KMA LTD. v. INCOME TAX OFFICER
[Citation -1985-LL-0909-1]

Citation 1985-LL-0909-1
Appellant Name KMA LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 09/09/1985
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags mercantile system of accounting • method of accounting • financial condition • mercantile basis • notional income • interest income • accrual basis • annual report • special bench • cash basis • job work
Bot Summary: Such charges are accounted for in its accounts as income/fees receivable. The said company, Kamani Tubes Ltd., did not pay the said amount and the appellant-company, also did not account for the same in its accounts. Shri Trivedi, the learned counsel for the appellant, submitted that the appellant was entitled to change its method of accounting from mercantile system to cash system unless its bona files are doubted. Shri S. K. Srivastava, the learned departmental representative, submitted that the appellant was admittedly following the mercantile system of accounting not only in the year of account but also in the earlier years and also in the subsequent years. The appellant's claim is that it had changed its method of accounting from accrual or due basis to cash system only in respect of the fees amounting to Rs. 2,83,835 receivable from Kamani Tubes Ltd. for the months of March to December 1977. There is no dispute that even in respect of this amount of Rs. 2,83,835 the appellant- company had actually raised debit notes against Kamani Tubes Ltd. by debiting the account of the said company in its books and crediting the service charges account consistent with its regular method of accounting, and that such entries were revised at the end of the accounting year at the time of finalisation of the accounts. The assessee objected and submitted that it had changed the method of accounting from mercantile to cash system and moreover the interest not having been received for a number of years, in the past, and there being no charge of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing the interest income in the accounts.


This appeal arises out of income-tax assessment of KMA Ltd., formerly known as Kamani Metals & Alloys Ltd., appellant herein. assessment year is 1978-79 for which previous year ended on 31-12-1977. 8. last ground relates to addition of Rs. 2,83,835 made by departmental authorities in respect of fees for sample testing and laboratory use receivable from Kamani Tubes Ltd. facts relating to this addition are following. appellant-company has its own equipped laboratory for sample testing products. It allows others to make use of its laboratory on payment of fees. During this year, appellant gave such laboratory assistance to three companies, viz., Kamani Tubes Ltd., Kamani Enggn. Corpn. Ltd. and Kamani Metal & Oxides Ltd. For charges levied and payable by users to it, appellant prepared debit notes and sent them to users. Such charges are accounted for in its accounts as income/fees receivable. In this year, Kamani Enggn. Corpn, Ltd. and Kamani Metal & Oxides Ltd. have paid charges as per debit notes or bills prepared by appellant. However, in case of Kamani Tubes Ltd., total of debit notes for fees chargeable amounted in all to Rs. 3,44,350 for period January 1977 to December 1977. Out of this, Kamani Tubes Ltd., paid fees for months of January and February 1977 amounting to Rs. 60,575 only, leaving balance of Rs. 2,83,835 representing charges for remaining ten months. said company, Kamani Tubes Ltd., did not pay said amount and appellant-company, also did not account for same in its accounts. 9. appellant claimed before ITO that it had changed its mentioned of accounting for job work done for Kamani Tubes Ltd. from mercantile basis to receipt basis. ITO, however, rejected above argument and proposed addition of Rs. 2,83,835. ITO before whom assessee objected to said addition, sustained said addition. He pointed out that appellant had been maintaining its books of account on mercantile basis and raised debit notes for job work done and just because appellant was facing certain problems in releasing amount due to it, did not mean that appellant should not offer for taxation income that had legally accrued to it. 10. Before Commissioner (Appeals) it was argued that Kamani Tubes L t d . was facing financial difficulties during relevant previous year and, therefore, appellant decided to change its method of accounting from accrual basis to cash basis in respect of service charges receivable from said company. Commissioner (Appeals) rejected this argument as of no force. H e held that it could not be denied that appellant maintained its books of account on mercantile basis. He further held that it was also fact that in past appellant had been showing income by way of sample testing and laboratory services fees on basis of debit notes raised, i.e., on due or accrual basis. He further held that appellant's present content implied that it still followed mercantile basis insofar as other two companies were concerned. It, however, made departure from regular method of accounting in respect of particular transaction with Kamani Tubes Ltd. and that this was not allowable under law. He, therefore, held that income of appellant from sample testing and laboratory use fees in present year was taxable on accrual or due basis and that since fees of Rs. 2,83,835 receivable from Kamani Tubes Ltd. had already fallen due in this year on basis of debit notes raised, said amount had been rightly included by ITO in impugned assessment order. This is being objected to by appellant before us. 11. Shri Trivedi, learned counsel for appellant, submitted that appellant was entitled to change its method of accounting from mercantile system to cash system unless its bona files are doubted. In support of this plea, Shri Trivedi relied on following three decisions: Sarupchand v. CIT [1936] 4 ITR 420 (Bom.), Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal) and CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal.). Shri Trivedi also relied on Special Bench decision of Tribunal in ITO v. Bajaj Auto Ltd. [1984] 8 ITD 296 (Bom.). learned counsel submitted that appellant-company had not realised this amount till today and that after this year these laboratory facilities were not made available to Kamani Tubes Ltd. He further stated that suit had been filed for recovery of this amount and that same was pending. It was also submitted before us that entries which were originally made in books of account debiting this party's account and crediting service charges account were reversed at end of accounting year. In support of this, learned counsel relied on Note No. 10 in 32 nd Annual Report for year 1977 of appellant-company. Alternatively, it was submitted that this amount did not represent appellant's income, as it represented merely entry passed in appellant's books of account. Shri Trivedi argued that what was taxable under Income-tax Act 1961, was real income of appellant and not some notional income represented by mere book entries. In support of this, learned counsel relied on decision of Tribunal in case of ITO v. Dyestuffs & Chemicals (P.) Ltd. [1983] 6 ITD 513 (Bom.) particularly on discussion at pp. 520-521. 