1978 (1) TMI 37 - HC - Income Tax

Summary

Issues involved: The judgment involves the issue of accounting system adopted by the assessee for interest and commission income derived from a loan transaction, and whether the interest and commission should be included in the assessee's total income for a specific assessment year.

Summary:

Accounting System Dispute:
The assessee, engaged in cloth sale and money-lending business, advanced a loan to a company with agreed interest and commission rates. The dispute arose when the assessee changed its accounting system from mercantile basis to cash basis for a particular assessment year, resulting in not showing the interest and commission income. The Income Tax Officer (ITO) included the interest and commission in the assessee's income, rejecting the change in accounting system. The Appellate Authority Commissioner (AAC) upheld the ITO's decision based on the principle that once an accounting system is chosen, it cannot be unilaterally changed during subsequent years. The Tribunal, however, considered the financial position of the debtor-company and the prudent business approach of the assessee, leading to the deletion of the addition.

Judgment and Decision:
The Tribunal's decision to delete the addition of interest and commission was challenged by the department, leading to a legal question on whether the amount should be included in the assessee's total income. The High Court disagreed with the Tribunal's reasoning, emphasizing that the debtor-company's financial status and correspondence after the relevant period were not relevant. The Court concluded that the assessee lacked reasonable justification for changing the accounting system and upheld the department's position to include the interest and commission in the assessee's total income for the assessment year in question.

Conclusion:
The High Court ruled against the assessee, highlighting the importance of consistency in accounting systems and the relevance of financial circumstances in determining income inclusion. The judgment reaffirmed the principle that changing accounting methods without proper justification may not be accepted for tax purposes, emphasizing the need for adherence to chosen accounting practices in income recognition.