P L D 1965 Dacca 325 (PLP)

ASIR, J.‑--This is a reference under section 66(1) of the Income‑tax Act ; Messrs Rathca Tea Estate is the assessee concerned. It was purchased and taken possession of by two partners‑Messrs Fazlur Rahman and Saidur Rahman and was managed by one Mamun ur Rashid, son‑in‑law of Mr. Fazal ur Rahman. Thereafter Mr. Mamun ur Rashid was dismissed and Mr. Fazal ur Rahman started managing the same. The assessment concerns the accounting year 1959. In the meantime some lease was created at the instance of Mamun ur Rashid in favour of one Ali Bakhsh who in his turn created a sub‑lease in favour of the children of the said Mamun ur Rashid. Mamun ur Rashid having been dismissed a suit was brought in the name of the children of Mamun ur Rashid for a declaration that the plaintiffs were lessees of Rathna Tea Estate in their lease‑hold right and that Mr. Fazal ur Rahman who has been made defendant No. 1 had been managing the said tea estate on behalf of the plaintiffs since 1st of January 1956 and as such accountable to them. It may be stated here that Mamun ur Rashid managed the tea estate till 1955. It further appears that for the accounting years ending 31st December 1956 and 1957, the valuation of the closing stock was made on the basis of the prices realised on sale up‑to‑date on the date of audit, namely, 17th January 1959. For the accounting year 1958 the assessee valued the closing stock at cost price. The Income‑tax Officer took the view that the value of the closing stock should have been shown at the market rate as before and upon that consideration raised the value of the closing stock from Rs. 2,87,791 to Rs. 8,03,259 in this way showing a margin of Rs. 5,15,

468. The Income‑tax Officer also disallowed a sum of Rs. 1,643 claimed on account of legal costs in defending the suit referred to above. The Tribunal also concurred with the Income tax Officer. Thereupon the following questions have been referred to this Court for opinion in terms of section 66(1) of the Income‑tax Act at the instance of the assessee. "(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the Income‑tax officer was justified in valuing the closing stock in accordance with the method employed by the assessee in earlier years and in not allowing the stock to be valued at cost price at the option of the assessee? (2) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the sum of Rs. 1,643 claimed as legal charges by the assessee was not an allowable deduction under section 10(2) of the Income‑tax Act on the ground that the expenditure was not made wholly and exclusively for the purpose of the business?" In regard to the first question it may be noted that neither the Income‑tax Officer nor the Tribunal has found that the change in the method of accounting by showing the closing stock at cost price instead of at the market rate was in any way wanting in bona fides or that it was a mere casual change to evade collection of taxes. The Department, however, claims that such a change is not permissible under the law. Section 13 of the Income‑tax Act reads as follows:‑ "Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee: Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income‑tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income‑tax Officer may determine." In the statement of the case it has been made clear that although for the accounting years ending 31st December 1956 and 1957 the valuation of the closing stock was made on the basis of the prices realised on sale yet for the accounting year 1958 the assessee valued the closing stock at cost price. We are, however, concerned in the present case with the accounting year 1959 in respect of the valuation of the closing stock at cost price. It is difficult in the circumstances to think that the assessee had no intention to continue this new method of accounting regularly. Mr. Huda appearing for the Department contends that such a change over is not permissible when the assessee had been following the method of accounting in the matter of the valuation of the closing stock by reference to the market rate. The word "regularly" has nowhere been explained. But certainly it is not synonymous with the words "perpetual" or "permanent". In our view it seems the intention underlying this expression is that if it appears that the assessee concerned means to adopt the changed method of accounting for the year under assessment as also for subsequent years at the relevant time then it cannot be contended that it would be a departure from the rule underlying the principal clause of section

13. The section does A not indicate by an express language or by implication that the assessee is not permitted to adopt a changed method of accounting provided he does not mean to adopt such a changed course only for a casual period and he does not mean to evade collection of taxes. The proviso under section 13 is there to safeguard the interest of the Department concerned. If by reason of such changed mode or method of accounting it becomes unintelligible to the Income‑tax Officer and if in his opinion the income, profit and gains cannot properly be deduced therefrom then it will be in his discretion to make the computation upon such basis and in such manner as the Income‑tax Officer may determine. The decision of the Privy Council in the case of Commissioner of Income‑tax, Bombay Presidency v. Ahmedabad New Cotton Mills Company, Limited (57 I A 21), does not in our view, lay down that it is not permissible to adopt a changed method of accounting even though, it might be bona fide and there might not be any prejudice to the interest of the Department concerned in the matter of collection of taxes. Their Lordships simply laid down that when in a return of the profits of a business for the year of assessment the opening and closing stocks have both been under‑valued by the assessee, the real profits for the particular year cannot be ascertained by merely raising the valuation of the closing stock without taking into account a similar under‑valuation of the opening stock. The under‑valuation having been discovered the Income‑tax Officer re-valued the closing stock at its proper value with the result that the assessment for the year was raised from Rs. 2,49,142 to Rs. 7,66,

