Delhi Financial Corporation,, v. ACIT, Co. Circle-10(1),,

ITA 67/DEL/2005 | 1997-1998
Pronouncement Date: 02-12-2010 | Result: Allowed

Appeal Details

RSA Number 6720114 RSA 2005
Bench Delhi
Appeal Number ITA 67/DEL/2005
Duration Of Justice 5 year(s) 10 month(s) 27 day(s)
Appellant Delhi Financial Corporation,,
Respondent ACIT, Co. Circle-10(1),,
Appeal Type Income Tax Appeal
Pronouncement Date 02-12-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted E
Tribunal Order Date 02-12-2010
Date Of Final Hearing 02-12-2010
Next Hearing Date 02-12-2010
Assessment Year 1997-1998
Appeal Filed On 06-01-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E DELHI) BEFORE SHRI A.D. JAIN AND SHAMIM YAHYA ITA NO. 67(DEL)2005 ASSESSMENT YEAR: 1997-98 DELHI FINANCIAL CORPORATION ASSTT.COMM ISSIONER OF I. TAX E-BLOCK SARASWATI BHAWAN V.CO. CIR.10(1) NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI C.V. SAJAN CA RESPONDENT BY: SMT. SANG EETA GUPTA CIT(DR) ORDER PER A.D. JAIN J.M . THIS IS ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 1 997-98 TAKING THE FOLLOWING GROUNDS:- 1. THE PROCEEDINGS INITIATED VIDE NOTICE DATED 6.8 .2002 AND REASSESSMENT U/S 148 ARE ABSOLUTELY INVALID AND UNS USTAINABLE CONSIDERING THE FACTS THAT THE APPELLANT/ASSESSEE H AD ALREADY BEEN ASSESSED U/S 143(3) VIDE ORDER DATED 11.2.2000 ESP ECIALLY IN WAKE OF THE FACT THAT THE SUBJECT MATTER CHOSEN AS BEHES T FOR INITIATING PROCEEDINGS U/S 148 DO NOT SATISFY THE PRIMARY PRE- CONDITIONS STIPULATED U/S 147. 2. THE IMPUGNED ORDERS ARE IN DEFIANCE OF LAW VIS- -VIS THE FACTS OF THE CASE/SUBJECT-MATTERS (VIZ. REASON-TO-BELIEVE RE CORDED BEFORE/ NECESSARY FOR ISSUE OF NOTICE U/S 148 WHICH WAS/IS ONE ONLY) IN THE IMPUGNED PROCEEDINGS AND ORDER U/S 148 WHILE TAKING UP MATTERS ITA 67(DE L)05 2 OUTSIDE ITS AMBIT/DOMAIN AND MAKING ADDITIONS/DISAL LOWANCES THEREIN TOWARDS THE: 2.1. INTEREST INCOME FOR THE YEAR UNDER ASSESSMENT ON BA D & DOUBTFUL ADVANCES/LOANS POPULARLY TERMED AS NPAS AMOUNTING TO ` 25 856 LAKHS ALLEGING FREQUENT CHANGES IN METHOD OF ACCOUNTING WHEREAS SUCH INCOME HAS ALWAYS (IN PRECEDING AS WELL AS SUBSEQUENT YEARS) BEEN ACCOUNT ED ON CASH BASIS IN COMPLIANCE WITH PROVISIONS OF SEC. 43 D IN THIS REGARD. 2.2. PURELY NOTIONAL INCOME ON ACCOUNT OF LEASE-EQUALIZA TION CHARGES AMOUNTING TO ` 26 93 926/- ACCOUNTED IN AUDITED FINANCIAL STATEMENTS (IN ADHERENCE WITH THE PROVISI ONS OF THE ACCOUNTING STANDARD 19 ISSUED BY THE ICAI) BUT NOT IN THE COMPUTATION OF TOTAL INCOME IN ACCORDANCE WITH ITS EXISTING ACCOUNTING POLICY CONSISTENTLY FROM PRECED ING YEARS. 2.3. BAD AND DOUBTFUL DEBTS WRITTEN OFF AMOUNTING TO ` 2 50 870/- IN THE AUDITED/REGULAR BOOKS OF ACCOUNTS AMAZINGLY WITHOUT EVEN CONFRONTING THE SUBJECT MATT ER WITH THE APPELLANT DURING NEITHER ASSESSMENT NOR REASSES SMENT PROCEEDINGS. 2.4. EXPENDITURE ON ACCOUNT OF INTEREST-ADJUSTMENT AMOUN TING TO ` 18 98 607/- WHICH FACTUALLY REPRESENT LOSS OF INTER EST INCOME DUE TO SETTLEMENT WITH THE BORROWERS AMAZIN GLY WITHOUT EVEN CONFRONTING THE SUBJECT MATTER WITH TH E APPELLANT DURING NEITHER ASSESSMENT NOR REASSESSMEN T PROCEEDINGS. 