2008 (7) TMI 387 - HC - Income Tax

Accounting change in the method of accounting ACIT disapproved a change in the method of accounting effected in the accounting for income and expenditure by way of interest from the mercantile method of accounting which the assessee was following hitherto to the cash method of accountingthe change in the method of accounting adopted by the assessee is genuine and bonafide held that - There was no reason for the learned Assistant Commissioner of Income Tax to disapprove the said change and merely on the basis of such disapproval to make an addition of interest income which in fact has not been received by the assessee in the year under consideration

Summary

Issues Involved:
1. Whether the change in the method of accounting from mercantile to cash basis was bona fide.
2. Whether the penalty under Section 271(1)(c) of the Income Tax Act, 1961, is attracted.

Detailed Analysis:

Issue 1: Change in Method of Accounting

The principal issue concerns the Assistant Commissioner of Income Tax's (ACIT) disapproval of the assessee's change in the method of accounting from mercantile to cash basis. The ACIT added Rs. 4,39,888/- to the assessee's total income, arguing that the change was not bona fide, lacked durability, and did not allow proper deduction of income.

The assessee challenged this decision, and the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition, finding the change bona fide. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, leading to the present appeal by the Revenue.

The court examined the background, noting that the assessee faced difficulties with the mercantile method, such as tax liabilities on accrued but not received interest, issues with TDS certificates, and penalties under Sections 215, 217, and 273. To address these, the assessee adopted the cash basis for accounting interest income and expenses from the accounting year 1984-85.

The CIT(A) found no evidence of the change being non-bona fide, lacking durability, or preventing proper income deduction. The ITAT agreed, citing the Supreme Court's decision in UCO Bank v. CIT and this court's decision in Ganga Charity Trust Fund, which supported the assessee's position.

The court concluded that the change was bona fide, addressing genuine difficulties, and consistent with legal principles. The Revenue's arguments, including comparisons with banking companies and sticky loans, were rejected. The court affirmed the ITAT's decision, holding the change bona fide and justified in law.

Issue 2: Penalty under Section 271(1)(c)

The Revenue also questioned whether the penalty under Section 271(1)(c) was attracted. The ITAT had held that the penalty was not applicable. The court, having found the change in accounting method bona fide, implicitly supported the ITAT's view that the penalty was not warranted.

Conclusion:

The court dismissed the appeal, confirming the ITAT's decision that the change in the method of accounting was bona fide and justified, and that the penalty under Section 271(1)(c) was not attracted. The appeal was dismissed without costs.