COMMISSIONER OF INCOME-TAX VS REVATHI AGENCIES
1999 P T D 2073
[226 I T R 554]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
REVATHI AGENCIES
Tax Case No.644 of 1984, decided on 12/06/1996.
Income-tax---
----Income---Firm---Accounting---Dissolution of firm with effect from 31-3-1974---Commission received after dissolution---Finding by Tribunal that firm followed cash system of accounting---Commission not assessable in the hands of firm in assessment year 1974-75.
The assessee was a firm of four partners which carried on business in purchase and sale of electrical goods. It had also acted as a distributing agent for electrical manufacturers and received commission. The partners agreed to dissolve the firm by a deed of dissolution with effect from March 31, 1974, by mutual consent. The accounts of the partnership were to be made up on March 31, 1974, and the profits or losses were divided in accordance with the provisions of the partnership deed, dated April 1, 1962. Public notice of the dissolution of the partnership firm was also given. An amount of Rs.1,52,807 was received by the assessee-firm subsequent to the dissolution. The assessee claimed that the amount should not be .included to the assessment for 1974-75 and that no assessment could also be made for 1975-76 as the firm ceased to function with effect from March 31, 1974 The Income-tax Officer. however, held that the assessee had been following the mercantile system of accounting and the amount was assessable in the assessment year 1974-75. The Appellate Assistant Commissioner was of the view that the assessee was following the method of accounting on receipt basis for commission and due basis for disbursement since its inception, and held that the commission which was received after the assessment year under consideration could not be taxed in the assessment year 1974-75. The Tribunal relied upon two instances in order to support the view taken by the Appellate Assistant Commissioner. According to the Tribunal, the assessee was not showing the commission receipts in the balance-sheet during the assessment year under consideration. Therefore, the assessee was not following the mercantile system of accounting. In a statement filed before the Tribunal it was shown that the assessee was doing major business with a concern, B, and the commission received from B was shown on receipt basis. Therefore, the assessee was following the cash system of accounting. The Tribunal also held that the provisions of section 176(3-A) of the Income Tax Act, 1961, would not be applicable in the assessee's case for the assessment year 1974-75. With regard to the question whether the commission receipts were assessable for the assessment year 1975-76, the Tribunal came to the conclusion that there was no provision to bring to tax amounts falling due before the dissolution, but received after dissolution. On a reference:
Held, that the Tribunal had found that with regard to the commission the- assessee was following the cash system of accounting. The sufficiency or otherwise of the materials for coming to such conclusion by the Tribunal could not be questioned before the Court because the Tribunal was the highest fact-finding authority. The sum of Rs.1,52,807 could not be brought to tax in the hands of the assessee for the assessment year 1974-75.
Nalinikant Ambalall Mody v. Narayan Row (S.A.L.), CIT (1966) 61 ITR 428 (SC) ref.
C.V. Rajan for the Commissioner.
S. Gurunatha Krishnan for the Assessee.
JUDGMENT
K. A. THANIKKACHALAM, J.---As per - the direction of this Court, the Tribunal referred, the following two questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961:.
"(1) Whether, on the facts and circumstances of the case and having regard to the terms of the dissolution deed, the Appellate Tribunal was right in confirming the deletion of the addition of Rs.1,52,807 in the assessment year 1974-75 being the commission amount received by the assessee-firm subsequent to the dissolution?
(2) Whether the Appellate Tribunal's finding that the assessee was following only cash system of accounting with regard to the commission receipts is based on valid and relevant materials and is sustainable in law?"
The assessee, Revathi Agencies, was a firm of four partners which carried on business in the purchase and sale of electrical goods. It had also acted as a distributing agent for electrical manufacturers and received commission. The said partnership firm was evidenced by a deed of partnership entered into on April 1, 1962. On February 24, 1974, the four partners agreed to dissolve the firm by a deed of dissolution with effect from March 31, 1974, by mutual consent. The accounts of the partnership were to be made up on March 31, 1974, and the profits or losses were divided in accordance with the provisions of the partnership deed, dated April ,1 1962. Public notice of the dissolution of the partnership firm was also given.
