(a) Income-tax---

----Business---Business income or income from property---Lease---Lease of industrial sheds constructed by public sector company---Income from lease was assessable as business income---Indian Income Tax Act, 1961, Ss.22 & 28.

The assessee, a public sector undertaking of the State Government, purchased land, developed it and constructed industrial sheds thereon. The industrial sheds had been leased out. The assessee claimed that the lease rent realised from the industrial sheds should be treated as income from business. The Income-tax Officer assessed the income as income from property. The Commissioner of Income-tax (Appeals) and the Tribunal, however, held that it was assessable as business income. On a reference:

Held, that the income was assessable as business income.

CIT v. A. P. Small Scale Industrial Development Corporation (1989) 175 ITR 352 (AP) fol.

(b) Income-tax---

----Accounting---Change in method of accounting---Change in method pertaining to one set of debtors---Finding by Tribunal that changed method had been followed consistently and that change was bona fide---Accounts could not be rejected---Indian Income Tax Act, 1961, S.145.

The assessee had been advancing loans to various cooperative sugar factories. The interest received on such loans had been accounted for on accrual basis including for the accounting year ending had on March 31, 1979. However, for the accounting year under consideration, namely, 1980-81, the assessee had chosen to account for such interest only on cash basis. The reason for this change was given in the directors' report. The directors had stated that for the year concerned, it had been decided to account for the interest on bridge loans advanced to cooperative sugar factories on receipt basis. The directors also passed a resolution to this effect and the interest due was not shown in the accounts. The Income-tax Officer was of the opinion that the interest on bridge loans could not be accepted on cash basis. The Tribunal found that the change in the method was consistent and bona fide; that no ulterior motive could be attributed for the change in the method; that it had been consistently followed in the subsequent years. It held that the changed method was in accordance with law. On a reference:

Held that the Tribunal found that the assessee was adopting the change in the method consistently and the only change in the accounting system was bona fide. The Tribunal was correct in law in holding that in spite of adoption of cash system, of accounting for interest accrued on loans advanced to various cooperative sugar factories, the income of the assessee could be properly deduced when the interest payable by it was being accounted for on accrual basis, and the assessee's case was not hit by the proviso to section 145(1) of the Income Tax Act, 1961.

S. R. Ashok for the Commissioner.

Y. Ratnakar for the Assessee.

JUDGMENT

MS. S. V. MARUTHI, J. ---The Tribunal referred the following two questions for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the income derived from the letting out of the sheds owned by the assessee should be assessed as 'income from business'?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that in spite of adoption of cash system of accounting for interest accrued on loans advanced to various co-operative sugar factories, the income of the assessee 'can be properly deduced when the interest payable. by it is being accounted for on accrual basis, and the assessee's case is not hit by the proviso to section 145(1) of the Income Tax Act, 1961??

The assessee, a public sector undertaking of the State Government, purchases large tracts of land, levelling the same, laying roads and creating infrastructural facilities like supply of power, water, drainage facilities, etc. Industrial sheds are constructed in such developed areas. The industrial sheds had been leased out. The assessee claimed that the lease rent realised from the industrial sheds should be treated as income from business. The Department, however, had contended that the income arises merely from letting out the property and, therefore, the proper head would be "income from properly" only. So, the income from lease rents was computed under the head "Income from property".

On appeal by the assessee, the Commissioner (Appeals) held that the income should be computed under the head "Business".

On further appeal by the Department, the Tribunal upheld the finding of the Commissioner. However, question No. 1 as set out in the earlier paragraph was referred by the Tribunal. The question is now conclusively decided by judgment of this Court in CIT v. A. P. Small Scale Industrial Development Corporation (1989) 175 ITR 352, wherein it was held that the income derived under the circumstances mentioned above, is to be assessed as business income. Following the above, we answer question No. 1 in the affirmative and in favour of the assessee.

As regards the second question, the facts in brief are as follows:

The assessee-corporation had been advancing loans to various cooperative sugar factories. The interest received on such loans has been accounted for on accrual basis and including the accounting year ended on March 31, 1979. However, for, the accounting year under consideration, namely, 1980-81, the assessee has chosen to account for such interest only on cash basis. The reason for this change is given in the directors' report. The directors had stated that for the year concerned, it had been decided to account for the interest on bridge loans advanced to cooperative sugar factories on receipt basis. The directors also passed a resolution to this effect and the interest due was not shown in the accounts.

The Income-tax Officer was of the opinion that the interest on bridge loans cannot be accepted on cash basis. He pointed out that the asses?see had been following the mercantile system of accounting in the past and it cannot change from this system in respect of a few of the transactions only.

On appeal, the Commissioner was of the opinion that the assessee was justified in the change effected by it in the accounts.

On a further appeal, the Tribunal found that the assessee has income from two sources: one source is income from property; and another source is income from business; that the system in which accounts were maintained by the assessee for the income from business till the earlier accounting year was mercantile; however, for the assessment year, the assessee has changed the system of accounting to cash system in respect of sugar factories. The Tribunal also found that the change in the method is consistent and bona fide; that no ulterior motive can be attributed for the change in the method; that it had been consistently followed in the subsequent years, and so the only thing that the Income-tax Officer is to see is whether the true income for the assessment year under consideration can be ascertained even after the change in the method of accounts. The Tribunal observed that the true income of the year can be ascertained even in the case of the change in the method of accounts. Holding as above, the Tribunal, had set aside the order of the Income-tax Officer. At the instance of the Revenue, question No.2 was referred by the Tribunal for the opinion of this Court.

The proviso to subsection (1) of section 145 of the Income Tax says that where the accounts are correct and complete to the satisfaction of the Income-tax Officer, but the method employed is such that., in the opinion of the Income-tax Officer, the income cannot properly be deduced there from, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. The Income-tax Officer says that the assessee picked up a few transactions and chose to switch over from the mercantile basis to the cash basis only in respect of those transactions, and that the method employed by the assessee is such that the income of the assessee cannot properly be deduced there from and, therefore, she has added an addition of Rs.52,42,580 in computing the income of the assessee invoking the proviso to section 145(1).

The Tribunal held that the change in the method of accounting by the assessee in respect of a class of debtors is in accordance with law.

The question, therefore, is whether the change in the method of accounting from mercantile to cash system in respect of receipts of interest by the assessee in so far as a class of debtors are concerned, is in accordance with section 145 of the Act.

It is true that the assessee has not maintained different books of account for the sugar factories exclusively. It is maintaining a single book of account for all debtors. It has adopted the mercantile system of accounting in so far as interest paid by the sugar factories and other debtors also. For the relevant assessment year, the assessee has changed the system of accounting to cash system in so far as class I debtors, namely, sugar factories, are concerned. It is not disputed that the assessee is entitled to change the system of accounting from the one system to another system as long as the change is bona fide. By changing the system of accounting from mercantile to cash system, he would be making an entry in the account books as and when interest is actually paid and received by him. Interest thus received would be subject to tax on the date on which it is actually paid. Further, the Tribunal also found that the assessee is adopting the change in the method consistently and the said change in the accounting system is bona fide.

In view of the above, we answer question No.2 in the affirmative and in favour of the assessee.

The reference is answered accordingly.

M.B.A./4155/FC ???????

Reference answered.