2011 (11) TMI 379 - HC - Income Tax

Method of accounting Mercantile system of accounting generally followed - accounting reimbursement claims in respect of student concession on a cash basis followed cash system of accounting in subsequent years, same being accepted by the Department Held that - A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. Further, the concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits.- Decided against the Revenue.

Summary

Issues:
1. Interpretation of accounting reimbursement claims in respect of student concession passes under different accounting systems.

Analysis:
The High Court of Madras addressed the issue of accounting reimbursement claims in respect of student concession passes under different accounting systems in the context of an appeal by the Revenue against the Income Tax Appellate Tribunal's order. The primary question was whether the Tribunal was correct in allowing the assessee to claim reimbursement on a cash basis despite generally following a mercantile system of accounting. The Court noted that the assessee had consistently followed the cash system of accounting for subsequent years, which was accepted by the Department. Additionally, the Court highlighted that for previous assessment years, the Department had accepted the assessee's approach without filing any appeals. The Court referenced the Supreme Court's principles in United Commercial Bank v. Commissioner of Income Tax, emphasizing the importance of disclosing the real income regardless of the accounting method used by the assessee.

The Court further elaborated on key points derived from the Supreme Court's judgment, including the freedom of the assessee to value closing stock at cost or market value, the allowance for the taxpayer to use their preferred accounting method, the importance of consistency in accounting practices, and the application of the concept of real income within recognized limits. The Court emphasized that the determination of whether income has accrued to the assessee should be based on the reality of the situation. Additionally, under Section 145 of the Income Tax Act, if the Income Tax Officer deems that the income cannot be properly deduced from correct and complete accounts, the computation can be made based on the Officer's determination.

Ultimately, the Court upheld the Tribunal's decision, stating that the assessee's practice of crediting amounts on a realization basis and following a consistent system annually justified the Tribunal's ruling. The Court found no grounds to interfere with the Tribunal's order, answering the substantial question of law against the Revenue and dismissing the appeal without costs.