2024 (3) TMI 1414 - AT - Income Tax

Addition made on account of accrued interest - AO was of the view that the assessee is following hybrid system of accounting which is not allowed u/s 145 and made the addition - AO also did not accept the submissions of the assessee that only the real income can be applied towards the objects of the trust for the purpose of claiming exemption u/s 11 - HELD THAT - From the plain reading of the above section it is clear that income chargeable under the head Profits Gains from Business or Profession or Income from Other Sources should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In the given case we notice that the assessee has been offering Income from Other Sources by following cash system of accounting i.e. on receipt basis consistently from inception. Therefore in our view there is merit in the contention there is no violation of section 145 since for the purpose computing income from Other Sources the assessee is not following hybrid system of accounting but has been consistently following cash system of accounting. As noticed that for the purpose of maintenance of books of accounts the assessee is following mercantile system of accounting since the assessee is mandatorily required to do so under the Companies Act. Therefore in our view the contention of the AO is that the assessee is following hybrid system of accounting which is not accordance with section 145 is factually incorrect and not sustainable. Therefore in our considered view the addition made by the AO on the basis that the assessee is following hybrid system of accounting is not correct and therefore we hold that the addition made towards interest income be deleted. Appeal of the assessee is allowed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition made on account of accrued interest of Rs. 3,82,40,749/-.

2. Whether the CIT(A) failed to appreciate that the mixed or hybrid system of accounting is prohibited under Section 145 of the Income Tax Act, 1961, and thus the addition made by the Assessing Officer (AO) should have been upheld.

3. Whether the assessee, a trust, was justified in following a cash system for interest income while maintaining a mercantile system for other purposes, thereby allegedly adopting an inconsistent accounting method.

ISSUE-WISE DETAILED ANALYSIS

1. Relevant Legal Framework and Precedents

The legal framework revolves around Section 145 of the Income Tax Act, which mandates that income under the heads "Profits and Gains of Business or Profession" or "Income from Other Sources" must be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The Central Government may notify standards for income computation and disclosure.

2. Court's Interpretation and Reasoning

The Tribunal noted that the CIT(A) provided relief to the assessee on the grounds that the AO did not adequately rebut the contention that the assessee, being a trust, could follow a hybrid system of accounting. The Tribunal emphasized that the assessee has been consistently following the cash system of accounting for income from other sources since its inception, which has been accepted by the Revenue until the assessment year 2010-11.

3. Key Evidence and Findings

The assessee provided a table showing how interest income was offered to tax from AY 2011-12 to AY 2014-15, demonstrating consistency in following the cash system of accounting. The Tribunal found that the AO's claim of a hybrid system was not substantiated, as the assessee consistently followed the cash system for interest income.

4. Application of Law to Facts

The Tribunal applied Section 145, emphasizing that the assessee has consistently employed the cash system for income from other sources, thus complying with the legal requirement. The Tribunal distinguished the facts of this case from the precedent cited by the Revenue, noting that the assessee did not mix cash and mercantile systems for the same head of income.

5. Treatment of Competing Arguments

The Tribunal considered the Revenue's argument that the assessee's accounting method was inconsistent and violated Section 145. However, it found the argument unconvincing, as the assessee's practice of offering interest income on a cash basis did not constitute a hybrid system. The Tribunal also acknowledged the alternate argument that there was no real loss to the Revenue, as interest income was eventually taxed on receipt.

6. Conclusions

The Tribunal concluded that the AO's addition based on the alleged hybrid accounting system was incorrect. The assessee's consistent use of the cash system for interest income aligned with Section 145, and there was no violation of the Act.

SIGNIFICANT HOLDINGS

1. Preserve Verbatim Quotes of Crucial Legal Reasoning

"The assessee has been offering Income from Other Sources by following cash system of accounting i.e. on receipt basis consistently from inception. Therefore, in our view there is merit in the contention there is no violation of section 145 since for the purpose computing income from Other Sources the assessee is not following hybrid system of accounting but has been consistently following cash system of accounting."

2. Core Principles Established

The Tribunal affirmed that trusts can follow a consistent accounting method for different heads of income, provided it aligns with statutory requirements. The consistent application of a cash system for interest income did not breach Section 145.

3. Final Determinations on Each Issue

The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 3,82,40,749/- made by the AO, ruling that the assessee did not adopt a hybrid accounting system in violation of Section 145. The appeal of the Revenue was dismissed, and the assessee's method of accounting was deemed compliant with the Act.

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