3. THE LD. ACIT HAS RESTRICTED THE DEDUCTION U/S 36(1)(VIII) TO ` 1 41 19 217/- IN THE IMPUGNED ORDER U/S 250 DATED INSTEAD OF GRANTING (AS DIRECTED BY THE LD. CIT(A) 40% OF GROS S TOTAL INCOME REASSESSED BY HIM ALLEGING ABSENCE OF ADEQUATE RES ERVE WHEREAS SPECIAL RESERVE CREATED AMOUNTED ` 2 75 44 217. ITA 67(DE L)05 3 2. VIDE ORDER DATED 11.2.2000 PASSED U/S 143(3) OF THE INCOME TAX ACT THE ASSESSMENT OF THE ASSESSEE FOR THE YEAR UN DER CONSIDERATION WAS COMPLETED. 3. ON 26.2.2004 VIDE THE FOLLOWING REASONS (COPY A T PAGE 51 OF THE ASSESSEES PAPER BOOK APB FOR SHORT) THE SAID CO MPLETED ASSESSMENT WAS REOPENED:- PLEASE REFER TO YOUR LETTER DATED 26.2.2004. THE REASONS FOR REOPENING ASSESSMENT FOR ASSESSMENT YEAR 1997-98 AR E AS UNDER: THE ASSESSEE COMPANY WAS FOLLOWING METHOD OF ACCOU NTING AS UNDER:- F.Y. 1995-96 (AY 1996-97)-HYBRID SYSTEM OF ACCOUNT ING. F.Y. 1996-97 (AY 1997-98)-CASH SYSTEM OF ACCOUNTIN G F.Y. 1997-98 (AY 1998-99)-MERCANTILE SYSTEM OF ACC OUNTING F.Y. 1998-99(AY 1999-2000)-CASH SYSTEM OF ACCOUNTI NG. THEREFORE IT IS OBVIOUS THAT THE ASSESSEE IS NOT C ONSISTENTLY FOLLOWING A PARTICULAR METHOD OF ACCOUNTING. IN THE ASSESSME NT YEAR UNDER CONSIDERATION THE ASSESSEE HAD SWITCHED FROM HYBRI D SYSTEM TO CASH SYSTEM OF ACCOUNTING AND IN THE FOLLOWING YEAR HAS SWITCHED AGAIN TO MERCANTILE SYSTEM. A SUM OF ` 1659.83 LACS WHICH WAS INTEREST OVERDUE ON LOANS AND ADVANCE PERTAINING TO FY 1996- 97 WAS NOT ACCOUNTED FOR IN THE SAME FY 1996-97 AS THE SYSTEM OF ACCOUNTING WAS CHANGED IN CASH BASIS. BUT THIS SUM WAS NOT O FFERED TO TAX IN THAT YEAR. THEREFORE THE SUM OF ` 1659.83 LACS HAS ESCAPED FROM TAXATION IN THE RELEVANT FINANCIAL YEAR I.E. 1996-9 7 (AY 1997-98). HOWEVER THE FREQUENT CHANGE IN METHOD OF ACCOUNTIN G AS SEEN IN SUBSEQUENT ASSESSMENT YEARS SHOWS THAT THE CHANGE IN METHOD OF ACCOUNTING IN A.Y. 1997-98 WAS NOT BONA FIDE. IT W AS CHANGED MERELY TO NOT ACCOUNT FOR THE SUM OF ` 1659.83 LACS AS INCOME OF HE RELEVANT A.Y. 19997-98. ITA 67(DE L)05 4 4. THE ASSESSEE TOOK THE FOLLOWING OBJECTIONS (COPY AT APB 52-53) AGAINST THE REOPENING OF ITS COMPLETED ASSESSMENT: THIS HAS REFERENCE TO YOUR LETTER DATED 26/2/2004 REGARDING REASONS FOR REOPENING OF CASE U/S 147 OF THE I.T. A CT IN THE CASE OF M/S. DELHI FINANCIAL CORPORATION FOR A.Y. 1997-98. IN THIS REGARD WE SUBMIT AS FOLLOWS: 1. THE AMOUNT WHICH IS ALLEGED TO HAVE ESCAPED TAXATIO N IN THE F.Y. 1996-97 (A.Y. 1997-98) PERTAINS TO INTEREST OVERDUE ON NPAS (NON-PERFORMING ASSETS). THERE IS NO CHANGE IN TH E SYSTEM OF ACCOUNTING SO FAR AS INTEREST ON NPAS IS CONCERNED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY. OVERDUE INTER EST ON NPA HAS CONSISTENTLY BEEN ACCOUNTED FOR ONLY ON CASH BASIS FROM F.Y. 1984-85 TO DATE I.E. FOR MORE THAN 20 YEARS IR RESPECTIVE OF THE SYSTEM OF THE ACCOUNTING FOLLOWED/CHANGED TO CO MPLY WITH EITHER IDBI GUIDELINES OR MANDATORY INCOME TAX LAWS AS DETAILED IN PARAS BELOW. 