HADA TEXTILE INDUSTRIES LTD. VS COMMISSIONER OF INCOME-TAX, 1992 PTD-CALCUTTA-HIGH-COURT-INDIA 1010 (1989)

(a) Income-tax---

----Accounting---Business expenditure---Change in method of accounting-- Change must be bona fide---Liability towards casual leave payment to employees claimed on cash basis in prior years---Deduction claimed on cash basis for relevant previous year and also on mercantile basis for subsequent previous year---No genuine change in method of accounting---Provision for payment in subsequent year not allowable.

The choice of the method of accounting lies with the assessee. It is open to the assessee to follow one-system of accounting in respect of one source and another system in respect of another source. It is also open to an assessee to change his method of accounting regularly employed by him. The change should be bona fide and not a casual departure from the regular method which has hitherto been adopted by him for a number, of years.

(b) Income-tax---

----Business expenditure---Gratuity---No provision made in accounts-- Conditions laid down in section 40A(7) not satisfied---Provision for gratuity not deductible---Income-tax Act, 1961, S.40A(7).

Under the first Industrial Tribunal Award, 1958, the assessee was under a statutory obligation to make the payment to its clerical employees and others by way of casual leave payment. In the years prior to 1973-74, the assessee was following a hybrid system of accounting. It was following the mercantile system of accounting in all matters except the aforesaid casual leave payment which was on cash basis. In its assessment for the year under consideration, the assessee claimed deductions on account of (1) the aforesaid casual leave payment of Rs.58,804 made by it to its employees during the year in respect of the accounting year 1973-74; and (2) the casual leave payment of Rs.88,111 provided for in the books, though not paid in the year under consideration for the financial year 1974-75. The assessee also claimed deduction of Rs.5,30,476 being the provision for gratuity on the basis of actuarial valuation. The Income-tax Officer negatived the claim of the assessee in regard to the sums of Rs.88,111 and Rs.5,30,476 and this was upheld by the Tribunal. On a reference:

Held. (i) that having chosen and regularly employed the cash system in respect of the transaction in question, that is, in the matter of its liability for casual leave payment in the earlier years, the assessee could not make a departure in the year under consideration to give a go-by to that method and claim the deductions both on payment basis for the earlier year and on mercantile basis for the year under consideration by making a provision in the accounts. The change was only for the year under reference. It was not the case of the assessee that it intended to adopt and in fact had adopted thereafter the changed method of accounting. The assessee was not entitled to the deduction of Rs.88,111 being the casual leave payments provided for in the books of the assessee for the financial year 1974-75;

(ii) that the assessee had not made any provision in its books towards the liability for gratuity. It had also not satisfied the conditions laid down- in section 40A(7) of the Income-tax Act, 1961. It was not, therefore, entitled-to the deduction of Rs.5,30,476.

Shree Saban Mills Ltd. v. CIT (1985) 156 ITR 586 (SC) ref.

R.L. Mukherjee for the Commissioner.

JUDGMENT

AJIT K. SENGUPTA, J.---In this reference under section 256(1) of the Income Tax Act, 1961, for the assessment year 1975-76, the following questions of law have been referred to this Court:

"(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs.88,111 being the casual leave payments provided in the books of the assessee for the financial year 1974-75?

(2) Whether, on the facts and in the circumstances of the case, the amount of Rs.5,30,476 being the gratuity calculated on the basis of actuarial valuation was, when no provision for gratuity was made in the books of the assessee for the year under consideration, deductible in the computation of the total income of the assessee for the year?"

Shortly stated, the facts are that, under the First Industrial Tribunal Award, 1958, the assessee was under the statutory obligation to make the payment to its clerical employees and others by way of casual leave payment. It is also an admitted position that, in the years prior to the year under consideration, the assessee was following a hybrid system of accounting. It was following the mercantile system of accounting in all matters except the aforesaid casual leave payment which was on cash basis. In its assessment for the year under consideration, the assessee claimed deductions on account of (1) the aforesaid casual leave payment of Rs.58,804 made by it to its employees during the year in respect of the accounting year 1974-74; and (2) the casual leave payment of Rs.88,111 provided for in the books, though not paid in the year under consideration for the financial year 1974-75. The deduction at S1. (1) mentioned was allowed by the Income-tax Officer. As far as the provision made in the book of Rs.88,111 for the financial year 1974-75 is concerned, the Income-tax Officer has negatived the said claim of the assessee on the ground that the accepted principle of accounting on the subject by the assessee was cash system, i.e., payment basis and not on provision basis. This was .the practice followed by the assessee in all the previous years and the above change in the year under consideration is a case of clear deviation from the said accepted principle of accounting on the subject. There could not be double deduction in the matter of casual leave payment under the said award in one year. This view of the Income-tax Officer had been upheld by the Commissioner of Income-tax (Appeals) VI, Calcutta.

In the appeal filed by the assessee, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) on the point at issue. According to the Tribunal, the change of the method was not bona fide. The Tribunal, therefore affirmed the order of the Commissioner of Income-tax (Appeals). The correctness of this view is at issue before us. The choice of the method of his accounting lies with the assessee. It is open to the assessee to follow one system of accounting in respect of one source and another system in respect of another source. It is also open to an assessee to change his method of accounting regularly employed by him. The change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years. Merely because in the subsequent assessment year, there was a loss and the bonus actually paid in that year could not be effectively set-off but had to be carried forward would furnish no justification for permitting a change in the method of accounting. Once having chosen and regularly employed the cash system in respect of the transaction in question that is, in the matter of its liability for casual leave payment in the earlier years, the assessee cannot make a departure in the year under consideration to give a go-by to that method and claim the deductions both on payment basis for the earlier year and on mercantile basis for the year under consideration by making a provision in the accounts. The change was only for the year under reference. It was not the case of the assessee that he intended to adopt and in fact had adopted thereafter the changed method of accounting. Although section 145(1) in terms does not require any enquiry into the bona fides but it becomes relevant where the conduct of the assessee shows that such change was not introduced for continuance henceforth but it was a casual departure from the method regularly employed till then. The conduct of the assessee in this case proves the absence of bona fides on its part. We are, therefore, of the view that the Tribunal was justified in negativing the claim of the assessee for deduction of the provision for casual leave payments. For the reasons aforesaid, the first question is answered in the negative and in favour of the Revenue.

The second question has also to be answered against the assessee.

The assessee, in the course of the assessment proceedings for the year under consideration, made a claim for deduction of Rs.5,30,476 being the provision for gratuity on the basis of acturial valuation, though no such provision was made in the books. This claim of the assessee was negatived by the Income-tax Officer on the ground that since neither there was any debit for this charge in the books of account for this year nor had the conditions laid down in section 40A(7) been satisfied.

The assessee cannot claim any deduction even if liability for gratuity has been ascertained on actuarial valuation unless the conditions laid down in section 40A(7) of the Act are satisfied. Admittedly, the assessee has not satisfied the conditions. In view of the judgment of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585, the second question is answered in the negative and in favour of the Revenue.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J.--I agree.

M.BA./1564/T Reference answered.