Law:

Section:

Section 145(1) of the income-tax act, 1961-Method of accounting-Rejection of accounts-Whether it is imperative that before rejecting the system of accounting consistently followed by assessee for several years and accepted by department in past, ito must refer to inherent defects in the system and record a clear finding that the system of accounting followed by assessee is such that correct profits cannot be deduced from books of account maintained by assessee-held, yes Facts The assessee-company carried on the business of conducting chit among its members. It happened sometimes that subscribers to chits discontinued after paying a few instalments. On such discontinuance, the assessee-company entered into the shoes of the defaulting subscribers, as a 'foreman', and paid the subscription for the instalments becoming due, until a new subscriber was found. If the assessee was unable to find a new subscriber, it continued to subscribe the necessary instalments till the period of the chit expired. If it was able to find a new subscriber in the place of the defaulting subscriber, the new subscriber negotiated terms with the assessee in the matter of paying the defaulted instalments and entered into the shoes of the defaulting subscriber. Until a new subscriber was found, the assessee became entitled to the dividend whenever the chit was bid. All such dividend received by the assessee was credited in its account books to an account, called 'Accrued Dividends Account', and carried over until a new subscriber was found. When the subscriber took over, all the dividend received by the assessee subsequent to the defaulting subscriber's exit from participation in the chit, was paid over to the new subscriber. Very frequently, the assessee paid not only the amount of dividend received by it, but also paid a further discount by way of inducement to a new subscriber, to take over the defaulting subscriber's place. The assessee had been following a system of accounting, whereby the dividend received by it was not accounted as income, as and when it was received, but was carried over to the 'Accrued Dividends Account' till either a new subscriber was found, or the period of the…

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