2002 (12) TMI 41 - HC - Income Tax

Whether, on the facts and in the circumstances of the case and in view of the admitted position that the assessee has been following the mercantile system of accounting in respect of its business activities, the Tribunal was justified in law in holding that the export duty drawback and cash assistance from the Government is assessable in the hands of the assessee on receipt basis and not on accrual basis and consequently holding that the addition of Rs. 2,26,227 and Rs. 5,34,255 made by the Income-tax Officer are not warranted? - we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department.

Summary

Issues:
Interpretation of the mercantile system of accounting in relation to export duty drawback and cash assistance for assessment years 1977-78 and 1978-79.

Analysis:

Facts:
The case involved a public limited company engaged in manufacturing electrical appliances, following the mercantile system of accounting. The company received cash assistance and duty drawbacks from the Government of India. Initially, the company accounted for these receipts on a mercantile basis. However, for the assessment years in question, the company changed its method to account for these receipts on a cash basis. The Assessing Officer rejected this change, stating that the company cannot maintain a mixed system of accounting for different types of income. The company's claim for an increase in loss due to the change in accounting method was also rejected.

Arguments:
The Department argued that the company, which traditionally followed the mercantile system of accounting, could not selectively change the accounting method for specific income sources like cash assistance and duty drawbacks. They contended that maintaining a mixed system of accounting was impermissible.

Findings:
The court disagreed with the Department's argument, upholding the change in the company's accounting method as bona fide. It was noted that the change did not result in any loss to the Revenue. Referring to previous judgments, the court highlighted that a mixed system of accounting could be permissible as long as there was no loss of income. The court cited cases where the mixed system of accounting was approved, emphasizing that such a system should not be discarded unless there is a loss, which was not the case here.

Conclusion:
The court ruled in favor of the assessee, stating that the change in the accounting method for cash assistance and duty drawbacks was justified. The judgment was based on the finding that the change was bona fide and did not result in any loss to the Revenue. The reference was disposed of with no order as to costs.