KISHAN CHAND AND CO. vs. C.I.T.

Facts

These four Income Tax References (ITR Nos. 224 to 227 of 1995) were filed before the High Court of Punjab and Haryana at Chandigarh. ITR Nos. 224 and 225 of 1995 were filed by M/s Kishan Chand & Co. Oil Inds. Ltd. (the assessee) against the Commissioner of Income Tax (Central), Ludhiana (the revenue). ITR Nos. 226 and 227 of 1995 were filed by the revenue against the assessee. The appeals concerned various assessment years. The High Court was to decide questions of law arising from the Income Tax Appellate Tribunal's orders. In ITR No. 226 of 1995, the revenue stated no question of law arose and requested dismissal. In ITR No. 227 of 1995, the assessee sought to withdraw the reference due to a low taxable amount, citing a circular.

Held

In ITR No. 226 of 1995, the High Court dismissed the reference as infructuous, accepting the revenue's submission that no question of law arose. In ITR No. 227 of 1995, the High Court allowed the assessee's prayer to withdraw the reference, citing Circular No. 3/2018 concerning taxable amounts below Rs. 50 Lakh, and dismissed it as withdrawn. For ITR Nos. 224 and 225 of 1995, the High Court upheld the Tribunal's findings on both questions. Regarding Question 1 (closing stock), the court noted the assessee admitted it was covered against them by the High Court's decision in ITR No. 139 of 1999. For Question 2 (interest on FDRs), the court accepted the Tribunal's exposition of law that income accrues in the year of approval, not actual receipt, even if the assessee followed the cash system inconsistently. The court upheld the Tribunal's conclusion that the assessee's practice of using the approval system but resorting to the cash system randomly was impermissible. The references were disposed of in terms of the Tribunal's findings, with a caveat regarding the adjustment of tax paid in subsequent years.

Key Issues

The High Court had to decide on the dismissal of ITR No. 226 of 1995, the withdrawal of ITR No. 227 of 1995, and two questions of law in ITR Nos. 224 and 225 of 1995. 1. Whether on the facts and in the circumstances of the case, the Tribunal is right in upholding the addition of Rs.88,479/- on account of alleged suppression of the value of closing stock and the said addition is legally sustainable in view of the constantly followed and accepted method of accounting to value the closing stock in the past? (Question of law) 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in sustaining the addition of Rs.88,556/- made on account of accrual of interest on FDRs in the bank especially when the assessee has been consistently following the cash system of accounting for the receipt of interest? (Question of law) Assessee's contentions: For ITR Nos. 224 and 225, the assessee admitted that Question 1 was covered against them by a previous decision of the High Court in ITR No. 139 of 1999. For Question 2, the assessee contended that the references would be revenue neutral as tax had been paid during the pendency of the matter before the Tribunal. Revenue's contentions: For ITR No. 226, the revenue stated no question of law arose and requested dismissal. For ITR Nos. 224 and 225, the revenue's counsel could not corroborate the assessee's statement about tax payment but argued that on principle, the Tribunal's decision was correct, and interest on FDRs should be included in income in the year of approval, not receipt. The revenue relied on the Tribunal's finding that the assessee inconsistently used the approval system and cash system.