Assessee entitled to make changes in accounting method
Under Section 145 of the Income-Tax Act, 1961, the assessee's regular method of accounting determines the mode of computing the taxable income but it does not determine or even affect the range of taxable income or the ambit of taxation. The provision for computation of income contained in this section cannot derogate from the provisions of the charging section.
In other words, the charge on income accruing or received in India, imposed by Section 5 cannot be avoided by any method of accounting. This proposition is of particular significance in the case of non-residents who might be assessable in respect of stray items of income accruing or received in India. The chargeability of income received cannot be escaped by a non-resident on the ground that his regular method of accounting is mercantile, nor can the chargeability of income accruing in India be escaped on the ground that he maintains his accounts on the cash system.
The Assessing officer, even where he accepts the assessee's method of accounting, is not bound by the figure of profits shown in the accounts. The assessee cannot escape liability to tax by omitting to make an entry or making a wrong entry in the accounts. The date of taxability of income is the date when the appropriate entries are made or should be made in the accounts in accordance with the method of accounting regularly employed by the assessee.
The substantive part of the section makes it clear that the income is to be computed "in accordance with the method of accounting regularly employed". The assessing officer may include in the computation of income an amount which does not figure in the accounts but the inclusion of which is required by the Assessee's method of accounting; that is to say, the Assessing Officer may, without deviating from the assessee's method, make such adjustments in the profit and loss account as are necessary for giving full and true effect to that method itself.
Having adopted a regular method of accounting, the assessee cannot be allowed to change it or depart from it for a particular year or for part of the year or in respect of a stray transaction. The burden of providing that there has been a change in the method of accounting is on the Department.
The assessee's departure from his own regular method cannot be justified on the ground that a similar departure in a prior year had been made by the assessee without any protest on behalf of the Department, if the Income-Tax authorities have accepted the assessee's system of accounting and taxed him on that basis for a number of years, they cannot suddenly seek to tax him on a different basis in a particular year. In Andhra Bank Ltd v CIT (225 ITR 447), the Supreme Court reiterated this point that where a change in the method of accounting is accepted by the Tax Department, the assessment cannot be reopened subsequently by the same assessing officer or by his successor. The facts in this case were that the bank was following calendar year, which was its accounting year. In the course of its banking business, it was purchasing government securities and also selling them from time to time.
On Government promissory notes and securities, interest is payable on specified dates, but, all the same, the transferor or the transferee can calculate the interest which has accrued on such promissory notes and pay or receive suchy amount of interest on the date of and up to the date of pourchase or sale. The assessee also adopted this method and it had been accepted by the Income-Tax authorities until the assessment year 1958-59.
However, with effect from the assessment year 1959-60, the asessee changed its method of returning income with respect to the transactions in securities. It attached a note to its return of income stating that by following the aforesaid method, the bank was experiencing several difficulties in the matter of accounting, therefore, it was changing the method of accounting with effect from the accounting year relevant to the assessment year 1959-60.
According to this changed method of accounting, the bank ignored the accrued amounts of interest paid or received relating to the broken periods. The bank further submitted that the excess amount received from the sale of securities was a capital receipt. Though he did not pass a specific order to that effect, the Income Tax officer accepted this change in the method of accounting and made the assessment order. For the assessment years 1960-61 to 1962-63, the said changed method of accounting was accepted and assessments made. However, in the course of the assessment proceedings relating to the assessment year 1963-64, the Income-Tax officer objected to this change.
He also took the view that the excess amount realised from the transactions in securities constituted a revenue receipt and not a capital receipt. He made the assessment accordingly. Further, he sought to reopen the assessments for the assessments years 1960-61 to 1962-63 under section 147(b) of the Income-tax Act , 1961.
Against the reassessments made for the said three assessment years, the bank appealed to the Appellate Assistant Commissioner, but without success. On further appeal preferred by the assessee, there was a difference of opinion between the two members of the Tribunal. While the judicial member held that the reopening was valid and legal, the accountant member took the contrary view.
The matter was referred to the president of the Tribunal, who agreed with the accountant member — with the result that the assessee's appeals came to be allowed by the Tribunal. Thereupon, the Revenue asked for and obtained the reference to the Court.
The High Court answered the question in favour of the revenue purporting to follow and apply the principles enunciated by the Supreme Court in Kalyanji Mavji v CIT (102 ITR 287). On further reference, the Supreme Court did not agree with the High Court.
It held that the facts as stated above clearly disclosed that the Income-Tax officer allowed the change in the method of accounting for the assessment years concerned, knowingly. It was not a case of an inadvertent mistake which was discovered later on after completion of the assessment or oversight. Once it was found that the change in the method of accounting was knowingly allowed by the Income-Tax officer after taking into account all the relevant facts. It was not permissible for the Income-Tax officer, or his successor, to reopen the assessment at a later point of time under section 147(b) of the Income-Tax Act unless any information came from an extraneous source.
Further, the Supreme Court found no "information" available to the Income-Tax officer in this case on the basis of which he was seeking to reopen the assessments under section 147(b). This appeared to be a case of mere change of opinion.
Hence, the Supreme Court held that the assessments could not be reopened. By taking this view, the Court upheld the right of a tax payer to make a bonafide change in the method of accounting which would be binding on the Tax Department.
To sum up, it is open to an assesee to make a clean change of the regular method adopted by him up to that time, provided he satisfies the Department on proper evidence that he has in fact changed the regular basis of accounting and has not merely abandoned or changed it for a casual period to suit his own purposes.
A bona fide change of the regular basis of accounting should be accepted by the Department and be given effect on such terms as may be necessary for preventing escape from taxation or double taxation. However, even bona fide changes, if too frequent, would disentitle the assessee to have his yearly income computed in accordance with his own changing methods, for the assessee's method of accounting prevails only if it has been regularly employed.
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