2. DELHI FINANCIAL CORPN. (HEREINAFTER REFERRED TO AS THE ASSESSEE COMPANY) HAS FOLLOWED SYSTEM OF ACCOUNTING AS PER D ETAILS GIVEN BELOW: SYSTEM OF ACCOUNTING ACCOUNTING F OR INTEREST OVERDUE ON LOAN & ADVANCES(NPA) F.Y. 1991-92 CASH ACCOUNTING CASH BASIS F.Y. 1992-93 CASH ACCOUNTING CASH B ASIS F.Y. 1993-94 HYBRID CASH BASIS F.Y. 1994-95 HYBRID CASH BASIS F.Y. 1995-96 HYBRID CASH BASIS F.Y. 1996-97 CASH ACCOUNTING CASH BASIS F.Y. 1997-98 MERCANTILE CASH BASIS F.Y. 1998-99 CASH ACCOUNTING CASH BASIS F.Y. 1999-00 CASH ACCOUNTING CASH BASIS F.Y. 2000-01 CASH ACCOUNTING CASH BASIS F.Y. 2001-02 CASH ACCOUNTING CASH BASIS F.Y. 2002-03 CASH ACCOUNTING CASH BASIS ITA 67(DE L)05 5 3. IT IS OBVIOUS FROM ABOVE THAT THE ASSESSEE COMP ANY WAS CONSISTENTLY FOLLOWING CASH SYSTEM OF ACCOUNTING UP TO F.Y. 1992-93 AND SWITCHED OVER TO HYBRID SYSTEM OF ACCOUNTING IN THE F.Y. 1993- 94 TO FOLLOW THE GUIDELINES ISSUED BY THE IDBI WHIC H IS THE NODAL AGENCY FOR STATE FINANCIAL CORPORATIONS (COPY OF ID BI GUIDELINES ENCLOSED AT ANNEXURE-I). IN HYBRID SYSTEM OF ACCOU NTING ALSO THE COMPANY CONTINUED TO ACCOUNT FOR ALL INCOME EXCLUSI VELY ON CASH BASIS ONLY. THE ASSESSEE-COMPANY CONTINUED TO FOL LOW THE SAME SYSTEM OF ACCOUNTING UPTO F.Y. 1995-96. THE COMPA NY SWITCHED OVER TO CASH SYSTEM OF ACCOUNTING FOR F.Y. 1996-97 TO COMPLY WITH REQUIREMENTS OF SECTION 145(1) OF THE INCOME TAX AC T 1961 AMENDED W.E.F. 1.4.1997 WHEREIN INCOME TAX ACT PROH IBITED HYBRID SYSTEM OF ACCOUNTING. THE ASSESSEE COMPANY IS CON SISTENTLY CONTINUING TO FOLLOW CASH SYSTEM OF ACCOUNTING TILL DATE EXCEPT FOR F.Y. 1997-98. IN THAT YEAR ALSO LIKE ALL EARLIER Y EARS AND YEARS THEREAFTER THE COMPANY CONTINUED TO ACCOUNT FOR INT EREST INCOME ON NON-PERFORMING ASSETS ON CASH BASIS. THUS THERE H AS NEVER BEEN A CHANGE IN THE METHOD OF ACCOUNTING SO FAR AS INTERE ST OVERDUE ON LOANS AND ADVANCES IS CONCERNED. THERE IS NO DOUB T ON THE BONA FIDE OF THE ASSESSEE-COMPANY AND THE SUM OF ` 1 659.83 LAKHS HAS NOT ESCAPED FROM TAXATION TO THE EXTENT REALIZED. 4. SECTION 43 D OF THE I.T. ACT 1961 READS AS UND ER:- SPECIAL PROVISION IN CASE OF PUBLIC FINANCIAL INST ITUTION ETC.- NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT IN THE CASE OF A PUBLIC FINA NCIAL INSTITUTION OR A SCHEDULED BANK OR A STATE FINANCIAL CORPORATION O R A STATE INDUSTRIAL INVESTMENT CORPORATION THE INCOME BY WA Y OF INTEREST IN RELATION TO SUCH CATEGONES OF BAD OR DOUBTFUL DEB TS AS MAY BE PRESCRIBED HAVING REGARD TO THE GUIDELINES ISSUED B Y THE RESERVE BANK OF INDIA IN RELATION TO SUCH DEBTS SHALL BE C HARGEABLE TO TAX IN THE PREVIOUS YEAR WHICH IT IS CREDITED BY THE PUBLI C FINANCIAL INSTITUTION OR THE SCHEDULED BANK OR THE STATE FINA NCIAL CORPORATION OR THE STATE INDUSTRIAL INVESTMENT CORPORATION TO I TS PROFIT AND LOSS ACCOUNT FOR THAT YEAR OR AS THE CASE MAY BE IN W HICH IT IS ACTUALLY RECEIVED BY THAT INSTITUTION OR BANK OR