| SooperKanoon Citation | sooperkanoon.com/378476 |
| Subject | Direct Taxation |
| Court | Karnataka High Court |
| Decided On | Oct-22-1992 |
| Case Number | Income-tax Referred Case No. 91 of 1989 |
| Judge | K. Jagannatha Shetty and ;S.A. Hakeem, JJ. |
| Reported in | [1993]201ITR674(KAR); [1993]201ITR674(Karn); 1993(37)KarLJ133 |
| Acts | Income Tax Act, 1961 - Sections 145, 145(1) and 254 |
| Appellant | Karnataka State Forest Industries Corporation Ltd. |
| Respondent | Commissioner of Income-tax |
| Appellant Advocate | K.S. Ramabhadran, Adv. |
| Respondent Advocate | H. Reghavendra Rao, High Court Govt. Pleader |
Excerpt:
- karnataka rent act, 1999.[k.a. no. 34/2001]. section 3(n): [d.v. shylendra kumar, j] tenant - held, there is distinction between the definition of tenant under the 1961 act and the definition of tenant under the 1999 act. under the 1961 act while the legal heirs of the deceased tenant themselves become tenant and are entitled for the protection provided under the 1999 act, under the 1999 act, the legal heirs or the mere relatives of the tenants who were living with the tenants at the time of his death do not become tenants by themselves. it is for this reason the 1999 act has provided the protection under section 5 of the 1999 act indicating that the right of tenancy was devolving on them for a period of five years from the date of the death of the original tenant. this protection is to be found only in terms of section 5 and not because persons were otherwise tenants under the act. further, the revision petitioners were not persons who are required to seek the protection under section 5 of the 1999 act, but they were persons who had become tenants under the 1961 act and as they were so even before the 1999 act came into force. the revision petitioners were themselves tenants. section 5 of the act, could have application only if a tenant had expired after the 1999 act came into force and not otherwise. - the tribunal has, without going into the question whether the changed method of accounting adopted by the assessee was permissible or bona fide, proceeded to sustain the order of the income-tax officer on an entirely different ground as if it was exercising its power under section 145 of the act, which is clearly impermissible for the reason that section 254 of the act does not contemplate such exercise of power. if, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the assessing officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee. ' 10. having noted the contentions as aforesaid, the tribunal has held that in its opinion, the addition has to be upheld on the ground that the situation arising in the case attracts the application of the proviso to section 145(1) of the act and the income-tax officer is well within his power to make the addition to offset the distortion in the profit of the year which accrued by reason of revaluation of the closing stock alone. the stand taken on behalf of the assessee is therefore, well-founded.k. jagannatha shetty, j.1. in this reference under section 256(1) of the income-tax act, 1961 (hereinafter referred to as 'the act'), the income-tax appellate tribunal has referred the following question of law for the opinion of this court : 'whether, on the facts and circumstances of the case, the tribunal was right in upholding the addition towards valuation of closing stock or account of change of method adopted by the assessee ?' 2. the material facts giving rise to this reference briefly are as follows the assessee is a company engaged in the business of developing and manufacturing forest products for sale. for the assessment year 1979-80 the assessee changed the method of accounting in relation to the valuation of closing stock. a claim was made before the assessing authority to say that the change was made for a bona fide reason and that the closing stock figures should be one as determined by the assessee for the purpose of income-tax assessment. the income-tax officer rejected the claim on the ground that statutory auditors of the assessee had not agreed to the change in the method of accounting. the first appellate authority upheld the income-tax officer's order. on further appeal by the assessee, the tribunal took a different stand, leaving out the findings of the lower authorities and upheld the additions on the ground that, because of the change in the method of accounting of the valuation of closing stock in a particular year, different valuation will be shown for the same stock which is held as the opening stock and remains as closing stock; and admittedly, thus a sum equal to that difference will either be taxed twice or will escape taxation altogether. in other words, the tribunal proceeded on a new ground not taken by the lower authorities or urged by the department before the tribunal and concluded the issue against the assessee. the assessee contended that such anomaly as pointed out by the tribunal will not arise since the opening stock of that year cannot be changed for the reason that it was the closing stock of the earlier year. however, the appellate tribunal rejected this contention in upholding the addition made by the assessing authority and accordingly, the assessees, appeal was dismissed. 