I.T.R. No. 72 of 1989 [ 1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Reference No. 72 of 1989 Date of decision: August 25,2008 The Commissioner of Income Tax, Patiala. .. Applicant. v. M/s Punjab State Small Industries Corporation Ltd., Chandigarh now The Punjab Small Industries & Export Corporation Limited, Chandigarh. .. Respondent. CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE RAJESH BINDAL Present: Ms. Urvashi Dhugga, Advocate for the applicant. Mr. Akshay Bhan, Advocate for the respondent. .. Rajesh Bindal J. 1. The following questions of law have been referred for opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, `the Tribunal') arising out of order dated 30.11.1987 in I.T.A. No. 437 of 1986, for the assessment year 1981-82: “1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law, in allowing weighted deduction u/s 35B on the expenditure of Rs.64,335/- incurred on the stay and other incidental expenses on the employees of the assessee, outside India? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law, in allowing change in the method of accounting from accrual basis to receipt basis for a part source of income i.e. interest income from seed money and consequently deleting the addition of Rs. 2,82,387/- ?” I.T.R. No. 72 of 1989 [ 2] 2. Briefly, the facts are that the assessee is a State owned Corporation assessed in the status of a Company. Return for the assessment year in question was filed on 31.7.1981 declaring a net loss of Rs. 5,51,904/-. As initially the return was filed with unaudited accounts, a revised return was filed on 3.2.1984 with audited accounts declaring a net loss of Rs. 1,52,534/-. Question No.1 3. In the return filed, the assessee claimed weighted deduction under Section 35B of the Income-tax Act, 1961 (for short, `the Act') of an expenditure of Rs. 1,18,732/- incurred on travelling by the Managing Director and other employees to participate in various Trade Fair, Market Fair and Industrial Exhibition etc. abroad for exploring export markets. Out of the amount mentioned above, a sum of Rs. 54,396/- was spent on actual travel fare, whereas a sum of Rs. 64,335/- was spent on stay and other incidental expenses. The Assessing Officer allowed deduction only to the extent of Rs. 54,396/-. In appeal, the order was upheld by the Commissioner of Income-tax (Appeals), Chandigarh. However, the Tribunal reversed the finding while holding that travelling is not restricted to the air fare alone. It also includes the expenses for local transport, stay etc. 4. Learned counsel for the Revenue submitted that the Tribunal had committed a grave error in accepting the contention of the assessee that the total amount spent on the travelling including for stay abroad is to be allowed as an expense under Section 35B of the Act, as it was only the trade fair which could be allowed. 5. Learned counsel for the assessee submitted that the interpretation which is sought to be projected by learned counsel for the Revenue cannot be accepted as such. Once the provisions of the Act provide for grant of weighted deduction on the amount spent on the air fair of foreign travel, that would necessarily mean that even the amount spent for stay in other incident or expenses would also fall within the domain on which deduction under Section 35B of the Act would be available. 6. A perusal of Section 35B(1)(b)(vii) of the Act shows that expenditure on travelling outside India for promotion of the sale outside India, including travelling outward from and return to India would be eligible for weighted deduction under Section 35B of the Act. In our I.T.R. No. 72 of 1989 [ 3] considered view, the Tribunal had rightly held that the entire amount spent by the assessee was eligible for such a deduction. The section does not suggest that it is not only the amount spent on the air fair which is eligible for deduction, rather, the entry is quite widely worded providing for expenditure on travelling outside India including travelling outward from and return to India. Travelling would not be possible outside India unless arrangement for stay is also made during the course of visit. If certain amount is spent on stay and other incidental expenses during visit to a foreign country for promotion of sale of goods outside India, the same would certainly be eligible for deduction under Section 35B of the Act. In the case in hand, it is not disputed that expenses on foreign tour incurred by the Managing Director and employees of the assessee were for the purpose of export promotion. 7. For the reasons recorded above, the question, as referred to above, is answered against the Revenue and in favour of the assessee. Question No.2 8. As far as question No.2 is concerned, the facts are that the assessee derived income from various sources including income from interest on seed money loans, interest on the hire purchase loans and other loans and advances. During the assessment year in question, interest on “seed money” on accrual basis was worked out at Rs. 6,78,661/-, whereas the assessee offered Rs. 3,96,274/- for the purpose of taxation on receipt basis by adopting change in the system of accounting from mercantile to cash basis in respect of this source of the income. The Assessing Officer rejected the claim and assessed the total amount as was determined as interest on seed money on accrual basis, i.e., Rs. 6,78,661/- by holding that the assessee was having interest income from seed money, hire purchase loans and other loans and advances and the method of accounting had been changed only in respect of seed money, whereas income from interest on hire purchase loans and other loans and advances was offered for taxation on accrual basis. In appeal, the assessment on this issue was confirmed by the Commissioner of Income-tax (Appeals). However, in further appeal before the Tribunal, the assessee succeeded. The Tribunal held that the change in the method of accounting was bonafide for the reasons explained by the assessee. I.T.R. No. 72 of 1989 [ 4] 9. Learned counsel for the Revenue submitted that the assessee in the present case cannot be permitted to adopt different method of accounting only for part of its income and the change having been effected only during the assessment year in question cannot be held to be bonafide as the effort was to avoid payment of due tax. She further submitted that on the expenditure side, the assessee is following mercantile system. Reliance has been placed upon Reform Flour Mills P. Ltd. v. Commissioner of Income-Tax, West Bengal-II, (1981) 132 ITR 184. 