The point in dispute was in respect of Rs.1,52,807 received by the assessee-firm subsequent to the dissolution. Before the Income-tax Officer, the assessee claimed that as the amounts have been received only after the dissolution of the firm and as the provisions of section 176(3-A) would come into operation only from April 1, 1976, the amount should not be included in the assessment for 1974-75 and that no assessment could also be made for 1975-76 as the firm ceased to function with effect from March 31, 1974. The Income-tax Officer, however, held that as the assessee has been following the mercantile system of accounting and as the commission, though subsequently received, pertains to the services rendered by the assessee-firm for the period ending March 31, 1974, it should be treated as the income of the firm for the assessment year 1974-75. After obtaining the consent of the Inspecting Assistant Commissioner as per the provisions contained in section 144-B(1) and (4) of the Act, the Income-tax Officer added the sum of Rs.1,52,807 and completed the assessment determining the total income at Rs.2,98,200.
Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the view that the assessee was following the method of accounting on receipt basis for commission and due basis for disbursement since its inception, and held that the commission which was received during (sic) the assessment year under consideration cannot be taxed in the assessment since the assessee was following the accounting method on cash basis. He accepted the assessee's contention that it followed a mixed system of accounting. He, therefore, held that it is not open to tax the sum of Rs.1,52,807 on due basis in the current assessment year even though the business was dissolved at the end of the accounting year. On the question whether it would be still assessable in the hands of the firm even though the business was discontinued earlier, following the decision of the. Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT (1966) 61 ITR 428 and also in view of the provisions of section 176(3-A) which came into operation only from April 1, 1976, the Appellate Assistant Commissioner held that the commission of Rs.1,52,807 could not be included in the assessee's hands.
Aggrieved, the Department filed a second appeal before the Tribunal. The Tribunal confirmed the finding of the Appellate Assistant Commissioner that the assessee has been following the cash system of accounting with regard to its commission receipts. The Tribunal also held that the provisions of section 176(3-A) would not be applicable to the assessee's case for the assessment year 1974-75. With regard to the question whether the commission receipts are assessable for the assessment year 1975-76, the Tribunal held that the decision of the Supreme Court in Nalinikant Ambalal Mody' s case (1966) 61 ITR 428 has to be applied. Accordingly, the Tribunal came to the conclusion that there is no provision to bring to tax in respect of the amounts falling due before the dissolution, but received after dissolution. Accordingly, the Tribunal dismissed the appeal filed by the Department.
Learned standing counsel appearing for the Department submitted that after going through the earlier assessment orders, the Income-tax Officer came to the conclusion that the assessee was regularly following the mercantile system of accounting. Therefore, the commission due to the assessee amounting to Rs.1,52,807 accrued during the accounting year relevant to the assessment year under consideration, viz., 1974-75, should be treated as income of the firm for the assessment year 1974-75. The Income tax Officer after going through the earlier assessment orders demonstrated that the assessee was accounting for the commission due to it on accrual basis. Therefore, according to the Income-tax Officer, the assessee is not entitled to change the method of accounting for the present assessment year under consideration from the mercantile system of accounting to cash system of accounting However, the Appellate Assistant Commissioner came to the conclusion that the assessee was all along following the cash system of accounting without assigning any reasons or controverting the reasons given by the Income-tax Officer in his order. However, the Tribunal pointed out that the assessee has not shown in the balance-sheet the commission due to it for the assessment year under consideration. This is because the assessee is not following the mercantile system of accounting. According to the Tribunal, during the accounting year relevant to the assessment year under consideration, the commission payment had accrued but it was not received by the assessee. The Tribunal further pointed out that a major portion of the commission receipts is due from Bijlee Products from whom the assessee had earned substantial commission as in the past. On going through the statement filed by the assessee, the Tribunal came to the conclusion that even for the year ending March 31, 1973, there were credit notes in the months of January, February and March, 1973, and the amounts were received late in the close of the accounting year. Therefore, according to the Tribunal, the assessee was not following the mercantile system of accounting. On these two grounds, the Tribunal confirmed the view taken b3. the Appellate Assistant Commissioner that the sum of Rs.1,52,807 cannot be included in the hands of the assessee for the assessment year under consideration. According to learned standing counsel, when the Income-tax Officer after going through the assessment order relating to the earlier assessment years came to the conclusion that the assessee was following the mercantile system of accounting, without assigning any reason to differ with the finding given by the Income-tax Officer, the Tribunal, mainly on the basis of the balance sheet and the statement showing the amounts received from Bijlee Products, came to the conclusion that the assessee is following the cash system of accounting. It was further submitted that the assessee itself admitted that it was following the mercantile system of accounting for expenditure and cash system of accounting for receipt of commission. So, it was submitted that it was not open to the assessee to follow two methods, of accounting with regard to the same item of income. It was further submitted that when the assessee was all along following the mercantile system of accounting, it cannot suddenly change the method of accounting to that of cash system without obtaining permission from the Income-tax Officer for the assessment year under consideration. For these reasons, learned standing counsel submitted that the order passed by the Tribunal confirming the view taken by the Appellate Assistant Commissioner is without any basis and there are no materials on record to support the view taken by the Tribunal.
