Can accounting practice override income tax law?

  

Can the accounting treatment of a particular item of income or expenditure in its books of account decide whether the same can be treated as income or expenditure?!  Perhaps, the most sought after issue in todays practical scenario.

For example , an assessee can treat an expenditure as revenue in nature and debits its P & L account . Whether his treatment as expenditure is final for computing his income??

Judicially it is held that any accounting treatment , whether it is done as per any other law or out of common practice , is not a material for consideration while computing income or loss under Income Tax Act.

This Law is settled by following Supreme Court judgments.

• The Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd, vs. CIT ((1971) 82 ITR 363) (SC) also affirmed the above view by observing that

"whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter".

• Subsequently the Hon'ble Court re-affirmed the said view in Sutlej Cotton Mills. Ltd. vs. CIT, 116 ITR 1 (SC).

"But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."

• Likewise, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT 227 ITR 172 (SC), Hon'ble Supreme Court held that:

"It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act as was pointed out by Lord Russell in the case of B. S.C. Footwear Ltd. [1970] 77 ITR 857, 860 (CA), the income tax law does not march step by step in the footprints of the accountancy profession."

In nutshell , only the provisions of Income Tax Law can determine whether an expenditure is allowable or a receipt is an income , and not how the accounts are maintained by assessee.

Posted by
Shalini Haridoss Nair

Source : EtaxIndia