T N Pandey: Tax accounts follow fiscal year

CHAT ROOM

We are partners in a firm, which has started business nearly a month back. Our family purohit has advised that our business would benefit if we close our accounts on Diwali day. Please inform, whether the firm can do so.

Up to the Assessment Year 1988-89, assessees had the option of adopting the accounting year of their choice. Such a choice is not available from the AY 1989-90 to non-company assessees. The Companies Act does not prescribe uniform accounting year.

The result is that companies can have different accounting years for the purpose of Companies Act and Income Tax Act. By doing so, the companies can follow different accounting policies and practices: one for reporting to shareholders and the other for tax purposes.

However, as far as the IT Act is concerned, the results will have to be adjusted on the basis of the financial year, if the accounting year followed by a company is different from the financial year.

We have a business in Uttar Pradesh. We claim an income-tax deduction which is not supported by a decision from the Allahabad High Court. However, the Delhi High Court has pronounced a decision on a similar claim, holding that the deduction is admissible.

The assessing officer (AO) is not prepared to follow the decision of the Delhi High Court and wants to disallow the same. Can the AO do so?

Strictly speaking, high court decisions are binding only on those, exercising authority in the jurisdiction of the high court, which has pronounced the decisions.

Other high courts' decisions have persuasive value in other high courts' jurisdiction, as has been said by the Karnataka High Court in its decision in the case of Patil Vijay Kumar vs UOI (1985) 151 ITR 48 (Karn).

However, it has been observed by the Bombay High Court in CIT vs Smt. Godavari Devi Saraf (1978) 113 ITR 589 (Bom) that in respect of all-India enactments, like Income Tax, in the absence of a contrary decision, the Income Tax Appellate Tribunal, wherever situated, is bound to follow the decision of the non-jurisdictional high court.

This appears to be a sound advice to check proliferation of litigation. However, unfortunately, there are umpteen decisions, where the practice has not been followed and decisions have been given by tribunals and IT authorities contrary to the views expressed by non-jurisdictional high courts.

Our company has advanced a loan of Rs 10 lakh to another company engaged in construction work. After some years, the financial position of the loanee company became bad and it stopped paying interest.

Up to the year 2001-02, no interest was received though accounted for in the accounts on mercantile accounting basis. For the year 2002-03, we did not make any entry for the interest.

For the AY 2003-04, the AO wants to add the interest amount on the ground that the company is following the mercantile system of accounting. Is the approach of the AO correct?

The mercantile system of accounting cannot be said to be a system which generates income. It merely provides for making entry in the books of account when the right to receive income arises. However, since income-tax law taxes real incomes"" not fictional ones"" the right to receive income has to be real.

Where the investment made has become doubtful and income is not likely to be received, the taxpayer is not bound to record the income merely because mercantile system of accounting is being followed even if there are no prospects of the realisation of income.

In UCO Bank vs CIT (1999) 237 ITR 889 (SC), the Supreme Court has recognised that it is not necessary to credit interest on doubtful debts in the Profit & Loss Accounts as income even when the assessee follows mercantile system of accounting. Similar view has been expressed in Karnataka State Financial Corporation vs CIT (2000) 242 ITR 623 (Karn).

Please list the income-tax benefits that a person gets if he constructs a house for self-occupation.

The income-tax benefits include:

• There is no tax liability in respect of a house owned and occupied for self-residence.
• A deduction up to Rs 1,50,000 is admissible if loan is taken for the construction of a house on or after April 1, 1999 and construction of the self-occupied property is completed by March 31, 2003. This deduction is admissible from the AY 2002-03.

Kindly indicate whether the loss suffered in respect of house property can be set off against other incomes of the assessee.

Section 71 allows setting off of loss from property against income under any other head in the same year.

Section 71B allows the loss, which remains unabsorbed, to be carried forward and set off against income from property in later years subject to a maximum of eight years.