450. The High Court held that the assessment should be varied by valuing at their true valuation the company's stock at the beginning or at the end of the year in question and not by revaluing the stock at the end of the year. Their Lordships of the Privy Council agreeing with the opinion of the High Court observed at page 23:‑ "When, therefore, there is under‑valuation at one end, the effect is to cause both a smaller debit in respect of the stock introduced into the next account and a larger sum for profits realized by the sale, change in market values being immediately reflected in the price obtained for the goods that are sold; in these circumstances to contend that there should be under valuation at one end and not at the other is to raise an argument which their Lordships cannot accept." In that particular case their Lordships also held that it was never suggested that the method employed by the assessee was not regularly or properly employed. Thus it appears that the question as to whether it was permissible to change the method of accounting was not before their Lordships. As already indicated, upon a reading of the language of section 13, it seems to us that there is no bar against a possible change in the method of accounting provided it does not prejudice the interest of the Department concerned. In a Madras case in the case of Indo‑Commercial Bank Ltd. v. Commissioner of Income‑tax, Madras (44 1 T R 22), it has been held that the assessee has the option of valuing the closing stock either at cost price or at market value, if the market value is lower than the cost price. But it has been consistently held in all the decisions placed before us that the change should not be arbitrary. There is no finding in the instant case that the change was arbitrary. On the other hand, on a query by the Department it was replied by the assessee that the method of accounting in so far it showed in previous years, the valuation of the closing stock at the market rate, was wrong. In a Bombay case, the case of Sarupchand v. Commissioner of Income‑tax, Bombay (4 I T R 420), it was held that an assessee was entitled to change the method of accounting regularly employed by him. What he must alter, however, is his regular method, that is to say, he must abandon what up to that time, has been his regular method, and start a new regular method and not merely a new method for a casual period. Nowhere it has been suggested that the present change as from 1958 is only for a casual period. It goes without saying that it is the assessee and not the Department which has the choice on the method of accounting in terms of section 13 of the Income‑tax Act, and the Income‑tax Officer can interfere only when it is likely to prejudice the interest of the Department concerned and the changed method of accounting may not furnish proper materials upon which the income, profits and gains are to be ascertained. The Department seems to be bound by the choice of the assessee in the matter of changing the method of accounting subject to the conditions as indicated above. In the case of Commissioner of Income‑tax, Bombay v. Sarangpur Cotton Manufacturing Co., Ltd. (6 I T R 36), their Lordships of the Judicial Committee of the Privy Council have stated at page 40 as follows:‑ "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes‑in this case for the purposes of the Company's business‑and does not relate to a method of making up the statutory return for assessment to income‑tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income‑tax Officer, the income, profits and gains cannot properly be deduced therefrom." We are, therefore, of the opinion that the Tribunal was not right in observing that, "the medication now wanted by the assessee would be a departure from the method of accounting and cannot be permitted under section 13 of the Income‑tax Act." The only test which would make a change in the method of accounting permissible is that it should be a bona fide, not intended to evade taxes and that it should be intended to be employed regularly and not for a casual period. In regard to the second question, it has been argued on behalf of the assessee that the legal costs incurred was in connection with the preservation of the title of the partners and as such it amounted to preservation of the estate from extinction. The findings seems to be otherwise. According to the Tribunal the suit was an offshoot of family dissension which has no normal bearing with the carrying of the business of the tea garden. The decision of the Privy Council in the case of Commissioner of Income‑tax, Bihar and Orissa v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga (10 I T R 214), relied upon by Mr. Asrar ul Hussain, seems to be quite distinguishable from the facts of the present case. In that case a sum of Rs. 10,00,000 was to be recovered in the interest of the money lending business. The expenses incurred for getting a decree for recovery had already been allowed as having been incurred for the purpose of earning such profits or gains. Their Lordships held that the legal expenses incurred for defending another action arising in connection with the same transaction was also an allowable deduction. In that case the sum of Rs. 10,00,000 advanced must have been a part of the funds of the money lending business and if that were lost the business itself would suffer. In the present case there is nothing to show that upon the success or loss of any particular party in Title Suit No. 21 of 1956, the business of the Rathna Tea Estate would in any way be affected. In view of the finding of fact that the suit was an offshoot of family dissension which has no normal bearing with the carrying on of business of the tea garden, we are unable to agree with the learned counsel Mr. Asrar ul Hussain that the legal costs can be said to be an expenditure wholly and exclusively for the purpose of business of the tea estate within the meaning of section 10(2) (xvi) of the Income‑tax Act. The unreported decision of this Court in Reference Case No. 23 of 1959 Dacca Picture Palace v. Com missioner of Income‑tax to which one of us was a party seems to have been rightly relied upon on behalf of the Department. The result, therefore, is that the questions are to be answered in the following manner: ‑‑ Question No. 1 must be answered in the negative and question No. 2 must be answered in the affirmative. This reference is disposed of accordingly. As the success is divided, there will be no order as to costs. SALAHUDDIN AHMED, J.‑

I agree. M. N. Order accordingly.