CORPORATION WHICHEVER IS EARLIER. ITA 67(DE L)05 6 SECTION 43D CLEARLY MENTIONS THAT INTEREST ON BAD A ND DOUBTFUL DEBTS SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED TO PROFIT AND LOSS ACCOUNT OR AS THE CASE MAY BE I N WHICH IT IS ACTUALLY RECEIVED BY THE COMPANY WHICHEVER IS EARLI ER. IN CASE OF THE ASSESSEE-COMPANY OVERDUE INTEREST ON BAD AND D OUBTFUL LOANS(NPA) IS TAKEN TO PROFIT AND LOSS ACCOUNT ONLY ON REALIZATION BASIS (CASH BASIS) WHICH IS IN TOTAL CONFORMITY WIT H PROVISIONS OF SECTION 43D. 5. FURTHER THE SYSTEM OF ACCOUNTING FOR NPA ADOPT ED BY THE ASSESSE-COMPANY IS ALSO IN COMPLIANCE WITH GUIDELIN ES ISSUED BY THE RBI WHICH ARE TO BE FOLLOWED MANDATORILY WHICH READ S AS UNDER(COPY ENCLOSED AT ANNEXURE 2): WE ADVISE THAT FIS SHOULD NOT CHARGE AND TAKE TO INCOME ACCOUNT INTEREST ON ANY NPA. SO FAR AS BILLS PURCHASED/DISCOUNTED/REDISCOUNTED ARE CONCERNED OV ERDUE INTEREST SHOULD NOT BE CHARGED AND TAKEN TO INCOME ACCOUNT UNLESS IT IS REALIZED. IN RESPECT OF ALL NPAS INTE REST ACCRUED AND OTHER CHARGES LIKE FEES AND COMMISSION CREDITED TO INCOME ACCOUNT DURING THE PREVIOUS ACCOUNTING YEARS BUT WHICH HAVE NOT BEEN ACTUALLY REALIZED SHOULD BE REV ERSED OR PROVIDED FOR IN THE CURRENT ACCOUNTING PERIOD PROV IDED THAT NO REVERSAL NEED TO MAKE FOR INCOME BOOKED IN THE A CCOUNTING YEARS PRIOR TO THE ACCOUNTING YEAR 1992-93. THUS IF INTEREST AND OTHER CHARGES DEBITED DURING THE ACCOUNTING YEA R 1992- 93 AND CREDITED TO INCOME ACCOUNT IN THAT YEAR HAVE NOT BEEN COLLECTED DURING 1993-94 THEY SHOULD BE REVERSED O R PROVIDED FOR WHEN THE ACCOUNTS ARE FINALIZED FOR THE YEAR EN DING MARCH 31 1994. ABOVE GUIDELINES OF RBI ALSO ADVISE SFCS NOT TO TA KE OVERDUE INTEREST ON NPA TO INCOME ACCOUNT UNLESS IT IS REAL IZED (I.E. ON CASH BASIS ONLY). IN VIEW OF SUBMISSIONS ABOVE AND SPECIFIC GUIDELINE S OF RBI & PROVISION OF SECTION 43D IT CLEARLY ESTABLISHES TH AT ASSESSEE- COMPANY HAS FOLLOWED CONSISTENT POLICY OF ACCOUNTIN G OF INCOME ON ITA 67(DE L)05 7 OVERDUE INTEREST ON CASH BASIS AND YOUR HONOUR WILL CONCUR WITH THE FACT THAT NO INCOME PERTAINS TO OVERDUE INTEREST TO THE EXTENT REALIZED HAS ESCAPED TAXATION IN ANY OF THE YEAR INCLUDING T HE FINANCIAL YEAR UNDER PRESENT PROCEEDING. 5. A PERUSAL OF THE ABOVE OBJECTIONS OF THE ASSESSE E SHOWS THAT THE ASSESSEE SPECIFICALLY RAISED OBJECTION CONCERNING 4 3D OF THE ACT. THE GRIEVANCE OF THE ASSESSEE IS THAT THIS OBJECTION WA S HOWEVER NOT DISPOSED OF BY THE AO WHILE PASSING THE ORDER DATED 26.3.20 04 PASSED U/S 143(3)/148 OF THE ACT THOUGH IN THE SAID ORDER TH E AO HAS OBSERVED THAT IT WAS INFORMED TO THE ASSESSEE COMPANY THAT THE OBJEC TIONS RAISED AGAINST REOPENING OF THE ASSESSMENT HAD BEEN CONSIDERED AND WERE NOT BEING ACCEPTED. THE LD. CIT(A) ALSO IN THE IMPUGNED OR DER DATED 16.3.2007 NOTED THE SAID FACT. 6. A PERUSAL OF THE ORDER DATED 26.3.2004 PASSED BY THE AO UNDER SECTIONS 143(3)/148 OF THE ACT WHICH FORMS THE BAS IS OF THE PRESENT APPEAL SHOWS THAT INDEED THE