2012 (12) TMI 897 - HC - Income Tax

Whether accrued interest on cash basis and payment of interest is allowable on mercantile basis is valid in law. - Whether interest expenditure is allowable on cash basis even though the assessee is following mercantile system of accounting is valid in law. For same assessment year Assessee switch over from the cash system to the mercantile system of accounting - the receipts and expenditure for the year were maintained under mercantile system of accounting - In respect of interest paid on loans and advances cash system of accounting was maintained Held that - Following the decision in case of Carborandum Universal Limited (1983 (8) TMI 39 - MADRAS HIGH COURT) held that switching over from cash system of accounting to mercantile system was on account of statutory compulsion we have no hesitation in agreeing with the assessee s contention that the interregnum period in the process of switching over would certainly have a mixed system where there is a cash system of accounting in respect of certain expenditure while the receipts and other expenditure would be maintained under mercantile system of accounting. The revenue has not disputed the fact that the assessee had to follow the mercantile system and during the transition period alone the hybrid system had arisen. In favour of assesse

Summary

Issues:
1. Whether the Appellate Tribunal was correct in deleting interest additions for the assessment years 1989-90 and 1990-91?
2. Whether the deletion of interest expenditure by the Appellate Tribunal for the assessment year 1989-90, despite the assessee following the mercantile system, is valid?

Analysis:
1. The case involved the transition of the assessee from the cash system of accounting to the mercantile system due to statutory compulsion. The Assessing Officer disallowed expenditure under the hybrid system, leading to an appeal before the Commissioner of Income Tax. The Commissioner allowed the appeals considering the peculiar situation of the transition period, following a decision of the Bombay High Court. The Tribunal upheld the Commissioner's view, leading to the Revenue's appeal. The High Court noted the statutory compulsion for the switch and the necessity for cash payments to be considered in the assessment year 1989-90 to allow deductions for cash-based expenditure.

2. The High Court referenced previous decisions to support its stance that the change in accounting method, though initially detrimental to the Revenue, should not be a basis for denying deductions. The court cited cases where the switch from cash to mercantile system due to statutory compulsion resulted in a mixed system during the transition period. The Revenue did not dispute the necessity for the assessee to follow the mercantile system, acknowledging the hybrid system during the transition. Relying on previous court decisions, the High Court rejected the Revenue's contention and affirmed the Tribunal's order, dismissing the tax case appeal without costs.