Decided on May 21,1982



S.N. Rotho, Accountant Member - (1.) THIS appeal has been filed by the assessee against the order dated 25-4-1980 of the Commissioner (Appeals), relating to the assessment year 1976-77, the previous year of which ended on 30-6-1975.
(2.) The assessee is a partnership firm which started its business, for the first time, during the previous year under consideration, as distributors and selling agents of various products. The assessee was constituted by a partnership deed dated 27-9-1974. The assessee took up the selling agency of Trac Industries and Components Ltd. ('Trac Industries'), Madras, with effect from 4-10-1974. During the previous year under consideration, the assessee earned a commission of Rs. 1,36,231 under the selling agency agreement. After debiting overhead expenses, an income Rs. 1,04,947 was returned by the assessee on 17-12-1976. This return was based on the books of account, which were duly closed on 30-6-1975, following the mercantile basis of accounting. Subsequently, on 26-7-1977, the assessee filed a revised return showing a net loss of Rs. 27,010. It was explained by the assessee that the original return showing a profit was filed on the basis of the mercantile system of accounting, followed in the books of account. Later, the assessee thought it proper to follow the cash system of accounting, because, under the terms of agreement with Trac Industries, commission would be realised to the assessee only after the said company realised the bills from the customers. Hence, the books of account for the year under consideration were re-written on cash basis and the revised return showing a loss was filed. The ITO asked the assessee to explain as to why it changed its system of accounting so soon after adopting the same. The assessee replied that in the line of business carried on by it, it would be correct to follow only the cash system. Further, it was urged that the assessee was entitled to choose any proper method of accounting and that they have made a bonafide change with no intention to evade tax. The ITO observed that the assessee had already made the choice of the mercantile system of accounting right from the commencement of its business and had actually closed its books of account on that basis on 30-6-1975 and had already drawn up the profit and loss account and the balance sheet and filed the original return accordingly. The fact that the commission from Trac Industries would be realised only after the bills were realised, was well-known to the assessee right from the beginning. Even so, it adopted the mercantile system of accounting. Hence, he held that the books were written on cash basis not because of any bona fide change in the system of accounting regularly employed, but only with a view to avoid payment of tax on the commission which had already accrued due. Hence, the ITO rejected the assessee's request to change over from the mercantile system of accounting as reflected in the original return, to the cash system of accounting as reflected in the revised return. He observed that if for any reason, the assessee was not able to recover the whole or any part of the commission which had already accrued due, then it was entitled to claim the same as bad debt in future. With these remarks, be completed the assessment on the basis of the original return.
(3.) THE assessee appealed to the Commissioner (Appeals) and contended that its claim before the ITO should have been accepted. THE arguments advanced before the ITO, as contained in the assessee's letter dated 21-3-1979, were reiterated before the Commissioner (Appeals). He did not agree with the contentions of the assessee, on the ground that the assessee had already adopted the mercantile system of accounting for the year under consideration and there was no good reason for changing the same before the assessment is completed. Further, he observed that the revised return, based on the books re-written on the cash system, could not enable the ITO to deduce the correct profits of the business carried on by the assessee. THE commission income had already accrued to the assessee and the same had been duly accounted for in the books of account which were closed. Hence, he upheld the action of the ITO and rejected the contention of the assessee.;

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