On the other hand, learned counsel appearing for the assessee, supporting the order passed by the Tribunal submitted that when the assessee was not showing the commission receivable by it in the balance-sheet for the assessment year under consideration, that would go to show that the assessee is following the cash system of accounting. The statement of account showing the commission received from Bijlee Products in the months of January, February and March, 1973, would go to show that the assessee was following receipt basis. Learned counsel for the assessee admitted that with regard to the same items of income both the accounting methods were followed. According to learned counsel, the Appellate Assistant Commissioner as well as the Tribunal, which is the highest fact-finding authority, after going through the accounts, ultimately came to the conclusion that the assessee was following the cash system of accounting, and, therefore, the impugned addition cannot be sustained for the assessment year under consideration. Therefore, it is only after considering the sufficient materials on record both the Appellate Assistant Commissioner as well as the Tribunal came to the conclusion that the addition is not sustainable.
We have heard learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. We have already set out the facts in detail. The assessee was a partnership firm under a partnership deed, dated April 1, 1962. It was dissolved by a deed of dissolution, dated February 24, 1974, with effect from March 31, 1974. Subsequent to the dissolution, the assessee received a sum of Rs.1, 52.807 b-"' way of commission. The point for consideration is whether this amount is includible in the hands of the assessee for the assessment year 1974-75. According to the Department, the assessee was all along following the mercantile system of accounting and the commission receipts accrued during the accounting year relevant to the assessment year under consideration, and, therefore, the abovesaid sum is includible in the hands of the assessee for the assessment year under consideration. According to the assessee, it all along followed the cash system of accounting and, therefore, inasmuch as the abovesaid sum was not received during the accounting year relevant to the assessment year under consideration it cannot be taxed for the assessment year under consideration. The Income-tax Officer has gone through the assessment orders relating to the assessee for the earlier assessment years and ultimately came to the conclusion that the' assessee was following the mercantile system of accounting. However, on appeal, the Appellate Assistant Commissioner in his order held that the assessee was following the cash system of accounting. According to the Appellate Assistant Commissioner, this conclusion was arrived at by him on a perusal of the accounts relating to the assessment year under consideration. However, the Tribunal relied upon two instances in order to support the view taken by the Appellate Assistant Commissioner. According to the Tribunal, the assessee was not showing the commission receipts in the balance-sheet during the assessment year under consideration. Therefore, the assessee was not following the mercantile system of accounting. In a statement filed before the Tribunal it was shown that the assessee was doing major business with Bijlee Products and the commission received from Bijlee Products was shown on receipts basis. Therefore, the assessee was following the cash system of accounting according to the Tribunal. We have also given our anxious thought over this matter. We have gone through the entire records relating to the assessee. It remains to be seen that the Income-tax Officer on a perusal of the earlier assessment orders came to the conclusion that the assessee was following the mercantile system of accounting. According to learned counsel appearing for the assessee, there was no finding given by the Income-tax Appellate Tribunal as to the fact that the commission received was shown in the balance-sheet. However, the Appellate Assistant Commissioner before whom the entire records were available also came to the conclusion that the assessee was following the method of accounting on receipt basis. The Tribunal has shown two instances of come to the conclusion that the assessee was following receipt basis in maintaining the accounts. The Department challenged the finding of the Tribunal on the ground that there are no material on record for the Tribunal to come to the abovesaid conclusion. The Tribunal has already pointed out two instances for coming to the conclusion. The sufficiency or otherwise of the materials for coming to such conclusion by the Tribunal cannot be questioned before this Court inasmuch as the Tribunal is the highest fact-finding authority and according to the Tribunal, on a perusal of records it would go to show that the assessee was following the cash system and, therefore, the sum of Rs.1,52,807, cannot be brought to tax in the hands of the assessee for the assessment year under consideration which appears to be in order. Accordingly, we answer the questions referred to us in the affirmative and against the Department. No costs.
M.B.A./1952/FCOrder accordingly.