10. In response to the contentions raised by learned counsel for the Revenue, learned counsel for the assessee submitted that in the present case, the findings recorded by the Tribunal are plain and simple findings of fact to the effect that changed method of accounting adopted by the assessee in the case in hand was bonafide, keeping in view the fact that the interest on seed money was not being recovered and the assessee was being made to pay tax on that merely on accrual basis. There was no mala fide intention to avoid payment of due tax. He further submitted that there was no bar as such under the Act at the relevant time from adopting a hybrid system of accounting in case the same was followed regularly and in the present case, this change in method of accounting was followed by the assessee till 1996 when amendment was effected in Section 145 of the Act. The submission is that the view expressed by the Tribunal is strictly in conformity with law and the question, referred to above, deserves to be answered in favour of the assessee. 11. We have heard learned counsel for the parties and perused the paper book. 12. Madras High Court in Commissioner of Income-Tax, Tamil Nadu-III v. North Arcot District Co-operative Spinning Mills Ltd., (1984) 148 ITR 406 opined that apart from two systems of accounting, namely, mercantile and cash, there is a possibility of an assessee adopting a hybrid system of accounting if it is possible to ascertain true profits on the basis of such accounting. Relevant paragraph is extracted as under: “.....We are not inclined to agree with the contentions of the learned counsel for the Revenue that an assessee has to adopt either a mercantile system of accounting or cash system and that it is not open to the assessee to adopt any other system of I.T.R. No. 72 of 1989 [ 5] accounting. It is well established that even apart from the two systems of accounting referred to above, there is a possibility of an assessee adopting a hybrid system of accounting if it is possible to ascertain the true profits on the basis of such accounting. In this case, though the assessee has generally adopted the mercantile system of accounting, so far as the transaction of import of plant and machinery from foreign sellers is concerned, it has been regularly showing the payment of interest in the year in which the interest was actually paid and not in the year in which the interest legally fell due. Having regard to the fact that it is not the case of the Revenue that it is not possible to ascertain the true profits from the method of accounting regularly followed by the assessee, the Tribunal is right in holding that is not open to the Revenue to go back on its stand taken in the earlier years and call upon the assessee either to adopt cash system of mercantile system of accounting. In this view of the matter, we have to agree with the view of the Tribunal in respect of both the questions.” 13. Bombay High Court in Commissioner of Income-Tax v. Smt. Vimla D. Sonwane and others, (1995) 212 ITR 489, while considering an issue where the assessee was following different methods of accounting for different sources of income, opined that the same was permissible in law and the department could not compel the assessee to adopt a particular method of accounting in case the assessee was consistently following the same method. 14. Kerala High Court in Commissioner of Income-Tax v. GEO Tech Construction Corporation, (1996) 221 ITR 164, while considering an application filed by the Revenue under Section 256(2) of the Act seeking a direction for reference of question of law in a case where the assessee was maintaining accounts where receipts were being shown on cash basis and expenditure was being claimed on mercantile basis, opined that no question of law arose as the view expressed by the Tribunal therein was in conformity with law. 15. Calcutta High Court in Commissioner of Income-Tax v. United Credit Ltd., (2002)257 ITR 443, while considering an issue as to whether an I.T.R. No. 72 of 1989 [ 6] assessee could be permitted to follow cash system of accounting in respect of interest income and continue to follow the mercantile system of accounting in respect of interest expenditure, opined that mixed accounts, even within a single head, is permissible. 16. This Court in I.T.R. No.182 of 1989 –The Commissioner of Income-Tax, Haryana, Rohtak v. M/s Sant Ram Mangat Ram, Ambala City, decided on 3.1.2005, while considering an issue as to whether ad hoc method of account is one of the recognised method of valuing stocks under the principles of accountancy, relying upon a judgment of Hon'ble the Supreme Court in United Commercial Bank v. Commissioner of Income- tax, (1999) 240 ITR 355, opined that the method of valuation of stock having been followed by the assessee continuously, the Revenue could not object to the same for a particular assessment year. 17. In the case in hand, the Tribunal found that change in the method of accounting by the assessee was bonafide for the reason that recovery of interest on seed money was not being made, while the assessee was paying tax thereon. The receipts on that account were outstanding for a number of years. Consistent with the change in the method of accounting, the assessee remitted a sum of Rs. 5,23,373/- on account of interest written off, which was found to be irrecoverable earlier but had been taxed on accrual basis. The case of the Revenue is not that with the system of accounting followed by the assessee, correct profits could not be arrived at. In fact, change in the system of accounting which was started in the year in question was consistently followed by the assessee thereafter upto 1996 when the amendment in Section 145 of the Act was carried out providing for adoption of a uniform method of accounting. Prior to that, in terms of the law as discussed above, there was no bar even in following hybrid system of accounting in case the same was being consistently followed. Merely because a new system of accounting is introduced in a year would not ipso facto mean that the same was not being followed consistently in case it is found that the change so effected was continuously followed thereafter. Similar view was expressed by Delhi High Court in Commissioner of Income-Tax, New Delhi v. Smt. V. Sikka and another, (1984) 149 ITR 73. 18. The judgment relied upon by learned counsel for the Revenue in Reform Flour Mills P. Ltd.'s case (supra) is not applicable in the facts I.T.R. No. 72 of 1989 [ 7] and circumstances of the present case for the reason that change in the method of accounting in that case was only for a particular transaction which was held to be not permissible. In the case in hand, change in the method of accounting by the assessee was not for a particular transaction but for a particular source of income containing number of transactions. 19. For the reasons mentioned above, question No.2, as referred to above, is answered in favour of the assessee and against the Revenue. 20. The reference is disposed of accordingly. (Rajesh Bindal) Judge (Hemant Gupta) Judge August 25, 2008 mk