OBJECTION RAISED BY THE ASSESSEE CONCERNING SECTION 43D OF THE ACT HAS NOWHERE BEEN DISPOSED OF THEREIN. THIS CONTRAVENTION OF G.K. N. DRIVESHAFT 269 ITR 19(S C) AS PER WHICH IT IS INCUMBENT UPON THE AO TO DISPOSE OF BEFORE FINALIZ ING THE REOPENED ASSESSMENT THE OBJECTIONS RAISED BY THE ASSESSEE A GAINST THE REOPENING OF A COMPLETED ASSESSMENT. ITA 67(DE L)05 8 7. THE ASSESSEE HAD RAISED THIS ISSUE BEFORE THE L D. CIT(A) THROUGH ITS GROUNDS OF APPEAL BY WAY OF GROUND NO.2 WHICH FO R READY REFERENCE IS REPRODUCED AS UNDER:- 2. THE LD. ACIT HAS ERRED IN LAW VIS--VIS THE FAC TS OF THE CASE/SUBJECT-MATTERS (VIZ. REASON TO BELIEVE RECORD ED BEFORE NECESSARY FOR USE OF NOTICE U/S 148 WHICH WAS/IS O NE ONLY) IN THE IMPUGNED PROCEEDINGS/ORDER U/S 148 WHILE TAKING UP MATTERS OUTSIDE ITS AMBIT/DOMAIN AND MAKING ADDITIONS/DISALLOWANCES THEREIN TOWARDS THE: (2.1) INTEREST INCOME FOR THE YEAR UNDER ASSESSMENT ON BAD AND DOUBTFUL ADVANCES/LOANS POPULARLY TERMED AS NPAS AMOUNTING TO ` 258.56 LAKHS ALLEGING FREQUENT CHANGES IN METHOD OF ACCOUNTING WHEREAS SUCH INCOME HAS ALWAYS (IN PRECEDING AS WEL L AS SUBSEQUENT YEARS) BEEN ACCOUNTED ON CASH BASIS IN C OMPLIANCE WITH PROVISIONS OF SEC. 43D IN THIS REGARD WHICH IS DUL Y DISCLOSED AND CERTIFIED BY THE STATUTORY AUDITORS IN THE FINANCIA L STATEMENTS FILED ALONG WITH THE RETURN OF INCOME. 8. THE LD. CIT(A) IN THIS REGARD OBSERVED AS FOLL OWS:- 2.9 THE WRITTEN SUBMISSION FILED BY THE AUTHOR IZED REPRESENTATIVE OF THE APPELLANT WAS FORWARDED TO THE ASSESSING OFF ICER FOR ITS COMMENTS VIDE LETTER DATED 30.8.2004. IN RESPONSE TO THAT THE AO HAS FILED REPLY DATED 30.9.2004 WHEREIN IT IS ARGUE D THAT DETAILED REASONS FOR INITIATING PROCEEDINGS U/S 147 WERE COM MUNICATED TO THE ASSESSEE VIDE LETTER DATED 26.2.2004. AS REGARDS THE TIME LIMIT FOR ISSUING NOTICE U/S 148 WITH THE STIPULATED U/S 149 OF THE INCOME TAX ACT DULY FULFILLED AS THE INSTANT CASE FALLS UNDER CLAUSE (B) TO SUB- SECTION (1) OF SECTION 149 OF THE I.T. ACT. THE I NCOME ESCAPED ASSESSMENT AMOUNTING TO MORE THAN ONE LAKH ( ` 2 80 98 093/-). IT IS FURTHER ARGUED BY THE AO THAT THE OBJECTION RAISED BY THE ASSESSEE WERE DISPOSED OFF AND AFTER DULY CONSIDERING THE SA ME AS NOTED DOWN BY THE AO VIDE ORDER SHEET ENTRY DATED 18.3.2004. THE AO HAS ITA 67(DE L)05 9 JURISDICTION TO COMPLETE THE ASSESSMENT AFRESH OF D E NOVO. RELIANCE IS PLACED ON THE FULL BENCH DECISION OF BOMBAY HIGH COURT IN CIT V. INDIA RARE EARTHS LIMITED 181 ITR 22. THE DEC ISION HAS MADE IN THE LIGHT OF APEX COURT DECISION IN ITO V. MEWALAL DWARKA PRASAD [1989] 176 ITR 529. IT IS ALSO POINTED OUT THAT T HE METHOD ADOPTED BY THE ASSESSEE IN VIEW OF THE AMENDMENT IN SEC. 14 5 OF THE INCOME TAX ACT HAVE NO FORCE BECAUSE THE ASSESSEE ITSELF H AS CHANGED ITS METHOD OF ACCOUNTING IN THE SUBSEQUENT YEAR I.E. IN ASSESSMENT YEAR 1998-99 WHEREIN THE CASH SYSTEM OF ACCOUNTING HAS B EEN CHANGED INTO MERCANTILE SYSTEM OF ACCOUNTING. IT SHOWS THA T THE ASSESSEE HAS GIVEN CONTRADICTORY SUBMISSION AS ON ONE HAND IT SA YS IT HAD ALWAYS CONSISTENTLY FOLLOWED THE ACCOUNTING POLICY ON THE OTHER HAND IT HAS ADMITTED THE CHANGE IN METHOD OF ACCOUNTING TOOK P LACE SUBSEQUENTLY. 