3. from the forgoing facts, the aforesaid question has been referred for the opinion of this court. 4. sri ramabhadran, learned counsel for the assessee, contended that it is open to the assessee to change the method of accounting in relation to the valuation of the closing stock for the assessment year, and that the income-tax officer was not entitled to revalue the opening stock merely because the changed method of accounting of the value of the closing stock was not agreed to by the statutory auditors. he further urged that even assuming that the changed method of accounting in relation to the valuation of closing stock was not acceptable, it was open to the income-tax officer to exercise his power under section 145 of the act and adopt such method of computation as may be appropriate for determining the true income of the assessee. admittedly, the income-tax officer did not find that the changed method of accounting was not bona fide merely relied upon the statement of the statutory auditors that would not approve the changed method of accounting and proceeded to add back a sum of rs. 10,56,746 which is, prima facie, inadmissible in law. 5. it is further contended that the tribunal has no power under section 254 of the act to go beyond the scope of appeal to adjudicate or give a finding on any question which does not form the subject-matter of the appeal. the tribunal has, without going into the question whether the changed method of accounting adopted by the assessee was permissible or bona fide, proceeded to sustain the order of the income-tax officer on an entirely different ground as if it was exercising its power under section 145 of the act, which is clearly impermissible for the reason that section 254 of the act does not contemplate such exercise of power. such power under section 145 can be exercised only by the assessing authority. in the absence of the assessing authority not having invoked its jurisdiction under section 145, the tribunal was not right in invoking the same in exercise of the power under section 254 of the act. 6. sri raghavendra rao, learned counsel for the revenue, on the other hand contended that having rejected the assessee's changed method of accounting on the basis of the report of the statutory auditors, the income-tax officer had rightly proceeded to compute the valuation and adding back the difference in the amount of the valuation between the closing and opening stock, which could be considered to have been done in the exercising of his power under section 145 of the act. 7. the scope and ambit of the jurisdiction under section 145 of the act is stated in cit v. british paints india ltd. : [1991]188itr44(sc) . the supreme court has held thus (headnote) : '(i) that even if the assessee had adopted a regular system of accounting, it was the duty of the assessing officer under section 145 of the income-tax act 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. if he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the income-tax act, 1961.' 'the question to be determined by the assessing officer in exercise of his power under section 145fis whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the method regularly employed by the assessee. what is to be determined by the officer is a question of fact, i.e., whether or not income chargeable under the act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. it is not only the right but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. it is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. there is no estoppel in these matters and the office is not bound by the method followed in the earlier years. valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. but whichever method he adopts, it should disclose a true picture of his profits and gains. if, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the assessing officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee.' 8. what emerges from the above principles laid down by the supreme court is that when the assessing authority does not accept the assessee's method of accounting for the assessment year, then he could exercise power under section 145 to make such computation in such method as he determines for deducing the correct profits and gains. in this case, the income-tax officer did not accept the changed method of accounting of the assessee merely on the basis of the objections taken by the statutory auditor. not accepting the assessee's changed method of valuation, the income-tax officer had merely taken the figure of the statutory auditor on the assumption that the assessee-corporation, while changing the method of valuation of the closing stock, has not, in the same manner, changed the valuation of the opening stock. the said action of the income-tax officer cannot be held to be in exercise of his power under section 145. the income-tax officer not having accepted the assessee's changed method of accounting, has not resorted to the exercise of power under section 145 for computation of income by adopting such other basis as determined by him. the income-tax officer's power under this proviso to choose the basis and manner of computation of income is not an arbitrary power to assess the income, but he must exercise his direction and judgment judicially. he cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee-company. the income-tax officer, after discarding the assessee's changed method of accounting, has mechanically added a sum of rs. 10,56,746 as per the auditor's report to the income returned, without adopting any method or disclosing any valid basis for such additions. 