2007 (4) TMI 185 - HC - Income Tax

Assessee switched over to cash system of accounting from mercantile system tribunal is justified in holding that the change of the system of accounting does not divest the assessee from receiving the benefits which have already accrued to him in the previous years.

Summary

Issues:
Interpretation of Income-tax Act, 1961 regarding cash system of accounting and prior period's expenses.

Analysis:
The appeal was filed under section 260A of the Income-tax Act, 1961 against the Tribunal's order for assessment years 1997-98 to 2001-2002. The main issue raised was whether the Tribunal was justified in confirming the Commissioner of Income-tax (Appeals) order without appreciating that the assessee, who had switched to the cash system of accounting, cannot claim prior period's expenses in the assessment year under reference.

The Revenue argued that the assessee, upon switching to the cash system from the mercantile system, should not be entitled to benefits accrued in previous years under the mercantile system. However, the Tribunal disagreed with this contention. The Tribunal noted that the assessee had changed the accounting system with approval from IDBI and the Department, and certain reverse entries were required for amounts credited earlier but not received. The Tribunal considered waiver, decompounding, or rebate as notional payments to be allowed as expenses incurred by the assessee, which could be treated as bad debt or trading loss if not allowed.

The High Court observed that there was no legal provision preventing the assessee from receiving benefits accrued after changing the accounting system. The Court agreed with the Tribunal that changing the accounting system does not deprive the assessee of benefits already accrued in previous years. Therefore, the Court found no merit in the appeal and summarily dismissed it.