2.10. THE CASE CITED BY THE ASSESSEE ARE DISTINGU ISHABLE AS THE ASSESSEE ITSELF HAS ADMITTED THAT A CLEAR REASON WA S RECORDED FOR INITIATING PROCEEDINGS. THE APPELLANT COMPANY HAS NOT BEEN FOLLOWING THE METHOD OF ACCOUNTING ADOPTED BY HIM REGULARLY. IT IS INCONSISTENT THEREFORE THAT THE SUBMISSIONS OF TH E ASSESSEE COMPANY ARE NOT TENABLE THE SAME DESERVES TO BE DISMISSED. 2.11. IN RESPONSE TO THE REPLY OF THE AO THE APPE LLANT HAS FILED REJOINDER DATED 12.10.2004 AND 19.10.2004. IT IS A RGUED THAT THE APPELLANT COMPANY HAS ACCOUNTED ITS INCOME REGULARL Y ON CASH BASIS. ONLY FOR HE EXPENSES THE METHOD HAS BEEN AD OPTED ON THE BASIS OF ACCRUAL. THE RECEIPT OF INTEREST ALWAYS ACCOUNTED ON CASH BASIS. THE APPELLANT COMPANY HAS RELIED ON THE DE CISION OF DELHI HIGH COURT AS WELL AS OF SUPREME COURT MAINLY IN CI T V. SUN ENGINEERING WORKS (P)LIMITED [1992](SC) 198 ITR 297 AND THE DECISION OF DELHI HIGH COURT DECIDED IN THE CASE OF JINDAL PHOTO FILMS LIMITED V. DCIT(DEL) 105 TAXMAN 386. 2.12. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE AUTHORIZED REPRESENTATIVE OF THE APPELLANT AND FACTS STATED IN THE ASSESSMENT ORDER AS WELL AS THE COMMENTS OFFERED ON WRITTEN SU BMISSION FILED BY THE AUTHORIZED REPRESENTATIVE OF THE APPELLANT AND SUBSEQUENTLY REJOINDER FILED BY THE APPELLANT COMPANY. THE MAI N ISSUE RELATES TO THE REOPENING OF THE CASE FOR ASSESSMENT YEAR 1997- 98. THE CASE WAS REOPENED AFTER RECORDING PROPER REASONS. IT WA S NOTICED BY THE ITA 67(DE L)05 10 AO THAT THE APPELLANT COMPANY HAS BEEN CHANGING HE METHOD OF ACCOUNTING IN DIFFERENT ASSESSMENT YEARS DUE TO WHI CH THE OVER DUE INTEREST AMOUNTING TO ` 1659.83 LAKHS WAS ESCAPING TAX. IN THE FINANCIAL YEAR 1996-97 THE APPELLANT HAS FOLLOWED T HE CASH SYSTEM OF ACCOUNTING BY ADOPTING THIS METHOD OVER DUE INTERE ST OF ` 1659.83 LAKHS HAS ESCAPED INCOME UPTO ASSESSMENT YEAR 1997- 98 I.E. IN THE YEAR UNDER CONSIDERATION. THE APPELLANT HAS REQUI RED TO FOLLOW THE CONSISTENT AND ONE SYSTEM OF ACCOUNTING. AS A RESU LT OF THIS INCONSISTENCY IN THE METHOD OF ACCOUNTING AS EMPLO YED BY THE APPELLANT TO ESCAPE INTEREST INCOME AS DISCUSSED AB OVE WHICH HAS RESULTED INTO AS SUBSTANTIAL LOSS OF GOVERNMENT RE VENUE/TAX. THE ASSESSMENT YEAR 1998-99 THE ASSESSEE HAS AGAIN NOT OFFERED THIS OVER DUE INTEREST AMOUNTING TO ` 1659.83 LAKHS WHICH IS A TAXABLE INCOME FOR TAX PURPOSE. HERE IT MAY BE EMPHASIZED THAT AGAIN IN THE SUBSEQUENT YEAR THE ASSESSEE HAS SWITCHED OVER TO CASH SYSTEM OF ACCOUNTING. THE SUBSEQUENT CHANGE IN THE METHO D OF ACCOUNTING IS NOT PERMISSIBLE UNDER INCOME TAX LAW WHICH HAS R ESULTED IN SHORT LEVY OF TAX ON THE OVER DUE INTEREST PERTAINING TO VARIOUS YEARS. 