9. the second contention of sri ramabhadran is regarding the jurisdiction of the appellate tribunal in the appeal under section 254 of the act. it is his case that it was not open to the tribunal to adjudicate or give a finding on a question that does not form the subject-matter of the appeal which, in the instant case, relates to the income-tax officer rejecting the changed method of accounting of the assessee without holding or finding that the changed method for revaluing the opening stock is not bona fide. in this connection, we find that the tribunal has only referred to the contentions of the assessee and the revenue. the relevant portion of the order at para 3 of the tribunal's order reads as follows : 'in the further appeal before us, it was contended on behalf of the assessee, relying on the decision of the supreme court in the case of chainrup sampatram v. cit : [1953]24itr481(sc) , that it was a misconception to think that any profit arose out of the valuation of the closing stock. reliance was also placed on the decision in the case of ram luxman sugar mills v. cit : [1967]63itr51(all) and the decision of the madras high court in cit v. carborandum universal ltd. : [1984]149itr759(mad) to the effect that the income-tax officer was not entitled to revalue the opening stock and the when the change of method was bona fide and was intended to be followed consistently in the future, the assessee was entitled to the adoption of the new method even if it was detrimental to the interests of the revenue. on the other hand, it was contended on behalf of the revenue that revaluation of the closing stock resulted in the escapement of tax and, therefore, the income-tax officer was justified in making additions to ascertain the true profits of this year.' 10. having noted the contentions as aforesaid, the tribunal has held that in its opinion, the addition has to be upheld on the ground that the situation arising in the case attracts the application of the proviso to section 145(1) of the act and the income-tax officer is well within his power to make the addition to offset the distortion in the profit of the year which accrued by reason of revaluation of the closing stock alone. the tribunal has not adverted to the subject-matter of the appeal, but proceeded to decide the question whether the income-tax officer has exercised his power under the proviso to section 145(1) or improperly exercised that power. the tribunal has proceeded on the assumption that the order of the income-tax officer was in exercise of the power under section 145(1) of the act. even the revenue had not contended that the income-tax officer had exercised the power under the proviso to section 145 of the act on his finding that the method adopted is such that he could not properly deduce the income and for the purpose of proper computation had resorted to any other basis. the power of the tribunal under section 254 of the act can be exercised only in relation to the grounds arising in the appeal. it cannot go beyond the scope of the appeal and decide the question whether the income-tax officer has exercised the power under section 145(1) of the act or not, which does not form the subject-matter of the appeal. it is apparent from the records that the tribunal has not decided the actual question involved in the appeal, but has trenched upon the power exercisable by the income-tax officer under section 145(1) of the act which was not the subject-matter of the appeal. moreover, the income-tax officer's action in adding back the difference in the closing and opening stock for computation of valuation is not traceable to the exercise of his power under section 145 of the act. the stand taken on behalf of the assessee is therefore, well-founded. nothing is pointed out by the tribunal as to how the method of accounting by the assessee leads to escapement of taxation justifying the income-tax officer's action in rejecting the assessee's changed method of accounting. the tribunal has, therefore, erred in proceeding on the assumption that the income-tax officer had proceeded under section 145(1) of the act in rejecting the assessee's claim. 11. in the view we have taken above, the answer to the question referred is in the negative and in favour of the assessee.
Judgment:K. Jagannatha Shetty, J.
1. In this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court :
'Whether, on the facts and circumstances of the case, the Tribunal was right in upholding the addition towards valuation of closing stock or account of change of method adopted by the assessee ?'