12. Shri S. K. Srivastava, learned departmental representative, submitted that appellant was admittedly following mercantile system of accounting not only in year of account but also in earlier years and also in subsequent years. He submitted that appellant's claim of change of method of accounting was only in respect of one customer, that too for part of accounting year, namely Kamani Tubes Ltd. He argued that this alleged change of method of accounting sought to be achieved by mere reveal of entries, which were originally recorded in books of account, just before finalisation of account after close of accounting year. learned departmental representative submitted that this was not permissible in law in view of decision of Bombay High Court in CIT v. Confinance Ltd. [1973] 89 ITR 292. It was further submitted by learned departmental representative that appellant did not raise any plea regarding bad financial condition of Kamani Tubes Ltd. nor produce any evidence in form of balance sheet, etc. to prove financial condition of Kamani Tubes Ltd. before departmental authorities or even before Tribunal. He, therefore, submitted that decisions relied on by learned counsel for appellant were inapplicable to facts of present case. He further submitted that decision of Calcutta High Court in case of Reform Flour Mills (P.) Ltd., v. CIT [1981] 132 ITR 184, directly answers contentions deserved to be rejected. learned departmental representative also relied on decision of Calcutta High Court in case of James Finlay & Co. v. CIT [1982] 137 ITR 698. 13. Shri Trivedi, learned counsel for appellant, argued that decision of Calcutta High Court in James Finlay & Co.'s case (supra) relied on by learned departmental representative was distinguishable on facts. 14. On careful consideration of submissions urged on both sides, we are of considered view that decision of Commissioner (Appeals) on this point is correct and does not call for any interference at our hands. We may mention here that there is no dispute on facts found by Commissioner (Appeals) in paragraph Nos. 15 and 16 of his order. appellant's claim is that it had changed its method of accounting from accrual or due basis to cash system only in respect of fees amounting to Rs. 2,83,835 receivable from Kamani Tubes Ltd. for months of March to December 1977. There is no dispute that even in respect of this amount of Rs. 2,83,835 appellant- company had actually raised debit notes against Kamani Tubes Ltd. by debiting account of said company in its books and crediting service charges account consistent with its regular method of accounting, and that such entries were revised at end of accounting year at time of finalisation of accounts. In our view, Note No. 10, at page 28 of 32nd Annual Report of appellant company does not advance case of appellant. Of various decisions that have been cited at bar, only decision, which is directly applicable to facts of present case is one in case of Reform Flour Mills (P.) Ltd.'s case (supra). In this case, it was held that assessee, who is following particular system of accounting and does claim to effect change in method of accounting, cannot treat particular transaction differently or separately from method followed by him. In said case ITO completed assessments for 1968-69 and 1969-70 of assessee was mercantile system. assessee objected and submitted that it had changed method of accounting from mercantile to cash system and moreover interest not having been received for number of years, in past, and there being no charge of receiving that interest or principal amount, assessee did not want to give any impression of profits by showing interest income in accounts. These contentions were rejected by AAC and by Tribunal. Calcutta High Court held that on facts there was no question of change of method as such, but only treatment of particular transaction differently or separately from method followed by assessee and this was not permissible. Their Lordships held that Tribunal was right and interest from A. I. Ltd. amounting to Rs. 1,36,170 was liable to be included in assessments for 1968-69 and 1969-70. In our view, this decision of Calcutta High Court relied on by revenue is directly applicable to facts of present case. What appellant in present case has sought is only treatment of certain transactions with Kamani Tubes Ltd. differently or separately from method regularly followed by it under mercantile system of accounting and this is not permissible in law. This decision is also supported by decision of Bombay High Court in Confinance Ltd.'s case (supra). Further as rightly contended for revenue, there is no evidence placed either before departmental authorities or even before us to prove alleged difficult financial condition of Kamani Tubes Ltd. to justify contention of appellant on basis of real income which has been taken as alternative plea before us. We, therefore, hold that decision of Tribunal in Dyestuffs & Chemicals (P.) Ltd.'s case (supra) relied on by appellant's learned counsel is not applicable to facts of present case. Similarly, other decisions relied on by learned counsel are also inapplicable to facts of present case. decision of Calcutta High Court in James Finlay & Co.'s case (supra) also supports contentions of revenue. We, therefore, respectfully follow these three decisions in Confinance Ltd.'s case (supra), Reform Flour Mills (P.) Ltd.'s case (supra) and James Finlay & Co.'s case (supra) and uphold decision of Commissioner (Appeals) and sustain addition of Rs. 2,83,835 as income of appellant for year under appeal. 15. In result, appeal is partly allowed. *** KMA LTD. v. INCOME TAX OFFICER
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