The Commissioner Of Income Tax-2 v. M/S. Gupta Paper House Pvt. Ltd

ASN IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.736 OF 2011 The Commissioner of Income Tax-2. v. M/s. Gupta Paper House Pvt. Ltd. ..Appellant. ..Respondent. Mr. Suresh Kumar for the Appellant.None for the Respondent. CORAM : J.P. DEVADHAR AND M.S. SANKLECHA, JJ. DATE : 22ND JANUARY, 2013 PC: In this appeal by the revenue for assessment year 2005-06 many questions have been raised. However, the following two questions as framed are being pressed by the revenue for our consideration. i)Whether on the facts and in the circumstances of the case the Tribunal was justified in not appreciating that the assessee's accounting method is mercantile system of accounting and interest receivable of Rs.36,68,742 and discount receivable of Rs.16,43,315 were to be offered to tax on accrued basis? ii)Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in not appreciating the facts that by accounting for interest and discount on cash basis, the assessee was following hybrid system of accounting which is not allowable as per Section 145 of the Income Tax Act, 1961? 2) The respondent assessee carries a business of trading in papers and paperboards of ITC Ltd. The Assessing officer while completing the assessment of the respondent assessee under Section 143(3) of the Income Tax Act, 1961 (“the Act”) noticed that interest was received as per debit notes raised on its creditors was Rs.36.68 lacs and discount received as per the credit note issued by the ITC Ltd. was Rs.16.68 lacs. The Assessing officer by his order dated 19/12/2007 while completing the assessment added the amount of interest and discount receivable to its income and therefore, enhancing the income from Rs.1.11 lacs to Rs.54.40 lacs. 3) In first appeal, the CIT (Appeals) by an order dated 24/2/2009 deleted the additions of Rs.36.68 lacs and Rs.16.43 lacs by following the decision of the Delhi High Court in the matter of Commissioner of Income Tax v. Modi Rubber Ltd. reported in 230 ITR 817. The CIT(A) held that in many cases even the principal amount was not receivable and thus there was no accrual of interest. Further, the discount receivable was dependent upon ITC Ltd. issuing credit notes and not prior thereto. Therefore, the interest and discount was recorded only on receipt. 4)Being aggrieved, the revenue carried the matter in appeal to Tribunal. The Tribunal by its order dated 22/1/2010 dismissed the revenue's appeal. The Tribunal held that the practice consistently followed by the assessee was that as issue ASN of debit notes and making of entires in books of accounts the amount were not taken to profit and loss account but shown in the balance sheet as interest/discount receivable and on receipt of amounts/credit notes the same was accounted as its income in the profit and loss account and offered to tax. So far method of accounting was concerned, the Tribunal held that even under the mercantile system of accounting, income becomes an accrued income only when a right to receive the income has accrued in favour of the assessee. Thus, unless the legal right to receive is there, no accrual of income can take place. In support of the above reliance was placed upon the decision of the Apex Court in the matter of ED Sassoon & Co. Ltd. and ors. v. CIT reported in 26 ITR 27(SC) and Delhi High Court in the matter of CIT v. Modi Rubber reported in 230 ITR 817. Therefore, the Tribunal concluded that the respondent assessee was correctly following the mercantile system of accounting . ASN 5/5 ITXA-736.sxw 5) In the circumstances, question (i) as proposed cannot ASN 5/5 ITXA-736.sxw 5) In the circumstances, question (i) as proposed cannot be entertained as the finding of the Tribunal is finding of fact. Moreover, it is not disputed that as and when the interest was received from the customers the same was offered to tax by the Moreover, it is not disputed that as and when the interest was received from the customers the same was offered to tax by the respondent assessee. So far as question (ii) is concerned, we find that the Tribunal has followed the principle laid down by the Apex Court in the matter of ED Sassoon & Co. Ltd. (supra) and find that the Tribunal has followed the principle laid down by the Apex Court in the matter of ED Sassoon & Co. Ltd. (supra) and the Delhi High Court in the matter of Modi Rubber Ltd.(supra) In the circumstances, question (ii) also does not arise for our consideration. consideration. 6)Accordingly, the appeal is dismissed with no order as to costs.to costs. (M.S.SANKLECHA, J.) (J.P. DEVADHAR, J.)