2.13. THE ASSESSEE IS CLAIMING THAT EVERY YEAR IN TEREST INCOME ON THE LOANS AND ADVANCES IS OFFERED FOR TAXATION ON C ASH BASIS BUT HERE IT MAY BE NOTICED THAT WHEN AN ASSESSEE FOLLOW A PA RTICULAR SYSTEM OF ACCOUNTING THE SAME HAS TO BE FOLLOWED FOR ALL ITEMS OF INCOME AND EXPENDITURE AND THE ASSESSEE DOES NOT HAVE THE OPTION OF ADOPTING A PARTICULAR SYSTEM OF ACCOUNTING FOR A PA RTICULAR ITEM. IN THIS CONTEXT THE AMENDMENT WAS BROUGHT IN THE INCOM E TAX ACT RELATING TO THE CONSISTENT SYSTEM OF ACCOUNTING WHI CH IS REQUIRED TO BE FOLLOWED BY THE ASSESSEE. THE ADDITIONAL COMM ISSIONER OF INCOME TAX RANGE 10 ATTENDED THE HEARING AND POINT ED OUT THAT THE ASSESSEE OBJECTED THE PROCEEDINGS FOR REOPENING OF THE CASE ON MERE CHANGE OF OPINION. SHE HAS ARGUED THAT THE FACT O F THE ESCAPEMENT OF THIS INCOME WAS POINTED OUT IN THE AUDIT OBJECTI ON WHICH WAS ANALYZED IN DETAIL BY COMMISSIONER OF INCOME TAX D ELHI IV HERSELF BEFORE ACCEPTING THE SAME. IT HAS BEEN SEEN FROM TH E RECORD WHILE PASSING THE ORIGINAL ASSESSMENT THAT THE AO HAD NOT CONSIDERED THIS MATTER AS THE ASSESSMENT ORDER IS SILENT ON THIS IS SUE. IN THIS CONTEXT THE RELIANCE IS PLACED ON THE CASE OF S. SHRINIVASA N V. CIT 101 ITR 94 WHEREIN IT IS HELD THAT IF AT THE TIME OF MAKIN G AN ASSESSMENT THE AO HAD NOT CONSIDERED A MATTER IT CANNOT BE SAID T HAT WHEN HE SUBSEQUENTLY CONSIDERED IT THAT WOULD AMOUNT TO A CHANGE OF ITA 67(DE L)05 11 OPINION. THE OBJECTION RAISED BY THE ASSESSEE WER E DISPOSED OFF BY THE AO AND THE SAME HAVE BEEN COMMUNICATED TO THE A SSESSEE ON 18.3.2004. IT IS FURTHER ARGUED THAT DUE TO FREQUE NT CHANGE IN SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE WHICH IS BAS ICALLY DESIGNED FOR NOT OFFERING OVER DUE INTEREST FOR TAXATION TH E ORDER PASSED BY THE AO IS APPROPRIATE JUSTIFIED AND NEEDS TO BE CO NFIRMED. 2.14. IN VIEW OF THE ABOVE FACT IT IS CLEAR THA T THE APPELLANT KEPT ON CHANGING THE SYSTEM OF ACCOUNTING ACCORDING TO ITS CONVENIENCE. IT HAS NOT FOLLOWED THE UNIFORM ACCOUNTING SYSTEM YEAR TO YEAR BASIS. THE APPELLANT HAS FOLLOWED HYBRID SYSTEM F OR FINANCIAL YEAR 1995-96 AND CASH SYSTEM FOR FINANCIAL YEAR 1996-97 MERCANTILE SYSTEM FOR FINANCIAL YEAR 1997-98 AND THEN AGAIN CA SH SYSTEM FOR FINANCIAL YEAR 1998-99. IT APPEARS THAT THE APPELL ANT COMPANY NEVER FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING IN THE TRU E SENSE. THE REGULAR AND CONSISTENT MERCANTILE SYSTEM OF ACCOUNT ING HAS TO BE FOLLOWED IN TOTO NOT IN PIECEMEAL TO SUIT ITS CONV ENIENCE AND DEFRAUD THE GOVT. REVENUE. THERE IS NO SUCH METHOD OF ACC OUNTING WHICH SUGGESTS THAT PARTICULAR ITEM OF INCOME CAN BE RECO RDED ON CASH BASIS IRRESPECTIVE OF METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT. RELIANCE CAN BE HELD ON THE DECISION OF UCO BANK V. CIT 237 ITR 889(SC) WHEREIN THE HONBLE SUPREME COURT REAFFIRME D CIRCULAR NO. 201/21/84 ITA DATED 9.10.1984 AND ACCEPTED THE SAME. THIS CIRCULAR IS APPLICABLE IN RESPECT OF SIMILAR SITUAT ION TO THE APPELLANTS CASE. IT HAS BEEN STATED THAT INTEREST IN RESPECT OF DOUBTFUL DEBT IS SUBJECT TO TAX IN CASE WHERE THERE HAS BEEN NO