2. The material facts giving rise to this reference briefly are as follows
The assessee is a company engaged in the business of developing and manufacturing forest products for sale. For the assessment year 1979-80 the assessee changed the method of accounting in relation to the valuation of closing stock. A claim was made before the assessing authority to say that the change was made for a bona fide reason and that the closing stock figures should be one as determined by the assessee for the purpose of income-tax assessment. The Income-tax Officer rejected the claim on the ground that statutory auditors of the assessee had not agreed to the change in the method of accounting. The first appellate authority upheld the Income-tax Officer's order. On further appeal by the assessee, the Tribunal took a different stand, leaving out the findings of the lower authorities and upheld the additions on the ground that, because of the change in the method of accounting of the valuation of closing stock in a particular year, different valuation will be shown for the same stock which is held as the opening stock and remains as closing stock; and admittedly, thus a sum equal to that difference will either be taxed twice or will escape taxation altogether. In other words, the Tribunal proceeded on a new ground not taken by the lower authorities or urged by the Department before the Tribunal and concluded the issue against the assessee. The assessee contended that such anomaly as pointed out by the Tribunal will not arise since the opening stock of that year cannot be changed for the reason that it was the closing stock of the earlier year. However, the Appellate Tribunal rejected this contention in upholding the addition made by the assessing authority and accordingly, the assessees, appeal was dismissed.
3. From the forgoing facts, the aforesaid question has been referred for the opinion of this court.
4. Sri Ramabhadran, learned counsel for the assessee, contended that it is open to the assessee to change the method of accounting in relation to the valuation of the closing stock for the assessment year, and that the Income-tax Officer was not entitled to revalue the opening stock merely because the changed method of accounting of the value of the closing stock was not agreed to by the statutory auditors. He further urged that even assuming that the changed method of accounting in relation to the valuation of closing stock was not acceptable, it was open to the Income-tax Officer to exercise his power under section 145 of the Act and adopt such method of computation as may be appropriate for determining the true income of the assessee. Admittedly, the Income-tax Officer did not find that the changed method of accounting was not bona fide merely relied upon the statement of the statutory auditors that would not approve the changed method of accounting and proceeded to add back a sum of Rs. 10,56,746 which is, prima facie, inadmissible in law.
5. It is further contended that the Tribunal has no power under section 254 of the Act to go beyond the scope of appeal to adjudicate or give a finding on any question which does not form the subject-matter of the appeal. The Tribunal has, without going into the question whether the changed method of accounting adopted by the assessee was permissible or bona fide, proceeded to sustain the order of the Income-tax Officer on an entirely different ground as if it was exercising its power under section 145 of the Act, which is clearly impermissible for the reason that section 254 of the Act does not contemplate such exercise of power. Such power under section 145 can be exercised only by the assessing authority. In the absence of the assessing authority not having invoked its jurisdiction under section 145, the Tribunal was not right in invoking the same in exercise of the power under section 254 of the Act.
6. Sri Raghavendra Rao, learned counsel for the Revenue, on the other hand contended that having rejected the assessee's changed method of accounting on the basis of the report of the statutory auditors, the Income-tax officer had rightly proceeded to compute the valuation and adding back the difference in the amount of the valuation between the closing and opening stock, which could be considered to have been done in the exercising of his power under section 145 of the Act.
7. The scope and ambit of the jurisdiction under section 145 of the Act is stated in CIT v. British Paints India Ltd. : [1991]188ITR44(SC) . The Supreme court has held thus (headnote) :
'(i) that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961.'
'The question to be determined by the Assessing Officer in exercise of his power under section 145fis whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the method regularly employed by the assessee. What is to be determined by the Officer is a question of fact, i.e., whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the office is not bound by the method followed in the earlier years. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee.'
8. What emerges from the above principles laid down by the Supreme Court is that when the assessing authority does not accept the assessee's method of accounting for the assessment year, then he could exercise power under section 145 to make such computation in such method as he determines for deducing the correct profits and gains. In this case, the Income-tax Officer did not accept the changed method of accounting of the assessee merely on the basis of the objections taken by the statutory auditor. Not accepting the assessee's changed method of valuation, the Income-tax Officer had merely taken the figure of the statutory auditor on the assumption that the assessee-corporation, while changing the method of valuation of the closing stock, has not, in the same manner, changed the valuation of the opening stock. The said action of the Income-tax Officer cannot be held to be in exercise of his power under section 145. The Income-tax Officer not having accepted the assessee's changed method of accounting, has not resorted to the exercise of power under section 145 for computation of income by adopting such other basis as determined by him. The Income-tax Officer's power under this proviso to choose the basis and manner of computation of income is not an arbitrary power to assess the income, but he must exercise his direction and judgment judicially. He cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee-company. The Income-tax Officer, after discarding the assessee's changed method of accounting, has mechanically added a sum of Rs. 10,56,746 as per the auditor's report to the income returned, without adopting any method or disclosing any valid basis for such additions.
