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Issues:
1. Treatment of interest and commission income in the assessment year 1964-65. 2. Justification for changing the system of accounting. 3. Treatment of interest and commission income in the assessment years 1965-66 and 1966-67. Analysis: Issue 1: Treatment of interest and commission income in the assessment year 1964-65 The assessee, a trading company, had advanced a loan to another company and earned interest and commission income. The assessee adopted the mercantile system of accounting, reflecting the interest receivable in its books. However, for the assessment year 1964-65, the assessee did not credit the debtor's account with interest or commission. The Income Tax Officer (ITO) included the interest and commission in the assessee's income, leading to an appeal. The Tribunal, considering the debtor company's financial position and the prudent business approach of the assessee, deleted the addition. The High Court, in a subsequent judgment, disagreed with the Tribunal's decision, emphasizing that the debtor company's indebtedness to other companies was not a significant factor. The court held that the assessee was not justified in changing the system of accounting and reinstated the addition of interest and commission income. Issue 2: Justification for changing the system of accounting The controversy revolved around whether the assessee was justified in changing the system of accounting from mercantile to cash basis. The Tribunal, for the assessment years 1965-66 and 1966-67, upheld the assessee's decision to switch to the cash system based on received payments and the debtor company's actions. However, for the assessment year 1966-67, where no payments were received, and the debtor company repudiated the debt, the court found the change in accounting system justified. The court ruled in favor of the assessee for the assessment year 1966-67, acknowledging the commercial expediency and sound business methods behind the accounting change. Issue 3: Treatment of interest and commission income in the assessment years 1965-66 and 1966-67 For the assessment year 1965-66, the court aligned with its previous decision for 1964-65, rejecting the justification for changing the accounting system. The court upheld the addition of interest and commission income. However, for the assessment year 1966-67, due to the debtor company's repudiation of the debt and absence of payments, the court deemed the change in accounting system reasonable. The court ruled in favor of the assessee for 1966-67, emphasizing the commercial rationale behind the accounting change.
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