- (1.) This is a reference by the Income Tax Appellate Tribunal pertaining to the Assessment Year 1984-85.
(2.) The Tribunal was of the opinion that the following questions of law raised by the applicant/assessee in their application under Section 256(1) of the Income Tax Act, 1961, do arise from its order:- "1) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant could not adopt cash system of accounting in respect of commission from M/s. Majestic Auto Limited, which was a new source of income 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant was liable to interest u/s 215 of the Incometax Act, 1961 -
(3.) The Tribunal accordingly proceeded to draw up a statement of case which states the following facts: (A) The assessee, a registered firm, earned income by way of commission for the accounting period ending 31.03.1984 from M/s Hero Cycles (P) Limited, Mr. Highway Cycle Industries Limited, M/s Rockman Cycle Industries and M/s Majestic Auto Limited (MAL). This reference relates to the validity of the assessee's having changed their accounting system from the mercantile system to the cash system in the midst of the accounting period ending 31.03.1984. The assessee had entered into an agreement dated 18.03.1981 with MAL titled "Sole Selling Agent". The terms and conditions thereof are contained in a letter addressed by MAL to the assessee dated 18.03.1981. The assessee endorsed its acceptance at the footnote of the letter. MAL agreed to avail the assessee's marketing services with effect from 01.04.1981 till 31.12.1982. The arrangement was to be reviewed thereafter. In consideration of a payment of Rs.30,000/- per month including expenses of TA, DA, postage, telephone, telegrams and other incidentals of the assessee's travelling agent and other staff members and executives, the assessees agreed to provide the services mentioned therein which included sending their representative to the dealers of MAL at various places throughout India. The assessee's representatives were required to forward to MAL daily reports of their visits to each dealer, inter alia, in respect of showroom condition, sale of any other brand by the dealer, stock position and any other matter felt necessary. The assessee had been showing the commission derived pursuant to this agreement on accrual basis. (B) MAL and the assessee thereafter entered into an agreement dated 01.10.1983. By clause-1, MAL appointed the assessee as sole selling agents for sale of all their products in India, Nepal and Bhutan. The agreement was for the period 01.10.1983 to 30.09.1988. MAL, however, reserved to itself the right to sell its products to its bulk buyers for which the assessee was not entitled to any commission. Clauses 4, 5, 6, 11, 12 and 13 of this agreement read as under:- "4. The Selling Agents hereby agree to obtain or procure from financially sound buyers in India, orders for minimum 75% of total production of the Product of the Principals during any period at the prices and upon the terms specified herein and the event in of his failure to do so, the principals shall have right to terminate this agreement by notifying the selling agent of such termination. If any goods are left unsold at the time of termination of this agreement, they shall have to be lifted by selling agents at the selling price of the Principals, then in force. 5. That the selling agents will not engage or be interested either directly or indirectly as principal agent or employee, in selling goods of any description of kind similar to those of the company or designed to perform the like functions as those of the company, whether alone or in conjunction with any other goods, without obtaining the previous consent in writing of the company. 6. That the selling agents will use its best endeavours and shall employ necessary staff to promote and extend the sales of product to all potential buyers thereof. .. .. .. .. 11. That the selling agents shall be entitled to get commission @ 1.5% (including del-credere commission) upon the invoice price of the product issued by the Principals in India, other than Direct Sales made by the Principals as mentioned in column 3 above and sales to Government Departments or the companies owned by the Government. The selling agents shall also be not entitled to any commission on exports. The above rate of commission is inclusive of the del-credere commission. 12. The selling agents shall not be entitled to commission on the amount of any invoice such amount shall be wholly or partly lost by reasons of the insolvency of the customers. The selling agents shall be responsible for making good the loss on account of bad debts arising out of sale of the products of the Principals made during the period of agreement. 13. That all the disputed bills shall be settled by the selling agents at their expenses and the loss on return of goods shall also be borne by them." (C) After entering into the agreement dated 01.10.1983, the assessee changed its system of accounting from the mercantile to the cash basis. The change was only in respect of the commission received from MAL. The assessee continued showing the commission received from the other concerns on the mercantile/accrual basis.;