9. The second contention of Sri Ramabhadran is regarding the jurisdiction of the Appellate Tribunal in the appeal under section 254 of the Act. It is his case that it was not open to the Tribunal to adjudicate or give a finding on a question that does not form the subject-matter of the appeal which, in the instant case, relates to the Income-tax Officer rejecting the changed method of accounting of the assessee without holding or finding that the changed method for revaluing the opening stock is not bona fide. In this connection, we find that the Tribunal has only referred to the contentions of the assessee and the Revenue. The relevant portion of the order at para 3 of the Tribunal's order reads as follows :
'In the further appeal before us, it was contended on behalf of the assessee, relying on the decision of the Supreme Court in the case of Chainrup Sampatram v. CIT : [1953]24ITR481(SC) , that it was a misconception to think that any profit arose out of the valuation of the closing stock. Reliance was also placed on the decision in the case of Ram Luxman Sugar Mills v. CIT : [1967]63ITR51(All) and the decision of the Madras High Court in CIT v. Carborandum Universal Ltd. : [1984]149ITR759(Mad) to the effect that the Income-tax Officer was not entitled to revalue the opening stock and the when the change of method was bona fide and was intended to be followed consistently in the future, the assessee was entitled to the adoption of the new method even if it was detrimental to the interests of the Revenue. On the other hand, it was contended on behalf of the Revenue that revaluation of the closing stock resulted in the escapement of tax and, therefore, the Income-tax Officer was justified in making additions to ascertain the true profits of this year.'
10. Having noted the contentions as aforesaid, the Tribunal has held that in its opinion, the addition has to be upheld on the ground that the situation arising in the case attracts the application of the proviso to section 145(1) of the Act and the Income-tax Officer is well within his power to make the addition to offset the distortion in the profit of the year which accrued by reason of revaluation of the closing stock alone. The Tribunal has not adverted to the subject-matter of the appeal, but proceeded to decide the question whether the Income-tax Officer has exercised his power under the proviso to section 145(1) or improperly exercised that power. The Tribunal has proceeded on the assumption that the order of the Income-tax Officer was in exercise of the power under section 145(1) of the Act. Even the Revenue had not contended that the Income-tax Officer had exercised the power under the proviso to section 145 of the Act on his finding that the method adopted is such that he could not properly deduce the income and for the purpose of proper computation had resorted to any other basis. The power of the Tribunal under section 254 of the Act can be exercised only in relation to the grounds arising in the appeal. It cannot go beyond the scope of the appeal and decide the question whether the Income-tax Officer has exercised the power under section 145(1) of the Act or not, which does not form the subject-matter of the appeal. It is apparent from the records that the Tribunal has not decided the actual question involved in the appeal, but has trenched upon the power exercisable by the Income-tax Officer under section 145(1) of the Act which was not the subject-matter of the appeal. Moreover, the Income-tax Officer's action in adding back the difference in the closing and opening stock for computation of valuation is not traceable to the exercise of his power under section 145 of the Act. The stand taken on behalf of the assessee is therefore, well-founded. Nothing is pointed out by the Tribunal as to how the method of accounting by the assessee leads to escapement of taxation justifying the Income-tax Officer's action in rejecting the assessee's changed method of accounting. The Tribunal has, therefore, erred in proceeding on the assumption that the Income-tax Officer had proceeded under section 145(1) of the Act in rejecting the assessee's claim.
11. In the view we have taken above, the answer to the question referred is in the negative and in favour of the assessee.