have rejected the contention of the assessee that the assessment should be made on the accounts maintained on cash basis. In view of that decision, the claim of the assessee in respect of Rs. 38,99,410 would be allowable on mercantile basis. The allowance allowed by the CIT (Appeals) was on sound basis. No interference is called for.

50. There is no other ground of appeal by the revenue for the assessment year 1981-82 for our adjudication.

51. In the result, the appeals by the assessee are treated as partly allowed for statistical purposes and the appeal by the revenue is dismissed.