RECOVERY FOR CONSECUTIVE ACCOUNTING YEAR. THE INT EREST WILL NOT BE SUBJECTED TO TAX ONLY IN THE 4 TH YEAR. THE AUDITOR OF THE APPELLANT COMPANY ITSELF POINTED OUT THAT BY ADOPTING THE MET HOD OF ACCOUNTING BY THE APPELLANT COMPANY THE OVER DUE IN TEREST OF ` 1659.83 LAKHS HAS NOT BEEN TAXED UPTO ASSESSMENT Y EAR 1997-98. THE AMOUNT PERTAINING TO ASSESSMENT YEAR 1996-97 AM OUNTING TO ` 258.56(1659.83 1401.27) WAS ADDED BY THE AO IN TH E INCOME OF THE ASSESSMENT YEAR UNDER CONSIDERATION. IN VIEW O F THE ABOVE DISCUSSION IT IS CLEAR THAT THE APPELLANT COMPANY H AS NEVER FOLLOWED CONSISTENT METHOD OF ACCOUNTING THE METHOD OF ACCO UNTING ADOPTED BY THE ASSESSEE IS PREJUDICIAL TO THE REVENUE. THIS ISSUE HAS NOT BEEN DISCUSSED BY THE AO. THE APPELLANT HAS NOT D ISCLOSED THE OVER DUE INTEREST IN THE PROFIT AND LOSS ACCOUNT AND ALS O NOT OFFERED FOR TAXATION. IN THE COMPUTATION OF INCOME THE OVER DUE INTEREST HAS NOT ITA 67(DE L)05 12 BEEN OFFERED AS INCOME IN SPITE OF THE FACT THAT TH E AUDITOR HAS POINTED OUT IN THE AUDITED ACCOUNTS THAT DUE TO THE ACCOUNTING SYSTEM ADOPTED BY THE APPELLANT THE OVER DUE INTER EST INCOME AMOUNTING TO ` 1659.83 LAKHS HAS NOT BEEN OFFERED FOR TAXATION DUE TO THE DIFFERENT INCONSISTENT METHOD OF ACCOUNTING I.E. FOR INTEREST RECEIPT OR CASH BASIS AND EXPENDITURE ON ACCRUAL BA SIS. EVEN THIS APPROACH WAS ALSO CHANGED IN PRECEDING AND SUBSEQUE NT YEARS. THE APPELLANT HAS NOT DISCLOSED THESE FACTS IN THE COMPUTATION OF INCOME. HENCE THE INCOME ESCAPED IS MORE THAN CRO RES I.E. ` 258.56 CRORES FOR THE YEAR UNDER CONSIDERATION. T HEREFORE THE ASSESSMENT PROCEEDINGS STARTED BY THE AO BY INITIAT ING PROCEEDINGS U/S 148 ARE VALID AND JUSTIFIED HENCE THE ACTION OF THE AO IS HEREBY CONFIRMED. IT IS ALSO IMPORTANT TO MENTION HERE TH AT THE METHOD OF ACCOUNTING ADOPTED BY THE APPELLANT COMPANY IS PREJ UDICE TO THE REVENUE BECAUSE OVER DUE INTEREST AMOUNTING TO ` 258.56 HAS NOT BEEN OFFERED FOR TAXATION FOR THE YEAR UNDER CONSID ERATION. THE ADDITION MADE BY THE AO TO THIS EXTENT IS ALSO CONF IRMED. 9. FROM THE ABOVE OBSERVATIONS OF THE LD. CIT(A) I T COMES OUT THAT THE OBJECTION CONCERNING SECTION 43 D OF THE ACT HAS NO WHERE BEEN DEALT AND DISPOSED OF. 10. THE GRIEVANCE OF THE ASSESSEE IN THIS REGARD IS THEREFORE FOUND TO BE JUSTIFIED AND IS ACCEPTED AS SUCH. 11. THE MATTER IS ACCORDINGLY REMITTED TO THE FILE OF THE AO TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW BY FIRST HEARING CO NSIDERING AND DISPOSING OF IN ACCORDANCE WITH G.K.N. DRIVESHAFT (SUPRA) THE OB JECTION TAKEN BY THE ASSESSEE CONCERNING SECTION 43D OF THE ACT AND THEREUPON RED ECIDING THE REOPENED ASSESSMENT. THE PARTIES ARE AGREEABLE TO THIS COU RSE BEING ADOPTED. ITA 67(DE L)05 13 12. IN THE RESULT FOR STATISTICAL PURPOSES THE AP PEAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2.12.2010. SD/- SD/- (SHAMIM YAHYA) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2.12.2010 *RM COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR